Kantilal Jain, Bangalore V. Income Tax Officer, Ward-3(3)(1), Bangalore

ITA 579/BANG/2022

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 6001 (ITAT-BANGALORE)
• Duration Of Justice: 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-08-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Assessment Year: 2017-2018
• Appeal Filed On: 21-07-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Cost of acquisition; Revised return; TDS; FORM 26AS
• Section: 154; 80C; 234B; 10(10D); 143(1); 250; 13

Judgement Text

ITA No.579/Bang/2022 Kantilal Jain, Bangalore IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” “A’’ BENCH: BANGALORE BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ITA No.579/Bang/2022 Assessment Year: 2017-18 Kantilal Jain #34, Kumbarpet Main Road Kumbarpet Bangalore 560 002 PAN NO : ABEPJ7246C Vs. ITO Ward-3(3)(1) Bangalore APPELLANT RESPONDENT Appellant by : Shri B.R. Sudheendra, A.R. Respondent by : Shri Ganesh R. Ghale, Standing Counsel Date of Hearing : 18.08.2022 Date of Pronouncement : 18.08.2022 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: This appeal by assessee is directed against the order of CIT(A), NFAC dated 13.7.2022 for the assessment year 2017-18. The assessee has raised following grounds of appeal:- 1. “General Ground 1.1. The learned Deputy Commissioner of Income Tax, Centralized Processing Centre. Bangalore (hereinafter referred as "DCIT, CPC" for brevity), has erred in passing the intimation under section 143(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') in the manner passed by him and the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Center, Delhi (hereinafter referred as `CIT(A), NFAC') has erred in affirming the variations made by the DCIT, CPC in the intimation. The order passed by the CIT(A), NFAC is bad in law and liable to be quashed. 2. Grounds on addition to Income from Other Sources based on Form 26AS ITA No.579/Bang/2022 Kantilal Jain, Bangalore Page 2 of 20 2.1. The learned DCIT, CPC and learned CIT(A), NFAC have erred in adding Rs. 9,66,006 to the income of the appellant based on Form 26AS without appreciating the facts of the case. Based on facts and circumstances of the case, the amount reflected in Form 26AS is not income chargeable to tax. 2.2. The learned DCIT, CPC and learned CIT(A), NFAC have erred in not appreciating that amount shown in Form 26AS under section 194DA (Payment in respect of life insurance policy) includes maturity proceeds of LIC towards principal component invested by the appellant which is not assessable as income in accordance with law. 2.3. The learned DCIT, CPC and learned CIT(A), NFAC have erred in not appreciating that: a) The amount of Rs. 14,78,000 shown under section 194DA in Form 26AS includes amount of insurance premium paid by the appellant of Rs. 10,62,750 and the excess portion was Rs. 4,15,250; b) only net proceeds (after excluding the premium paid by the appellant) is taxable on maturity of the life insurance policy; c) the appellant had offered the net income of Rs. 4,78,000 being excess of gross maturity proceeds of Rs. 14,78,000 over the sum assured amounting to Rs. 10,00,000, thereby offering an excess income of Rs. 62,750 [4,78,000 — 4,15,250]; and d) the entry appearing under section 194DA in Form 26AS is not conclusive. 2.4. The learned CIT(A), NFAC has erred in not appreciating that a) the appellant had relied upon the amendment to section 194DA made by the Finance (No.2) Act, 2019 only to support the proposition that net proceeds (after excluding the premium paid by the appellant) is taxable on maturity of the life insurance policy b) the date from which the above amendment becomes effective has no bearing in deciding the present case. 2.5. On facts and circumstances of the case and law applicable, the addition Rs. 9,66,006 to the income of the appellant based on entry appearing in Form 26AS is bad in law and liable to be deleted. 3. Grounds relating to short grant of TDS credit 3.1. The learned DCIT, CPC has erred in not granting credit for tax deducted at source at Rs.84,056 as against Rs. 1,21,659 claimed by the appellant in the return of income. 3.2. The learned CIT(A), NFAC has erred in not adjudicating the specific ground raised by the appellant in relation to the short grant of tax deducted at source. ITA No.579/Bang/2022 Kantilal Jain, Bangalore Page 3 of 20 3.3. On facts and circumstances of the case and law applicable, the appellant is entitled to claim the entire credit for tax deducted at source amounting to Rs. 1,21,659. 4. Levy of consequential interest under sections 234B and 234C 4.1. The learned DCIT, CPC has erred in levying consequential interest under section 234B and under section 234C of the Act amounting to Rs. 87,090 and Rs.16,979 respectively. On facts and circumstances of the case and law applicable, levy of consequential interest under section 234B and under section 234C is incorrect. The appellant denies its liability to pay the consequential interest under section 234B and under section 234C. Prayer: 5.1. In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned CIT(A), NFAC under section 250 of the Act being bad in law, be quashed, or in the alternative a) the addition of income of Rs. 9,66,006 be deleted, b) Full TDS credit of Rs. 1,21,659 be allowed, and c) Interest levied under sections 234B and 234C be deleted. The Appellant prays accordingly.” 2. With regard to the additions to income from other sources, based on Form 26AS, short grant of TDS credit and levy of interest u/s 234B of the Income-tax Act,1961 ['the Act' for short]. 3. Facts of the issue are that the appellant, a resident individual, filed his return of income for Assessment Year (AY)2017-18 on 05.08.2017 vide Ack. No. 146483630050817 declaring a total income of Rs.16,13,080/- after claiming deductions under Chapter Vl-A of the Income Tax Act of Rs. 1,60,000/-. The total income of the appellant included Income from Salary, House property and Income from other sources. 3.1 The Income from Other Sources (`IFOS) included interest income of Rs. 3,30,282/- and income of ITA No.579/Bang/2022 Kantilal Jain, Bangalore Page 4 of 20 Rs. 4,78,000/- out of LIC maturity proceeds. Total tax payable in the return of income amounted to Rs. 3,34,331/-, which was paid via advance tax Rs. 32,000/-, Tax deducted at source Rs. 1,21,659/- and self-assessment tax Rs. 1,80,672/- 3.2 During the financial year 2006-07, the appellant took a life insurance policy for a period of 10 years. The sum assured of the policy was Rs. 10,00,000 and the appellant was mandated to pay the half yearly premium of Rs. 1,06,275 for the first five years. Total premium paid for 5 years amounted to Rs. 10,62,750 [1,06,275 x 10]. It was a policy wherein the annual premium exceeded 10% of the sum assured. The maturity proceeds were therefore not exempt under section 10(10D) and it was chargeable to tax under the head 'Income from other sources'. As per the policy, maturity proceeds would be received by the appellant at the end of the 10th year i.e. in FY 2016-17 relevant to AY 2017-18. The maturity proceeds were received by the appellant on 28.10.2016 amounting to Rs. 14,63,220 [Rs. 14,78,000Rs. 14,780(TDS)]. 3.3 In the IT return, the appellant offered Rs. 4,78,000/- being excess of gross maturity proceeds of Rs. 14,78,000/- over the sum assured amounting to Rs. 10,00,000/-. Ideally, the appellant should have offered income of Rs. 4,15,250/- being excess of maturity proceeds of Rs.14,78,000/- over total premium paid for all 5 years amounting to Rs. 10,62,750/-. Thus, a sum of Rs. 62,750/- [4,78,000 — 4,15,250] was offered to tax excessively in the return of income. 3.4 The return was processed by the CPC and a communication notice was received from CPC dated 21.05.2018 informing about an error, being inconsistency between IFOS in the return of income and in Form 26AS ITA No.579/Bang/2022 Kantilal Jain, Bangalore Page 5 of 20 amounting to Rs. 9,66,006. This difference was computed based on income offered under the head IFOS vis-a-vis income reported in Form 26AS. 3.5 Following table explains how the difference of Rs. 9,66,006/- was computed by the CPC. PARTICULARS As per IT return (Rs.) As per Form 26AS (Rs.) SB interest not liable for TDS – hence not appearing in Form 26as 14,887 Interest from other parties – not liable for TDS – hence not appearing in Form 26AS 19,107 Interest from Cha Chaganraj Thalajee & Sons TDS done – appearing in Form 26AS 2,96,288 2,6,288 Income from LIC proceeds 4,78,000 14,78,000 Total 8,08,282 17,74,288 Difference between Form 26AS and IFOS as per return of income = 17,74,288 - 8,08,282 = 9,66,006. 3.6 The appellant submitted an online response on 1.6.2018 stating that difference was towards the refund of principal amount received by the appellant on maturity of LIC policy No. 103235137. It was submitted that the refund towards principal amount is not a part of the income of the appellant. The amount received on maturity was Rs. 14,78,000/- out of which sum assured was Rs. 10,00,000/- and excess portion was Rs, 4,78,000/-. Certain other incomes in the head of IFOS, which were disclosed and reported in the return of income were not included in the Form 26AS, as follows: i) Savings Bank Interest Rs. 14,887/- ii) Other Interest Income Rs. 9,262/- and Rs. 9,845/- from two parties which were not liable to TDS ITA No.579/Bang/2022 Kantilal Jain, Bangalore Page 6 of 20 3.7 The CPC rejected the explanation provided by the appellant via communication notice dated 25.09.2018. The reason for non-acceptance of response was stated by CPC as, 'The response furnished by you is not acceptable for the reason that the income on the basis of which the difference has been arrived at in accordance with section 143(1)(a)(vi) of the IT Act is reflected in your Form 26AS. The head under which the difference has arisen due to non-reporting of income in your return of income was communicated through the notice cited in this communication. Your response to the earlier notice fails to prove that the income as reflected in his 26AS has been offered to tax in your return of income either under the head relatable to such TDS, or under such heads of income taxable at such special rates.' 3.8 The Intimation U/s. 143(1) of the Act was passed by CPC vide Communication Reference No.CPC/ 1718/A2/ 1885843345 dated 26.03.2019. The following adjustments were made in the said intimation order U/s. 143(1): a) Income from Other Sources was enhanced by Rs. 9,66,006/- as explained in the above table. b) Short credit of TDS by Rs. 37,603/- was allowed in the Intimation U/s 143(1) as compared to the return of income filed. 3.9 Due to the above variances, the total income as per Intimation U/s 143(1) has been computed as Rs.25,79,090/- and tax liability has been enhanced to Rs.7,36,897/- after additional Interest U/s. 234B Rs. 95,311/- and 234C Rs. 24,897/-. Such tax liability is adjusted with advance tax, TDS and self-assessment tax paid by the appellant. Thus, net tax liability ITA No.579/Bang/2022 Kantilal Jain, Bangalore Page 7 of 20 payable has been determined to be Rs. 4,40,170/- as per the Intimation U/s. 143(1) of the Income Tax Act. 3.10 Owing to the fact that the intimation passed under section 143(1) contained errors apparent on record, the assessee filed online rectification request with the CPC on 09.05.2019. On 04.11.2019, the assessee received a rectification order under section 154 of the Act dated 31.10.2019. However, the rectification order did not rectify any of the aforesaid errors and the demand of Rs. 4,40,170/- as per 143(1) intimation sustained in the order u/s 154 dated 31.10.2019. The appellant has also filed a rectification request manually before the assessing officer on 19.12.2019. 3.11 However, no action has been taken by the learned AO in respect of the said application. 4. Against this assessee went in appeal before Ld. CIT(A). Ld. CIT(A) have gone through above submissions of the Appellant and have considered the facts and evidence on record. 4.1 Ld. CIT(A) observed that the appellant is a resident individual who filed the return of income for A/Y 2017-18 on 05.08.2017 disclosing total income of Rs. 16,13,080/- from salary, house property and income from other sources. 4.2 The A,O., CPC, Bangalore processed the return on 21.05.2018 and communicated to the appellant about an error, being inconsistency between income from other sources in the return of income and in Form 26AS amounting to Rs. 9,66,006. This difference was computed based on income offered under the head income from other sources vis-à-vis income reported in Form 26 AS (Difference between Form 26AS and IFOS as per return of income = Rs. ITA No.579/Bang/2022 Kantilal Jain, Bangalore Page 8 of 20 17,74,288/- — Rs. 8,08,282/- = Rs. 9,66,006/-). The appellant has filed the present appeal contesting the adjustments made by the A.O. CPC and in his submissions contended as under: "The Income from Other Sources (`IFOS') included interest income of Rs. 3,30,282/-and income of Rs. 4,78,000/- out of LIC maturity proceeds. Total tax payable in the return of income amounted to Rs. 3,34,331/-, which was paid via. advance tax Rs. 32,000/-, Tax deducted at source Rs. 1,21,659/- and self- assessment tax Rs. 1,80,672/- 1.3 During the financial year 2006-07, the appellant took a life insurance policy fora period of 10 years. The sum assured of the policy was Rs. 10,00,000 and the appellant was mandated to pay the half yearly premium of Rs. 1,06,275 for the first five years. Total premium paid for 5 years amounted to Rs. 10,62,750 [1,06,275 x 10]. It was a policy wherein the annual premium exceeded 10% of the sum assured. The maturity proceeds were therefore not 2 exempt under section 10(10D) and it was chargeable to tax under the head 'Income from other sources'. As per the policy, maturity proceeds would be received by the appellant at the end of the 10th year i.e. in FY 2016-17 relevant to AY 2017-18. The maturity proceeds were received by the appellant on 28.10.2016 amounting to Rs. 14,63,220 [Rs. 14,78,000- Rs. 14,780(TDS)]. 4.3 Ld. CIT(A) further observed that in the IT return, the appellant offered Rs. 4,78,000/- being excess of gross maturity proceeds of Rs. 14,78,000/- over the sum assured amounting to Rs. 10,00,000/-. Ideally, the appellant should have offered income of Rs. 4,15,250/- being excess of maturity proceeds of Rs. 14,78,000/- over total premium paid for all 5 years amounting to Rs. 10,62,750/-. Thus, a sum of Rs. 62,750/- [Rs.4,78,000/- — Rs. 4,15,250/-] was offered to tax excessively in the return of income. ITA No.579/Bang/2022 Kantilal Jain, Bangalore Page 9 of 20 4.4 The appellant submitted an online response on 01.06.2018 stating that difference was towards the refund of principal amount received by the appellant on maturity of LIC policy No. 103235137. It was submitted that the refund towards principal amount is not a part of the income of the appellant. The amount received on maturity was Rs. 14,78,000/- out of which sum assured was Rs. 10,00,000/- and excess portion was Rs. 4,78,000/-. Certain other incomes in the head of IFOS, which were disclosed and reported in the return of income were not included in the Form 26AS, as follows: i) Savings Bank Interest Rs. 14,887/- ii) Other Interest Income Rs. 9,262/- and Rs. 9,845/- from two parties which were not liable to TDS 1.8 The CPC rejected the explanation provided by the appellant via communication notice dated 25.09.2018. The reason for non- acceptance of response was stated by CPC as, 'The response furnished by you is not acceptable for the reason that the income on the basis of which the difference has been arrived at in accordance with section 143(1)(a)(vi) of the IT Act is reflected in your Form 26AS. The head under which the difference has arisen due to non-reporting of income in your return of income was commune through the notice cited in this communication. Your response to the earlier rye fails to prove that the income as reflected in his 26AS has been offered to tax in your return of income either under the head relatable to such TDS, or under such heads of income taxable at such special rates.' 4.5 Ld. CIT(A) stated that the appellant further reiterated that Section 10(10D) contemplates exemption on any sum received under a life insurance policy. It reads as follows-" any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than— "(a) any ITA No.579/Bang/2022 Kantilal Jain, Bangalore Page 10 of 20 sum received under sub-section (3) of section 80DD or sub- section (3) of section 80DDA; or (b) any sum received under a Keyman insurance policy; or (c) any sum received under an insurance policy issued on or after the 1st day of April, 2003 but on or before the 31st day of March, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured; or (d) any sum received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured: Provided that the provisions of sub-clauses (c) and (d) shall not apply to any sum received on the death of a person" It states that any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy shall be exempted from the levy of income tax. It also enlists the categories of policies which shall not be entitled to the exemption from clauses (a) to (d). Clause (d) of the section 10(10D) states that any sum received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable 6 for any of the years during the term of the policy exceeds 10% of the actual capital sum assured. In the present case, the annual premium discharged by the appellant is Rs. 2,12,550 [1,06,275 x 2] and it exceeds 10% of the actual sum assured of Rs. 10,00,000. Therefore, the exemption contemplated under section 10(10D) was not available to the appellant. The appellant received an amount of Rs. 14,78,000/- on maturity vis-a-vis principal portion of Rs. 10,00,000/- and Bonus of Rs. 4,78,000/-. The difference between the maturity amount and the principal was offered to tax as income under the head IFOS. The appellant should have offered income of Rs. 4,15,0/- being excess of ITA No.579/Bang/2022 Kantilal Jain, Bangalore Page 11 of 20 maturity proceeds of Rs. 14,78,000/- over total premium paid for all 5 years amounting to Rs. 10,62,750. Thus, a sum of Rs. 62,750/- [Rs. 4,78,000/- — Rs. 4,15,250/-] was offered to tax excessively in the return of income. The amount received towards principal portion of the policy is not a part of the income of the appellant as the same represents the investment value of the policy paid by th'e appellant through premiums. In other words, principal portion represents the cost of acquisition of the policy. Only amounts received over and above the principal should be exigible to tax under the Act. The amount received on maturity of the life insurance policy is synonymous to amount received on the maturity of a fixed deposit with a banking institution or receipt of installment of an EMI. Under the latter transactions, only the interest received at the end of term of the policy or the interest portion of the EMI is taxable under the provisions - of the Act. The principal invested portion remains untaxed. It is only the accretion in the investment that can be taxed under the Act. Applying the same principle in the present case, the principal portion invested in the life insurance policy remains outside the ambit of taxation and the accretion by way of bonus shall only be taxable under the Act. The above proposition that only net proceeds is taxable on maturity of the life insurance policy is supported by the CBDT in Circular No. 7 of 2003 dated 5.9.2003. Paragraph 10.3 of the circular states as follows: "The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, amendments have been made in section 88 and clause (10D) of section 10. The existing clause (10D) of section 10 has been substituted so as to provide that the exemption available under the said clause shall not be allowed on any sum received under ITA No.579/Bang/2022 Kantilal Jain, Bangalore Page 12 of 20 an insurance policy issued on or after the 1st day of April, 2003, in respect of which the premium payable in any of the years during the term of the policy, exceeds twenty per cent of the actual capital sum assured. In view of this, the income accruing on such policies (not including the premium paid by the appellant) shall become taxable." Thus, only a sum of Rs. 4,15,250/- being excess of maturity proceeds of Rs. 14,78,000 over total premium paid for all 5 years amounting to Rs. 10,62,750/- was chargeable to tax. 2.8 Further, in the present case, TDS equivalent to 1% of the maturity proceeds was deduction under section 194DA by LIC amounting to Rs. 14,780/-. Section 194DA of the Act deals with the deduction of tax at source in respect of proceeds received from life insurance policy. Prior to the amendment of section 194DA by the Finance Act, 2019, it read as follows: "Any person responsible for paying to a resident any sum under a life insurance policy, including the sum allocated by way of bonus on such policy, other than the amount not includible in the total income under clause (10D) of section 10, shall, at the time of payment thereof, deduct income-tax thereon at the rate of one per cent. Provided that no deduction under this section shall be made where the amount of such payment or, as the case may be, the aggregate amount of such payments to the payee during the financial year is less than one hundred thousand rupees." The section mandates deduction of tax at source for any sum paid under a life insurance policy, including sum allocated by way of bonus other than the amount exempted under section 10(10D). As stated earlier, exemption under section 10(10D) is not available to the appellant and therefore TDS under section 194DA is available. Circular 7 of 2003 states that only the income accruing on maturity of life insurance policy excluding the premiums already paid is to be ITA No.579/Bang/2022 Kantilal Jain, Bangalore Page 13 of 20 taxed in the hands of the policy holder. Therefore, only net proceeds are taxable. On the other hand, section 194DA mandates deduction of tax at source on any sum received from a life insurance policy, not exempt under section 10(10D). This results in a situation wherein only the net proceeds on maturity of life insurance is taxable but TDS undersection 194DA is on the entire amount of proceeds. Thus, there is a mismatch between the amount of income offered to tax and the amount on which TDS is deducted. This issue of the underlying difference in the amount on which TDS is deducted (gross amount) and amount taxable in the hands of the appellant (net amount) is an area of contention in the present case. This deficiency