Income Tax Appellate Tribunal - Delhi
Harneet Singh Chandhoke , Delhi vs Assessee on 24 December, 2012
1 ITA No. 2905/Del/2013
Asstt.Year: 2008-09
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `C' NEW DELHI
BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER
AND
SHRI CHANDRAMOHAN GARG, JUDICIAL MEMBER
I.T.A.No.2905/Del/2013
Assessment Year : 2008-09
Harneet Singh Chandoke, Vs Asstt. Commissioner of Income Tax,
JCR, Sales 105, Circle 20(1), New Delhi.
Gurunanak Auto Market,
Kashmere Gate, Delhi.
(PAN: AAAPC2258C)
(Appellant) (Respondent)
Appellant by: Shri Parag Mohanty
Respondent by : Shri Satpal Singh, Sr.DR
ORDER
PER CHANDRA MOHAN GARG, JUDICIAL MEMBER
This appeal has been preferred by the assessee against the order of Commissioner of Income Tax(A)-XXII, New Delhi dated 24.12.2012 in Appeal No. 337/10-11 for AY 2008-09.
2. Ground no. 7 and 8 of the assessee are general in nature which need no adjudication. Remaining grounds of the assessee read as under:-
"1. The ld.CIT(A) - XXII, New Delhi ("Ld. CIT(A)") has erred in law and on the facts and circumstances of the case by not accepting the returned income of Rs. 16,18,6501- and confirming the assessment at income of Rs. 73,04,440/- as made by the Learned Assistant Commissioner of Income Tax, Circle-20(1), New Delhi, ("Ld AO").2 ITA No. 2905/Del/2013 Asstt.Year: 2008-09
2) The Ld. CIT(A) has passed the order without understanding the nature of the keyman insurance policy after its assignment by the firm to the appellant.
3) The Ld. CIT(A) has erred in law and circumstances of the case by completely ignoring the clarification from Birla Sun life Insurance that after the assignment of keyman policy, the policy is covered under individual status and looses the identity of keyman insurance policy, copy of which was submitted to the Ld. AO.
4) The Ld. CIT(A) has erred in law and circumstances of the case by questioning the nil surrender value of the policy at the time of assignment of the policy in favour of the appellant, when the same was certified by the insurance company, copy of which was submitted to the Ld. AO.
5) The Ld. CIT(A) has erred in law and circumstances of the case by completely ignoring the principle of the decision of the Hon'ble Delhi High Court in case of Commissioner of Income Tax vs. Rajan Nanda [(2012)249CfR(Del)141, [2012]18TAXMAN98(Delhi)J.
6) The Ld. CIT(A)/Ld. AO have erred in law and on the facts and circumstances of the case by imposing interest under See 234A and Sec 234B of the Act."
3. Briefly stated the facts giving rise to this appeal are that the assessee is a partner at M/s Luthra & Luthra Law Offices and has remuneration from this Firm and also professional income, income from house property etc. During the year under consideration, the assessee received a sum of Rs.56,85,794 on surrender of a Keyman Life Insurance Policy. This amount was added to the income of the assessee by the Assessing Officer by holding 3 ITA No. 2905/Del/2013 Asstt.Year: 2008-09 that the surrender value of this policy is a taxable income as per section 2(24)(xi) read with section 10(10D) of the Income Tax Act 1961 (for short the Act) if the income is not chargeable to the income tax under the head "profits & gains of business profession" or under the head "Salaries" u/s 56(iv) i.e. "Income from other sources". Being aggrieved by the above assessment order, the assessee preferred an appeal before the Commissioner of Income Tax(A) but remained empty handed as the appeal of the assessee was also dismissed by holding that the facts of the case are different from the case of Shri Rajan Nanda on which heavy reliance has been placed by the assessee. The Commissioner of Income Tax(A) also held that the assessee has not given out the true facts of the case and has tried to deny the basic terms and conditions of the policy and has made a claim that there was no supplementary account contrary to the terms of the policy and the assessee has also claimed that there was no special surrender value of the policy which is again contrary to the terms of policy. Now, the assessee is in this second appeal with the grounds as mentioned hereinabove. Ground nos. 1 to 5 of the assessee
4. We have heard rival arguments of both the parties and carefully perused the record inter alia the assessment order and appellate order of the Commissioner of Income Tax(A). The counsel of the assessee has drawn 4 ITA No. 2905/Del/2013 Asstt.Year: 2008-09 our attention towards the decision of Hon'ble Jurisdictional High Court of Delhi in the case of C.I.T. vs Rajan Nanda (2012) 349 ITR 8 (Del) wherein it has been held that there is no prohibition as to the assignment or conversion under the Act. Their lordships have held that once there is an assignment, it leads to conversion and the character of policy changes and as per the clarification of the insurance policy on assignment, the policy does not remain a keyman policy and the same gets converted into an ordinary policy and in these circumstances it is not open to the revenue to still allege that the policy in question is a keyman policy and when it matures, the advantage therefrom is taxable. Their lordships pointed out that on maturity, it is not the company but an individual getting the matured value of the insurance policy.
5. The counsel of the assessee has further drawn our attention towards decision of ITAT Delhi Bench 'F' in the case of Commissioner of Income Tax vs Rajan Nanda (2013) 37 Taxman.com 335 wherein the decision of Hon'ble High Court of Delhi in the case of Rajan Nanda for AY 2003-04 and 2004-05 (supra) has been followed by observing and holding as under:-
"7. We have heard the parties and have perused the material on record. Section 10 (10D) (b) of the IT Act provides that in computing the total income of a previous year of any person, any sum received under a Life Insurance Policy other than any sum received under a Keyman Insurance Policy shall not be included. The 5 ITA No. 2905/Del/2013 Asstt.Year: 2008-09 Department contends that the maturity amounts received by the assessee are those pertaining to a Keyman Insurance Policy, whereas the assessee maintains that these maturity amounts are concerning ordinary insurance policies. The insurance policies, though having initially been taken as Keyman Insurance policies by the employer of the assessee, were, later, assigned to the assessee and thereupon their character underwent a change from that of Keyman Insurance policies to ordinary individual insurance policies.
8. The matter, it is seen, has elaborately been dealt with by the Hon'ble jurisdictional High Court in the assessee's own case for Assessment Years 2003-04 and 2004-05 (supra). The Ld. CIT (A) has extensively quoted therefrom as follows:-
"The scheme of the Act by introducing Keyman insurance policy, clearly provides that such an amount can be taxed either as business profits or surrender value of the policy endorsed in favour of the employee (Keyman) or the sum received by him at the time of retirement and in all these cases, it, would be profits in lieu of salary for tax purpose. In case there is no employee-employer relationship, then the surrender value of the policy or the business profits are to be taken from other sources. We are also supported our conclusion by CBDT's Circular NO.762 dated 18.2.1998, which reads as under:-
''Taxation of a sum received under the Keyman insurance policy.
14.1 A Keyman insurance policy of the Life Insurance corporation of India, etc. provides for an insurance policy taken by a business organization or a professional organization on the life of an employee, in order to protect the business against the financial loss, which may occur from the employees premature death. The "Keyman" is an employee or a director, whose services are perceived to 6 ITA No. 2905/Del/2013 Asstt.Year: 2008-09 have a significant effect on the profitability of the business. The premium is paid by the employer.
14.2 There were some doubts on the taxability of the income including bonus, etc. from such policy, and also regarding the treatment of the premium paid - whether it should be allowed as a capital expenditure or as a revenue expenditure. The Finance (No.2) Act, 1996, therefore, lays down the tax treatment of the Keyman Insurance Policy.
14.3 Clause (10D) of Section 10 of the Income Tax Act exempts certain income from tax. The Finance (No.2) Act, 1996 mends clause (10D) of Section 10 to exclude any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus of such policy for this purpose.
14.4 The Finance (No.2) Act, 1996, also lays down that the sums received by the said organization; on such policies be taxed as business profits; the surrender value of the policy, endorsed in favour of the employee (Keyman); or the sum received by him at the time of retirement be taken as ''profits in lieu of salary" for tax purposes;" and in case other persons having no employer-employee relationship the surrender value of the policy or the sum received under the policy be taken as income from other sources and taxed accordingly. The premium paid on ITA No.400 of 2008, etc., the Keyman Insurance Policy is allowed as business expenditure.
14.5 The amendments take effect from the 1st day of October, 1996."
48. It also follows from the aforesaid that it was only the surrender value of the policy at the time of assignment or the sum received by an individual at the time of retirement, which is taxable.
49. Insofar as assignment is concerned, at that time surrender value was paid by the Director and therefore, 7 ITA No. 2905/Del/2013 Asstt.Year: 2008-09 nothing could be taxed. Therefore, from any angle, matter is to be looked into, this component cannot be taxed at the bands of the Director assesses as mentioned.
Re: Whether the maturity value of the insurance policy received by the assessee is taxable:
50. The Tribunal has taken the view that the Keyman insurance policy was taken in a particular year and assigned in the next year and both these events had taken place in the years preceding the assessment year in question. The Tribunal took note of the certificate obtained by the assessee from the LIC whereby it had certified that a Keyman insurance policy, after assignment, assumed the status of an ordinary insurance policy. The Tribunal also took note of the ITA No.400 of 2008, etc., relevant provisions of the Act and the aforesaid CBDT Circular, to hold as under:
"All this shows that from the time of taking out the policy upto its maturity, the Legislature has envisaged the treatment to be given with regard to sums involved in the hands of the players involved. The players involved obviously are two-one, the person on the life of whom the insurance policy is taken out and second he person who takes out such policy. The premium is borne by the second person. Where such a dual role comes to an end, the very essence of the Keyman Insurance Policy is lost. This is the reason why the LIC of India confirmed that after assignment of a Keyman Insurance Policy in the name of the individual and the premiums thereafter being paid by such individual, the hitherto Keyman Insurance Policy becomes an ordinary policy. In this case, on the date of maturity, the policy in question is rightly to be accepted as an ordinary insurance policy."
51. The Tribunal while giving requisite relief brought to tax the amount of surrender value at the time of assignment subject to verification by the AO. It also rejected the alternative argument of the assessee that in case the sum received on maturity was held to be taxable, 8 ITA No. 2905/Del/2013 Asstt.Year: 2008-09 then deduction be allowed for the premia paid by the assessee after the assignment of the policy, which were embedded in the maturity amount and not claimed as a deduction in the tax assessments.
52. Thus, the issue depends on the question as to whether on assignment of the insurance policy to the assessee, it changes its character from Keyman insurance also to an ordinary policy. It is because of the reason that if it remains Keyman insurance policy, then the maturity value received is subjected to tax as per Section 10(10D) of the Act. On the other hand, if it had become ordinary policy, the premium received under this policy, in view of the aforesaid Section 10(10D) itself, the same would not be subjected to tax.
53. Once there is assignment of company/employer in favour of the individual the character of the insurance policy changes and it gets converted into an ordinary policy. Contracting parties also change inasmuch as after the assignment which is accepted by the insurance, the contract is now between the insurance company and the individual and not the company/employer which initially took the policy. Such company/employer no more remains the contracting parties. We have to bear in mind that law permits such an assignment. Even LIC accepted the assignment and the same is permissible. There is no prohibition as to the assignment or conversion under the Act. Once there is an assignment, it leads co conversion and the character of policy changes. The insurance company has itself clarified that on assignment, it does not remain a keyman policy and gets converted into an ordinary policy.
In these circumstances, it is not open to the Revenue to still allege that the policy in question is keyman policy and when it matures, the advantage drawn therefrom is taxable. One has to keep in mind that on maturity, it is not the company but the individual who is getting the matured value of the insurance.
9 ITA No. 2905/Del/2013Asstt.Year: 2008-09
54. No doubt, the parties here, viz, the company as when as the individual taken huge benefit of these provisions, but it cannot be treated as the case of tax evasion It is a case of arranging the affairs in such a manner as to avail the state exemption as provided in Section 10(10D) of the Act. Law is clear. Every assessee has right to plan its affairs in such a manner which may result in payment of least tax possible, albeit in conformity with the provisions of Act. It is also permissible to the assessee to take advantage of the gaping holes in the provisions of the Act. The job of the Court is to simply look at the provisions of the Act and to see whether these provisions allow the assessee to arrange their affairs to ensure lesser payment of tax. If that is permissible, no further scrutiny is required and this would not amount to tax evasion Benefit inured owing to the combined effect of a prudent investment and statutory exemption provided under Section 10(10D) of the Act, the section does not envisage of any bifurcation in the amount received on maturity on any basis whatsoever. Nothing can be read in Section 10 (10D) of the Act, which is not specifically provided because any attempt in that behalf as contended by Revenue would be tantamount to legislation and not interpretation.
55. Accordingly, we answer the questions of law as framed in favour of the assessees and against the Revenue. As a result, the appeals of the Revenue are dismissed and those of the assessees are hereby allowed.'
9. Thus, the Hon'ble High Court has effectively held in favour of the assessee to the effect that once there is an assignment of the employer in favour of the individual, the character of the insurance policy changes and it gets converted into an ordinary policy; that such assignment is duly permitted by law; that even the LIC accepted the assignment, itself clarifying that on assignment, the policy no longer remains a Keyman Policy and gets converted into an ordinary policy; that as such, it is not open to the Department to still allege that the policy is a Keyman 10 ITA No. 2905/Del/2013 Asstt.Year: 2008-09 Policy and when it matures, the advantage drawn therefrom is taxable; that on maturity of the policy, it is not the employer, but the individual, who is getting the maturity value of the insurance; that no doubt, the employer as well as the individual take huge benefit by such assignment, but it cannot be treated as a case of tax evasion, rather it is a case of arranging the affairs in such a manner as to avail the state exemption as provided in Section 10 (10D) of the Act; that benefit inured owing to the combined effect of a prudent investment and the statutory exemption provided u/s 10 (10D) of the Act does not call for any bifurcation in the amount received on maturity on any basis whatsoever; and that nothing can be read into Section 10 (10D) of the Act, if it is not specifically provided therein, since any such attempt would tantamount to legislation and not interpretation. It is on the basis of the above enunciation of law by the Hon'ble High Court in the assessee's own case, that the Ld. CIT(A) has held and, in our considered opinion, rightly so, that after assignment of the policy in favour of the assessee, it changes its character from that of a Keyman Insurance Policy to that of an ordinary policy and that once it has become an ordinary policy, the proceeds received thereunder would not be subject to tax in view of Section 10 (10D) of the Act due to which nothing is taxable out of the maturity value received from the insurance policy."
6. In view of above decisions of Hon'ble High Court of Delhi in the case of Rajan Nanda (supra) and decision of ITAT Delhi Bench 'F' Bench in the case of DCIT vs Rajan Nanda for AY 2007-08 to 2009-10 (supra), we observe that Hon'ble Jurisdictional High Court has effectively held in favour of the assessee to the effect that once there is an assignment of the employer in favour of the individual employer, then the character of the insurance 11 ITA No. 2905/Del/2013 Asstt.Year: 2008-09 policy changes and it gets converted into an ordinary policy, that such assignment is duly permitted by law; that even the LIC accepted the assignment, then on assignment the policy no longer remains the keyman policy and gets converted into an ordinary policy; that as such it is not open to the department to still take a stand that the policy is a keyman policy and when it matures, the advantage drawn therefrom is taxable. Respectfully following the judgment of jurisdictional High Court of Delhi in the case of Rajan Nanda, 'F' Bench of this Tribunal has further held that on maturity of the policy, it is not the employer but the individual employee who is getting maturity value/benefits of the insurance policy and no doubt the employer as well as the individual take huge benefit by such assignment and at the same time, it cannot be treated as a case of tax evasion. It is a case of arranging the affairs in such a manner as to avail the exemption as per provisions of section 10(D) of the Act.
7. Dismissing the appeal of the revenue for the AY 2007-08 to 2009-10, ITAT Delhi Bench 'F' approved and upheld the observations and findings of the Commissioner of Income Tax(A) in favour of the assessee on the same issue and held that the benefit incurred owing to the combined effect of a prudent investment and statutory exemption provided u/s 10(10D) of the Act. The section does not envisage any bifurcation in the amount received 12 ITA No. 2905/Del/2013 Asstt.Year: 2008-09 on maturity on any basis whatsoever. Nothing can be read in section 10(10D) of the Act, which is not specifically provided therein. The Tribunal further held that since any such attempt would tantamount to legislation and not interpretation, on the basis of foregoing discussion, we are of the considered view that on the basis of above enunciation of law by Hon'ble High Court, it is amply clear that after assignment of the policy in favour of the assessee employee, it changes its character and gets converted from that of keyman insurance policy to that of ordinary policy and that once it has become a policy, the proceeds received thereunder would not be subject to tax in view of section 10/10(D) of the Act. Accordingly, nothing is taxable out of the maturity value of the policy received from the insurance company by the assessee employee. The present case of the assessee is also squarely covered by the above decision of Hon'ble High Court of Delhi in the case of Commissioner of Income Tax vs Rajan Nanda (supra) and by the decision of ITAT Delhi Bench 'F' in the case of DCIT vs Rajan Nanda (supra).
8. At this juncture, it is relevant to mention that by Finance Act 2013, an amendment to Explanation 1 to Section 10(10D) of the Act has been inserted w.e.f. 1.4.2014 i.e. with prospective effect but this has no effect on the present case which is related to AY 2008-09. Thus, we hold that the authorities below took an unjustified approach and at the cost of repetition, 13 ITA No. 2905/Del/2013 Asstt.Year: 2008-09 we are of the firm opinion that the case of the assessee is covered on all four corners in favour of the assessee by the decision of Hon'ble High Court of Delhi in the case of Commissioner of Income Tax vs Rajan Nanda (supra) and the decision of ITAT Delhi Bench "F" in the case of DCIT vs Rajan Nanda (supra) and we respectfully follow the same. Resultantly, ground no. 1 to 5 of the assessee are allowed with a direction to the Assessing Officer that the assessee is entitled for exemption u/s 10/(10D) of the Act. Ground no.6
9. Since we have allowed main ground of the assessee by directing the Assessing Officer to grant exemption u/s 10(10D) of the Act for the assessee with regard to surrender value of keyman life insurance policy, therefore, ground no. 6 being consequential does not survive for adjudication on merits and hence we dismiss the same.
10. In the result, appeal of the assessee is allowed in the manner as indicated above.
Order pronounced in the open court on 17.4.2014.
Sd/- Sd/- (S.V. MEHROTRA) (CHANDRAMOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 17th APRIL 2014 'GS' 14 ITA No. 2905/Del/2013 Asstt.Year: 2008-09 Copy forwarded to:- 1. Appellant 2. Respondent 3. C.I.T.(A) 4. C.I.T. 5. DR By Order Asstt.Registrar