2012 (6) TMI 514 - AT - Income Tax

Keyman Insurance Policy - taxability of difference between the premium paid by employer and surrender value paid by employee to employer at time of assignment of same to employee - Held that - Hight court in case of CIT Vs Rajan Nanda(2011 (12) TMI 392 (HC)), held that it was only the surrender value of the policy at the time of assignment or the sum received by an individual at the time of retirement, which is taxable. Insofar as assignment is concerned, at that time surrender value was paid by the employee and therefore, nothing could be taxed. Therefore, the difference between premium paid and surrender value is not taxable in the hands of assignee - Decided in favor of assessee. It is noteworthy that Keyman insurance policies becomes ordinary insurance policies at the time of assignment, hence, amount received on maturity of keyman insurance policy is to be treated as exempt u/s 10(10D).

Issues:
1. Taxability of surrender value of life insurance policies assigned to the appellant.
2. Correct treatment of keyman insurance policy on assignment.
3. Taxability of maturity value of keyman insurance policy.
4. Applicability of previous tribunal and high court judgments on similar issues.

Issue 1: Taxability of surrender value of life insurance policies assigned to the appellant:
The appellant contested the taxability of the surrender value of life insurance policies assigned in their favor. The Assessing Officer added the maturity value of these policies to the appellant's income, leading to an appeal before the Ld CIT(A). The ITAT directed the case back to the Assessing Officer to clarify the status of the policies post-assignment. LIC confirmed that the policies became ordinary insurance policies upon assignment. Referring to previous tribunal orders, the Assessing Officer treated the maturity amount as exempt but taxed the difference between the premium paid and surrender value at the time of assignment.

Issue 2: Correct treatment of keyman insurance policy on assignment:
The crux of the issue revolved around the correct treatment of keyman insurance policy on assignment to the keyman. Contradictory letters from LIC regarding the status of the policy post-assignment led to confusion. The ITAT directed the Assessing Officer to seek clarification from LIC on the correct status of the policy and its taxability in the hands of the assessee. Subsequently, LIC clarified that the policies became ordinary insurance policies upon assignment, leading to the exemption of the maturity amount but taxation of the difference between premium and surrender value.

Issue 3: Taxability of maturity value of keyman insurance policy:
The Ld CIT(A) upheld the Assessing Officer's decision to tax the maturity value of the keyman insurance policy. However, the appellant produced a judgment from the Hon'ble High Court of Delhi, which favored the assessee in a similar case for the assessment years 2003-04 and 2004-05. Citing the High Court's judgment, the ITAT held that the difference between premium paid and surrender value is not taxable in the hands of the assignee, aligning with the previous court decision.

Issue 4: Applicability of previous tribunal and high court judgments:
The ITAT considered previous tribunal orders and the judgment of the Hon'ble High Court of Delhi in a similar case to determine the taxability of the surrender value and maturity amount of the keyman insurance policy. Relying on the High Court's decision, the ITAT allowed the appeal filed by the assessee, concluding that the difference between premium paid and surrender value is not taxable for the assignee.

In conclusion, the judgment addressed the taxability of surrender value and maturity amount of life insurance policies assigned to the appellant, the correct treatment of keyman insurance policy on assignment, and the applicability of previous tribunal and high court judgments on similar issues, ultimately ruling in favor of the assessee based on the High Court's decision.

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