2014 (4) TMI 1000 - AT - Income Tax

Assignment of Keyman insurance policy by the firm to its employee Nature of Keyman insurance policy Taxability of income u/s 2(24)(xi) r.w. section 10(10D) of the Act Held that - Following Commissioner of Income-tax Versus Rajan Nanda 2011 (12) TMI 392 - DELHI HIGH COURT - once there is an assignment of the employer in favour of the individual employer, then the character of the insurance policy changes and it gets converted into an ordinary policy, that such assignment is duly permitted by law - even the LIC accepted the assignment, then on assignment the policy no longer remains the keyman policy and gets converted into an ordinary policy - as such it is not open to the department to still take a stand that the policy is a keyman policy and when it matures, the advantage drawn therefrom is taxable - on maturity of the policy, it is not the employer but the individual employee who is getting maturity value/benefits of the insurance policy and no doubt the employer as well as the individual take huge benefit by such assignment and at the same time, it cannot be treated as a case of tax evasion - It is a case of arranging the affairs in such a manner as to avail the exemption as per provisions of section 10(D) of the Act thus, nothing is taxable out of the maturity value of the policy received from the insurance company by the assessee employee Decided in favour of Assessee.

Issues Involved:
1. Acceptance of the returned income vs. assessed income.
2. Nature and assignment of the Keyman Insurance Policy.
3. Clarification from Birla Sun Life Insurance regarding policy status post-assignment.
4. Questioning the nil surrender value of the policy at the time of assignment.
5. Ignoring the principles established in the case of Commissioner of Income Tax vs. Rajan Nanda.
6. Imposition of interest under Sections 234A and 234B of the Income Tax Act.

Detailed Analysis:

Issue 1: Acceptance of the Returned Income vs. Assessed Income
The assessee contested the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] for not accepting the returned income of Rs. 16,18,650 and confirming the assessment at an income of Rs. 73,04,440 as determined by the Assessing Officer (AO). The AO had added the surrender value of the Keyman Life Insurance Policy to the income of the assessee, deeming it taxable under Section 2(24)(xi) read with Section 10(10D) of the Income Tax Act, 1961.

Issue 2: Nature and Assignment of the Keyman Insurance Policy
The CIT(A) was criticized for not understanding the nature of the Keyman Insurance Policy after it was assigned by the firm to the appellant. The appellant argued that post-assignment, the policy should be treated as an individual policy and not a Keyman Insurance Policy, as per the clarification provided by Birla Sun Life Insurance.

Issue 3: Clarification from Birla Sun Life Insurance Regarding Policy Status Post-Assignment
The appellant submitted a clarification from Birla Sun Life Insurance stating that after the assignment, the policy loses its identity as a Keyman Insurance Policy and is treated as an individual policy. The CIT(A) ignored this clarification, which was a significant point of contention.

Issue 4: Questioning the Nil Surrender Value of the Policy at the Time of Assignment
The CIT(A) questioned the nil surrender value of the policy at the time of its assignment to the appellant, despite certification from the insurance company. The appellant argued that this questioning was unwarranted and contrary to the terms of the policy.

Issue 5: Ignoring the Principles Established in the Case of Commissioner of Income Tax vs. Rajan Nanda
The appellant contended that the CIT(A) ignored the principles established in the case of Commissioner of Income Tax vs. Rajan Nanda, where it was held that post-assignment, a Keyman Insurance Policy converts into an ordinary policy. The Hon'ble Delhi High Court had ruled that once a policy is assigned, it leads to conversion, and the character of the policy changes, making it non-taxable under Section 10(10D).

Issue 6: Imposition of Interest under Sections 234A and 234B of the Income Tax Act
The appellant also challenged the imposition of interest under Sections 234A and 234B of the Income Tax Act. However, since the main grounds were allowed, this issue became consequential and did not require separate adjudication.

Judgment Summary:
The Tribunal considered the arguments and evidence presented, including the decision of the Hon'ble Delhi High Court in the case of Commissioner of Income Tax vs. Rajan Nanda. It was observed that the High Court had clearly stated that post-assignment, the Keyman Insurance Policy converts into an ordinary policy, and the maturity value received is not taxable under Section 10(10D).

The Tribunal concluded that the assessee's case was covered by the decision in Rajan Nanda's case. It held that after the assignment of the policy, it changes its character and is no longer a Keyman Insurance Policy. Therefore, the maturity proceeds received under such a policy are exempt from tax under Section 10(10D).

The Tribunal allowed grounds 1 to 5 of the assessee, directing the AO to grant exemption under Section 10(10D). Consequently, ground 6 regarding the imposition of interest under Sections 234A and 234B was dismissed as it became redundant.

Conclusion:
The appeal of the assessee was allowed, and the order was pronounced in the open court on 17.4.2014. The Tribunal's decision reinforced the principle that post-assignment, a Keyman Insurance Policy is treated as an ordinary policy, and the proceeds from such a policy are exempt from tax under Section 10(10D) of the Income Tax Act.

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