Income Tax Appellate Tribunal - Delhi
Naresh K Trehan , New Delhi vs Assessee on 29 March, 2010
ITA NO. 1690/DEL/2010 A.Y. 2007-08 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH "F" NEW DELHI BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. No. 1690/Del/2010 A.Y. : 2007-08 Dr. Naresh Trehan, vs. DCIT, Central Circle 3, New Delhi , B-4, Maharani Bagh, New Delhi - 110 065 (PAN: AACPT7305F) [Appellant] (Respondent) ASSESSEE BY : Shri Rahul Khare, Advocate DEPARTMENT BY : Shri V.K. Tiwari, C.I.T. (D R) PER SHAMIM YAHYA: AM This appeal by the assessee is directed against the order of the Ld. Commissioners of Income Tax (Appeals) dated 29.3.2010 pertaining to assessment year 2007-08.
2. The grounds raised read as under:-
"The Ld. Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the addition of Rs. 2,41,38,519/- on account of encashment of key man policy."
"The Ld. Commissioner of Income Tax (Appeals) erred in fact and in law in partly treating the encashment of key man policy as revenue receipt as against capital receipt."
3. In this case the Assessing Officer during assessment proceedings noted that the assessee has received an amount of Rs. 4,27,50,000/- received from LIC 1 ITA NO. 1690/DEL/2010 A.Y. 2007-08 being maturity of keyman insurance policy. The same had not been reflected in the computation of income stating, that the amount is eligible for exemption u/s 10(10D) of the Act. The Assessing Officer further noted that the total premium paid under keyman insurance policy No. 112683959 is Rs. 3,18,62,295/- and the maturity value is Rs. 4,27,50,000/- which is inclusive of sum assured and bonus of Rs. 1,08,87,705/-. The keyman insurance policy was taken by Escorts Heart Institute and Research Centre (EHIRC) where the appellant was main Cardio Vascular Surgeon. The EHIRC has paid two premium towards this policy (Rs. 1,05,86,445/- each) and then the policy was surrendered to the appellant at the surrender value of RS. 31,82,045/-. The third premium of Rs. 1,06,89,405/- was paid by the appellant. Thus the assessee, who paid only third premium (to LIC) and surrender value of EHIRC, claimed entire amount received on maturity as exempt treating the same as normal policy after assignment. Thus, by way of assignment of the keyman policy in its favour, the assessee has received total amount of maturity value of Rs. 4.27 crores by praying a single premium amount of Rs. 1,06,89,405/- and surrender value of Rs. 31,82,045/-. The total amount effectively paid by the assessee is Rs. 1,38,71,450/- [1,06,89,405 plus 31,82,045] whereas the total amount effectively paid by EHIRC is Rs. 1,79,90,845/- [2x1,05,86,445 minus 31,82,045]. Thus the assessee has received the benefit of premium amounts paid to the company which is also being claimed as exempt u/s 10(10D). According to Assessing Officer this claim of the appellant is not correct.
3.1 Assessing Officer proceeded to workout the proportionate amount of Rs.2,41,38,519/- out of total amount received which according to him was proceeds pertaining to contribution to EHIRC and hence the same is taxable.
2ITA NO. 1690/DEL/2010 A.Y. 2007-08
4. Upon assessee's appeal Ld. Commissioner of Income Tax (Appeals) held that exactly identical issue was there in the case of assessee for A.Y. 2006-07 as well as in the case of Shri Rajan Nanda for A.Y. 2006-07, though the treatment of Assessing Officer was little different to the extent that in assessment year 2006- 07, he has treated entire amount received on maturity as taxable and nothing was allowed as exempt u/s 10(10D). Ld. Commissioner of Income Tax (Appeals) referred to his own decision for A.Y. 2006-07 in the case of the assessee and held that Assessing Officer has followed the exactly the same principle which has been followed by the Ld. Commissioner of Income Tax (Appeals) in his order for A.Y. 2006-07 in the case of the assessee. Hence he held that no interference was called for in Assessing Officer 's action of treating the amount of Rs. 2,41,38,519/- as not exempt u/s 10(10D).
5. Against this order the assessee is in appeal before us.
6. We have heard both the counsel and perused the records. Both the counsels fairly agreed that identical issue was decided by the Tribunal in assessee's own case for A.Y. 2006-07 and the matter was remitted to the files of the Assessing Officer. We find that the tribunal in the said order for A.Y. 2006-07 vide order dated 4.6.2010 had dealt with the issue as under:-
"6. We have heard both the counsel 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:-3
ITA NO. 1690/DEL/2010 A.Y. 2007-08
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:
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.4
ITA NO. 1690/DEL/2010 A.Y. 2007-08
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 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."5
ITA NO. 1690/DEL/2010 A.Y. 2007-08 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 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. 6 ITA NO. 1690/DEL/2010 A.Y. 2007-08 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 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. 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."
7ITA NO. 1690/DEL/2010 A.Y. 2007-08
7. We find that Assessing Officer in this case has followed the order of the Ld. Commissioner of Income Tax (Appeals) for A.Y. 2006-07. We have already remitted the matter in that year to the files of Assessing Officer with the above directions. Since the facts are identical, we remit this issue in appeal to the files of Assessing Officer to consider it afresh with the same directions. Needless to add that the assessee should be given adequate opportunity of being heard.
8. In the result, appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the open court on 18/06/2010.
Sd/- Sd/-
[A.D. JAIN] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date 18/06/2010
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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