2017 (4) TMI 103 - AT - Income Tax

Taxable event - accrual of income - Taxability of surrender value of the Keyman Insurance policy in the hands of the appellant as the assignment in favour of the appellant has happened during the year - whether the taxable event is the date of assignment of the policy which falls in the year under consideration or the date when the amount was actually received by the appellant on actual surrender of the policy which falls in the subsequent financial year? - Held that - The taxable event will occur when the amount was actually received by the appellant on actual surrender of the Keyman Insurance policy. The surrender of the policy and the actual receipt of money by the appellant under the Keyman Insurance Policy has admittedly not happened during the year under consideration but has happened only in the subsequent financial year. Hence, no amount can be brought to tax in the year under consideration. In our view, the pendulum of taxability will start titling from the firm towards the appellant as soon as the policy has been assigned by the firm in favour of the appellant but the taxability will only be fastened on the appellant when he actually receives the surrender value. The assignment alone cannot be a basis for bringing to tax the surrender value but the act of assignment along with actual receipt of money under the policy would be the correct basis for bringing to tax such amount in the hands of the appellant. This is the way the Legislature in its wisdom has worded these charging provisions and we have to read it accordingly. Referring to Circular No.792 dated 18.02.1998 issued by the CBDT in the context of Finance Act (No 2), 1996 explaining the tax treatment of Keymjan Insurance Policy have to be read in the context of the express provisions in the statute as provided by the legislature and doesn t support the case of the Revenue. Thus it cannot be held that the arrangement has been entered into between the firm and the appellant with a view to avoid payment of taxes. As we have held above, the taxable event is the year of actual receipt of the surrender value and the Revenue will be well within its rights to bring to tax such receipt on surrender of the Keyman Insurance policy as per law prevailing for the said year. In fact, it is noted that the Revenue has brought to tax the actual surrender value in the year of surrender in subsequent AY 2009-10 which however has not found favour with the ld CIT(A) and the same has been held eligible for exemption by the ld CIT(A) under section 10(10D) of the Act. The fact that the amount has been held eligible for exemption in the year of happening of the taxable event cannot be basis to hold that the taxable event can be shifted to another year or to hold that the arrangement has been entered into between the firm and the appellant with a view to avoid payment of taxes. Thus even though the assignment has happened during the year, surrender value as computed as on the date of assignment cannot be brought to tax in absence of actual receipt of the surrender value during the year under consideration. - Decided in favour of assessee.

Issues Involved:
1. Legality of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Taxability of the surrender value of the Keyman Insurance Policy assigned to the assessee.
3. Impact of Fringe Benefit Tax (FBT) paid by the firm on the surrender value of the Keyman Insurance Policy.

Detailed Analysis:

1. Legality of the Notice Issued Under Section 148:
The assessee challenged the action of the Assessing Officer (AO) in issuing a notice under Section 148, arguing it was bad in law. The AO had reopened the assessment based on the grounds that the surrender value of the Keyman Insurance Policy assigned to the assessee was taxable. The assessee objected to the reopening, but the AO proceeded with the assessment, leading to the present appeal.

2. Taxability of the Surrender Value of the Keyman Insurance Policy:
The primary issue was whether the surrender value of ?44.78 lakhs, determined at the time of the policy's assignment, was taxable in the hands of the assessee during the Assessment Year (AY) 2008-09. The AO added this amount to the assessee's income, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].

The assessee argued that no sum was "received" during the AY 2008-09, as required by Section 2(24)(xi) of the Income Tax Act, 1961. The term "received" implies actual receipt of money, which did not occur during the year of assignment. The assessee cited various judicial precedents, including the Supreme Court's decision in CIT vs. Ashok Bhai Chiman Bhai, to support the interpretation that income is taxable only when it is actually received.

The Tribunal agreed with the assessee, stating that the taxable event is the actual receipt of the surrender value, which occurred in the subsequent financial year when the policy was surrendered, and not at the time of assignment. The Tribunal referred to the Delhi High Court's decision in CIT vs. Rajan Nanda, which held that no income could be charged to tax at the time of assignment as no amount was received.

The Tribunal also noted that the legislative amendment in Finance Act, 2013, which included assigned policies within the definition of Keyman Insurance Policies, was prospective and applicable from AY 2014-15 onwards. Therefore, it could not be applied retrospectively to the AY 2008-09.

3. Impact of Fringe Benefit Tax (FBT) Paid by the Firm:
The assessee contended that the firm had already paid FBT on the surrender value, and thus, the same amount could not be taxed again in the hands of the assessee. However, since the Tribunal decided the main issue on the basis of actual receipt of the surrender value, it did not find it necessary to examine this alternate ground.

Conclusion:
The Tribunal concluded that the surrender value of ?44.78 lakhs could not be brought to tax in the AY 2008-09 in the absence of actual receipt of the amount. The appeal filed by the assessee was partly allowed, and the grounds related to the legality of the proceedings and the impact of FBT became infructuous and were dismissed. The order was pronounced in the open court on 24/03/2017.

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