SANTOSH KUMAR,KAYAMKULAM V. DCIT CIRCLE INTERNATIONAL, TRIVANDRUM

ITITA 6/COCH/2023

AI Insights

The case revolves around the tax treatment of gains from the surrender of a Unit Linked Insurance Policy (ULIP) by Santhosh Kumar, a non-resident Indian. The Assessing Officer (AO) initially classified the gains as 'Income from Other Sources', leading to an appeal. The Dispute Resolution Panel (DRP) upheld this classification, which was contested in the tribunal. The tribunal, referencing a similar case and recent legislative changes, concluded that ULIPs are capital assets and the gains should be taxed under 'Capital Gains'.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 396864 (ITAT-COCHIN)
• Appeal Type: Income Tax (International Taxation) Appeal
• Pronouncement Date: 27-05-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2017-2018
• Other Referred Cases: Sanjeev Behl vs. ITO, Mihir K Jhaveri vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJIT KUMAR DAS
• Assessee Lawyers: SURESH KUMAR VARMA
• Keywords: Set aside; Capital asset; Capital Gains
• Section: 147; 148; 56; 10; 2(14); 10(10D)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER IT(IT)A No. 6/Coch/2023 Assessment Year : 2017-18 Santhosh Kumar, Pranavam, Keerickad PO, Kayamkulam-690508 Kerala PAN : DOLPS7592F vs. DCIT Circle, International Taxation Thiruvananthapuram (Appellant) (Respondent) For Assessee : Shri Suresh Kumar Varma, CA For Revenue : Shri Sanjit Kumar Das, CIT-DR (Heard in Hybrid Bench) Date of Hearing : 26-03-2025 Date of Pronouncement : 27-05-2025 O R D E R PER SANDEEP SINGH KARHAIL, J.M : 1. The assessee has filed the present appeal challenging the final assessment order dated 04/01/2023, passed under section 147 read with section 144C(13) of the Income Tax Act, 1961 (“the Act”), pursuant to the directions dated 27/12/2022 passed by the learned Dispute Resolution Panel (“learned DRP”) under section 144C(5) of the Act, for the assessment year 2017-18. 2. In this appeal, the assessee has raised the following grounds: – 2 IT(IT)A No. 6/Coch/2023  The Direction of respected Dispute Resolution Panel is against law, facts and circumstances of the case.  Respected DRP ought to have considered Unit Linked Insurance Policy in par with mutual funds or other capital Asset  Respected DRP failed to appreciate the fact that intention of the Investor while investing in Unit Linked Insurance policy is not insurance coverage, rather an investment which may appreciate in future. Insurance coverage is just an additional advantage.  Respected DRP ought to have considered the later amendments in Income Tax Act which clearly made Unit Linked Insurance policies as Capital Asset.  The appellant craves, leave to add, amend, alter, modify or omit any of the aforesaid Grounds of appeal as occasion may arise of demand. 3. The solitary issue that arises for consideration in the present case pertains to the taxability of the gains arising from the surrender of a Unit Linked Insurance policy under the head “Capital Gains” instead of “Income from Other Sources”. 4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is a non-resident Indian and for the year under consideration, did not file his return of income. On the basis of the information received that the assessee, inter-alia, received Rs. 1,20,43,789 as maturity proceeds from the LIC, notice under section 148 of the Act was issued on 30/03/2021 and proceedings under section 147 of the Act were initiated. In response to the notice issued under section 148 of the Act, the 3 IT(IT)A No. 6/Coch/2023 assessee filed its return of income, inter-alia, declaring a long-term capital gain of Rs. 24,41,878 on surrender of the Unit Linked Insurance Plan of LIC. During the assessment proceedings, the assessee furnished bank account details, a copy of the LIC maturity receipt, etc. On the verification of the copy of insurance premium produced by the assessee, it was noted that the assessee had purchased the policy on 27/08/2011 for an instalment premium of Rs. 67 lakh, and the same was surrendered on 05/09/2016, on which the assessee received an amount of Rs. 1,20,43,789 as maturity proceeds. Accordingly, the Assessing Officer (“AO”), vide draft assessment order dated 31/03/2022 passed under section 144C(1) read with section 147 of the Act, inter-alia, added the net profit from the transaction amounting to Rs. 53,43,789 to the total income of the assessee as “Income from Other Sources”. 5. The assessee filed detailed objections against the addition made by the AO.Vide directions dated 27/12/2022, issued under section 144C(5) of the Act, the learned DRP rejected the objections filed by the assessee and upheld the proposed addition of Rs. 53,43,789 made by the AO as “Income from Other Sources”. 6. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order under section 147 read with section 144C (13) of the Act, adding the gains arising from 4 IT(IT)A No. 6/Coch/2023 the surrender of ULIP as “Income from Other Sources”. Being aggrieved, the assessee is in appeal before us. 7. We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee paid a premium of Rs. 67 lakhs in respect of the Unit Linked Insurance Policy (“ULIP”) scheme of Life Insurance Corporation of India (“LIC”) on 27/08/2011. In the year under consideration, the assessee surrendered the policy and received an amount of Rs. 1,20,43,789 as maturity proceeds. There is no dispute among the parties regarding the aforesaid basic facts of the present case. 8. As per the assessee, the ULIP is a hybrid investment option which consists of a mix of insurance and investment to serve the needs of the respective investors. Further, the amount of premium of the ULIP scheme is partly towards the insurance of the policyholder and partly towards the investment. As per the assessee, some portion of the premium is invested in equity, debt, money market or a mix of all based on the goals and risk appetite of the investor. Thus, as per the assessee, just like investment in mutual fund units, the ULIP plan is also completely exposed to the fluctuations in the market value of shares held in the portfolio of the LIC assigned managers. 9. In the present case, as evident from the record, there is also no dispute amongst the parties that the accretion on the surrender of 5 IT(IT)A No. 6/Coch/2023 the policy is taxable. The assessee offered the same to tax under the head “Capital Gains”, while the lower authorities have taxed the same under the head “Income from Other Sources”. Thus, the only issue that arises for our consideration, in the present case, is whether the gains arising from the surrender of the ULIP are taxable under the head “Capital Gains” or “Income from Other Sources”. We find that while considering a similar issue, the coordinate Mumbai bench of the Tribunal in Sanjeev Behl vs. ITO, in ITA no. 5345/MUM/2024, vide order dated 30/04/2025, held that the ULIP plan of the LIC comes under the purview of “capital asset”, and therefore, the income accrued to the assessee from the surrender of the said policy is taxable under the head “Capital Gains”. The relevant findings of the coordinate bench, in the aforesaid decision, are reproduced as follows: – 7. We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee invested in LIC Market Plus-1 Policy No. 903629621 and paid a yearly premium of INR 15 lakh. On 28/03/2016, the assessee surrendered the said policy and received an amount of INR 88,56,026, which was offered for taxation as capital gains. The AO, on the basis that the policy was an annuity/deferred pension plan as referred to in section 10(23AAB) of the Act, held that the proceeds from the surrender of such pension plan are taxable under section 80-CCC(2) of the Act. Accordingly, the AO made the addition with respect to the difference between the maturity value and investment value under section 80- CCC(2) of the Act. The learned CIT(A), vide impugned order, granted partial relief to the assessee and held that since the assessee has not claimed any deduction under section 80-CCC(1) of the Act in respect of the payment of premium related to LIC Market Plus-1 Policy, therefore addition cannot be made under section 80-CCC(2) of the Act. However, on the basis that the assessee’s case falls under the exception provided under section 10(10D) of the Act, the learned 6 IT(IT)A No. 6/Coch/2023 CIT(A) held that the income of INR 28,56,026 earned by the assessee from the surrender of LIC policy is taxable under the head “Income from Other Sources”. Accordingly, the learned CIT(A) taxed the income of INR 28,56,026 earned from the surrender of the LIC policy under section 56 of the Act. 8. During the hearing, the learned Authorised Representative (“learned AR”) placed on record a copy of the LIC Market Plus-1 Policy (UIN: 512L249V01) issued by the LIC. From the perusal of the said policy document, we find that premiums paid by the policyholder, after applying the allocation rate, as specified in the policy document, were utilised for the purchase of units of the opted Investment Fund at the Net Asset Value on the date of purchase. It is further evident from the policy document that the same provides for four different types of funds, namely Bond Fund (Lower Risk), Secured Fund (Steady Income), Balanced Fund (Balanced Income and Growth), and Growth Fund (Long-Term Capital Growth-High- Risk). Therefore, from the perusal of the policy document, we find that the policy issued under the LIC Market Plus-1 was the Unit Linked Insurance Policy (“ULIP”) and the same cannot be merely treated as a life insurance policy. In the present case, as evident from the record, there is no dispute amongst the parties that the accretion on the surrender of the policy is taxable. The assessee offered the same to tax under the head “Capital Gains”, while the lower authorities have taxed the same under the head “Income from Other Sources”. 9. From the record, we further find that in order to treat the income arising from the surrender of the policy as taxable under the head “Income from Other Sources”, the learned CIT(A) referred to the provisions of section 2(14) of the Act and held that since life insurance policy is not included within the definition of capital asset under section 2(14) of the Act, therefore the sum received from the life insurance policy (other than ULIP) is taxable under the head “Income from Other Sources”. Since the LIC policy in which the assessee has invested has been found to be a ULIP and not merely a life insurance policy, we do not find any merit in the findings of the learned CIT(A) in treating the same as not covered under the provisions of section 2(14) of the Act. 10. During the hearing, the learned Departmental Representative (“learned DR”) raised a plea that the amendment by the Finance Act, 2021 to section 2(14) of the Act, whereby ULIP is considered to be a capital asset, was made with effect from 01/04/2021, and therefore, the same is not applicable to the year under consideration. Thus, it was submitted that, accordingly, the accretion from the surrender of the policy will be taxable only under the head \"Income from Other Sources\" during the year under consideration. From the perusal of the memorandum explaining the provisions of the Finance Act, 2021, we find that the amendment was brought in to overcome the mischief 7 IT(IT)A No. 6/Coch/2023 of high-net-worth individuals claiming exemption under section 10(10D) of the Act by investing in ULIP with a huge premium. Since allowing the exemption to policies with huge premium was defeating the legislative intent as the legislature intended to provide benefit to small and genuine cases of life insurance, vide aforesaid amendment, the amount of premium payable for claiming the benefit under section 10(10D) of the Act was restricted to INR 2,50,000. Accordingly, corresponding amendment was also made in the definition of “capital asset” under section 2(14) of the Act, and it was provided that a ULIP [to which exemption under clause (10D) of section 10 of the Act does not apply on account of the applicability of the 4th and 5th proviso] the same shall be considered as a “capital asset” under clause (14) of section 2 of the Act. Thus, we are of the considered view that the mere fact that the aforesaid amendment was brought in the statute by Finance Act, 2012, with effect from 01/04/2021, the same cannot lead to the conclusion that prior to the aforesaid amendment the accretion from the surrender of ULIP was not taxable under the head “Capital Gains”. At this stage, it is pertinent to note that ULIP is a combination of insurance and investment product, wherein part of the premium paid is invested in various fund options, such as equity, debt, or a mix of both. Therefore, ULIP has all the attributes of a capital asset, though now specifically included in the definition of the term provided under section 2(14) of the Act.Thus, the fact that the ULIP is now treated as “capital asset” under section 2(14) of the Act further substantiates the claim of the assessee that the accretion on the surrender of ULIP is taxable under the head “Capital Gains”, since the legislature has also now recognised the fact that the ULIP is a capital asset. Further, it is evident from the record that the yearly premium payable exceeds the monetary limit provided in the 4th and 5th proviso to section 10(10D) of the Act. We find that similar findings were rendered by the coordinate bench of the Tribunal in Mihir K Jhaveri vs. CIT, in ITA No. 21/Mum./2023, for the assessment year 2014-15 vide order dated 20/05/2023. Accordingly, we do not find any merit in the aforesaid submission of the learned DR. 11. Therefore, in view of the facts and circumstances of the present case, legal position and judicial pronouncements as noted above, we are of the considered view that the LIC Market Plus-1 Policy, in which the assessee invested, comes under the purview of “capital asset”, and therefore the income accrued to the assessee from the surrender of the said policy is taxable under the head “Capital Gains”. Accordingly, the impugned order on this issue is set aside, and Ground No. 2 raised in assessee’s appeal is allowed.” 10. Since in the present case, the assessee has also invested in the ULIP plan of the LIC, which is of a similar nature as considered by the 8 IT(IT)A No. 6/Coch/2023 coordinate bench in the aforesaid decision, therefore respectfully following the decision cited supra, we are of the considered view that the ULIP plan of the LIC, in which the assessee had invested, comes within the ambit of “Capital Gains”. Therefore, the gains accrued to the assessee from the surrender of the said policy are only taxable under the head “Capital Gains”. Accordingly, the finding of the lower authorities taxing the said gain as income of the assessee under the head “Income from Other Sources” is overruled. As a result, the grounds raised by the assessee are allowed. 11. In the result, the appeal filed by the assessee is allowed. Order pronounced on 27-05-2025 by way of proper mentioning on the Notice Board Sd/- Sd/- [INTURI RAMA RAO] [SANDEEP SINGH KARHAIL] ACCOUNTANT MEMBER JUDICIAL MEMBER Cochin, Dated: 27-05-2025 TNMM Copy to : 1) The Appellant 2) The Respondent 3) The CIT concerned 4) The D.R, ITAT 5) Guard file By Order Asst. Registrar I.T.A.T, Cochin "