Rajan Nanda, New Delhi V. ACIT, New Delhi

ITA 922/DEL/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3898 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-06-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 06-05-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 05-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: R M MEHTA; ARUN KUM AR BHATIA
• Keywords: Business income; Business expenditure
• Section: 143(3); 10(10D); 37(1); 10; 154

Judgement Text

ITA NO. 922/DEL/2010 A.Y. 2006-07 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F. NEW DELHI BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 922/DEL/2010 A.Y. : 2006-07 MR. RAJAN NANDA, VS. ASSTT. COMMISSIONER OF IN COME TAX, 2, FRIENDS COLONY (W), CENTRAL CIRCLE-3, ARA CEN TRE, E-2, NEW DELHI 110 065 JHANDEWALAN EXTN., NEW DELH I (PAN:AAEPN3548A) [APPELLANT] (RESPONDENT) ASSESSEE BY : SH. R.M. MEHTA, ADV. & SH. ARUN KUM AR BHATIA, AR DEPARTMENT BY : SHRI M.K. GAUTAM, C.I.T. (D.R.) PER SHAMIM YAHYA: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDERS OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DATED 3.2.2010 PERTAINING TO ASSESSMENT YEAR 2006-07. 2. THE ISSUE RAISED IS SUMMED UP IN THE FOLLOWING G ROUNDS OF APPEAL WHICH READ AS UNDER:- THE COMMISSIONER (APPEALS) HAS ERRED IN SUSTAININ G ADDITION OF RS. 13,25,92,264/- OUT OF A TOTAL ADDITION OF RS. 23,51 ,25,000/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF MATURING PROCEEDS O F CERTAIN LIFE INSURANCE POLICES WHICH WERE ORIGINALLY TAKEN AS KEYMAN INSU RANCE POLICIES BUT LATER ASSIGNED TO THE APPELLANT AT THEIR RESPECTIVE SURR ENDER VALUE, BY MISINTERPRETING THE ORDERS OF THE HONBLE TRIBUNAL FOR THE ASSESSMENT YEARS 2003-04, 2004-05 AND 2005-06 WHEREBY THE AMOUNT WHI CH WAS DIRECTED TO ITA NO. 922/DEL/2010 A.Y. 2006-07 2 BE TAXED WAS THE SURRENDER VALUE OF SUCH POLICIES A T THE TIME OF THEIR ASSIGNMENT BY THE COMPANY IN FAVOUR OF THE APPELLAN T. THE COMMISSIONER (APPEALS) OUGHT TO HAVE DELETED THE ENTIRE ADDITION OF RS. 23,51,25,000/- BY GIVING THE BENEFIT OF EXEMPT ION U/S 10(10D) OF THE INCOME TAX ACT, 1961 AND EVEN THE SURRENDER VALUE A MOUNT IS NOT LIABLE TO TAX AS THE ASSESSEE HAS PAID THE SAME TO THE RESPEC TIVE COMPANY AT THE TIME OF ASSIGNMENT OF THE POLICIES. 3. THE ASSESSEE IN THIS CASE DERIVED INCOME FROM S ALARY AND ALSO INCOME FROM CAPITAL GAIN AND INCOME FROM OTHER SOURCE. FROM THE DETAILS FILED DURING THE COURSE OF ASSESSMENT, ASSESSING OFFICER NOTED THAT ASESSEE HAS RECEIVED THE FOLLOWING AMOUNTS TOWARDS MATURITY OF FOLLOWING KEY MAN POLICIES FROM LIC:- S.NO. DATE OF RECEIPT POLICY NO. MATURING AMOUNT TAKEN BY 1 1.4.2005 112963783 71250000/- EHIRCL 2 1.4.2005 112960968 42750000/- M/S ESCORTEL MOBILE [phone] 112689601 71250000/- EHIRCL 4 1.4.2005 112960969 49875000/- M/S ESCORTS LTD. 3.1 ASSESSING OFFICER ENQUIRED AS TO WHY THE MATUR ITY OF KEYMAN POLICY BE NOT BROUGHT TO TAX IN THE HANDS OF THE ASSESSEE. ASS ESSEE RESPONDED THAT THE ITAT IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2003-0 4 FOR SIMILAR ADDITION HAS DELETED THE SAME. ASSESSING OFFICER NOTED THAT DEPARTMENT HAS NOT ACCEPTED THE DECISION OF THE ITAT AND PREFERRED AN APPEAL BE FORE THE DELHI HIGH COURT. HENCE HE DID NOT ACCEPT THE CONTENTION AND MADE THE ADDITION OF RS. 23,51,25,000/- IN THE HANDS OF THE ASSESSEE. 4. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOM E TAX (APPEALS) REFERRED TO THE DECISION OF THE ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2003-04 IN ITA NO. 922/DEL/2010 A.Y. 2006-07 3 ITA NO. 2805/DEL/06 VIDE ORDER DATED 15.1.2007. I N PARA 17 OF THE SAID ORDER THE TRIBUNAL HAD HELD AS UNDER:- 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 POLIC Y WAS TAKEN OUT OF M/S ESCORTS 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 199 7 WHICH HAS SINCE BEEN ASSIGNED IN FAVOUR OF THE ASSESSEE IN 1998, BOTH TH E EVENTS HAVING TAKEN PLACE IN THE YEARS PRECEDING THE ASSESSMENT YEAR IN QUESTION. IN THE YEAR UNDER CONSIDERATION, THE SAID POLICY HAS SINCE MATU RED. SECTION 10(10D) OF THE ACT PROVIDES FOR EXEMPTION FROM TAXATION OF AN Y SUMS RECEIVED UNDER A LIFE INSURANCE POLICY INCLUDING THE SUM ALLOCATED B Y WAY OF BONUS ON SUCH POLICY. ONE OF THE EXCEPTION, WHICH IS RELEVANT F OR OUR PURPOSE, IS THAT SUMS RECEIVED UNDER A KEYMAN INSURANCE POLICY ARE N OT ENTITLED TO THE EXEMPTION OUTLINED IN SECTION 10(10D). ACCORDING T O THE ASSESSEE, UPON ASSIGNMENT, THE IMPUGNED POLICY IS TO BE UNDERSTOOD AS AN ORDINARY POLICY AND SUCH A CLAIM IS SUPPORTED BY A CERTIFICATE OF LIC OF INDIA. ON THE OTHER HAND, THE REVENUE CONTENDS THAT THE IMPUGNED POLICY WAS TAKEN OUT AS A KEYMAN INSURANCE POLICY AND IT REMAINS SO EVEN FOR CONSIDERING THE NATURE OF THE SUM RECEIVED AT THE TIME OF ITS MATURITY. I N THE EARLIER PART OF THE OTHER, WE HAVE CONSIDERED AS TO WHAT IS A KEYMAN INSURANCE POLICY AND THE INTENTION OF THE LEGISLATURE REGARDING THE TAXATI ON OF SUMS RECEIVED UNDER KEYMAN INSURANCE POLICY. EXPLANATION BELOW S ECTION 10(10D) DEFINES AS TO WHAT IS A KEYMAN INSURANCE POLICY. IT IS SU FFICIENT TO DEDUCE HERE THAT ITA NO. 922/DEL/2010 A.Y. 2006-07 4 IN ALL THE PROVISIONS, WHAT IS ENVISAGED IS SUM RE CEIVED EITHER ON MATURITY OR ONE PREMATURE SURRENDER I.E. SURRENDER VALUE UND ER KEYMAN INSURANCE POLICY. THE SCHEME OF TAXATION COVERS THE TREATMENT OF THE PREMIUMS PAID, I.E. ITS DEDUCTIBILITY IN THE HANDS OF THE EMPLOYE R, TAXABILITY IN THE HANDS OF THE EMPLOYEES AS PROFITS IN LIEU OF SALARY, TAXAB ILITY UNDER THE HEAD PROFITS AND GAINS OF BUSINESS IN CASE OF ABSEN CE OF EMPLOYEE-EMPLOYER RELATIONSHIP AND THE RESIDUAL TAXING PROVISION OF S ECTION 56(2), ETC. ALL THIS SHOWS THAT THE FROM THE TIME OF TAKING OUT THE POLI CY UPTO ITS MATURITY, THE LEGISLATURE HAS ENVISAGED THE TREATMENT TO BE GIVEN WITH REGARD TO SUMS INVOLVED IN THE HANDS OF THE PLAYERS INVOLVED. TH E PLAYERS INVOLVED OBVIOUSLY ARE TWO ONE, THE PERSON ON LIFE OF WHOM 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 AND END, THE VERY ESSENCE OF THE KEYMAN INSURANCE POLICY IS LOST. THIS IS THE REASON WHY THE LIC OF INDIA CONFIRMED THAT AFTER ASSIGNME NT OF A KEYMAN INSURANCE POLICY IN THE NAME OF THE INDIVIDUAL AN D THE PREMIUMS THEREAFTER BEING PAID BY SUCH INDIVIDUAL, THE HITHE RTO KEYMAN INSURANCE POLICY BECOMES AN ORDINARY POLICY. IN THIS CASE, O N THE DATE OF MATURITY, THE POLICY IN QUESTION IS RIGHTLY TO BE ACCEPTED AS AN ORDINARY INSURANCE POLICY. SO, HOWEVER, THE SCHEME OF TAXATION, WHICH WE HAVE REFERRED ABOVE, DOES NOT DEAL WITH A SITUATION WHERE A KEYMAN INSURANCE POLICY SUBSEQUENTLY ATTAINS THE CHARACTER OF ORDINARY INSURANCE POLICY. CERTAINLY, SECTION 10(10D) COMES INTO OPERATION WHILE EVALUATING THE T AXABILITY OF SUMS RECEIVED UNDER AN ORDINARY INSURANCE POLICY, INCL UDING THE AMOUNT OF BONUS THEREON. SO, HOWEVER, THE AMOUNT SO RECEIVED IN THE INSTANT CASE ITA NO. 922/DEL/2010 A.Y. 2006-07 5 CERTAINLY IS CONSTITUTED OF SUM WHICH FLOWS AS A K EYMAN INSURANCE POLICY UPTO THE DATE OF THE ASSIGNMENT. THE AMOUNT WHICH PERTAINS TO SUCH PERIOD CERTAINLY IS OUTSIDE THE PURVIEW OF EXEMPTIO N U/S 10(10D) AS IT REPRESENTS A SUM RECEIVED ON ACCOUNT OF KEYMAN INS URANCE POLICY. THEREFORE, IN OUR CONSIDERED VIEW, IT WOULD BE IN T HE 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 LD. COMMISSIONER OF INCOME TAX (APPEALS) AND DIRECT THE ASSESSING OFFICER TO BRING TO TAX THE AFORESAID SUM IN THIS YEAR. 4.1 LD. COMMISSIONER OF INCOME TAX (APPEALS) NOTED THAT IDENTICAL ISSUE WAS THERE IN ASSESSMENT YEAR 2004-05 IN THE CASE OF THE ASSESSEE AND THE TIAT HAD FOLLOWED ITS ORDER FOR ASSESSMENT YEAR 2003-04. FOR ASSESSMENT YEAR 2005-06 ALSO THE TRIBUNAL HAD PRINCIPALLY FOLLOWED THE DECI SION FROM EARLIER TRIBUNALS DECISION. HENCE, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) OBSERVED THAT THE DECISION OF THE ITAT AS GIVEN FOR ASSESSMENT YEAR 2 003-04 AND FOLLOWED IN ASSESSMENT YEAR 2004-05 BECOMES APPLICABLE EVEN FOR ASSESSMENT YEAR 2005-06. HENCE LD. COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT MATURITY VALUE RECEIVED BY THE APPELLANT IS EXEMPT U./S 10(10D) O F THE ACT SUBJECT TO THE RESTRICTION THAT THE AMOUNT SO RECEIVED CONSTITUTED A SUM WHICH FLOWS AS A KEYMAN INSURANCE POLICY UPTO THE DATE OF ASSIGNMENT AND THE AMOUNT WHICH PERTAINS TO SUCH PERIOD CERTAINLY IS OUTSIDE THE PU RVIEW OF EXEMPTION U/S 10(10D) AS IT REPRESENTS A SUM RECEIVED ON ACCOUNT OF KEYM AN INSURANCE POLICY. ITA NO. 922/DEL/2010 A.Y. 2006-07 6 4.2 LD. COMMISSIONER OF INCOME TAX (APPEALS) FURTHE R HELD THAT: AS REGARDS QUANTIFICATION OF SUCH AMOUNT, THE ITA T IN ITS ORDER FOR A.Y. 2003-04 HAS HELD THE SAME TO BE A SUM EQUIVALE NT TO THE SURRENDER VALUE OF THE POLICY AT THE TIME OF ITS ASSIGNMENT B Y THE COMPANY IN FAVOUR OF THE ASSESSEE. IT APPEARS THAT THE PROPER FACTS WERE NOT PLACED BEFORE ITAT TO COME TO THE CONCLUSION OF QUANTIFICATION O F THE SUM RECEIVED ON ACCOUNT OF KEYMAN INSURANCE POLICY OUT OF TOTAL SUM RECEIVED ON MATURITY AS SURRENDER VALUE IS THE AMOUNT PAID BY THE ASSESS EE TO THE EMPLOYER ON ASSIGNMENT OF KEYMAN INSURANCE POLICY AND IT HAS NO THING TO DO WITH THE AMOUNT RECEIVED ON MATURITY AS THE SURRENDER VALUE DOES NOT REPRESENT THE SUM RECEIVED BY THE APPELLANT ON ACCOUNT OF KE YMAN INSURANCE POLICY. THEREFORE IT IS IMPERATIVE ON MY PART TO ASCERTAIN THE SUM OUT OF THE AMOUNT SO RECEIVED ON MATURITY WHICH REPRESENTS A SUM RECEIVED ON ACCOUNT OF KEYMAN INSURANCE POLICY. IN MY OPINION T HIS SUM SHOULD BE WORKED OUT BY GIVING A NARRATIVE EXAMPLE:- LET US PRESUME THAT A EMPLOYER E TAKES A KEYMAN I NSURANCE POLICY FOR KEYMAN (K) FOR 3 YEARS; THE MATURITY VALUE OF WHICH IS 100 LAKHS. THE E HAS TO PAY THREE INSTALMENT OF PREMIUMS @20 LAKHS E ACH. IN NORMAL CIRCUMSTANCE EVERY YEAR WHEN E IS PAYING PREMIUM OF 2- LAKHS, SAME IS ALLOWABLE BUSINESS EXPENDITURE AND ON MATURITY WHEN E RECEIVES 100 LAKHS, THE ENTIRE AMOUNT OF 100 LAKH WILL BE TREATE D AS BUSINESS INCOME OF E FOR THE YEAR IN WHICH THE MATURITY AMOUNT IS R ECEIVED. HOWEVER, AFTER TWO YEARS E ASSIGNS THIS POLICY IN FAVOUR OF K AT RS. 15 LAKHS WHICH ACCORDING TO LIC WAS THE SURRENDER VALUE OF THE POL ICY AT THAT TIME. ITA NO. 922/DEL/2010 A.Y. 2006-07 7 SUBSEQUENT PREMIUM OF 20 LAKH IS PAID BY K. AS RS. 15 LAKHS PAID BY K TO E IS OFFERED AS INCOME OF THE E, EFFECTIVELY E PAID RS. 25 LAKHS (40-15) AND CLAIMED DEDUCTION OF EXPENDITURE ALSO TO THE E XTENT OF RS. 25 LAKH AND ON MATURITY NOTHING HAS BEEN OFFERED AS INCOME BY E. ON THE OTHER HAND K HAS PAID ONE PREMIUM OF RS. 20 LAKHS FOR WHICH NO DEDUCTION HAS BEEN CLAIMED IN THAT YEAR BY HIM. SIMILARLY NO DEDUC TION HAS BEEN CLAIMED FOR RS. 15 LAKHS WHICH HE PAID TO E ON ASSIGNMENT OF THE POLICY IN HIS FAVOUR FOR WHICH ALSO NO DEDUCTION HAS BEEN CLAIMED BY HI M. THUS EFFECTIVELY HE PAID RS. 35 LAKHS PREMIUM FOR WHICH NO DEDUCTION H AS BEEN CLAIMED. THUS TO SUM UP, E HAS PAID RS. 25 LAKHS, CLAIMED DEDUC TION OF RS. 25 LAKHS AS EXPENDITURE AND NO AMOUNT IS OFFERED AS INCOME ON M ATURITY WHEREAS K HAS PAID RS. 35 LAKHS AS PREMIUM, NO DEDUCTION HAS BEEN CLAIMED AND RECEIVES ON MATURITY 100 LAKHS AND NOTHING IS OFFER ED AS INCOME AS ENTIRE AMOUNT OF RS. 100 LAKHS IS CLAIMED AS EXEMPT U/S 10 (10D) OF THE ACT. IN THE LIGHT OF THE ABOVE FACTS, IF ONE HAS TO WORK OUT THE SUM PERTAINING TO THE PERIOD WHEN THE POLICY WAS KEYMA N INSURANCE POLICY, OUT OF SUM SO RECEIVED ON MATURITY I.E. RS. 100 LAKHS, IT WILL BE 100 X 25/60 AND EXEMPTED AMOUNT U/S 10(10D) WILL BE 100X 35/60 . IF ALLOCATION IS DONE IN SUCH A WAY THEN ONLY THE REAL SPIRIT OF THE DECISION OF THE ITAT WILL BE REPRESENTED. THUS RESPECTFULLY FOLLOWING THE D ECISION OF THE ITAT IN PRINCIPLE THAT OUT OF SUM SO RECEIVED ON MATURITY THE SUM RECEIVED ON ITA NO. 922/DEL/2010 A.Y. 2006-07 8 ACCOUNT OF KEYMAN INSURANCE POLICY SHOULD BE TAXED, WHICH HAS TO BE WORKED OUT IN THIS MANNER. 5. IN THE LIGHT OF HIS AFORESAID OBSERVATIONS, LD . COMMISSIONER OF INCOME TAX (APPEALS) COMMUTED THE AMOUNTS AS UNDER:- IT IS NOTICED THAT OUT OF TOTAL PREMIUM OF RS. 17, 81,84,705/-, THE APPELLANT HAS PAID RS. 7,77,02,351/- AND EFFECTIVE AMOUNT OF PREMIUM PAID BY THE EMPLOYER COMPANIES IS RS. 10,04,82,354/-. THE TOTAL AMOUNT RECEIVED ON MATURITY IS RS. 23,51,25,000/-. THUS FOLLOWING THE GUIDELINES AS GIVEN HEREINABOVE IN PARA 3.3.5.2., THE AMOUNT TO BE TAXED, IN VIEW OF IN PRINCIPLE DE CISIONS OF ITAT GIVEN IN A.Y. 2003-04, HAS TO BE WORKED OUT AS UNDER:- 23,51,25,000 X 10,04,82,354 17,81,84,705 WHICH IS RS. 13,25,92,264/- THE ASSESSING OFFICER IS, THEREFORE, DIRECTED TO TAX RS. 13,25,92,264/- AS INCOME OF THE APPELLANT DURING THE YEAR FOLLOWIN G THE DIRECTION OF THE ITAT IN PRINCIPLE AS GIVEN IN A.Y. 2003-04, 2004-05 AND EVEN IN 2005-06 (AFTER VERIFICATION DONE BY ASSESSING OFFICER AS P ER DIRECTIONS OF THE ITAT). THE APPELLANT GETS RELIEF OF RS. 10,25,32,736/- ON THESE GROUNDS ITA NO. 922/DEL/2010 A.Y. 2006-07 9 6. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPEA L BEFORE US. 7. WE FIND THAT IDENTICAL ISSUES HAVE BEEN CONSIDER ED IN ASSESSEES OWN CASE FOR EARLIER YEAR (2003-04). THE TRIBUNAL HAD CLEA RLY HELD THAT THE TOTAL RECEIVED BY THE ASSESSEE ON MATURITY EXCEPT FOR THE SUM EQUIVAL ENT TO THE SURRENDER VALUE OF THE POLICY AT THE TIME OF ITS ASSIGNMENT BY THE COM PANY IN FAVOUR OF THE ASSESSEE IS TAXABLE. HENCE THE TRIBUNAL HAD DIRECTED THA T THE SAID AMOUNT EQUIVALENT TO THE SURRENDER VALUE HAVING BEEN RECEIVED IN THIS Y EAR, WAS THEREFORE, DIRECTED TO BE TAXED PRESENTLY. IN OTHER WORDS, THE TRIBUNAL HAD HELD THAT THE MATURITY VALUE OF THE IMPUGNED POLICY AS REDUCED BY THE SUR RENDER VALUE OF THE ASSESSEE AT THE 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 POLICY AND OBSERVED TH AT:- 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 T AX AS PER SECTION 10(10D) OF THE INCOME TAX ACT. THE PROCEED S OF THE POLICY WILL BE TREATED AS INCOME U/S 28(VI) OF THE ACT. PROVISIONS APPLICABLE TO THE KEYMAN: ITA NO. 922/DEL/2010 A.Y. 2006-07 10 1) IN THE EVENT OF THE POLICY BEING ASSIGNED TO THE KE YMAN, THE PROCEEDS OF THE POLICY INCLUDING BONUS WILL BE TREA TED AS PROFITS IN LIEU OF SALARY UNDER SECTION 17 (CLAUS E 3) OF THE INCOME TAX ACT. 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 TA X 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 AND CONDITIONS WHILE IN THE LETTER I SSUED TO THE ASSESSEE IT WAS STATED THAT AFTER ASSIGNMENT THE KEYMAN POLICY WILL BE TREATED AS ORDINARY 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 T HE DEPARTMENT, IN THE INTEREST OF JUSTICE AND FAIR PLAY WE RESTORE THE AP PEAL TO THE FILE OF THE ASSESSING OFFICER FOR GETTING CLARIFICATION FROM T HE HIGHER AUTHORITIES OF LIC WITH REGARD TO CORRECT STATUS OF KEYMAN POLICY ON T HE OCCASION OF ASSIGNMENT AND CONSEQUENTIAL TREATMENT OF TAXABILIT Y IN THE HANDS OF THE ASSESSEE, AND TO DECIDE THE ISSUE AFRESH AS PER TH E TERMS AND CONDITIONS APPLICABLE TO THE KEYMAN INSURANCE POLICY ON ASS IGNMENT TO THE KEYMAN. AFTER GETTING THE CLEAR POSITION IF THE ASSESSING O FFICER FOUND THAT AS PER CLARIFICATION ISSUED BY LIC, THE KEYMAN POLICY IS C ONVERTED INTO ORDINARY POLICY, THEN TO FOLLOW THE OBSERVATION OF COORDINAT E BENCH AS DISCUSSED HEREINABOVE. BEFORE PARTING WITH THE MATTER, WE MA Y CLARIFY THAT AMOUNT OF LOANS AND INTEREST THEREON AS AVAILED BY THE A SSESSEE ON THESE POLICIES ITA NO. 922/DEL/2010 A.Y. 2006-07 11 WILL NOT EFFECT THE MATURITY VALUE OF THE POLICY, WHICH IS LIABLE TO BE CONSIDERED ALONGWITH AMOUNT OF BONUS THEREON, WHIC H THE ASSESSEE IS ENTITLED TO GET. ACCORDINGLY, ACTION OF THE ASSESS EE IN OFFERING THE NET AMOUNT RECEIVED FROM LIC AFTER DEDUCTION OF LOAN AN D INTEREST THEREON AS AVAILED BY THE ASSESSEE ON THESE POLICIES ARE NOT C ORRECT. 7.3 FROM THE ABOVE IT IS VERY CLEAR THAT TRIBUNAL H AD DIRECTED THAT THE ASSESSING OFFICER SHOULD MAKE ENQUIRY AND EXAMINE THE ISSUE INTER-ALIA AS PER THE TERMS AND CONDITIONS APPLICABLE TO THE KEYMAN POLICY ON A SSIGNMENT TO KEYMAN. LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT SUBSEQUENT TO THE DIRECTIONS OF THE TRIBUNAL THE ASSESSING OFFICER HAD PASSED AN ORDE R FOR ASSESSMENT YEAR 2005-06. IN THE SAID ORDER THE ASSESSING OFFICER NOTED THAT LIC HAS CLARIFIED THAT THE KEYMAN INSURANCE POLICIES WHICH WERE LATER ON ASSI GNED IN THE NAME OF SHRI RAJAN NANDA ON 25.08.1998 WAS TO BE TREATED AS AN ORDINAR Y INDIVIDUAL POLICY. ACCORDINGLY, THE ASSESSING OFFICER HAS BROUGHT TO TAXATION THE SURRENDER VALUE OF THE POLICY AT THE TIME OF ASSIGNMENT BY THE COMPANY IN FAVOUR OF THE ASSESSEE. WE FIND THAT THE SAID ASSESSMENT ORDER HAS BEEN PAS SED 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 ORDER FOR ASSE SSMENT YEAR 2005-06, AS THE SAME IS NOT A SUBJECT MATTER OF 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 EARLIE R TRIBUNALS ORDER IN PRINCIPLE, BUT AS FAR AS THE QUANTIFYING THE AMOUNT SUBJECT TO TAXATION, HE MADE IS OWN COMPUTATION ON FOLLOWING LINES. THE LD. COMMISSION ER OF INCOME TAX (APPEALS) HAS OPINED THAT THE SURRENDER VALUE IS TO BE COMPUT ED AS PER THE RATIO BETWEEN THE PREMIUMS PAID BY THE ASSESSEE AND THE COMPANY, TO THE FINAL MATURITY PROCEEDS, THIS IS TO BE THE BASIS FOR ARRIVING AT T HE PORTION WHICH IS TAXABLE AND ITA NO. 922/DEL/2010 A.Y. 2006-07 12 THAT WHICH IS NOT TAXABLE. THE LD. COMMISSIONER O F INCOME TAX (APPEALS) WAS OF THE OPINION THAT TO THE EXTENT THE MATURITY VALUE B EARS A RATIO TO THE PREMIUM PAID BY THE COMPANY, THE SAME IS TO BE TREATED AS S URRENDER VALUE AND THE EQUIVALENT AMOUNT RECEIVED IS TO BE TAXED AND ONLY THAT PORTION OF THE MATURITY PROCEEDS WHICH BEARS A RATIO TO THE PREMIUM PAID BY THE ASSESSEE SHOULD BE ALLOWED AS PROCEEDS OF AN ORDINARY POLICY AND NOT T AXED. 7.5 NOW WE FIND THAT SURRENDER VALUE AS PER THE TER MS APPLICABLE IN INSURANCE POLICY AND INSURANCE INDUSTRY IS THE VALUE WHICH IS RECEIVED ON PREMATURE SURRENDER. WE NOTE THAT IT IS NOT THE CASE OF LD. COMMISSIONER OF INCOME TAX (APPEALS) THAT THE IMPUGNED KEYMAN POLICIES DO NOT HAVE A PROVISION OF PREMATURE SURRENDER 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 OF INCOME TA X (APPEALS)S ORDER IS NOT IN ACCORDANCE WITH THE RATIO LAID DOWN BY THE TRIBUNAL IN ASSESSEES OWN CASE EARLIER. WE ALSO NOTE THAT BEFORE THE LD. COMMISSIONER OF IN COME TAX (APPEALS) ASSESSEE HAD SUBMITTED THAT THE ASSESSING OFFICER BE GIVEN THE SAME DIRECTION AS THAT GIVEN BY THE TRIBUNAL FOR A.Y. 2005-06. HENCE, ADHERING TO THE DOCTRINE OF STAIRE DECISES, WE FOLLOW THE RATIO EMANATING OUT OF THE T RIBUNALS ORDER FOR ASSESSMENT YEAR 2005-06 WHICH IS THE IMMEDIATELY PRECEDING YEA R, WHEREIN THE TRIBUNAL HAD 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 STATEMENTS IN LETTER ISSUED TO THE IN COME TAX DEPARTMENT AND THAT ITA NO. 922/DEL/2010 A.Y. 2006-07 13 ISSUED TO THE ASSESSEE. HENCE, WITH THE SAME DIREC TION AS FOR ASSESSMENT 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 ASSESSIN G OFFICER FOR GETTING CLARIFICATION FROM HIGHER AUTHORITIES OF LIC WITH REGARD TO CORR ECT STATUS OF KEYMAN POLICY ON THE OCCASION OF ASSIGNMENT AND CONSEQUENTIAL TREATM ENT OF TAXABILITY IN THE HANDS OF THE ASSESSEE, AND TO DECIDE THE ISSUE AFRESH AS PER THE TERMS AND CONDITIONS APPLICABLE TO THE KEYMAN INSURANCE POLICY ON ASSIGN MENT TO THE KEYMAN. AFTER THE ASSESSING OFFICER COMES TO THE CONCLUSION THAT THE KEYMAN POLICY IS CONVERTED INTO AN ORDINARY POLICY, THEN HE SHOULD F OLLOW THE OBSERVATION OF COORDINATE BENCH AS IN EARLIER ASSESSMENT YEARS. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 04/06/2010. SD/- SD/- [RAJPAL YADAV] [SHAMIM YAHYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATE 04/06/2010 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