Dr Naresh K Trehan, New Delhi V. DCIT, New Delhi

ITA 1690/DEL/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3740 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-06-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 15-06-2010
• Assessment Year: 2007-2008
• Appeal Filed On: 15-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Opportunity of being heard; Capital receipt
• Section: 10(10D); 37(1); 154

Judgement Text

ITA NO. 1690/DEL/2010 A.Y. 2007-08 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F NEW DELHI BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 1690/DEL/2010 A.Y. : 2007-08 DR. NARESH TREHAN, VS. DCIT, CENTRAL CIRCLE 3 , NEW DELHI , B-4, MAHARANI BAGH, NEW DELHI 110 065 (PAN: AACPT7305F) [APPELLANT] (RESPONDENT) ASSESSEE BY : SHRI RAHUL KHARE, ADVOCATE DEPARTMENT BY : SHRI V.K. TIWARI, C.I.T. (D R) PER SHAMIM YAHYA: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE LD. COMMISSIONERS OF INCOME TAX (APPEALS) DATED 29.3.20 10 PERTAINING TO ASSESSMENT YEAR 2007-08. 2. THE GROUNDS RAISED READ AS UNDER:- THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN FACT AND IN LAW IN CONFIRMING THE ADDITION OF RS. 2,41,38,519/- ON ACCOUNT OF ENCASHMENT OF KEY MAN POLICY. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN FACT AND IN LAW IN PARTLY TREATING THE ENCASHMENT OF KEY MAN PO LICY AS REVENUE RECEIPT AS AGAINST CAPITAL RECEIPT. 3. IN THIS CASE THE ASSESSING OFFICER DURING ASS ESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAS RECEIVED AN AMOUNT OF RS. 4, 27,50,000/- RECEIVED FROM LIC ITA NO. 1690/DEL/2010 A.Y. 2007-08 2 BEING MATURITY OF KEYMAN INSURANCE POLICY. THE SAME HAD NOT BEEN REFLECTED IN THE COMPUTATION OF INCOME STATING, THAT THE AMOUNT IS ELIGIBLE FOR EXEMPTION U/S 10(10D) OF THE ACT. THE ASSESSING OFFICER FURTHER N OTED THAT THE TOTAL PREMIUM PAID UNDER KEYMAN INSURANCE POLICY NO. 112683959 IS RS. 3,18,62,295/- AND THE MATURITY VALUE IS RS. 4,27,50,000/- WHICH IS INCLU SIVE OF SUM ASSURED AND BONUS OF RS. 1,08,87,705/-. THE KEYMAN INSURANCE POLICY WAS TAKEN BY ESCORTS HEART INSTITUTE AND RESEARCH CENTRE (EHIRC) WHERE THE APP ELLANT WAS MAIN CARDIO VASCULAR SURGEON. THE EHIRC HAS PAID TWO PREMIUM TOWARDS THIS POLICY (RS. 1,05,86,445/- EACH) AND THEN THE POLICY WAS SU RRENDERED TO THE APPELLANT AT THE SURRENDER VALUE OF RS. 31,82,045/-. THE THIRD P REMIUM OF RS. 1,06,89,405/- WAS PAID BY THE APPELLANT. THUS THE ASSESSEE, WHO PAID ONLY THIRD PREMIUM (TO LIC) AND SURRENDER VALUE OF EHIRC, CLAIMED ENTIRE A MOUNT RECEIVED ON MATURITY AS EXEMPT TREATING THE SAME AS NORMAL POLICY AFTER AS SIGNMENT. THUS, BY WAY OF ASSIGNMENT OF THE KEYMAN POLICY IN ITS FAVOUR, THE ASSESSEE HAS RECEIVED TOTAL AMOUNT OF MATURITY VALUE OF RS. 4.27 CRORES BY PRAY ING A SINGLE PREMIUM AMOUNT OF RS. 1,06,89,405/- AND SURRENDER VALUE OF RS. 31, 82,045/-. THE TOTAL AMOUNT EFFECTIVELY PAID BY THE ASSESSEE IS RS. 1,38,71,450 /- [1,06,89,405 PLUS 31,82,045] WHEREAS THE TOTAL AMOUNT EFFECTIVELY PAID BY EHIRC IS RS. 1,79,90,845/- [2X1,05,86,445 MINUS 31,82,045]. THUS THE ASSESSE E HAS RECEIVED THE BENEFIT OF PREMIUM AMOUNTS PAID TO THE COMPANY WHICH IS ALSO B EING CLAIMED AS EXEMPT U/S 10(10D). ACCORDING TO ASSESSING OFFICER THIS CLA IM OF THE APPELLANT IS NOT CORRECT. 3.1 ASSESSING OFFICER PROCEEDED TO WORKOUT THE PRO PORTIONATE AMOUNT OF RS.2,41,38,519/- OUT OF TOTAL AMOUNT RECEIVED WHICH ACCORDING TO HIM WAS PROCEEDS PERTAINING TO CONTRIBUTION TO EHIRC AND H ENCE THE SAME IS TAXABLE. ITA NO. 1690/DEL/2010 A.Y. 2007-08 3 4. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOM E TAX (APPEALS) HELD THAT EXACTLY IDENTICAL ISSUE WAS THERE IN THE CASE OF ASSESSEE FOR A.Y. 2006-07 AS WELL AS IN THE CASE OF SHRI RAJAN NANDA FOR A.Y. 20 06-07, THOUGH THE TREATMENT OF ASSESSING OFFICER WAS LITTLE DIFFERENT TO THE EXTE NT THAT IN ASSESSMENT YEAR 2006- 07, HE HAS TREATED ENTIRE AMOUNT RECEIVED ON MATU RITY AS TAXABLE AND NOTHING WAS ALLOWED AS EXEMPT U/S 10(10D). LD. COMMISSIONE R OF INCOME TAX (APPEALS) REFERRED TO HIS OWN DECISION FOR A.Y. 2006-07 IN T HE CASE OF THE ASSESSEE AND HELD THAT ASSESSING OFFICER HAS FOLLOWED THE EXACTLY TH E SAME PRINCIPLE WHICH HAS BEEN FOLLOWED BY THE LD. COMMISSIONER OF INCOME TAX (APP EALS) IN HIS ORDER FOR A.Y. 2006-07 IN THE CASE OF THE ASSESSEE. HENCE HE HEL D THAT NO INTERFERENCE WAS CALLED FOR IN ASSESSING OFFICER S ACTION OF TREATI NG THE AMOUNT OF RS. 2,41,38,519/- AS NOT EXEMPT U/S 10(10D). 5. AGAINST THIS ORDER THE ASSESSEE IS IN APPEAL BE FORE US. 6. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE R ECORDS. BOTH THE COUNSELS FAIRLY AGREED THAT IDENTICAL ISSUE WAS DEC IDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2006-07 AND THE MATTER WAS REMITTED TO THE FILES OF THE ASSESSING OFFICER. WE FIND THAT THE TRIBUNAL I N THE SAID ORDER FOR A.Y. 2006-07 VIDE ORDER DATED 4.6.2010 HAD DEALT WITH THE ISSUE AS UNDER:- 6. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE RECORDS. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT FACT OF THE CASE BEING IDENTICAL TO THAT OF THE CASE OF SHRI RAJAN NANDA. SINCE BOTH THE APPEALS WERE HEARD TOGETHER, HE SUBMITTED THAT THE SAME RATIO AS IN THE CASE OF SHRI RAJAN NANDA BE FOLLOWE D. 7. WE FIND THAT IN THE CASE OF SHRI RAJAN NANDA IN ITA NO. 922/DEL/2010 VIDE OUR ORDER DATED 04/06/2010, WE HA VE DEALT WITH THE ISSUE AS UNDER:- ITA NO. 1690/DEL/2010 A.Y. 2007-08 4 7. WE FIND THAT IDENTICAL ISSUES HAVE BEEN CONSIDER ED IN ASSESSEES OWN CASE FOR EARLIER YEAR (2003-04). T HE TRIBUNAL HAD CLEARLY HELD THAT THE TOTAL RECEIVED BY THE ASS ESSEE ON MATURITY EXCEPT FOR THE SUM EQUIVALENT TO THE SURRE NDER VALUE OF THE POLICY AT THE TIME OF ITS ASSIGNMENT BY THE COMPANY IN FAVOUR OF THE ASSESSEE IS TAXABLE. HENCE THE TRI BUNAL HAD DIRECTED THAT THE SAID AMOUNT EQUIVALENT TO THE S URRENDER VALUE HAVING BEEN RECEIVED IN THIS YEAR, WAS THERE FORE, DIRECTED TO BE TAXED PRESENTLY. IN OTHER WORDS, THE TRIBUNAL HAD HELD THAT THE MATURITY VALUE OF THE IMPUGNED POLICY AS REDUCED BY THE SURRENDER VALUE OF THE ASSESSEE AT T HE TIME OF ASSIGNMENT BY THE COMPANY IN FAVOUR OF THE ASESSEE IS NOT TO BE TAXED. 7.1 FOR A.Y. 2005-06 THE TRIBUNAL HAD REFERRED TO T HE FOLLOWING PORTION OF TERMS AND CONDITIONS OF THE KEYMAN POLIC Y AND OBSERVED THAT:- WE FOUND THAT PAGE 72 OF THE KEYMAN POLICY PROVID ED TERMS AND CONDITIONS WITH REGARD TO TAXATION ASPECT OF THE KE YMAN INSURANCE POLICY, WHICH READS AS UNDER:- TAXATION ASPECTS: PROVISIONS APPLICABLE TO THE COMPANY: 1) CORPORATE ENTITIES CAN CLAIM THE PREMIUM PAID UNDER KEYMAN INSURANCE AS A BONA FIDE BUSINESS DEDUCTION UNDER S ECTION 37(1) OF THE INCOME TAX ACT. 2) AS PER THE FINANCE ACT, 1996 THE AMOUNT RECEIVED U NDER A KEYMAN INSURANCE POLICY WILL NOT BE EXEMPTED FROM TAX AS P ER SECTION 10(10D) OF THE INCOME TAX ACT. THE PROCEEDS OF TH E POLICY WILL BE TREATED AS INCOME U/S 28(VI) OF THE ACT. PROVISIONS APPLICABLE TO THE KEYMAN: 1) IN THE EVENT OF THE POLICY BEING ASSIGNED TO THE KE YMAN, THE PROCEEDS OF THE POLICY INCLUDING BONUS WILL BE TREATED AS P ROFITS IN LIEU OF SALARY UNDER SECTION 17 (CLAUSE 3) OF THE INCOME T AX ACT. ITA NO. 1690/DEL/2010 A.Y. 2007-08 5 2) IN THE EVENT OF A DIRECTOR BEING THE ASSIGNEE UNDER THE KEYMAN POLICY. IT WILL BE TREATED AS INCOME FROM OTHE R SOURCES AND TAXED ACCORDINGLY (SECTION 56(2IV) OF THE INCOME TAX ACT, 1961. THE UNDERLYING PRINCIPLE IS THAT THE PREMIUM PAID I S ALLOWED AS A BUSINESS DEDUCTION AND THE AMOUNT RECEIVED SHOULD B E TAXED AS BUSINESS INCOME. (EMPHASIS SUPPLIED BY US) 7.2 THE TRIBUNAL HAD ALSO REFERRED TO THE CONTRADI CTORY LETTERS RECEIVED FROM THE LIC. THE TRIBUNAL HAD NOTED THAT IN THE LETTER ISSUED TO THE INCOME TAX DEPARTMENT, IT WAS STATED THAT THERE WAS NO CHANGE IN THE BASIC FEATURES OF ORIGINAL TERMS A ND CONDITIONS WHILE IN THE LETTER ISSUED TO THE ASSESSEE IT WAS S TATED THAT AFTER ASSIGNMENT THE KEYMAN POLICY WILL BE TREATED AS ORD INARY INDIVIDUAL POLICY. AFTER ELABORATE DISCUSSION AND TAKING INTO ACCOUNT EARLIER TRIBUNAL DECISION THE TRIBUNAL FINALLY CONCLUDED A S UNDER:- IN VIEW OF THE CLEAR CONTRADICTION IN THE TWO LETT ERS ISSUED BY THE LIC, ONE HAND WRITTEN DIRECTLY TO THE ASSESSEE AND ONE TO THE DEPARTMENT, IN THE INTEREST OF JUSTICE AND FAIR PLAY WE RESTORE THE APPEAL TO THE FILE OF THE ASSESSING OFFICER FOR GE TTING CLARIFICATION FROM THE HIGHER AUTHORITIES OF LIC WITH REGARD TO C ORRECT STATUS OF KEYMAN POLICY ON THE OCCASION OF ASSIGNMENT AND CON SEQUENTIAL TREATMENT OF TAXABILITY IN THE HANDS OF THE ASSESSE E, AND TO DECIDE THE ISSUE AFRESH AS PER THE TERMS AND CONDITIONS A PPLICABLE TO THE KEYMAN INSURANCE POLICY ON ASSIGNMENT TO THE KEYM AN. AFTER GETTING THE CLEAR POSITION IF THE ASSESSING OFFICER FOUND THAT AS PER CLARIFICATION ISSUED BY LIC, THE KEYMAN POLICY IS C ONVERTED INTO ORDINARY POLICY, THEN TO FOLLOW THE OBSERVATION OF COORDINATE BENCH AS DISCUSSED HEREINABOVE. BEFORE PARTING WITH THE MATTER, WE MAY CLARIFY THAT AMOUNT OF LOANS AND INTEREST THEREON AS AVAILED BY THE ASSESSEE ON THESE POLICIES WILL NOT EFFECT THE MAT URITY VALUE OF THE POLICY, WHICH IS LIABLE TO BE CONSIDERED ALONGWITH AMOUNT OF BONUS THEREON, WHICH THE ASSESSEE IS ENTITLED TO GET. AC CORDINGLY, ACTION OF THE ASSESSEE IN OFFERING THE NET AMOUNT RECEIVED F ROM LIC AFTER DEDUCTION OF LOAN AND INTEREST THEREON AS AVAILED BY THE ASSESSEE ON THESE POLICIES ARE NOT CORRECT. ITA NO. 1690/DEL/2010 A.Y. 2007-08 6 7.3 FROM THE ABOVE IT IS VERY CLEAR THAT TRIBUNAL H AD DIRECTED THAT THE ASSESSING OFFICER SHOULD MAKE ENQUIRY AND EXAM INE THE ISSUE INTER-ALIA AS PER THE TERMS AND CONDITIONS APPLICAB LE TO THE KEYMAN POLICY ON ASSIGNMENT TO KEYMAN. LD. COUNSEL OF TH E ASSESSEE SUBMITTED THAT SUBSEQUENT TO THE DIRECTIONS OF THE TRIBUNAL THE ASSESSING OFFICER HAD PASSED AN ORDER FOR ASSESSM ENT YEAR 2005-06. IN THE SAID ORDER THE ASSESSING OFFICER NOTED THAT LIC HAS CLARIFIED THAT THE KEYMAN INSURANCE POLICIES WHICH WERE LATE R ON ASSIGNED IN THE NAME OF SHRI RAJAN NANDA ON 25.08.1998 WAS TO BE TREATED AS AN ORDINARY INDIVIDUAL POLICY. ACCORDINGLY, THE AS SESSING OFFICER HAS BROUGHT TO TAXATION THE SURRENDER VALUE OF THE PO LICY AT THE TIME OF ASSIGNMENT BY THE COMPANY IN FAVOUR OF THE ASSESSE E. WE FIND THAT THE SAID ASSESSMENT ORDER HAS BEEN PASSED U/S 143(3 ) READ WITH SECTION 154 OF THE IT ACT. IN OUR CONSIDERED OPIN ION, WE ARE NOT IN A POSITION TO COMMENT ON THIS ASSESSING OFFICERS OR DER FOR ASSESSMENT YEAR 2005-06, AS THE SAME IS NOT A SUBJECT MATTER O F APPEAL BEFORE US. 7.4 NOW IN THE PRESENT ASSESSMENT YEAR LD. COMMISSI ONER OF INCOME TAX (APPEALS) HAS HELD THAT HE WAS FOLLOWING THE EARLIER TRIBUNALS ORDER IN PRINCIPLE, BUT AS FAR AS THE Q UANTIFYING THE AMOUNT SUBJECT TO TAXATION, HE MADE IS OWN COMPUTATI ON ON FOLLOWING LINES. THE LD. COMMISSIONER OF INCOME TA X (APPEALS) HAS OPINED THAT THE SURRENDER VALUE IS TO BE COMPUTED A S PER THE RATIO BETWEEN THE PREMIUMS PAID BY THE ASSESSEE AND THE C OMPANY, TO THE FINAL MATURITY PROCEEDS, THIS IS TO BE THE BASIS FO R ARRIVING AT THE PORTION WHICH IS TAXABLE AND THAT WHICH IS NOT TAX ABLE. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) WAS OF THE OP INION THAT TO THE EXTENT THE MATURITY VALUE BEARS A RATIO TO THE PREMIUM PAID BY THE COMPANY, THE SAME IS TO BE TREATED AS SURRENDER VALUE AND THE EQUIVALENT AMOUNT RECEIVED IS TO BE TAXED AND ONLY THAT PORTION OF THE MATURITY PROCEEDS WHICH BEARS A RATIO TO THE P REMIUM PAID BY THE ASSESSEE SHOULD BE ALLOWED AS PROCEEDS OF AN OR DINARY POLICY AND NOT TAXED. 7.5 NOW WE FIND THAT SURRENDER VALUE AS PER THE TER MS APPLICABLE IN INSURANCE POLICY AND INSURANCE INDUSTRY IS THE VALU E WHICH IS RECEIVED ON PREMATURE SURRENDER. WE NOTE THAT IT IS NOT THE CASE OF LD. ITA NO. 1690/DEL/2010 A.Y. 2007-08 7 COMMISSIONER OF INCOME TAX (APPEALS) THAT THE IMPUG NED KEYMAN POLICIES DO NOT HAVE A PROVISION OF PREMATURE SURRE NDER AND HENCE THERE CAN NOT BE ANY QUESTION OF SURRENDER VALUE. WE FIND OURSELVES IN AGREEMENT WITH THE CONTENTION OF THE LD. COUNSEL OF THE ASSESSEE THAT THE LD. COMMISSIONER O F INCOME TAX (APPEALS)S ORDER IS NOT IN ACCORDANCE WITH THE RA TIO LAID DOWN BY THE TRIBUNAL IN ASSESSEES OWN CASE EARLIER. WE A LSO NOTE THAT BEFORE THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ASSESS EE HAD SUBMITTED THAT THE ASSESSING OFFICER BE GIVEN THE SAME DIRECTION AS THAT GIVEN BY THE TRIBUNAL FOR A.Y. 2005-06. HE NCE, ADHERING TO THE DOCTRINE OF STAIRE DECISES, WE FOLLOW THE RATIO EMA NATING OUT OF THE TRIBUNALS ORDER FOR ASSESSMENT YEAR 2005-06 WHICH IS THE IMMEDIATELY PRECEDING YEAR, WHEREIN THE TRIBUNAL HA D CONSIDERED THE EARLIER TRIBUNAL DECISIONS AND ALSO TAKEN NOTE OF THE TERMS AND CONDITIONS OF THE KEYMAN INSURANCE POLICY, AS REGAR DS THE PROVISION APPLICABLE IN THE EVENT OF POLICY BEING ASSIGNED. THE TRIBUNAL HAD ALSO NOTED THAT LIC HAD GIVEN CONTRADICTORY STATEME NTS IN LETTER ISSUED TO THE INCOME TAX DEPARTMENT AND THAT ISSUED TO THE ASSESSEE. HENCE, WITH THE SAME DIRECTION AS FOR A SSESSMENT YEAR 2005-06, WE REMIT THE MATTER TO THE FILES OF THE AS SESSING OFFICER. HENCE, THE MATTER STANDS RESTORED TO THE FILES OF THE ASSESSING OFFICER FOR GETTING CLARIFICATION FROM HIGHER AUT HORITIES OF LIC WITH REGARD TO CORRECT STATUS OF KEYMAN POLICY ON THE OC CASION OF ASSIGNMENT AND CONSEQUENTIAL TREATMENT OF TAXABILIT Y IN THE HANDS OF THE ASSESSEE, AND TO DECIDE THE ISSUE AFRESH AS PER THE TERMS AND CONDITIONS APPLICABLE TO THE KEYMAN INSURANCE POLIC Y ON ASSIGNMENT TO THE KEYMAN. AFTER THE ASSESSING OFFICER COMES TO THE CONCLUSION THAT THE KEYMAN POLICY IS CONVERTED INTO AN ORDINAR Y POLICY, THEN HE SHOULD FOLLOW THE OBSERVATION OF COORDINATE BENCH A S IN EARLIER ASSESSMENT YEARS. 8. SINCE THE FACTS IN THE PRESENT CASE ARE IDENTICA L, WE REMIT THE ISSUE ALSO TO THE FILES OF ASSESSING OFFICER TO CO NSIDER IT AFRESH WITH THE SAME DIRECTIONS AS ABOVE. NEEDLESS TO ADD THAT THE ASSESSEE SHOULD BE GIVEN ADEQUATE OPPORTUNITY OF BEING HEARD . ITA NO. 1690/DEL/2010 A.Y. 2007-08 8 7. WE FIND THAT ASSESSING OFFICER IN THIS CASE HAS FOLLOWED THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) FOR A.Y. 2 006-07. WE HAVE ALREADY REMITTED THE MATTER IN THAT YEAR TO THE FILES OF AS SESSING OFFICER WITH THE ABOVE DIRECTIONS. SINCE THE FACTS ARE IDENTICAL, WE REMI T THIS ISSUE IN APPEAL TO THE FILES OF ASSESSING OFFICER TO CONSIDER IT AFRESH WITH TH E SAME DIRECTIONS. NEEDLESS TO ADD THAT THE ASSESSEE SHOULD BE GIVEN ADEQUATE OPPO RTUNITY OF BEING HEARD. 8. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 18/06/2010. SD/- SD/- [A.D. JAIN] [SHAMIM YAHYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATE 18/06/2010 SRB COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, DEPUTY REGISTRAR, ITAT, DELHI BENCHES