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TMI Blog2009 (3) TMI 226X X X X Extracts X X X X X X X X Extracts X X X X ..... o tax the surrender value of the two policies at the time of their assignment by the companies to the appellant although this is without prejudice to the argument that even such surrender value was not taxable since the policies after assignment became ordinary insurance policies and no part of the maturity amount including the surrender value was taxable. (4) Without prejudice to the earlier grounds, the CIT(A) erred in law in enhancing the addition made by the AO without putting the appellant on notice about such enhancement." 2. Rival contentions have been heard and records perused. At the outset learned Authorised Representative placed on record the order of Tribunal dt. 15th Jan., 2007 for the asst. yr. 2003-04 in the case of instant assessee and contended that issue with regard to chargeability of amount received on maturity of keyman policy is covered by this order. We have heard the rival contentions; the facts in brief are that during the previous year relevant to the assessment year under consideration the assessee derived income as salary from M/s Escorts Ltd., had income from capital gain and also had income from other sources, i.e., bank interest, and dividend from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the keyman becomes ordinary policy, hence the amount received as maturity value of such policy is exempt from tax. However, their Honour has ruled that a sum of surrender value should be treated as income of the policyholder at the time of maturity. In fact the surrender value is the amount paid by the assessee to the employer on assignment of keyman insurance policies. Hence it appears that proper facts were not placed before the Hon'ble Tribunal to appreciate the same and to reach conclusions. As far as maturity value is concerned, the Hon'ble Tribunal has proceeded on the basis of a handwritten letter of an official of LIC of India stating that after assignment the keyman policy will be treated as ordinary individual policy. In order to ascertaining true facts of the matter and terms and conditions of the keyman insurance policy etc., the AO has been directed to approach LIC and obtain the details. In response to AO's query it was replied by the LIC of India that at the time of assignment of keyman insurance policy there is no change in basic features of original terms and conditions, as such, assignment does not have any effect on originally sum assured, maturity value, bonu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s argued by the appellant. The original conditions do apply even after assignment to the keyman. Appellant could not provide any basic characters which are changed vis-a-vis the initial policy taken by the organization. In fact the LIC does not change the original policy issued. In other words there is no change of policy number etc. Keyman policies are not issued in any separate format and in fact they are issued in the normal schemes like Jeevan Shree etc. with the words 'keyman insurance' written on top of it. In the column of name of proposer and life assured, the name of keyman is mentioned and whereas in nominee column the company's name is written. For all purposes it is common but to allow commercial establishments to protect their business interests from untoward happenings a special endowment policy is introduced with very high maturity values and premium for varying periods. Normally such high premiums are not associated with individual cases. It is seen only in keyman policies. This scheme also envisages the event of such keyman leaving the organization before expiry of the due date and provides for surrender of such policies Lo the LIC at the time of assigning such pol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y person on whom the business or profession of the organization is dependent. Thereby to cover any eventuality of untoward happenings the keyman policy is taken. These business entities are allowed deduction of premium paid in the computation of total income. That means on maturity of the policy the amount received along with associated bonus and incentives is taxable under the head 'Business income or professional income' under s. 28 (vi) of IT Act. In other words the said amount under any circumstances cannot be brought to tax in their hands under the category of salary or income from other sources. In such a situation there is no need to bring in provisions of s. 17(3)(i) and s. 56(2)(iv) to tax maturity amount received under keyman policy under the head 'Salary' or under the head 'Income from other sources'. It only strengthens the belief that the legislature has envisaged the taxability of maturity amount of keyman insurance policy even in the hands of employees/directors/other key persons consequent to the assignment of such policies. If the intention of the legislature is to tax only the original subscriber there is no need to amend the other sections to provide taxation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to be given as per the law taking into consideration the facts of that year. In this regard support is drawn from the decision of Hon'ble High Court of Madras delivered in the case of ACE Investments (P) Ltd. vs. CIT (1999) 157 CTR (Mad) 185 : (2000) 244 ITR 166 (Mad) wherein their Lordships have ruled that on reconsideration of facts for a later year a different finding can be recorded. Earlier finding cannot be a conclusive one to follow in subsequent years. As far as principle of res judicata is concerned it is not applicable to income-tax proceedings." 4. By referring to the principle of res judicata which is not applicable to the income-tax proceedings the CIT(A) further observed that on examination of the facts of the case, it is observed that over the years the assessee is deriving the benefit in the form of assignment of keyman insurance policies. However, at the same time no part of such benefit has been declared as income in the return for tax purposes. It is a device adopted to derive benefits from the employer without payment of any tax. On its part the employers takes the policies and claims the deduction from its profit on account of premium paid on keyman insur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red a clear benefit to the assessee, which is convertible in cash on a subsequent date. Hence the maturity value is taxable under any circumstances as discussed above. Accordingly the contention of the appellants claiming the proceeds as, exempt is rejected and the AO is directed to recompute the total income of the assessee as per above directions. Aggrieved by the same, the assessee is in further appeal before us. 5. Learned Authorised Representative argued that the issue is squarely covered by the order of Tribunal for the asst. yr. 2003-04. Our attention was drawn to the following conclusion of Tribunal: "We have considered the rival submissions carefully on this aspect. The assessee in this year has received the sum of Rs. 2,85,00,000 on maturity of an insurance policy. The said insurance policy was taken out by M/s Escort Ltd. wherein the assessee is the chairman and managing director earning salary therefrom. The said company had taken out a keyman insurance policy on the life of the assessee in 1997 which has since been assigned in favour of the assessee in 1998, both the events having taken place in the years preceding the assessment year in question. In the year under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yman insurance policy subsequently attains the character of ordinary insurance policy. Certainly, s. 10(10D) comes into operation while evaluating the taxability of sums received under an ordinary insurance policy, including the amount of bonus thereon. So, however, the amount so received in the instant case certainly is constituted of sum, which flows as a keyman insurance policy upto the date of the assignment. The amount, which pertains to such period certainly is outside the purview of exemption under s. 10(10D) as it represents a sum received on account of keyman insurance policy. Therefore, in our considered view. it would be in the fitness of things to hold that out of the sum received by the assessee on maturity of the impugned policy, a sum equivalent to the surrender value of the policy at the time of its assignment by the company in favour of the assessee is taxable. The said amount having been received in this year is, therefore, rightly to be taxed presently. We, therefore, set aside the order of the CIT(A) and direct the AO to bring to tax the aforesaid sum in this year. Now, we may consider the alternative plea of the assessee that it is only the real income resultin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a bona fide business deduction under s. 37(1) of the IT Act. (2) As per the Finance Act, 1996 the amount received under a keyman insurance policy will not be exempted from tax as per s. 10(10D) of the IT Act. The proceeds of the policy will be treated as income under s. 28(vi) of the Act. Provisions applicable to the keyman: (l) In the event of the policy being assigned to the keyman, the proceeds of the policy including bonus will be treated as 'profits in lieu of salary' under s. 17 (cl. 3) of the IT Act. (2) In the event of a director being the assignee under the keyman policy, it will be treated as 'income from other sources' and taxed accordingly [s. 56(2iv) of the IT Act, 1961]. The underlying principle is that the premium paid is allowed as a business deduction and the amount received should be taxed as business income." From the order of the Tribunal as placed on record by the learned Authorised Representative for the asst. yr. 2003-04, we found that the conclusion arrived at by the Tribunal was based on a letter obtained by the assessee from LIC dt. 21st March, 2006 with regard to the change of status of keyman policy to the ordinary policy on assignment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sd/- Senior Branch Manager, LIC Branch Office No. 11S, A-14, Kailash Colony, New Delhi. Copy of letter dt. 6th Aug., 2008 'directly issued to the Department'. 6th Aug., 2008 The Asstt. CIT, IT Department, Central Circle 3, Room No. 355, ARA Centre, Jhandewalan, New Delhi-55. Sir, Ref: Keyman Insurance Policy in case of Shri Rajan Nanda for asst. yr. 2005-06. Policy Nos. 112688642 and 112682470 With reference to your letter dt. 28th July, 2008 on the above subject we have to state as under: 'At the time of assignment of keyman insurance policy, there is no change in basic features of original terms and conditions, as such assignment does not have any effect on originally sum assured, maturity value, bonus incentives etc. there is no accounting at the time of assignment. The difference between normal policies and keyman policies is due to restriction on assignment of keyman policies to keyman of the company only. No other difference is there. However, we are providing our terms an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty value, the CIT(A) has also enhanced the assessment and the assessee has alleged that no opportunity was given before any action was taken by the CIT(A) for enhancing the same. As the new facts have come to the notice of CIT(A) during appellate proceedings with regard to the terms and conditions of keyman insurance policy on assignment, he brought to tax the amount of maturity value as reduced by the amount of surrender value and subsequent premium paid by the keyman. 8. The crux of the issue revolves around treatment of status of keyman policy on assignment to keyman. The earlier letter of LIC dt. 21st March, 2006 as furnished by the assessee before the Tribunal in case of asst. yr. 2003-04 stipulates regarding change in basic features of keyman policy on assignment whereas the subsequent letter issued by the LIC directly to the AO dt. 6th March, 2008 provides that there is no change in the basic features of keyman policy on assignment. Taxability of amount received by the assessee on maturity of policy, which as per the terms and conditions as provided in the policy itself, on assignment to key person, is liable to tax including bonus either as "profit in lieu of salary" unde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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