Income Tax Appellate Tribunal - Delhi
Naresh Theran , New Delhi vs Assessee on 4 February, 2010
ITA NO. 934/DEL/2010 A.Y. 2006-07 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH "F." NEW DELHI BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. No. 934/Del/2010 A.Y. : 2006-07 Dr. Naresh Trehan, vs. Deputy Commissioner of Income Tax, B-4, Maharani Bagh, Central Circle-3, New Delhi - 110 065 New Delhi (PAN:AACPT 7305F) [Appellant] (Respondent) ASSESSEE BY : Sh. Rahul Khare, Adv.
DEPARTMENT BY : Sh. H.K. Lal, Sr. DR PER SHAMIM YAHYA: AM
This appeal by the assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals) dated 4.2.2010 pertaining to assessment year 2006-07.
2. The issues raised read as under:-
"The Commissioner (Appeals) erred in fact and in law in partly confirming the addition of Rs. 2,43,28,726/- on account encashment of key man policy. The Commissioner (Appeals) erred in fact and in law in partly treating the encashment of key man policy as revenue receipt as against capital receipt."
3. The assessee in this case is a renowned Doctor by profession. During the course of assessment Assessing Officer found that asesee received 1 ITA NO. 934/DEL/2010 A.Y. 2006-07 Rs. 4,27,50,000/- as maturity amount towards key man policy from LIC taken by Escorts Heart Institute and Research Centre Ltd.. Assessing Officer enquired as to why the said amount received on maturity of key man insurance policy be not brought to tax in the hands of the assessee. Assessee replied that as per the policy rules issued by the LIC the key man policy once transferred/ assigned becomes a normal policy and encashment of such policy, the proceeds receipt is exempt from tax. Assessing Officer did not accept this contention. He observed that as per the details collected from LIC regarding the terms and conditions of keyman insurance policy, nowhere it was mentioned as such. Hence he brought to tax an amount of Rs. 4,27,50,000/-.
4. Before the Ld. Commissioner of Income Tax (Appeals) it was submitted that identical issue has been considered by the ITAT in the case of Shri Rajan Nanda for A.Y. 2003-04 and 2004-05. It was argued that based on these orders of the ITAT, the Assessing Officer was not correct in treating the entire amount received from maturity as income of the assessee. The assessee's counsel further submitted to the Ld. Commissioner of Income Tax (Appeals) that identical issue regarding taxability of maturity value of keyman policy was involved in the case of the assessee for the assessment year 2005-06 also. It was stated that the ITAT in ITA No. 468/Del/2009 vide order dated 17.7.2009 had restored the appeal to the files of the Assessing Officer with the following directions:-
"We, therefore, restore the matter back to the file of Assessing Officer for fresh adjudication in the light of the observation and direction given by the Tribunal in the case of Shri Rajan Nanda. The assessee is hereby directed to produce a copy of Tribunal's order in the case of Rajan Nanda pertaining to the assessment year 2005-06 before the Assessing Officer in order to enable him to decide the 2 ITA NO. 934/DEL/2010 A.Y. 2006-07 matter afresh as per directions or observations given therein. The Assessing Officer shall provide reasonable opportunity of being heard to the assessee. The assessee shall be at liberty to submit the alternative contention before the Assessing Officer to claim the benefit of exemption with regard to the bonus amount on premium paid by the assessee. The Assessing Officer shall consider all contentions and submissions that may be advances by the assessee before him, and he shall pass a well reasoned and speaking order on all aspects of the matter relating to the issue in hand. We order accordingly."
4.1 The assessee further submitted before the Ld. Commissioner of Income Tax (Appeals) that Assessing Officer after verification, as directed by the ITAT, has given effect as exactly same manner as was given in A.Y.rs. 2003-04 and 2004- 0-5 in the case of Shri Rajan Nanda. Therefore, it was submitted to the Ld. Commissioner of Income Tax (Appeals) that facts being identical for this year in the case of the assessee, the Assessing Officer may be directed to follow the order of the ITAT. Thereafter, Ld. Commissioner of Income Tax (Appeals) observed that the issue was exactly identical as in the case of Sh. Rajan Nanda. He reproduced certain portion of his order in the case Sh. Rajan Nanda for A.Y. 2006-07. Thereafter, Ld. Commissioner of Income Tax (Appeals) concluded as under:-
"5.3.1 Thus, in the case of Dr. Naresh K. Trehan also the same decision has to be followed as the issue and facts are exactly identical. Thus the action of the Assessing Officer to tax the entire amount of Rs. 4,27,50,000/- received on maturity as income of the appellant can not be held. On the other hand the appellant's action of treating entire amount as exempt also can not be approved. In the instant case the EHIRC has paid effectively Rs. 1,80,41,722/- as premium (Rs. 2,11,35,660/- minus Rs. 30,93,338/-) out of total premium of 3 ITA NO. 934/DEL/2010 A.Y. 2006-07 Rs. 3,17,02,590/- whereas amount received on maturity by the appellant is Rs. 4,27,50,000/-. Based on the decision given in the case of Shri Rajan Nanda (supra), the amount taxable in the hands of the appellant is Rs. 2,43,28,726/- which has to be worked out as under:-
4,27,50,000 x 1,80,41,722 3,17,02,590 5.3.2 This (Rs. 2,43,28,726/) is the amount constituting the sum pertaining to the period when it was keyman insurance policy in the total amount of Rs. 4,27,50,000/- received on maturity and the same has to be taxed as income of the appellant based on the principle decision of Hon'ble ITAT in the case of Shri Rajan Nanda for A.Y. 2003-04. The remaining amount of Rs.
1,84,21,274/- is to be treated as exempt u/s 10(10D). Thus appellant gets relief of Rs. 1,84,21,274/- on this ground."
5. Against this order the assessee is in appeal before us.
6. We have heard both the counsels and perused the records. Ld. counsel of the assessee submitted that fact of the case being identical to that of the case of Shri Rajan Nanda. Since both the appeals were heard together, he submitted that the same ratio as in the case of Shri Rajan Nanda be followed.
7. We find that in the case of Shri Rajan Nanda in ITA No. 922/Del/2010 vide our order dated 04/06/2010, we have dealt with the issue as under:-
7. We find that identical issues have been considered in assessee's own case for earlier year (2003-04). The Tribunal had clearly held that the total received by the assessee on maturity except for the sum equivalent to the surrender value of the policy at the time of its assignment by the company in 4 ITA NO. 934/DEL/2010 A.Y. 2006-07 favour of the assessee is taxable. Hence the Tribunal had directed that the said amount equivalent to the surrender value having been received in this year, was therefore, directed to be taxed presently. In other words, the Tribunal had held that the maturity value of the impugned policy as reduced by the surrender value of the assessee at the time of assignment by the company in favour of the asessee is not to be taxed.
7.1 For A.Y. 2005-06 the tribunal had referred to the following portion of terms and conditions of the keyman policy and observed that:-
"We found that page 72 of the keyman policy provided terms and conditions with regard to taxation aspect of the keyman insurance policy, which reads as under:-
"Taxation Aspects:
Provisions applicable to the company:
1) Corporate entities can claim the premium paid under keyman insurance as a bona fide business deduction under section 37(1) of the Income Tax Act.
2) As per the Finance Act, 1996 the amount received under a keyman insurance policy will not be exempted from tax as per section 10(10D) of the Income Tax Act. The proceeds of the policy will be treated as income u/s 28(vi) of the Act.
Provisions applicable to the keyman:
1) In the event of the policy being assigned to the keyman, the proceeds of the policy including bonus will be treated as "profits in lieu of salary" under section 17 (clause 3) of the Income Tax Act.
2) In the event of a director being the assignee under the keyman policy. It will be treated as "income from other sources" and taxed accordingly (section 56(2iv) of the Income Tax Act, 1961.5
ITA NO. 934/DEL/2010 A.Y. 2006-07 The underlying principle is that the premium paid is allowed as a business deduction and the amount received should be taxed as business income."
(emphasis supplied by us) 7.2 The Tribunal had also referred to the contradictory letters received from the LIC. The Tribunal had noted that in the letter issued to the Income Tax Department, it was stated that there was no change in the basic features of original terms and conditions while in the letter issued to the assessee it was stated that after assignment the keyman policy will be treated as ordinary individual policy. After elaborate discussion and taking into account earlier tribunal decision the tribunal finally concluded as under:-
"In view of the clear contradiction in the two letters issued by the LIC, one hand written directly to the assessee and one to the department, in the interest of justice and fair play we restore the appeal to the file of the Assessing Officer for getting clarification from the higher authorities of LIC with regard to correct status of keyman policy on the occasion of assignment and consequential treatment of taxability in the hands of the assessee, and to decide the issue afresh as per the terms and conditions applicable to the keyman insurance policy on assignment to the keyman. After getting the clear position if the Assessing Officer found that as per clarification issued by LIC, the keyman policy is converted into ordinary policy, then to follow the observation of coordinate bench as discussed hereinabove. Before parting with the matter, we may clarify that amount of loans and interest thereon as availed by the assessee on these policies will not effect the maturity value of the policy, which is liable to be considered alongwith amount of bonus thereon, which the assessee is entitled to get. Accordingly, action of the assessee in offering the net amount received from LIC after deduction of loan and interest thereon as availed by the assessee on these policies are not correct."
7.3 From the above it is very clear that Tribunal had directed that the Assessing Officer should make enquiry and examine the issue inter-alia as per the terms and conditions applicable to the keyman 6 ITA NO. 934/DEL/2010 A.Y. 2006-07 policy on assignment to keyman. Ld. counsel of the assessee submitted that subsequent to the directions of the Tribunal the Assessing Officer had passed an order for assessment year 2005-06. In the said order the Assessing Officer noted that LIC has clarified that the keyman insurance policies which were later on assigned in the name of Shri Rajan Nanda on 25.08.1998 was to be treated as an ordinary individual policy. Accordingly, the Assessing Officer has brought to taxation the surrender value of the policy at the time of assignment by the company in favour of the assessee. We find that the said assessment order has been passed u/s 143(3) read with section 154 of the IT Act. In our considered opinion, we are not in a position to comment on this Assessing Officer's order for assessment year 2005-06, as the same is not a subject matter of appeal before us.
7.4 Now in the present assessment year Ld. Commissioner of Income Tax (Appeals) has held that he was following the earlier Tribunal's order in principle, but as far as the quantifying the amount subject to taxation, he made is own computation on following lines. The Ld. Commissioner of Income Tax (Appeals) has opined that the surrender value is to be computed as per the ratio between the premiums paid by the assessee and the company, to the final maturity proceeds, this is to be the basis for arriving at the portion which is taxable and that which is not taxable. The Ld. Commissioner of Income Tax (Appeals) was of the opinion that to the extent the maturity value bears a ratio to the premium paid by the company, the same is to be treated as surrender value and the equivalent amount received is to be taxed and only that portion of the maturity proceeds which bears a ratio to the premium paid by the assessee should be allowed as proceeds of an ordinary policy and not taxed.
7.5 Now we find that surrender value as per the terms applicable in insurance policy and insurance industry is the value which is received on premature surrender. We note that it is not the case of Ld. Commissioner of Income Tax (Appeals) that the impugned keyman policies do not have a provision of premature surrender and hence there can not be any question of surrender value.
7ITA NO. 934/DEL/2010 A.Y. 2006-07 We find ourselves in agreement with the contention of the ld. counsel of the assessee that the Ld. Commissioner of Income Tax (Appeals)'s order is not in accordance with the ratio laid down by the tribunal in assessee's own case earlier. We also note that before the Ld. Commissioner of Income Tax (Appeals) assessee had submitted that the Assessing Officer be given the same direction as that given by the Tribunal for A.Y. 2005-06. Hence, adhering to the doctrine of staire decises, we follow the ratio emanating out of the tribunal's order for assessment year 2005-06 which is the immediately preceding year, wherein the Tribunal had considered the earlier tribunal decisions and also taken note of the terms and conditions of the keyman insurance policy, as regards the provision applicable in the event of policy being assigned. The tribunal had also noted that LIC had given contradictory statements in letter issued to the Income Tax Department and that issued to the assessee. Hence, with the same direction as for assessment year 2005-06, we remit the matter to the files of the Assessing Officer. Hence, the matter stands restored to the files of the Assessing Officer for getting clarification from higher authorities of LIC with regard to correct status of keyman policy on the occasion of assignment and consequential treatment of taxability in the hands of the assessee, and to decide the issue afresh as per the terms and conditions applicable to the keyman insurance policy on assignment to the keyman. After the Assessing Officer comes to the conclusion that the keyman policy is converted into an ordinary policy, then he should follow the observation of coordinate bench as in earlier assessment years.
8. In the result, the appeal filed by the assessee is treated as allowed for statistical purposes."
8. Since the facts in the present case are identical, we remit the issue also to the files of Assessing Officer to consider it afresh with the same directions as above. Needless to add that the assessee should be given adequate opportunity of being heard.
8ITA NO. 934/DEL/2010 A.Y. 2006-07
9. In the result, appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 04/06/2010.
Sd/- Sd/-
[RAJPAL YADAV] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date 04/06/2010
SRB
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY By Order,
Deputy Registrar,ITAT, Delhi Benches
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