In a recent decision by the Income Tax Appellate Tribunal (ITAT) Delhi Bench 'E', the case of Mihir Parikh versus Assistant Commissioner of Income-tax, Circle-61(1) (IT Appeal No. 2982 of 2023) sheds light on the taxation of sums received on surrender of a life insurance policy and the applicability of exemptions under section 10(10D) of the Income Tax Act, 1961. This landmark decision, rendered on February 21, 2024, provides clarity on the tax treatment of policies that undergo a change in character due to assignment or transfer.
Facts of the Case:
The case revolved around the claim for exemption under section 10(10D) concerning sums received upon the maturity of a life insurance policy. Initially, the Assessing Officer (AO) deemed the sum taxable under section 28(vi) as part of a Keyman Insurance policy. The contention arose from the nature of the policy, which was originally acquired under a Keyman Insurance policy by a certain concern where the assessee served as a Keyman. Subsequently, upon the dissolution of the proprietorship concern, the assessee purchased the Keyman Insurance policy in 2008. The assessee argued that this change in ownership altered the character of the policy, making it an ordinary policy and thereby eligible for exemption under section 10(10D).
Decision of the ITAT:
The ITAT, in its deliberation, acknowledged the merit in the assessee's contention that the transfer of the policy before its maturity alters its character. Citing the precedent set by the Delhi High Court in the case of CIT vs Rajan Nanda [2012] 18 taxmann.com 98 (Delhi), the tribunal emphasized the significance of whether the assignment of the insurance policy to the assessee transforms it from a Keyman insurance policy to an ordinary one. It was noted that if the policy remains categorized as a Keyman insurance policy, the maturity value received would indeed be subjected to tax as per Section 10(10D). However, upon conversion to an ordinary policy, the premium received would be exempt from taxation under the same section.
Furthermore, the ITAT highlighted the absence of any prohibition regarding assignment or conversion under the Income Tax Act. Once the policy undergoes assignment, it leads to a change in character, as affirmed by the insurance company itself. Consequently, the Revenue's claim that the policy in question retained its Keyman policy status and thereby subjected the maturity proceeds to taxation was deemed untenable.
Conclusion:
In light of the binding precedents and the clear understanding that assignment of the policy alters its character, the ITAT ruled in favor of the assessee. The lower authorities were found unjustified in denying the benefit of exemption under section 10(10D). Consequently, the AO was directed to delete the addition made to the assessee's income.
This decision not only provides clarity on the tax treatment of sums received on surrender of life insurance policies but also underscores the significance of policy assignment in determining its tax implications. It sets a precedent for cases involving the conversion of policies from Keyman insurance to ordinary insurance and reaffirms the principles outlined in Section 10(10D) of the Income Tax Act, 1961.
