SELINA N. SHETH ,MUMBAI V. INCOME TAX OFFICER -17(3)(1), MUMBAI

ITA 2352/MUM/2025

AI Insights

The case revolves around the taxation of maturity proceeds from a Unit Linked Insurance Policy (ULIP) under the Income Tax Act. The assessee, Selina N. Sheth, contested the decision of the lower authorities, which treated the proceeds as 'income from other sources' and not as a capital receipt. The primary legal contention was whether the proceeds from the ULIP should be taxed under 'capital gains' or 'income from other sources'. The Tribunal examined the definitions under sections 2(14) and 10(10D) of the Income Tax Act, along with relevant amendments and judicial precedents, to arrive at its decision.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 772782 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Assessment Year: 2017-2018
• Other Referred Cases: Mihir K. Jhaveri Vs CIT, Subhash Tandon Vs ITO, ACIT Vs Shri Girish Haribhai Trivedi, Anjala Goyal Vs DCIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDRA MOHAN
• Assessee Lawyers: M.M.GOLVALA; INVITING MY
• Keywords: Capital asset; Cost of acquisition; Capital receipt; Capital Gains; TDS; FORM 26AS
• Section: 148; 10; 2(14); 10(10D)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, MUMBAI BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER ITA No. 2352/MUM/2025 (AY: 2017-18) (Physical hearing) Selina N. Sheth M/s. Kalyaniwalla & Mistry LLP, Esplanade House, 2nd Floor, 29 Hazarimal Somani Marg, Fort, Mumbai – 400001. [PAN: AABPS9851L] Vs ITO, Ward – 17(3)(1), Aayakar Bhawan, M.K. Road, Mumbai – 400020. Appellant / Assessee Respondent / Revenue Assessee by Shri M.M. Golvala, CA Revenue by Shri Surendra Mohan, Sr. DR Date of Institution 03.04.2025 Date of hearing 17.07.2025 Date of pronouncement 28.08.2025 Order under section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by assessee is directed against the order of Ld. CIT(A)/NFAC dated 24.01.2025 for assessment year (AY) 2017-18. The assessee has raised following grounds of appeal: “1. Both the lower authorities erred in holding that Rs. 30,07,228/- was liable to tax, in respect of maturity proceeds of a Unit Linked Insurance Policy (ULIP) under the head “Income from Other Sources”. 2. Both the lower authorities erred in holding that a Unit Linked Insurance Policy is not a capital asset under section 2(14). 3. Both the lower authorities erred in not taxing the surrender proceeds from the unit linked insurance policy under the head “income from Capital Gains.” 4. Both the lower authorities erred in not granting exemption to the capital gains earned under section 10(38) of the Act. Printed from counselvise.com ITA No. 2352/Mum/2025 Selina N. Sheth 2 5. The appellant submits that both the lower authorities erred in not allowing the benefit of indexation while computing “Capital Gains” in respect of the surrendered insurance policy. 6. Both the lower authorities erred in taxing the surrender proceeds from the insurance policy under the head “Income from Other Sources’. 7. Without prejudice to the ground nos. 1 to 6 above, if the surrender proceeds of the insurance policy are to be taxed under the head “income from Other Sources”, the premium paid should be allowed as a deduction under section 57, following the ‘real income theory’. 2. The assessee vide application dated 14.07.2025 as raised following additional ground of appeal: “The assessing officer erred in not granting credit for tax deducted at source of Rs. 60,145/- by HDFC Life Insurance Company Limited, even though the same was appearing in 26AS of the said assessment year.” 3. Rival submissions of both the parties have been heard and record perused. The learned Authorised Representative (ld. AR) of the assessee submits that he has raised additional ground of appeal vide application dated 14.07.2025 for not allowing credit of TDS of Rs. 60,145/- deducted by HDFC Life Insurance Company, the same is appearing in Form 26AS. The ld. AR of the assessee submits that no additional fact is required to be brought on record for adjudication of such additional ground of appeal. Therefore, same may be admitted for consideration by the bench. For other/remaining grounds of appeal, that is Ground No.1 to 6 which relates to treating the surrender proceeds of Unit Linked Insurance Policy (ULIP) as income from other sources in place of exempt capital receipt as claimed by the assessee, the ld. AR of the assessee submits that though the assessee has raised multiple grounds of appeal, but sum and substance, solitary grounds of appeal relates to taxing maturity receipt of ULIP and treating the same under the head Printed from counselvise.com ITA No. 2352/Mum/2025 Selina N. Sheth 3 “income from other sources”. The ld. AR of the assessee submits that during re-assessment proceedings, initiated pursuant to notice under section 148, the assessing officer (AO) issued show cause notice to the assessee for proposing to tax redemption proceed of ULIP as income, along with other income declared by assessee. The assessee while filing return of income in response to notice under section 148 declared taxable income of Rs. 1,08,920/-. In the computation of income, the assessee claimed exemption under section 10(38) in respect of ULIP of Life Insurance Policy with HDFC Standard Life Insurance Company aggregating Rs. 30,07,227/-. The assessee arrived at such figure after deducting cost of premium of Rs. 20.00 lakhs as disclosed capital gain of Rs. 10,07,227/-. The assessee claimed that expenditure of that ULIP policy was purchased in February, 2012 by paying single premium to Rs. 20.00 lakhs. The assessee also explained that right to receive a sum under insurance policy is a ‘capital asset’ within meaning of section 2(14) of the Income Tax Act and any income or losses arising on redemption will be taxable under the head ‘capital gain’. The assessee while referring policy document explained that Rs. 20.00 lakhs were invested with HDFC Standard Insurance Company under HDFC SL Progrowth Maximizer Plan which is a Unit Linked Insurance Plan, whereby investors are given choice as to the manner in which their funds are to be invested. The assessee explained that she opted for “Blue Chip Fund” in which 80-100% of fund value is invested in equity market and, therefore, the underlying units represent investments made in equity markets for a period of almost seven Printed from counselvise.com ITA No. 2352/Mum/2025 Selina N. Sheth 4 years and gains were required to be exempt under section 10(38) of the Act. Considering the exemption granted to shares and mutual fund unit. 4. The assessee in alternative submitted that to treat sum as a non-equity investment subject to tax @ 20% being long term capital asset as per provisions of section 112. The working was also provided to the assessing officer wherein it resulted into capital loss. In other alternative, the ld AR of the assessee explained that tax is required to levied on real income and the assessing officer was required to allow deduction of the premium of Rs. 20.00 lakhs being cost of acquisition of the policy underlying the units. The assessing officer disregarded the submissions of assessee and held that redemption proceeds are governed by the provisions of section 10(10D) and that case of assessee falls within exception and the assessee is not entitled for exemption and treated the entire sum of Rs. 30,07,227/- as chargeable to tax. The ld. CIT(A) held that section 2(14)(c) specified that ULIP is a capital asset only when exemption under section 10(10D) does not apply on account of 4th& 5th proviso thereof and these particular clauses were introduced only with effect from 01.04.2021. 4th& 5th proviso of section 10(10D) were not applicable and the insurance policy could not be considered as a capital asset and also upheld the action of assessing officer to apply the head income from other sources and not allowed the deduction of premium payment of Rs. 20 lakhs. The action of lower authorities is totally unjustified. The ld. AR of the assessee submits that even if the redemption proceeds of a ULIP are not exempted under section 10(10D) does not convert the receipt on redemption of a revenue receipt. Section 10(10D) is not a charging provision. The life Printed from counselvise.com ITA No. 2352/Mum/2025 Selina N. Sheth 5 insurance policy is an asset and a ULIP is like any investment scheme, similar of units of mutual fund or shares etc. When amount was invested in 2012 in a ULIP and redemption proceeds are received on surrender in 2017, in the hands of an individual investor, who is doing no business, the said receipt is a capital receipt and the proceeds are required to be considered for taxation under the head Long Term Capital Gains. Merely because the redemption proceeds are not exempt under section 10(10D) does not automatically make the receipt taxable as income. Section 10(10D) is not a charging provision in the manner in which the lower authorities have interpreted the Act. Once it is held that exemption is not available under section 10(10D) then the charge of tax is to be considered under section 4 and 5 and the head of income under which the charge falls is to be considered under section 14. When one considers the nature of this receipt on redemption, the character can only be that of a capital receipt and the head of income which is to be applied is required to be ‘capital gains’. The ld. AR of the assessee by inviting my attention to the definition of ‘capital asset’ in section 2(14) and the definition of ‘income’ under section 2(24) submits that even after amendments were made denying exemption to redemption proceeds of certain ULIPs under section 10(10D) in 2003, no amendment was made in the definition of ‘income’ where under such redemption proceeds were compulsorily required to be taxed as income (as held by the lower authorities) until the insertion of sub clause (xviid) by Finance Act 2023 w.e.f. 1\" April, 2024 which, thereafter, includes any sum referred to Section 56(2)(xiii). Section 56(2)(xiii) was simultaneously inserted by the Finance Act 2023 w.e.f. 1 April, 2024 which Printed from counselvise.com ITA No. 2352/Mum/2025 Selina N. Sheth 6 has made provision for taxing under the head \"Income from Other Sources\", maturity of certain Life Insurance Policies, other than a ULIP, which Policies are not exempt under section 10(10D). Prior to this insertion in Section 56(2)(xiii) and correspondingly in Section 2(24)(xviid), there was no provision to tax the maturity proceeds of a Life Insurance Policy as income. This is besides the fact that even today ULIPs are excluded from such taxation under \"Income from Other Sources\". The only rationale for this is that ULIPs are like any other investment scheme, and the gains on redemption can only be taxed under the head \"capital gains\". It was submitted that in a series of decision, Tribunal held that a ULIP amounts to a capital asset even prior to the insertion of section 2(14)(c) and the redemption proceeds are required to be taxed under the head capita gain after allowing indexation cost. To support his submission, the ld. AR relied upon the following decision:  Mihir K. Jhaveri Vs CIT dated 30th May, 2023 (ITA No. 21/Mum/2023),  Subhash Tandon Vs ITO dated 17th August, 2023 (ITA No. 1382/Del/2023),  ACIT Vs Shri Girish Haribhai Trivedi dated 13th July, 2012 (ITA No. 2986/Ahd/2011)  Anjala Goyal Vs DCIT dated 1st August, 2022 (ITA No. 01/JP/2022) (Jaipur) 5. The ld AR of the assessee submits that even if any receipt is subject to TDS, it does not automatically result in a receipt classified as taxable or revenue receipt. The TDS cannot decide the chargeability to tax of the receipt and not to decide whether receipt is ‘capital’ or ‘revenue’ in nature in the hands of recipient or to decide the ‘head of income’ under which a particular receipt is to be taxed. In a without prejudice submission, which is the issue in ground no. 7 of the appeal, the ld. AR of the assessee submits that taxing of receipt Printed from counselvise.com ITA No. 2352/Mum/2025 Selina N. Sheth 7 on account of redemption proceed to ULIP under the head capital gain, even if the said receipt is to be taxed as income from other sources, deduction was required to be allowed for a single premium of Rs. 20.00 lakhs in 2011, following the “real income” theory. To support such contention, he relied on the decision of Hon’ble Apex Court in Balbir Singh Maini 398 ITR 531. The ld AR of the assessee prayed to allow his appeal on his primary submissions. In support of additional grounds of appeal, the ld AR of the assessee submits that in case any tax liability is determined, the credit of TDS reflected in Form-26AS be allowed to the assessee. Or in case, no liability is determined, it may be allowed as refund. 6. On the other hand, learned senior departmental representative (ld. Sr. DR) for the revenue supported the order of lower authorities. The ld. CIT(A) in para 6.6 of his order held that the impugned policy is covered by Clause c of Section 10(10D). It is not covered by exemption and TDS was made under section 194DA. The single premium policy cannot be classified as a capital asset and is to be taxed under the head income from other sources. 7. I have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. I have also gone through the case laws relied by the ld AR of the assessee. Ground No. 1 to 6 relates to treating the maturity receipts of ULIP as income from other sources instead of capital receipt as claimed by the assessee. The AO brought that surrender value of ULIP to tax by taking view that the assessee has not invested in blue chips fund directly. It is the HDFC after receipt of premium from policy holders invested. The investment made in a Life Insurance Policy Printed from counselvise.com ITA No. 2352/Mum/2025 Selina N. Sheth 8 and the sums so received is governed by the provisions of section 10(10D) of the Act. The ld CIT(A) confirmed the action of AO by taking view that the assessee purchased policy in question in 2010-11and entire premium of Rs. 20.00 lacs was paid in single premium. It was noted that this policy is covered by clause-c of section 10(10D). It is not covered by the exemption under section 10(10D) and hence suffered TDS under section 194DA. The ld CIT(A) also applied the 4th and 5th Proviso of section 10(10D) and held that the receipt is taxable under the head ‘other sources”. 8. I find that 4th and 5th Proviso of section 10(10D) were inserted in the Act w.e.f. 01.04.2021 and thus not applicable on the present case which relates to AY 2017-18. Further, mere making TDS any receipt does not determine its nature or chargeability to tax or head of income. I find that division bench of Mumbai Tribunal in Mihir K Jhaveri Vs CIT (supra) on almost similar set of fact on similar grounds of appeal passed the following order; “10. We have heard the ld. DR and perused the materials on record. It is observed that the assessee has invested in the said policy on 30.12.2006 and had surrendered the same on 31.12.2013. The assessee has declared the same as ‘long term capital gain’ treating the said policy as a capital asset u/s.2(14) of the Act and the same is reflected in the balance sheet of the assessee from A.Y. 2007-08 to A.Y. 2014-15. The assessee further contended that the same cannot be taxed u/s. 80CCC(2) of the Act as the amount of premium paid by the assessee was not claimed as ‘deduction’ u/s.80CCC(1) of the Act. It is also pertinent to point out from the assessee’s submission that ULIP is treated as ‘capital asset’ as per the Finance Act, 2021 which further substantiates the claim of the assessee. It is relevant to consider clause (c) of section 2(14) of the Act which has defined capital asset and has included any unit linked insurance policy to which exemption under clause 10D of section 10 does not apply on account of Printed from counselvise.com ITA No. 2352/Mum/2025 Selina N. Sheth 9 applicability of the fourth and fifth proviso thereof. In the present case, in hand, the assessee has paid a premium more than the limit specified under the fourth proviso to section 10(10D) of the Act. This has been further emphasized by amendment to section 2(14)(c) of the Act vide Act No. 13 of 2021 which has specifically stated the investment in unit linked insurance policy as ‘capital asset’. 11. From the above observation, we find merit in the submission of the assessee and we hereby hold that the above mentioned policy will come under the purview of ‘capital asset’ as per section 2(14) of the Act for which the A.O. is directed to tax the accretion on surrender of the said policy under the head ‘income from capital gains’ and not as ‘income from other sources’.” 9. I further find that division bench of Delhi Tribunal in Subhash Tandon Vs ITO (supra) on similar issue passed following order; “9. In our considered view, the lower authorities have mis-directed themselves by not considering the distinction between the ordinary life insurance scheme and ULIP. In the assessee’s case, it is unit linked insurance scheme and is related to the units of mutual fund allotted to the assessee in respect of the money paid by him. Therefore, Ld.CIT(A) ought to have considered the issue from that perspective since the transactions are akin to mutual fund therefore, deserves same treatment. Merely, because life is insured by the transaction would not alter basic character of transaction. The CBDT has issued a circular regarding exemption u/s 10(10D) of the Act. Section 10(10D) provides exemption qua the life insurance schemes. It is pertinent to note that a new provision has been inserted w.e.f. 01.04.2021 by Finance Act, 2021 i.e. Section 45(1B) of the Act which reads as under:- 45(1B) “Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any amount under a unit linked insurance policy, to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof, including the amount allocated by way of bonus on such policy, then, any profits or gains arising from receipt of such amount by such person shall be chargeable to income-tax under the head \"Capital gains\" and shall be deemed to be the income of such person of the previous year in which such amount was received and the income taxable shall be calculated in such manner as may be prescribed.]” Printed from counselvise.com ITA No. 2352/Mum/2025 Selina N. Sheth 10 9.1. Now, question arises that what would be the fate of ULIP redeemed prior to insertion of this provision. The objective of inserting of this provision is stated to subject the matured/redeemed amount to tax which otherwise was exempt u/s 10(10D) of the Act. Hence, it can be construed the receipt fell under the head “capital gains” but not under “income from other sources”. We therefore, direct the AO to allow indexation and tax the amount under the head “capital gains”. The grounds raised by the assessee are allowed.” 10. Thus, in view of the aforesaid factual and legal position as discussed by the division bench of Tribunal I direct the assessing officer to consider the impugned receipt under the head “capital gains” and not under “income from other sources”. And further, direct the AO to allow indexation and tax the amount under the head “capital gains”. In the result, the ground No. 1 to 6 are allowed. Considering the facts that I have allowed ground No. 1 to 6, thus, ground No. 6 has become academic. 11. Additional Ground of appeal relates to not allowing credit of TDS. I find that credit of TDS is reflected in Form-26AS, therefore, the assessing officer is directed to allow credit of TDS while giving the order effect of this order. In the result, this ground of appeal is allowed. 12. In the result, the appeal of assessee is allowed. Order was pronounced in the open Court on 28/08/2025. Sd/- PAWAN SINGH JUDICIAL MEMBER MUMBAI, Dated: 28/08/2025 Biswajit Printed from counselvise.com ITA No. 2352/Mum/2025 Selina N. Sheth 11 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order Assistant Registrar ITAT, Mumbai Printed from counselvise.com "