I-T dept to reopen assessments of risk firms

The income tax department has decided to reopen the assessments of all life insurance companies since 2002-03 for fresh scrutiny based on the judgement passed by the commissioner (appeals) in case of Life Insurance Corporation of India.

According to official sources, the appellate authority, upholding the assessment of LIC, is of the view that solvency margin fund should be taxed since it is an application of income.

Moreover, it has also been held that losses incurred in one scheme cannot be set off from the profit of other schemes under section 10 (23)AAB.

According to section 115B that deals with taxation of life insurance business, profit and gains from the life insurance business is not taxed. Therefore, if an income is not taxed, then no losses could be set off against such profit.

The cut-off year of 2002-03 has been decided since most of the private sector players started operations in 2000-01.

Leading to the fall in the interest rates in government securities, most of the schemes offering assured rate of return of 8-9 per cent started incurring huge losses since there were no schemes to generate such returns.

LIC was assessed for the last six years starting 2000-01 and the department had raised a tax demand of Rs 4000 crore and an addition of Rs 24,000 crore on account of solvency margin and Section 10(23)AAB.

Sources added that LIC in turn had contested the taxation of solvency margin, which is like a reserve fund.

Moreover, the life insurance firms started incurring huge losses since the interest rates on government securities started falling from 2001-02 and various schemes of the LIC had assured rate of return.

In one of such schemes, Jeevan Suraksha, LIC was deducting the losses from the profit of other schemes, sources said. This was disallowed by the I-T department.

Solvency margin is a minimum excess on an insurer's assets over its liabilities set by regulators. It can be regarded as similar to capital adequacy requirements for banks.

Besides this judgement, the department also feels the need to reopen the assessment of the life insurance companies since most of the returns have been filed on the basis of profit and loss.

As per the section 44 of I-T Act, Schedule 1 states the taxable profit of the insurance companies is the average annual surplus certified by the actuary which is otherwise called actuarial profit. This is basis for calculation for calculation of tax for insurance companies.