2014 (1) TMI 249 - AT - Income Tax

Deletion on account of amount received from LIC on maturity of Keyman Insurance Policy u/s 10(10D)(b) of the Act Held that - Following Commissioner of Income-tax Versus Rajan Nanda 2011 (12) TMI 392 - DELHI HIGH COURT - once there is assignment of the employer in favour of the individual, the character of the insurance policy changes and it gets converted into an ordinary policy; that such assignment is duly permitted by law; that even the LIC accepted the assignment, itself clarifying that on assignment, the policy no longer remains a Keyman Policy and gets converted into an ordinary policy; that as such, it is not open to the Department to still allege that the policy is a Keyman Policy and when it matures, the advantage drawn therefrom is taxable - that on maturity of the policy, it is not the employer, but the individual, who is getting the maturity value of the insurance; that no doubt, the employer as well as the individual take huge benefit by such assignment, but it cannot be treated as a case of tax evasion, rather it is a case of arranging the affairs in such a manner as to avail the state exemption as provided in Section 10 (10D) of the Act. Benefit inured owing to the combined effect of a prudent investment and the statutory exemption provided u/s 10 (10D) of the Act does not call for any bifurcation in the amount received on maturity on any basis whatsoever - nothing can be read into Section 10 (10D) of the Act, if it is not specifically provided - any such attempt would tantamount to legislation and not interpretation - after assignment of the policy in favour of the assessee, it changes its character from that of a Keyman Insurance Policy to that of an ordinary policy and that once it has become an ordinary policy, the proceeds received thereunder would not be subject to tax in view of Section 10 (10D) of the Act, due to which nothing is taxable out of the maturity value received from the insurance policy The order of the CIT(A) upheld Decided against Revenue.

Summary

Issues:
- Department's appeals against deletion of additions made on account of amount received from LIC on maturity of Keyman Insurance Policy for Assessment Years 2007-08 to 2009-10.
- Whether the maturity value of the insurance policy received by the assessee is taxable.

Analysis:
1. The Department filed appeals against the deletion of additions made on account of amount received from LIC on maturity of Keyman Insurance Policy for Assessment Years 2007-08 to 2009-10. The Ld. CIT (A) had deleted the additions for all three years, leading to the Department's appeals before the ITAT Delhi.

2. The main issue revolved around whether the maturity value of the insurance policy received by the assessee was taxable. The Department contended that the maturity amounts received were from a Keyman Insurance Policy, while the assessee argued that the policies had transformed into ordinary insurance policies after assignment from the employer. The High Court had previously addressed similar issues in the assessee's cases for Assessment Years 2003-04 and 2004-05, providing crucial guidance.

3. Section 10(10D) of the IT Act was pivotal in determining the taxability of the maturity amounts. The High Court's analysis highlighted that once there was an assignment of the policy from the employer to the individual, the policy's character changed from a Keyman Insurance Policy to an ordinary policy. This transformation was legally permissible, and even LIC acknowledged this conversion, affirming that the policy no longer retained its Keyman status post-assignment.

4. The High Court emphasized that the Department could not argue that the policy remained a Keyman Policy upon maturity, as it was the individual, not the employer, who received the maturity value. The court clarified that such arrangements were not tantamount to tax evasion but rather strategic tax planning within the confines of the law. The benefits derived from prudent investments and statutory exemptions did not necessitate a breakdown of the maturity amount for tax purposes.

5. The High Court's decision in the assessee's case remained unchallenged by the Department, indicating the validity and soundness of the ruling. Consequently, the ITAT Delhi upheld the Ld. CIT (A)'s orders, dismissing the Department's appeals due to the lack of merit. The judgment reaffirmed that post-assignment, the policy's character changed to an ordinary policy, rendering the maturity proceeds non-taxable under Section 10(10D) of the Act.