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September 28, 2022

Insurance premiums are exempt from tax if section 80C deduction was not claimed

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Insurance premiums are exempt from tax if section 80C deduction was not claimed

Facts and Issue of the Case

“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.

Grounds on addition to Income from Other Sources based on Form 26AS

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.

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.

The learned DCIT, CPC and learned CIT(A), NFAC have erred in not appreciating that:

  1. 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;
  2. only net proceeds (after excluding the premium paid by the appellant) is taxable on maturity of the life insurance policy;
  3. 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 the entry appearing under section 194DA in Form 26AS is not conclusive

The learned CIT(A), NFAC has erred in not appreciating that

  1. 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
  2. the date from which the above amendment becomes effective has no bearing in deciding the present case.

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. 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  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. 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.Against this assessee is in appeal before me.

Observation by the Court

The court  heard the rival submissions and perused the materials available on record. In this case, assessee took  a  Life  Insurance Policy for a period of 10 years in the financial year 2006-07. The sum assured was Rs.10 lakhs.  The assessee has paid half yearly premium of Rs.1,06,275/- for 5 years totalling of Rs.10,62,750/- (Rs.1,06,275 x 10). It was a policy, wherein the annual premium exceeded 10% of sum assured. The maturity proceeds were therefore not exempted u/s 10 (10D) of the Act and it was chargeable to tax under the head “income from other sources”. As per policy condition, assessee has received in the assessment year 2017-18 (on 28.10.2016) a sum of Rs.14,63,220/- and TDS of it was Rs.14,780/- totalling (Rs.14,78,000/-). The assessee offered a sum of Rs.4,78,000/- as income on net receipt i.e. (Rs.14,78,000 – Rs10 lakhs). Though the assessee was required to offer net receipt of Rs.4,15,250/- (Rs.14,78,000/- – Rs.10,62,750/-). Thus, assessee offered an excess amount of Rs.62,750/-. The return was  processed  u/s  143(1)  by CPC vide their intimation dated 21.5.2018. The  Form  No.26AS reflects Rs.17,74,288/- and assessee disclosed  only  Rs.8,08,282/-. The CPC brought into tax a sum of Rs.9,66,006/- into tax. Now the contention of the Ld. A.R. is that the assessee is only liable for net amount issued from maturity of life insurance policy at Rs.4,15,250/- only and the CPC committed an error in taxing the entire amount of Rs.14,78,000/-. It was submission of the assessee that the assessee made a payment of premium at Rs.10,62,750/-, which was included in maturity value that cannot be brough to tax.

In my opinion, this error has been happened because the  tax  has been deducted on entire amount contemplated u/s 194DA of the Act. This problem has been taken notice while increasing the TDS rate from 1% to 5% albeit in the financial bill 2019, Having gone through the contents while moving the bill, the court find that Government has taken note of this problem

From a reading of the aforesaid observation as well as taking note of contention of the assessee in respect of premium paid to the insurance company cannot be brought to tax subject to the fact that assessee shall not avail deduction u/s 80C of the Act in respect of premium paid towards that insurance policy. Being so, the court  remit this issue to the file of AO to consider only net amount as discussed above to taxation provided assessee has not claimed deduction u/s 80C of the Act in respect of premium paid on life insurance policy or claimed any deduction u/s 10(10D) of the Act. With  this observation, the court  remit this issue to the file of AO for fresh consideration after hearing to the assessee.

Conclusion

 The appeal filed by the assessee is partly allowed for statistical purposes.

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