S. 14A and S. 44 — S. 44 provides for application of special provisions for computation of profits and gains of insurance business in accordance with Rule 5 of Schedule 1 and, therefore, Assessing Officer cannot make disallowance by applying S. 14A.

For the relevant assessment
year, the Assessing Officer held that the investments made by the assessee are
both taxable as well as tax-free. An estimated disallowance of 50% out of the
management expenses incurred and claimed in the P & L a/c was treated as
expenses incurred in connection with the tax-free investment. The CIT(A)
confirmed the disallowance. The Tribunal deleted the addition and noted as under
:

1. The income of the
assessee is to be computed u/s.44 r.w.r. 5 of Schedule I of the Income-tax
Act, 1961. S. 44 is a non obstante clause and applies notwithstanding anything
to the contrary contained within the provisions of the Act relating to
computation of income chargeable under different heads other than the income
to be computed under the head ‘Profits and gains of business or profession’.

2. In case of the
computation of profits and gains of any business of insurance, the same shall
be done in accordance with the rules prescribed in First Schedule of the Act,
meaning thereby Ss.28 to Ss.43B shall not apply. No other provision pertaining
to computation of income will become relevant.

3. In light of these
special provisions coupled with the non obstante clause, the Assessing Officer
is not permitted to travel beyond these provisions. S. 14A contemplates an
exception for deductions as allowable under the Act contained u/s.28 to
u/s.43B. S. 44 creates special application of these provisions in case of
insurance companies.

4. Therefore, the
disallowance made by the Assessing Officer which is based on the application
of S. 14A is deleted as it is not permissible to the Assessing Officer to
travel beyond S. 44 and First Schedule of the Income-tax Act.