2022 (3) TMI 1605 - AT - Income Tax

Nature of receipts - proceeds of maturity of insurance policy - whether life insurance policy is a capital asset? - whether proceeds of a maturity of a single/double premium life insurance policy are to be assessed as Long-term capital gain (LTCG) or under the head Income from other sources ? - HELD THAT - As per section 2(24) of the Act, capital asset means property of any kind held by an assessee, including any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof except stock in trade, personal effects etc., the agricultural land and gold bonds and special bearer bonds as mentioned therein. The Parliament while substituting section 10(10D) and inserting section (2A) to section 88 has denied the benefit of exemption and deduction in respect of policies, which are similar to deposits/investments and also has treated the premium paid over and above of 20% of the sum assured towards investment and not towards insurance or hedging of life risk. The amount of premium paid by the assessee, which was more than 20% of the sum assured was, in fact, investment made by the assessee. However, it is pertinent to note here that as per section 10(10D)(d), entire maturity amount received including sum assured has been excluded of the policies in respect of premium payable for any of the years exceeds 20% of the sum assured. Meaning thereby, the exclusion is not for any amount received over and above the sum assured, rather the entire amount received under the policy has been excluded. Therefore, the entire maturity value/gains at the time of extinguishment of the rights of the assessee in the said policy i.e. on the date of maturity are liable to be treated as capital gains. While computing the capital gains, the cost of acquisition will be taken the amount paid towards premium minus 20% of the sum assured, which amount shall be treated as not part of the investment rather towards the cost of hedging of risk under the insurance policy, for which a deduction is already available to that extent under sub section (2A) to section 88 and thereafter, indexation is to be allowed accordingly.

Summary

Issues Involved:
1. Whether a life insurance policy is a capital asset.
2. Whether proceeds of a maturity of a single/double premium life insurance policy are to be assessed as “Long-term capital gain” (LTCG) or under the head “Income from other sources”.

Issue-wise Detailed Analysis:

1. Life Insurance Policy as a Capital Asset:

The appellant-assessee argued that the life insurance policy should be treated as a capital asset. The CIT(A) did not agree, stating that the insurance policy is not an asset but a contract of insurance hedging against certain risks, regulated by IRDA, and not tradable or transferable like mutual funds. The policy entitles the holder to certain events, which is a general feature of any insurance policy. The CIT(A) concluded that the policy is not an asset and thus not eligible for indexation benefits.

2. Assessment of Maturity Proceeds:

The main contention was whether the maturity proceeds should be taxed as LTCG or as income from other sources. The assessee received Rs. 18,14,072/- as maturity proceeds from Bajaj Allianz Insurance Company and computed a long-term capital loss of Rs. 3,26,569/-. The Assessing Officer (AO) treated the maturity proceeds as income from other sources, disallowing the LTCG claim.

The CIT(A) upheld the AO’s decision, noting that the insurance policy taken by the appellant was in the nature of a pension policy, not a capital asset. The policy provided a sum assured at the end of the maturity term, and the proceeds from such policies are taxable under Section 56 of the Income Tax Act, not as capital gains. The CIT(A) also referenced Section 80CCC(2) for taxability, stating that the accretion value (Maturity Value - Premium paid) would be taxable under Section 56 if no deductions were claimed for the premiums.

The CIT(A) also distinguished the appellant’s case from the case of Girish Haribhai Trivedi, where the policy was a unit-linked insurance policy with investments in mutual funds, unlike the appellant’s single premium insurance policy.

3. Application of Section 10(10D) and Section 88:

The judgment discussed the changes introduced by the Finance Act 2003, which substituted Section 10(10D) to ensure that high premium insurance policies with minimal risk cover are treated like other investments. The exemption under Section 10(10D) does not apply if the premium exceeds 20% of the sum assured. The memorandum explaining the Finance Bill 2003 clarified that such policies are akin to deposits or bonds, and the amendment aimed to rationalize tax concessions for such policies.

4. Definition of Capital Asset:

Section 2(14) of the Act defines a capital asset, including any unit-linked insurance policy to which the exemption under Section 10(10D) does not apply. The judgment noted that the Parliament intended to treat premiums exceeding 20% of the sum assured as investments, not insurance. Therefore, the maturity amount received is treated as capital gains, but the cost of acquisition should exclude the portion of the premium towards hedging risk, with indexation benefits allowed accordingly.

Conclusion:

The Tribunal concluded that the appeal of the assessee is partly allowed, recognizing the dual nature of the policy (insurance and investment) and treating the maturity proceeds as capital gains with specific adjustments for the cost of acquisition and indexation.