2015 (2) TMI 627 - AT - Income Tax

Taxability of amount received from LIC on maturity of key man insurance policies - Held that - The surrender value is taxable in the hands of the Key Man but in the case of present assessee he had paid the surrender value to the organizations which took out the said policies, and such surrender value has been taxed in the hands of Institute. Both the parties agree that this issue is covered by the decision of Hon ble Delhi High Court in assessee s own case 2011 (12) TMI 392 - DELHI HIGH COURT wherein held that once there is no 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 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 to 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. Once has to keep inmind on maturity, it does not the company but who is an individual getting the matured value of the insurance. - Decided in favour of assesse

Summary

Issues:
1. Addition of amount received from LIC on maturity of key man insurance policies.
2. Taxability of encashed Keyman policies worth &8377; 19.06 crores.

Analysis:
*Issue 1: Addition of amount received from LIC on maturity of key man insurance policies*
The appeal was against the order of the CIT(A) for A.Y. 2008-09, where the assessee, a renowned Doctor, received income from various sources, including capital gains. The dispute arose when the AO made an addition of &8377; 19,06,30,917/- from LIC on maturity of key man insurance policies. The CIT(A) deleted the addition based on a decision of the Delhi High Court, clarifying that key man policies, upon assignment, become ordinary policies exempt u/s 10(10D) of the Act. The Department appealed, arguing that the matter was sub judice in the Supreme Court. However, the Tribunal, following the Delhi High Court's decision, dismissed the appeal, stating that the issue was settled by the High Court.

*Issue 2: Taxability of encashed Keyman policies*
The AO contended that the encashed Keyman policies were taxable, as they were taken out by the institute where the assessee worked as a Cardio Vascular Surgeon. The assessee's representative argued that as per LIC rules, upon assignment, key man policies become normal policies, and the proceeds are exempt from tax. The Tribunal noted that the issue was covered by a previous Delhi High Court decision, which emphasized that on assignment, the policy changes to an ordinary one, not subject to tax under section 10(10D). The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal based on the settled law and the High Court's interpretation of the tax provisions.

In conclusion, both issues were decided in favor of the assessee based on the interpretation of key man insurance policies and their tax treatment under the relevant provisions of the Income Tax Act. The Tribunal upheld the decisions of the CIT(A) and relied on the binding precedent set by the Delhi High Court, leading to the dismissal of the Revenue's appeals in both matters.