Section 10(10D) Only net income is taxable upon the maturity of a life insurance policy

Facts and issues of the case

The assessee has taken the following grounds of appeal:-

• The learned Commissioner of Income Tax (Appeals) National Faceless Centre erred in law and on facts in confirming addition of Rs. 7,35,785/- made by Assessing Officer in respect of 1St INSTALLMENT RECEIVED FROM LIC FOR SINGLE PREMIUM POLICY U/S. 10(10D) OF THE ACT as against Rs. 61,103/-

• The appellant reserves right to amend, to modify or to withdraw any ground of appeal.”

The assessee is an individual senior citizen deriving “income from other sources” only. During the year under consideration, the assessee received 1st installment of ₹ 7,95,000/- from LIC in respect of one-time premium policy (single premium policy) after deduction of TDS of ₹ 7,950/- u/s 194DA of the Income Tax Act, 1961 (Act). The assessee had paid one-time premium of ₹ 38,63,753/- for a policy sum assured of ₹ 53,00,000/- which exceeds 20% of capital sum assured, and therefore a portion of sum received (of 1st installment of ₹ 7,95,000/- from LIC) is taxable u/s 10(10D) of the Act. While furnishing the original return of income, the assessee included entire 1st installment of ₹ 7,95,000/- from LIC as taxable income without deducting therefrom proportionate premium paid on the aforesaid sum. Thereafter, the assessee furnished revised return of income declaring only the surplus of ₹ 59,215/- as taxable income in respect of 1st installment of ₹ 7,95,000/- received from LIC after deducting therefrom a sum of ₹ 7,35,785/- (being the proportionate premium paid i.e. 15% of Rs. 38,63,753/- in respect of the aforesaid 1st installment of ₹ 7,95,000/-). The assessee placed reliance on the CBDT circular number 7/2003 at paragraph 10.3 on taxability of maturity of policies under section 10(10D) which states that the income accruing on such policies (but not including the premium paid by the assessee) shall become taxable. However, while filing the revised return, as per the assessee, by way of bona-fide mistake, he incorrectly computed net surplus on the basis of surrender value received in February 2018, which was incorrect since the surrender was not done in assessment year 2017-18. However, the Ld. Assessing Officer brought the entire sum of ₹ 7,35,785/- (7,95,000/- i.e. the 1st installment received by the assessee less ₹ 59,215 being the sum already considered in the return of income by the assessee) as taxable income in the hands of the assessee.

Observation by the court

 The Ld. Counsel for the assessee reiterated the arguments which were earlier placed before Ld. CIT(A) and relied upon the CBDT Circular number 7/2003 at paragraph 10.3 on taxability of maturity of policies under section 10(10D) to argue that the entire amount of 1st installment (less sum offered for tax by the assessee in the return of income) could not be subject to tax in the hands of the assessee in view of the above CBDT Circular. The assessee is entitled to deduct therefrom the proportionate principal amount paid for obtaining the aforesaid 1st installment. The Ld. Counsel for the assessee submitted that the assessee has also not claimed deduction of the premium paid under section 80C of the Act. The assessee also placed reliance on the decision of Kolkata Tribunal in the case of Sandeep Modi v DCITTS-184-ITAT- 2022 (Kol), which has held that on maturity of life insurance policy, where section 10(10D) does not apply, it is only the net income which is chargeable to tax in the hands of the assessee. The Ld. Departmental Representative in response relied upon the observations of Ld. CIT(A) in the appeal order.

Court had heard the rival contentions and perused the material on record. In our considered view, we are in agreement with the Ld. Counsel for the assessee that he would be entitled to be taxed on the maturity amount received in terms of CBDT Circular number 7/2003 dated 5-9-2003 on taxability of maturity of policies under section 10(10D) of the Act, as per which only net income is chargeable to tax in the hands of the assessee. Accordingly, in the interest of justice, we set aside the order passed by Ld. CIT(A) to the file of Ld. Assessing Officer for re-computing the taxable amount of maturity amount of LIC received by the assessee in light of the CBDT Circular No. 7/2003 dated 5-9-2003 referred to above. The Ld. Assessing Officer is directed to work out the correct taxable amount in the hands of the assessee in terms of CBDT Circular No. 7/2003 dated 5-9-2003 referred to above.

Conclusion

The appeal of the assessee is allowed for statistical purposes.

Vinayna-Veljee-Vs-ITO-ITAT-Ahmedabad

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