In case of Mihir Parikh[1] (Taxpayer) the issue before Delhi Tribunal was whether KIP loses its character on assignment prior to maturity to become an ordinary policy and consequently whether the maturity proceeds from such policy is eligible for exemption under Section (S.)10(10D) of the Income Tax laws (ITL).
A proprietorship concern, Pratap Parikh Associates took an KIP on the life of Taxpayer being a keyman in that concern. The concern was dissolved and the Taxpayer purchased the KIP from the concern in November 2008 after paying a surrender value of INR 45.54 lacs. The Taxpayer received maturity proceeds from the policy in tax year 2015-16. He claimed the maturity proceeds to be exempt under S.10(10D) on the ground that the character of KIP had changed to normal policy way back in 2008. In support of his contention, he relied on Indore Tribunal ruling with identical facts in case of Smt. Harleen Kaur Bhatia[2] and Delhi High Court (HC) ruling in case of Rajan Nanda[3]. However, Tax Authority denied exemption and treated the proceeds as taxable business income under S.28(iv) considering it to be KIP which was upheld by First Appellate Authority as well.
On Taxpayer’s further appeal before the Tribunal, it found merit in Taxpayer’s contention that if the policy is transferred before its maturity, it loses its character. Placing reliance on Delhi HC ruling in case of Rajan Nanda, it held that the assignment of KIP prior to its maturity alters its character from a KIP to an ordinary policy. If the policy remains a KIP, the maturity value is subject to tax. Conversely, if it becomes an ordinary policy, the maturity proceeds are exempt under S.10(10D). Post the assignment, the employer is no more a party to the insurance contract and such assignment is permitted under the ITL. Once there is an assignment, it leads to conversion, and the character of the policy changes. The insurance company itself clarified that upon assignment, the policy ceases to be a KIP and becomes an ordinary policy.
Accordingly, Delhi Tribunal held that the sum received on maturity of insurance policy which got recharacterized from KIP to normal policy is eligible for exemption under S.10(10D).
Note: The Tribunal did not notice amendment by Finance Act 2013 with effect from tax year 2013-14 to the effect that KIP retains its status as KIP for tax purposes despite its assignment at any time during the term of the policy, with or without consideration. In the facts of the case, the KIP was converted into ordinary life insurance policy prior to the said amendment and accordingly, the impact of amendment to policies converted prior to amendment was also not noticed.
[1] [2024] 205 ITD 731 (Delhi - Trib.)
[2] (2020) 181 ITD 294 (Indore Trib.)
[3] (2012) 349 ITR 8
