Reinsurance premiums paid to foreign reinsurers by an Indian insurer before amendments to the Insurance Act in 2014 cannot be considered as business expenditure, the Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has ruled.
The recent ruling could have a significant impact on insurers’ tax liabilities before the amendments to the Insurance Act in 2014, according to a report by Hindu Business Line.
“Section 2C read with Section 2(9)(c) of Insurance Act, 1938, prohibits any person from doing insurance or reinsurance business in India otherwise permitted under Insurance Act, 1938,” the ITAT noted.
“Therefore, there is a clear prohibition of payment of reinsurance premium to non-resident reinsurance companies,” it said. Accordingly, such payments cannot be considered as business expenditure under Section 37 of the Income Tax Act, 1961, it said.
A tax deduction or allowance will not be given for any expenditure prohibited by law.
The tribunal further held that assessees have to deduct tax on the premiums paid to non-resident reinsurance companies.
The ruling was made in the case of Cholamandalam MS General Insurance against the Income Tax Department for assessment years 2003-04 to 2009-10.
The tax authorities had disallowed reinsurance premiums paid by the assessee to non-resident reinsurance companies.
The Tribunal said the Assessing Officer had rightly disallowed the reinsurance premium under the Income Tax Act.
Responding to the ruling, a spokesperson for Cholamandamam MS General Insurance said, “The matter is sub-judice and, therefore, it will be inappropriate to comment at the moment. Chola MS has already taken up the matter with the relevant appellate authorities against the Income Tax Tribunal order.”
State-controlled GIC Re was the only reinsurer in India before last year, and many insurers turned to foreign reinsurers. The insurers may have to review their tax laibilities till 2014.