DCIT, New Delhi V. Sh. Naresh Kumar Trehan, New Delhi

ITA 3882/DEL/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73974 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2008-2009
• Appeal Filed On: 18-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GUNJAN P RASAD
• Section: 10(10D)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E: NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SMT. DIVA SINGH, JUDICIAL MEMBER ITA NO. 3882/DEL/2013 ASSESSMENT YEAR: 2008-09 DCIT, CIRCLE 37(1), NEW DELHI. VS. NARESH KUMAR TREHAN, B-4, MAHARANI BAGH, NEW DELHI. AACPT7305F (APPELLANT) (RESPONDENT) APPELLANT BY: SH. GUNJAN PRASAD, CIT(DR) RESPONDENT BY: SHRI RAHUL KHARE, ADV. O R D E R PER S.V. MEHROTRA, A.M. THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER OF LD. CIT(A)-IV, NEW DELHI DATED 20/03/2013 FOR A.Y. 2008 -09. 2. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS A R ENOWNED DOCTOR BY PROFESSION (CARDIOVASCULAR SURGEON). DURING THE PR EVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESS EE DERIVED INCOME FROM PROFESSION, HOUSE PROPERTY AND OTHER SOURCES. THE ASSESSEE ALSO RECEIVED INCOME FROM CAPITAL GAINS. THE ASSESSEE H AD FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 66,22,68,470/- . THE ASSESSMENT WAS COMPLETED AT A TOTAL INCOME OF RS. 88,70,88,120/-, INTER-ALIA, MAKING AN ADDITION OF RS. 19,06,30,917/- BEING AMOUNT RECEIVE D FROM LIC ON MATURITY OF KEY MAN INSURANCE POLICIES. ITA NO. 3882/D/ 2013 NARESH KUMAR TREHAN 2 3. LD. CIT(A) DELETED THE ADDITION FOLLOWING THE DE CISION OF HONBLE DELHI HIGH COURT VIDE ORDER DATED 16/12/2011 IN ITA NO. 1 65/2011, ITA NO. 22/2009, ITA NO. 1010/2010, ITA NO. 2073/2010, ITA NO. 152/2011 & ITA NO. 232/2011, WHEREIN IT WAS, INTER-ALIA, CLARIFIED THAT ON ASSIGNMENT THE KEY MAN INSURANCE POLICY GETS CONVERTED INTO AN ORDINAR Y POLICY AND IT IS NOT OPEN TO THE REVENUE TO ALLEGE THAT THE POLICY IN QU ESTION IS A KEY MAN POLICY AND WHEN IT MATURES, THE ADVANTAGE DRAWN FROM THEM IS TAXABLE. IT WAS FURTHER OBSERVED BY THE HONBLE DELHI HIGH COURT TH AT NO DOUBT THE COMPANY AS WELL AS INDIVIDUAL HAD TAKEN HUGE BENEFIT OF THE TAX PROVISION BUT SAME IS ALLOWABLE AND EXEMPT U/S 10(10D) OF THE ACT. 3.1 BEING AGGRIEVED WITH THE ORDER OF LD. CIT(A), T HE DEPARTMENT IS IN APPEAL BEFORE US AND HAS TAKEN FOLLOWING GROUNDS OF APPEAL: 1. IN THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD . CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE AO ON ACCOUNT OF AMOUNT RECEIVED FROM LIC ON ENCASHMENT OF KEYMAN LIFE INSURANCE POLICIES REL YING ON THE DELHI HIGH COURTS DECISION IN THE CASE OF ASSESSEE IN PRECEDI NG A.Y. 2005-06 AND 2006- 07 NOT APPRECIATING THE FACT THE DEPARTMENT HAS FIL ED SLP BEFORE HONBLE SUPREME COURT AGAINST THE ORDER OF HONBLE DELHI HI GH COURT. 2. THAT THE GROUNDS OF APPEAL ARE WITHOUT PREJUDICE TO EACH OTHER. 4. BRIEF FACTS APROPOS THIS ISSUE ARE THAT FROM THE DETAILS FILED IN COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY AO THAT A SSESSEE HAD ENCASHED KEYMAN POLICIES WORTH RS. 19.06 CRORES. THE AO WAS OF THE OPINION THAT THIS WAS TAXABLE. THESE POLICIES WERE TAKEN BY ESCORTS HEART INSTITUTE & RESEARCH CENTRE WHEREFROM THE ASSESSEE WAS OPERATIN G AS A CARDIO ITA NO. 3882/D/ 2013 NARESH KUMAR TREHAN 3 VASCULAR SURGEON, HE BEING THE MAIN CARDIAC SURGEON . THE INSTITUTTE HAD TAKEN FOLLOWING KEY MAN POLICIES: S.NO. POLICY NO. & DOC INSURED AMT. PAID BY EHIRC PAID BY ASSESSEE ENCASHMENT AMT. & DOM 1. 112427973 1/11/97 2.00CR 1,07,58,000 1,43,44,000 3,27,86,115 1/11/2007 2. 112427974 1/11/97 1.00CR 53,79,000 35,86,000 10,75,800 1,63,93,057 1/11/2007 3. 11320445 1/4/2002 3.00CR 2,13,78,810 1,06,89,405 4,06,40,367 15/04/2007 4. 113670387 1/9/2002 5.00CR 2,80,49,025 93,49,675 3,46,65,750 1/9/2012 5. 113670388 1/9/2002 5.00CR 2,80,49,025 93,49,675 3,46,65,750 1/9/2012 6. 113675876 28/3/2003 5.00CR 1,87,91,512 1,87,91,512 3,46,65,750 28/3/2013 4.1 THE ASSESSEES REPRESENTATIVE POINTED OUT THA T AS PER THE POLICY RULES ISSUED BY LIC OF INDIA, THE KEY MAN POLICY ONCE TRA NSFERRED/ASSIGNED BECOMES THE NORMAL POLICY AND ON ENCASHMENT OF SUCH POLICY, THE PROCEEDS RECEIVED ARE EXEMPT FROM TAX. THE AO OBSERVED THAT BASED ON THE CERTIFICATION OF LIC THAT A KEYMAN INSURANCE POLICY BECOMES AN ORDINARY INSURANCE POLICY UPON ASSIGNMENT IN FAVOUR OF THE I NSURED PERSON, THE ISSUE WAS DECIDED IN FAVOUR OF ASSESSEE BUT THE DECISION HAS NOT BEEN ACCEPTED BY THE DEPARTMENT. LD. CIT(A), HOWEVER, HAS FOLLOW ED THE DECISION OF HONBLE DELHI HIGH COURT WHICH IS BINDING. 4.2 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF BOT H THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. BEFORE LD. CIT(A) IT WAS CLARIFIED THAT AS PER PARA 14.4 OF THE CIRCULAR, THE SURRENDER VALUE IS T AXABLE IN THE HANDS OF THE KEY MAN BUT IN THE CASE OF PRESENT ASSESSEE HE HAD PAID THE SURRENDER VALUE TO THE ORGANIZATIONS WHICH TOOK OUT THE SAID POLICIES, AND SUCH SURRENDER VALUE HAS BEEN TAXED IN THE HANDS OF INST ITUTE. BOTH THE PARTIES AGREE THAT THIS ISSUE IS COVERED BY THE DECISION OF HONBLE DELHI HIGH COURT ITA NO. 3882/D/ 2013 NARESH KUMAR TREHAN 4 IN ASSESSEES OWN CASE, VIDE ITA NO. 165/2011, CIT VS. DR. NARESH KUMAR TREHAN, WHEREIN THE HONBLE DELHI HIGH COURT HAS OB SERVED AS UNDER: 50. THE TRIBUNAL HAS TAKEN THE VIEW THAT THE KEYMAN IN SURANCE POLICY WAS TAKEN IN A PARTICULAR YEAR AND ASSIGNED IN THE NEXT YEAR AND BOTH THESE EVENTS HAD TAKEN PLACE IN THE YEARS PRECEDING THE ASSESSMENT YEAR IN QUESTION. THE TRIBUNAL TOOK NOT E OF THE CERTIFICATE OBTAINED BY THE ASSESSEE FROM THE LIC W HEREBY IT HAD CERTIFIED THAT A KEYMAN INSURANCE POLICY AFTER ASSI GNMENT ASSUMED THE STATUS OF AN ORDINARY INSURANCE POLICY. THE TR IBUNAL ALSO TOOK NOTE OF THE RELEVANT PROVISIONS OF THE ACT AND THE AFORESAID CBDT CIRCULAR TO HOLD AS UNDER: ALL THIS SHOWS THAT FROM THE TIME OF TAKING OUT TH E POLICY UPTO ITS MATURITY, THE LEGISLATURE HAS ENVISAGED TH E TREATMENT TO BE GIVEN WITH REGARD TO SUMS INVOLVED IN THE HANDS OF THE PLAYERS INVOLVED. THE PLAYERS INVOLVE D OBVIOUSLY ARE TWO-ONE, THE PERSON ON THE LIFE OF WH OM THE INSURANCE POLICY IS TAKEN OUT AND SECOND THE PERSON WHO TAKES OUT SUCH POLICY. THE PREMIUM IS BORNE BY THE SECOND PERSON. WHERE SUCH A DUAL ROLE COMES TO AN END, TH E VERY ESSENCE OF THE KEYMAN INSURANCE POLICY IS LOST. TH IS IS THE REASON WHY THE LIC OF INDIA CONFIRMED THAT AFTER ASSIGNMENT OF A KEYMAN INSURANCE POLICY IN THE NAME OF THE INDIVIDUAL AND THE PREMIUMS THEREAFTER BEING PA ID BY SUCH INDIVIDUAL, THE HITHERTO KEYMAN INSURANCE POLI CY BECOMES AN ORDINARY POLICY. IN THIS CASE, ON THE D ATE OF MATURITY, THE POLICY IN QUESTION IS RIGHTLY TO BE A CCEPTED AS AN ORDINARY INSURANCE POLICY. 51. THE TRIBUNAL WHILE GIVING REQUISITE RELIEF BROUGHT TO TAX THE AMOUNT OF SURRENDER VALUE AT THE TIME OF ASSIGNMENT SUBJECT TO VERIFICATION BY THE AO. IT ALSO REJECTED THE ALTER NATIVE ARGUMENT OF THE ASSESSEE THAT IN CASE THE SUM RECEIVED ON MATUR ITY WAS HELD TO BE TAXABLE THEN DEDUCTION BE ALLOWED FOR THE PREMIA PA ID BY THE ASSESSEE AFTER THE ASSIGNMENT OF THE POLICY, WHICH WERE EMBEDDED IN THE MATURITY AMOUNT AND NOT CLAIMED AS A DEDUCTION IN THE TAX ASSESSMENTS. ITA NO. 3882/D/ 2013 NARESH KUMAR TREHAN 5 52. THUS, THE ISSUE DEPENDS ON THE QUESTION AS TO WHETH ER ON ASSIGNMENT OF THE INSURANCE POLICY TO THE ASSESSEE, IT CHANGES ITS CHARACTER FROM KEYMAN INSURANCE ALSO TO AN ORDINARY POLICY. IT IS BECAUSE OF THE REASON THAT IF IT REMAINS KEYMAN INS URANCE POLICY, THEN THE MATURITY VALUE RECEIVED IS SUBJECTED TO TA X AS PER SECTION 10(10D) OF THE ACT. ON THE OTHER HAND, IF IT HAD B ECOME ORDINARY POLICY, THE PREMIUM RECEIVED UNDER THIS POLICY, IN VIEW OF THE AFORESAID SECTION 10(10D) ITSELF, THE SAME WOULD NO T BE SUBJECTED TO TAX. 53. ONCE THERE IS NO ASSIGNMENT OF COMPANY/EMPLOYER IN FAVOUR OF THE INDIVIDUAL, THE CHARACTER OF THE INSURANCE P OLICY CHANGES AND IT GETS CONVERTED INTO AN ORDINARY POLICY. CONTRAC TING PARTIES ALSO CHANGE INASMUCH AS AFTER THE ASSIGNMENT WHICH IS AC CEPTED BY THE INSURANCE, THE CONTRACT IS NOW BETWEEN THE INSURANC E COMPANY AND THE INDIVIDUAL AND NOT THE COMPANY/EMPLOYER NO MORE REMAINS THE CONTRACTING PARTIES. WE HAVE TO BEAR IN MIND THAT LAW PERMITS SUCH AN ASSIGNMENT EVEN LIC ACCEPTED THE ASSIGNMENT AND THE SAME IS PERMISSIBLE. THERE IS NO PROHIBITION AS TO THE ASS IGNMENT OR CONVERSION UNDER THE ACT. ONCE THERE IS AN ASSIGNM ENT, IT LEADS TO CONVERSION AND THE CHARACTER OF POLICY CHANGES. TH E INSURANCE COMPANY HAS ITSELF CLARIFIED THAT ON ASSIGNMENT, IT DOES NOT REMAIN A KEYMAN POLICY AND GETS CONVERTED INTO AN ORDINARY P OLICY. IN THESE CIRCUMSTANCES, IT IS NOT OPEN TO THE REVEN UE TO STILL ALLEGE THAT THE POLICY IN QUESTION IS KEYMAN POLICY AND WH EN IT MATURES, THE ADVANTAGE DRAWN THEREFROM IS TAXABLE. ONCE HAS TO KEEP INMIND ON MATURITY, IT DOES NOT THE COMPANY BUT WHO IS AN IND IVIDUAL GETTING THE MATURED VALUE OF THE INSURANCE. 54. NO DOUBT, THE PARTIES HERE, VIZ., THE COMPANY AS WE LL AS THE INDIVIDUAL TAKEN HUGE BENEFIT OF THESE PROVISIONS, BUT IT CANNOT BE TREATED AS THE CASE OF TAX EVASION. IT IS A CASE O F ARRANGING THE ITA NO. 3882/D/ 2013 NARESH KUMAR TREHAN 6 AFFAIRS IN SUCH A MANNER AS TO AVAIL THE STATE EXEM PTION AS PROVIDED IN SECTION 10(10D) OF THE ACT. LAW IS CLEAR. EVER Y ASSESSEE HAS RIGHT TO PLAN ITS AFFAIRS IN SUCH A MANNER WHICH MA Y RESULT IN PAYMENT OF LEAST TAX POSSIBLE, ALBEIT, IN CONFORMIT Y WITH THE PROVISIONS OF ACT. IT IS ALSO PERMISSIBLE TO THE A SSESSEE TO TAKE ADVANTAGE OF THE GAPING HOLES IN THE PROVISIONS OF THE ACT AND TO SEE WHETHER THESE PROVISIONS ALLOW THE ASSESSEE TO ARRA NGE THEIR AFFAIRS TO ENSURE LESSER PAYMENT OF TAX. IF THAT IS PERMIS SIBLE, NO FURTHER SCRUTINY IS REQUIRED AND THIS WOULD NOT AMOUNT TO T AX EVASION. BENEFIT INURED OWING TO THE COMBINED EFFECT OF A PR UDENT INVESTMENT AND STATUTORY EXEMPTION PROVIDED UNDER SECTION 10(1 0D) OF THE ACT, THE SECTION DOES NOT ENVISAGE OF ANY BIFURCATION IN THE AMOUNT RECEIVED ON MATURITY ON ANY BASIS WHATSOEVER. NOTH ING CAN BE READ IN SECTION 10(10D) OF THE ACT, WHICH IS NOT SPECIFI CALLY PROVIDED BECAUSE ANY ATTEMPT IN THAT BEHALF AS CONTENDED BY REVENUE WOULD BE TANTAMOUNT TO LEGISLATION AND NOT INTERPRETATION . 55. ACCORDINGLY, WE ANSWER THE QUESTIONS OF LAW AS FRAM ED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. AS A RESULT, THE APPEALS OF THE REVENUE ARE DISMISSED AND THOSE OF T HE ASSESSES ARE HEREBY ALLOWED. 5. FACTS BEING NOT IN DISPUTE, RESPECTFULLY, FOLLOW ING THE DECISION OF HONBLE DELHI HIGH COURT, THE REVENUES APPEAL IS D ISMISSED. 6. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 10/01/2014 SD/- SD/- (DIVA SINGH) JUDICIAL MEMBER (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED: 10/01/2014 *KAVITA COPY TO: ITA NO. 3882/D/ 2013 NARESH KUMAR TREHAN 7 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI. TRUE COPY BY ORDER ASSISTANT REGISTRAR