2020 (12) TMI 232 - HC - Income Tax

Exemption u/s 10(10D) - addition of the surrender value of the assigned keyman insurance policy as income of the appellant - Whether Tribunal is correct in law in not taking notice of the amendment introduced by the Finance Act, 2013, to include the assigned policies also within the ambit of keyman insurance policy for the purpose of taxation with effect from 01.04.2014 which clearly go to prove that the surrender value of the assigned keyman insurance policy was not taxable up to 31.03.2014? - HELD THAT - In the present facts, the Keyman Insurance Policy was taken out by the Company and was assigned in favour of the Managing Director on 31.03.2006. To the extent of surrender value accrued as on 31.03.2006, namely ₹ 58,74,752/-, was offered for taxation as perquisite in the hands of the Assessee. The character of Insurance Policies does not change after assignment. The Assessee himself has never paid any premium on the said Keyman Insurance Policy from his own resources. Therefore, even if the assignment is endorsed by the Insurance Company as on 31.03.2006, the character of the Policy does not convert into an ordinary Life Insurance Policy in the hands of the Assessee. The Keyman Insurance Policy is a Life Insurance Policy taken by the employer company in favour of its employee Managing Director. Its character continues to be the same. In RAJAN NANDA AND NARESH KUMAR TREHAN 2011 (12) TMI 392 - DELHI HIGH COURT clearly expresses that the character of the Insurance Policy gets converted into an ordinary policy. Because Section 10(10D) of the Act does not make any such distinction, it cannot be said to be a case of tax evasion, but rather a case of tax planning, even if huge benefit of these provisions are taken by both company as well as individual. It is this caveat, along with the pronouncement of Delhi High Court, led to the insertion of aforesaid Explanation 1 to Section 10(10D) of the Act and therefore, after such amendment, which in our opinion applies retrospectively to all the previous years, including the Assessment Year 2007-08 in the present case - the reliance placed by the learned counsel for the Assessee of Delhi High Court decision is misplaced and cannot enure to the benefit of the Assessee. On the basis of Section 10(10D) of the Act, with its Explanation 1, the clear position of law which emerges is that the character of the Keyman Insurance Policy does not get converted into ordinary Life Insurance Policy despite its assignment and therefore, any benefit accruing to the employee upon its surrender or encashment will be taxable in the hands of the Employee as perquisite . Appeal filed by the Assessee, therefore, deserves to be dismissed

Summary

Issues Involved:
1. Taxability of the surrender value of the assigned Keyman Insurance Policy under Section 10(10D) before the amendment by the Finance Act, 2013.
2. Consideration of the amendment introduced by the Finance Act, 2013, regarding the taxability of assigned Keyman Insurance Policies effective from 01.04.2014.

Issue-wise Detailed Analysis:

1. Taxability of the Surrender Value of the Assigned Keyman Insurance Policy:
The primary issue revolves around whether the surrender value of the assigned Keyman Insurance Policy should be considered taxable income. The Tribunal's findings indicate that the policy, initially taken by Allu Entertainment Private Ltd. (AEPL) on the life of its Managing Director, was assigned to him on 31.03.2006. The surrendered value of ?58,74,752 was offered as taxable income for the assessment year 2006-07. Subsequently, the policy was encashed for ?97,03,083 on 29.06.2006, and the additional sum of ?38,28,331 was added by the AO as taxable income for the assessment year 2007-08.

The CIT(A) upheld the AO's decision, emphasizing that Section 10(10D) of the Act excludes sums received under a Keyman Insurance Policy from the exemption, thereby treating such sums as taxable income. The Tribunal concurred, dismissing the appeal and labeling the assignment and subsequent encashment as a "colorable device" to evade tax.

2. Consideration of the Amendment Introduced by the Finance Act, 2013:
The appellant argued that the amendment to Section 10(10D) by the Finance Act, 2013, which included assigned policies within the ambit of Keyman Insurance Policy for taxation purposes effective from 01.04.2014, implied that such policies were not taxable before this date. The appellant relied on the Delhi High Court's decision in CIT v. Rajan Nanda, which held that the character of the insurance policy changes upon assignment, converting it into an ordinary policy exempt under Section 10(10D).

The Revenue countered by asserting that the amendment was clarificatory and should apply retrospectively, maintaining the policy's character as a Keyman Insurance Policy even after assignment. The Tribunal rejected the appellant's reliance on the Rajan Nanda case, stating that the amendment aimed to clarify the legislative intent and rectify the judicial interpretation that allowed tax evasion.

Conclusion:
The court agreed with the Revenue's arguments, concluding that the character of the Keyman Insurance Policy does not change upon assignment and remains taxable. The insertion of Explanation 1 to Section 10(10D) was deemed clarificatory, applying retrospectively to ensure the policy's consistent tax treatment. Consequently, the appeal was dismissed, affirming the taxability of the surrender value received by the appellant.

The judgment emphasizes that despite the assignment, the Keyman Insurance Policy retains its original nature, and any benefits derived from its surrender or encashment are taxable as perquisites under Section 17(3) of the Act. The court also dismissed the appellant's reliance on the Bombay High Court's decision in Prashant J Agarwal, which was based on a concession by the Revenue, not a substantive legal analysis.