Income Tax Appellate Tribunal - Delhi
Rajan Nanda , New Delhi vs Assessee on 3 February, 2010
ITA NO. 922/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. 922/Del/2010 A.Y. : 2006-07 Mr. Rajan Nanda, vs. Asstt. Commissioner of Income Tax, 2, Friends Colony (W), Central Circle-3, ARA Centre, E-2, New Delhi - 110 065 Jhandewalan Extn., New Delhi (PAN:AAEPN3548A) [Appellant] (Respondent) ASSESSEE BY : Sh. R.M. Mehta, Adv. & sh. Arun Kumar Bhatia, AR DEPARTMENT BY : Shri M.K. Gautam, C.I.T. (D.R.) PER SHAMIM YAHYA: AM This appeal by the assessee is directed against the orders of the Ld. Commissioner of Income Tax (Appeals) dated 3.2.2010 pertaining to assessment year 2006-07.
2. The issue raised is summed up in the following grounds of appeal which read as under:-
"The Commissioner (Appeals) has erred in sustaining addition of Rs. 13,25,92,264/- out of a total addition of Rs. 23,51,25,000/- made by the Assessing Officer on account of maturing proceeds of certain life insurance polices which were originally taken as keyman insurance policies but later assigned to the appellant at their respective surrender value, by misinterpreting the orders of the Hon'ble Tribunal for the Assessment Years 2003-04, 2004-05 and 2005-06 whereby the amount which was directed to 1 ITA NO. 922/DEL/2010 A.Y. 2006-07 be taxed was the surrender value of such policies at the time of their assignment by the company in favour of the appellant. The Commissioner (Appeals) ought to have deleted the entire addition of Rs. 23,51,25,000/- by giving the benefit of exemption u/s 10(10D) of the Income Tax Act, 1961 and even the surrender value amount is not liable to tax as the assessee has paid the same to the respective company at the time of assignment of the policies."
3. The assessee in this case derived income from salary and also income from capital gain and income from other source. From the details filed during the course of assessment, Assessing Officer noted that asessee has received the following amounts towards maturity of following keyman policies from LIC:-
S.No. Date of receipt Policy No. Maturing Taken by amount 1 1.4.2005 112963783 71250000/- EHIRCL 2 1.4.2005 112960968 42750000/- M/s Escortel Mobile 3 1.4.2005 112689601 71250000/- EHIRCL 4 1.4.2005 112960969 49875000/- M/s Escorts Ltd.
3.1 Assessing Officer enquired as to why the maturity of keyman policy be not brought to tax in the hands of the assessee. Assessee responded that the ITAT in the case of the assessee for assessment year 2003-04 for similar addition has deleted the same. Assessing Officer noted that department has not accepted the decision of the ITAT and preferred an appeal before the Delhi High Court.
Hence he did not accept the contention and made the addition of Rs. 23,51,25,000/- in the hands of the assessee.
4. Upon assessee's appeal Ld. Commissioner of Income Tax (Appeals) referred to the decision of the ITAT in assessee's own case for assessment year 2003-04 in 2 ITA NO. 922/DEL/2010 A.Y. 2006-07 ITA No. 2805/Del/06 vide order dated 15.1.2007. In para 17 of the said order the Tribunal had held as under:-
"We have considered the rival submissions carefully on this aspect. The assessee in this year has received the sum of Rs. 2,85,00,000 on maturity of an insurance policy. The said insurance policy was taken out of M/s Escorts Ltd. wherein the assessee is the Chairman and Managing Director earning salary therefrom. The said company had taken out a keyman insurance policy on the life of the assessee in 1997 which has since been assigned in favour of the assessee in 1998, both the events having taken place in the years preceding the assessment year in question. In the year under consideration, the said policy has since matured. Section 10(10D) of the Act provides for exemption from taxation of any sums received under a life insurance policy including the sum allocated by way of bonus on such policy. One of the exception, which is relevant for our purpose, is that sums received under a keyman insurance policy are not entitled to the exemption outlined in section 10(10D). According to the assessee, upon assignment, the impugned policy is to be understood as an ordinary policy and such a claim is supported by a certificate of LIC of India. On the other hand, the revenue contends that the impugned policy was taken out as a keyman insurance policy and it remains so even for considering the nature of the sum received at the time of its maturity. In the earlier part of the other, we have considered as to what is a keyman insurance policy and the intention of the Legislature regarding the taxation of sums received under keyman insurance policy. Explanation below section 10(10D) defines as to what is a keyman insurance policy. It is sufficient to deduce here that 3 ITA NO. 922/DEL/2010 A.Y. 2006-07 in all the provisions, what is envisaged is "sum received" either on maturity or one premature surrender i.e. surrender value under keyman insurance policy. The scheme of taxation covers the treatment of the premiums paid, i.e. its deductibility in the hands of the employer, taxability in the hands of the employees as "profits in lieu of salary", taxability under the head 'profits and gains of business' in case of absence of employee-employer relationship and the residual taxing provision of section 56(2), etc. All this shows that the 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 life of whom the insurance policy is taken out and second, the person who takes out such policy. The premium is borne by the second person. Where such a dual role comes to and 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. So, however, the scheme of taxation, which we have referred above, does not deal with a situation where a keyman insurance policy subsequently attains the character of ordinary insurance policy. Certainly, section 10(10D) comes into operation while evaluating the taxability of sums received under an ordinary insurance policy, including the amount of bonus thereon. So, however, the amount so received in the instant case 4 ITA NO. 922/DEL/2010 A.Y. 2006-07 certainly is constituted of sum which flows as a keyman insurance policy upto the date of the assignment. The amount which pertains to such period certainly is outside the purview of exemption u/s 10(10D) as it represents a sum received on account of keyman insurance policy. Therefore, in our considered view, it would be in the fitness of things to hold that out of the sum received by the assessee on maturity of the impugned policy, a sum equivalent to the surrender value of the policy at the time of its assignment by the company in favour of the assessee is taxable. The said amount having been received in this year is, therefore, rightly to be taxed presently. We, therefore, set aside the order of the Ld. Commissioner of Income Tax (Appeals) and direct the Assessing Officer to bring to tax the aforesaid sum in this year."
4.1 Ld. Commissioner of Income Tax (Appeals) noted that identical issue was there in assessment year 2004-05 in the case of the assessee and the TIAT had followed its order for assessment year 2003-04. For assessment year 2005-06 also the tribunal had principally followed the decision from earlier tribunal's decision. Hence, the Ld. Commissioner of Income Tax (Appeals) observed that the decision of the ITAT as given for assessment year 2003-04 and followed in assessment year 2004-05 becomes applicable even for assessment year 2005-06. Hence Ld. Commissioner of Income Tax (Appeals) held that maturity value received by the appellant is exempt u./s 10(10D) of the Act subject to the restriction that the amount so received constituted a sum which flows as a keyman insurance policy upto the date of assignment and the amount which pertains to such period certainly is outside the purview of exemption u/s 10(10D) as it represents a sum received on account of keyman insurance policy.
5ITA NO. 922/DEL/2010 A.Y. 2006-07 4.2 Ld. Commissioner of Income Tax (Appeals) further held that:
"As regards quantification of such amount, the ITAT in its order for A.Y. 2003-04 has held the same to be a sum equivalent to the surrender value of the policy at the time of its assignment by the company in favour of the assessee. It appears that the proper facts were not placed before ITAT to come to the conclusion of quantification of the sum received on account of keyman insurance policy out of total sum received on maturity as surrender value is the amount paid by the assessee to the employer on assignment of keyman insurance policy and it has nothing to do with the amount received on maturity as the surrender value does not represent the sum received by the appellant on account of keyman insurance policy. Therefore it is imperative on my part to ascertain the sum out of the amount so received on maturity which represents a sum received on account of keyman insurance policy. In my opinion this sum should be worked out by giving a narrative example:-
Let us presume that a employer 'E' takes a keyman insurance policy for keyman (K) for 3 years; the maturity value of which is 100 lakhs. The 'E' has to pay three instalment of premiums @20 lakhs each. In normal circumstance every year when 'E' is paying premium of 2- lakhs, same is allowable business expenditure and on maturity when 'E' receives 100 lakhs, the entire amount of 100 lakh will be treated as business income of 'E' for the year in which the maturity amount is received. However, after two years 'E' assigns this policy in favour of 'K' at Rs. 15 lakhs which according to LIC was the surrender value of the policy at that time.6
ITA NO. 922/DEL/2010 A.Y. 2006-07 Subsequent premium of 20 lakh is paid by 'K'. as Rs. 15 lakhs paid by 'K' to 'E' is offered as income of the 'E', effectively 'E' paid Rs. 25 lakhs (40-15) and claimed deduction of expenditure also to the extent of Rs. 25 lakh and on maturity nothing has been offered as income by 'E'. on the other hand 'K' has paid one premium of Rs. 20 lakhs for which no deduction has been claimed in that year by him. Similarly no deduction has been claimed for Rs. 15 lakhs which he paid to 'E' on assignment of the policy in his favour for which also no deduction has been claimed by him. Thus effectively he paid Rs. 35 lakhs premium for which no deduction has been claimed. Thus to sum up, 'E' has paid Rs. 25 lakhs, claimed deduction of Rs. 25 lakhs as expenditure and no amount is offered as income on maturity whereas 'K' has paid Rs. 35 lakhs as premium, no deduction has been claimed and receives on maturity 100 lakhs and nothing is offered as income as entire amount of Rs. 100 lakhs is claimed as exempt u/s 10(10D) of the Act.
In the light of the above facts, if one has to work out the sum pertaining to the period when the policy was keyman insurance policy, out of sum so received on maturity i.e. Rs. 100 lakhs, it will be "100 x 25/60"
and exempted amount u/s 10(10D) will be "100x 35/60". If allocation is done in such a way then only the real spirit of the decision of the ITAT will be represented. Thus respectfully following the decision of the ITAT in principle that out of sum so received on maturity the sum received on 7 ITA NO. 922/DEL/2010 A.Y. 2006-07 account of keyman insurance policy should be taxed, which has to be worked out in this manner."
5. In the light of his aforesaid observations, Ld. Commissioner of Income Tax (Appeals) commuted the amounts as under:-
"It is noticed that out of total premium of Rs. 17,81,84,705/-, the appellant has paid Rs. 7,77,02,351/- and effective amount of premium paid by the employer companies is Rs. 10,04,82,354/-. The total amount received on maturity is Rs. 23,51,25,000/-.
Thus following the guidelines as given hereinabove in para 3.3.5.2., the amount to be taxed, in view of in principle decisions of ITAT given in A.Y. 2003-04, has to be worked out as under:-
23,51,25,000 x 10,04,82,354 17,81,84,705 Which is Rs. 13,25,92,264/-
The Assessing Officer is, therefore, directed to tax Rs. 13,25,92,264/- as income of the appellant during the year following the direction of the ITAT in principle as given in A.Y. 2003-04, 2004-05 and even in 2005-06 (after verification done by Assessing Officer as per directions of the ITAT). The appellant gets relief of Rs. 10,25,32,736/- on these grounds"8
ITA NO. 922/DEL/2010 A.Y. 2006-07
6. Against the above order the assessee is in appeal before us.
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 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:
9ITA NO. 922/DEL/2010 A.Y. 2006-07
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.
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 10 ITA NO. 922/DEL/2010 A.Y. 2006-07 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 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 11 ITA NO. 922/DEL/2010 A.Y. 2006-07 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.
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 12 ITA NO. 922/DEL/2010 A.Y. 2006-07 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.
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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