Facts of the Case

The Revenue challenged the order of the Income Tax Appellate Tribunal (ITAT) which had deleted disallowances made by the Assessing Officer in respect of provisions for unsettled claims and “Incurred But Not Reported” (IBNR) claims of the respondent insurance company (formerly Religare Health Insurance Co. Ltd., now Care Health Insurance Ltd.).

For the relevant assessment years, the Assessing Officer treated these provisions as contingent liabilities and disallowed them under Section 37 of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) and the ITAT allowed the claims, leading to the present appeal before the Delhi High Court.

Issues Involved

  1. Whether provisions for unsettled outstanding insurance claims constitute contingent liabilities or allowable deductions.
  2. Whether provisions for IBNR claims—claims incurred but not yet reported—are deductible under the Income Tax Act.
  3. Applicability of actuarial principles and IRDA regulations in determining insurance liabilities for tax purposes.

 Petitioner’s (Revenue’s) Arguments

The Revenue contended that both provisions represented contingent liabilities because the actual amounts payable were uncertain and subject to future adjudication. It argued that such provisions were based on estimates and therefore could not be allowed as deductions in the year of creation.

The Revenue further asserted that IBNR provisions were ad hoc in nature and should be allowed only when claims materialize.

Respondent’s (Assessee’s) Arguments

The assessee argued that the provision for unsettled claims was based on actual claims lodged by policyholders, supported by customer-wise data. Although final quantification might occur later, the liability had already arisen when the claim was filed.

Regarding IBNR claims, the assessee submitted that these provisions were mandated by IRDA regulations and were computed using scientific actuarial methods by appointed actuaries. Therefore, they represented ascertained liabilities rather than contingent ones.

 Court Order / Findings

The Delhi High Court dismissed the Revenue’s appeals and upheld the Tribunal’s decision in favour of the assessee.

On Unsettled Claims:
The Court held that once claims are lodged by policyholders, the insurer incurs a present obligation. The fact that verification or quantification occurs later does not render the liability contingent. The provision was based on actual data and therefore constituted an ascertained liability.

On IBNR Claims:
The Court emphasized that IBNR reserves are computed using actuarial principles under statutory IRDA regulations. These estimates are derived from empirical data and predictive methodologies, reflecting liabilities already incurred though not yet reported.

The Court relied on the Supreme Court decision in Rotork Controls India Pvt. Ltd. v. CIT, which recognized that provisions based on reliable estimation of obligations arising from past events are allowable deductions. It also referred to precedents recognizing that liabilities may accrue even if payment is deferred to a future date.

  • A provision is allowable if it represents a present obligation arising from past events.
  • Reliable estimation based on historical data or actuarial methods is sufficient.
  • Insurance claim provisions mandated by regulatory frameworks cannot be treated as contingent liabilities merely because precise quantification is pending.

Important Clarification

The judgment clarifies that for insurance companies, statutory and actuarially determined provisions for claims—including IBNR reserves—constitute legitimate business liabilities. Such provisions reflect obligations already incurred and are not disallowed merely due to uncertainty in exact quantum.

This ruling has significant implications for insurers, confirming that regulatory compliance and scientific estimation methods are key determinants in recognizing deductible liabilities under tax law.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1772177547_PRINCIPALCOMMISSIONEROFINCOMETAX1VsMSCAREHEALTHINSURANCELIMITEDEARLIERKNOWNASMSRELIGAREHEALTHINSURANCECO.LTD..pdf 

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