ITAT Mumbai clarifies depreciation, AMP TP adjustment and statutory deductions for general insurance companies under Section 44

1. Background of the dispute

The Mumbai Bench of the Income Tax Appellate Tribunal, in ACIT Vs Tata AIG General Insurance Co. Ltd (ITA No.2451/Mum/2017 & cross-appeal), decided a series of issues concerning computation of income of a general insurance company under Section 44 read with Rule 5 of the First Schedule to the Income Tax Act 1961 for assessment year 2010-11.

The appeals before the Tribunal comprised:

  • An appeal by the assessee, Tata AIG General Insurance Co. Ltd, challenging:

    • Refusal to reduce profit on sale of fixed assets from the taxable base
    • Denial of statutory depreciation under Section 32
    • Non-allowance, in the current year, of expenditure previously disallowed under Section 40(a)(ia) and on which tax was later deducted and deposited
    • Treatment of advertisement and marketing spend as an international transaction for transfer pricing

  • A counter appeal by the Revenue disputing:

    • Deletion of advertisement, marketing and promotion (AMP) transfer-pricing adjustment
    • Exemption of profit on sale of investments
    • Exemption of dividend income under Section 10(34) and non-application of Section 14A
    • Relief on co-insurance administration fees (Section 194H / Section 40(a)(ia))
    • Treatment of expenditure on computer peripherals and consumable hardware as revenue in nature

The assessee is engaged in general insurance business and its income is governed by the special computation mechanism under Section 44 read with Rule 5 of the First Schedule. For A.Y. 2010-11, the assessee filed its return declaring total income of Rs.1,81,26,258, while the assessment was ultimately framed at Rs.17,47,60,856 after various adjustments.

The Tribunal’s ruling leans heavily on consistent earlier decisions in the assessee’s own case across multiple years, as well as binding High Court precedents.

2. Issues arising from the assessment

While computing income under Section 44 read with Rule 5, the Assessing Officer (AO) made, inter alia, the following adjustments:

  • Transfer pricing (TP) adjustment of Rs.2,18,83,513 on AMP expenditure
  • Taxation of profit on sale of investments of Rs.17,65,97,000
  • Refusal to reduce profit on sale of fixed assets of Rs.2,02,000
  • Denial of depreciation under Section 32 amounting to Rs.10,37,11,785 (while allowing only book depreciation)
  • Disallowance of Rs.3,63,76,969 previously disallowed under Section 40(a)(ia) in an earlier year, even though tax was deducted and paid in the current year
  • Denial of exemption for dividend income of Rs.49,56,093 under Section 10(34) and application of Section 14A
  • Disallowance of co-insurance administration fees of Rs.34,41,175 under Section 40(a)(ia) on the ground that Section 194H applied
  • Capitalisation of computer peripherals and hardware consumables of Rs.22,15,160 (with only depreciation allowed)

The Commissioner of Income-tax (Appeals) [CIT(A)]:

  • Accepted the assessee’s case on AMP (by deleting the TP adjustment), investment profits, dividend exemption, inapplicability of Section 14A, co-insurance fees and computer peripherals
  • However, he sustained the additions relating to:
    • Profit on sale of fixed assets
    • Non-allowance of statutory depreciation
    • Current year deduction of expenses earlier disallowed under Section 40(a)(ia)

Both sides carried the matter to the Tribunal.

3. Depreciation, profit on sale of fixed assets and Section 40(a)(ia) deductions

3.1 Core controversy

Three connected issues were examined together:

  1. Whether profit on sale of fixed assets of Rs.2,02,000 should be reduced from the profits considered under Rule 5
  2. Whether the assessee is entitled to depreciation under Section 32 (Rs.10,37,11,785) in addition to the treatment under Rule 5, especially when book depreciation had already been added back in the return
  3. Whether expenditure of Rs.3,63,76,969, disallowed in an earlier year under Section 40(a)(ia) but tax deducted and paid during the year under consideration, must be allowed in the current year

CIT(A) had primarily relied on New India Assurance Co. Ltd. v. Addl. CIT (2012) 133 ITD 131 (Mumbai) to deny these claims.

3.2 Tribunal’s reliance on own earlier orders

The Tribunal noted that these exact issues had been decided in favour of the assessee in later years in its own case, particularly in:

  • ITA No.1718/Mum/2020 (A.Y. 2015-16), order dated 25.04.2022
  • ITA Nos.1834 and 1835/Mum/2023 (A.Ys. 2016-17 and 2017-18), order dated 30.10.2024
  • ITA No.5394/Mum/2025 (A.Y. 2013-14), order dated 23.12.2025

In ITA No.1718/Mum/2020, the coordinate bench analysed the interplay between Section 44, Rule 5 and Section 32 in depth.

Key findings from that decision, which the present bench reproduced and followed, include:

  • The assessee had:
    • Debited book depreciation in the profit and loss account; and
    • Added back such book depreciation in the computation of income
  • The AO, relying on New India Assurance Co. Ltd. v. Addl. CIT, refused to allow depreciation under Section 32 on the ground that Rule 5 does not provide for such a deduction
  • This led to a situation where no depreciation at all (neither book depreciation nor tax depreciation) was allowed, contrary to the mandate of Section 32 and Explanation 5 thereto

The coordinate bench held that:

  • Explanation 5 to Section 32 makes allowance of depreciation under Section 32 mandatory
  • Rule 5, read with Section 44, is intended to disallow items not admissible under Sections 30 to 43B that have been debited, but it cannot be interpreted to deny deductions that are specifically allowable under those provisions
  • A purely literal interpretation that results in the assessee getting no depreciation deduction at all is unacceptable, as it leads to an unjust and unintended outcome

For this purposive interpretation, reliance was placed on `CIT v.