Case Law Details
Mihir K. Jhaveri Vs CIT (ITAT Mumbai)
Introduction: The Income Tax Appellate Tribunal (ITAT) Mumbai has recently ruled in the case of Mihir K. Jhaveri Vs CIT that the investment in a Unit-Linked Insurance Plan (ULIP) policy must be treated as a ‘Capital Asset’ under Section 2(14) of the Income Tax Act. Moreover, the accretion on the surrender of the policy is to be taxed under ‘Income from Capital Gains’, not ‘Income from Other Sources’.
Analysis: The case revolves around a critical tax issue – whether the Unit-Linked Insurance Plan (ULIP) should be deemed as a ‘Capital Asset’ and thus the surrender value be taxed under ‘Income from Capital Gains’ instead of ‘Income from Other Sources’. The ITAT decision not only affirmed that the ULIP policy falls within the definition of ‘Capital Asset’ under section 2(14) of the Act, but also directed the Assessing Officer to tax the accretion on surrender of the policy under ‘Income from Capital Gains’. This important decision aids in the classification of similar insurance products for tax purposes and sets a significant precedent for other such disputes.
Conclusion: The ITAT Mumbai’s decision clarifies the taxation treatment for ULIP policies, emphasizing the interpretation of these policies as ‘Capital Assets’ and thereby impacting how the accretion on their surrender is taxed. This verdict underscores the importance of comprehensive understanding and accurate classification of financial products in line with the existing tax laws and amendments, aiding both taxpayers and tax professionals in ensuring correct compliance.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal has been filed by the assessee, challenging the order of the learned Commissioner of Income Tax (Appeals)-51, Mumbai (‘ld.CIT(A) for short), passed u/s.250 of the Income Tax Act, 1961 (‘the Act’), pertaining to the Assessment Year (‘A.Y.’ for short) 2014-15.
2. The assessee has challenged the grounds of reopening the assessment by notice u/s. 148 of the Act as being barred by limitation and has challenged the grounds of addition of Rs.25,73,185/- made on accretion in value of the policy received on surrender and on the disallowance of long term capital gain amounting to Rs.15,15,268/- by not treating the unit linked market plus policy of LIC as ‘capital asset’ within the meaning of section 2(14) of the Act.
3. As there was no representation on behalf of the assessee, we hereby proceed to hear this appeal by hearing the learned Departmental Representative (ld. DR for short) for the Revenue and on perusal of the materials available on record.
4. The brief facts of the case are that the assessee is an individual and has filed his return of income on 27.09.2014, declaring total income of Rs.5,52,030/- and the return was processed u/s. 143(1) of the Act. The assessee’s case was reopened u/s. 147 of the Act by issue of notice u/s. 148 of the Act dated 31.03.2021. The assessee has filed its return of income dated 14.04.2021, declaring total income of Rs.5,52,030/- in response to the notice u/s. 148 of the Act. The assessment order dated 01.03.2022 was passed u/s. 147 of the Act where the Assessing Officer (A.O. for short) determined the total income at Rs.31,25,215/- by making an addition of Rs.25,73,185/- as ‘income from other sources’ u/s. 56 of the Act and disallowance of loss claimed amounting to Rs.15,15,268/-.
5. The assessee was in appeal before the ld. CIT(A), challenging the notice u/s. 148 of the Act and on the addition/disallowances.
6. The ld. CIT(A) confirmed the additions made by the A.O. on the ground that section 2(14)(c) of the Act is w.e.f. 01.04.2021 and does not apply retrospectively for this assessment year, thereby held that the surrender proceeds of the ULIP to be taxed under the head ‘income from other sources’ by invoking the provision of section 56(1) of the Act and thereby confirming the disallowance of long term capital loss along with the indexation benefit.
7. The assessee is in appeal before us, challenging the impugned order.
8. The ld. DR for the Revenue relied on the order of the lower authorities.
9. It is observed that the assessee has invested in the market plus policy of LIC (ULIP policy) during A.Y. 2007-08 and had paid single premium of Rs.50 lacs and opted for ‘BOND’ option of the said policy. The assessee was allotted 470262.703 units at its NAV. The assessee is said to have surrendered the policy during the impugned year and had received Rs.75,73, 185/- as maturity proceeds for all the units which are redeemed at its NAV as on the date of the surrender. The assessee in its return of income has shown this under the head ‘income from capital gains’ by treating ULIP as ‘capital asset’ as per the provision of section 2(14) of the Act. During the assessment proceeding, the A.O. has treated the same as ‘income from other sources’ and had made the impugned addition of Rs.25,73,185/- being accretion in the value of the policy. The A.O. treated the policy as unit linked differed pension plan intended for pension benefit as per section 10(23AAB) of the Act along with section 80CCC of the Act. The ld. CIT(A) has also held the same to be taxed under the head ‘income from other sources’ for the reason that the unit linked insurance plan is both a pension plan and has also an insurance component in it, where the hedging of risk of life and related benefits are both available in the said policy and also for the reason that it is a source of investment. The A.O. and the ld. CIT(A) has treated this as ULIP for which the exemption is available u/s.10(10D) of the Act. The ld. CIT(A) further held that the surrender proceeds of ULIP are taxable and the same is taxed under the head ‘income from other sources’. The assessee’s contention that ULIP is a capital asset as per section 2(14)(c) of the Act as per the latest amendment to the provision was not accepted by the ld. CIT(A) for the reason that section 2(14)(c) of the Act was effective only from 01.04.2021 and not for the impugned assessment year. The ld. CIT(A) further held that the amendment is neither clarificatory nor retrospective and since the assessee has failed to furnish any decision in support of this, the ld. CIT(A) upheld the view taken by the A.O.
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 3 1.12.2013. 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 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’. Hence, ground nos. 2 & 3 raised by the assessee are allowed. Ground nos. 4 & 5 are consequential in nature. Ground no. 6 being a general ground requires no adjudication. Since we have decided this issue on merits, ground no. 1 raised by the assessee becomes academic in nature.
12. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 30.05.2023
