SANJEEV BEHL ,MUMBAI vs. INCOME TAX OFFICER INT TAX WARD, 1(2)(1), MUMBAI

In this appeal, the assessee has raised the following grounds:

The learned CIT(A), vide impugned order, agreed with the submission of the assessee that since he has not claimed any deduction under section 80- CCC(1) of the Act in respect of premium paid in respect of LIC Market Plus-1 Plan, which is an annuity plan of LIC, therefore addition under section 80- CCC(2) cannot be made. The learned CIT(A), by referring to the provisions of section 2(24) and section 56 of the Act, held that sum received from life insurance policies (other than Unit Linked Insurance Policies and Keyman Insurance Policies) are treated as income under the head “Income from Other Sources”, if not exempt under section 10(10D) of the Act. On the basis that the yearly premium paid by the assessee exceeded 20% of the actual capital sum assured, the learned CIT(A) held that the assessee’s case is covered under the exceptions provided under section 10(10D) of the Act. Accordingly, the learned CIT(A) held that income amounting to INR 28,56,026 earned from the surrender of the LIC policy is taxable under section 56 of the Act. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee invested in LIC Market Plus-1 Policy No. 903629621 and paid a yearly premium of INR 15 lakh. On 28/03/2016, the assessee surrendered the said policy and received an amount of INR 88,56,026, which was offered for taxation as capital gains. The AO, on the basis that the policy was an annuity/deferred pension plan as referred to in section 10(23AAB) of the Act, held that the proceeds from the surrender of such pension plan are taxable under section 80-CCC(2) of the Act. Accordingly, the AO made the addition with respect to the difference between the maturity value and investment value under section 80-CCC(2) of the Act. The learned CIT(A), vide impugned order, granted partial relief to the assessee and held that since the assessee has not claimed any deduction under section 80-CCC(1) of the Act in respect of the payment of premium related to LIC Market Plus-1 Policy, therefore addition cannot be made under section 80-CCC(2) of the Act. However, on the basis that the assessee’s case falls under the exception provided under section 10(10D) of the Act, the learned CIT(A) held that the income of INR 28,56,026 earned by the assessee from the surrender of LIC policy is taxable under the head “Income from Other Sources”. Accordingly, the learned CIT(A) taxed the income of INR 28,56,026 earned from the surrender of the LIC policy under section 56 of the Act.

During the hearing, the learned Authorised Representative (“learned AR”) placed on record a copy of the LIC Market Plus-1 Policy (UIN: 512L249V01) issued by the LIC. From the perusal of the said policy document, we find that premiums paid by the policyholder, after applying the allocation rate, as specified in the policy document, were utilised for the purchase of units of the opted Investment Fund at the Net Asset Value on the date of purchase. It is further evident from the policy document that the same provides for four different types of funds, namely Bond Fund (Lower Risk), Secured Fund (Steady Income), Balanced Fund (Balanced Income and Growth), and Growth Fund (Long-Term Capital Growth-High-Risk). Therefore, from the perusal of the policy document, we find that the policy issued under the LIC Market Plus-1 was the Unit Linked Insurance Policy (“ULIP”) and the same cannot be merely treated as a life insurance policy. In the present case, as evident from the record, there is no dispute amongst the parties that the accretion on the surrender of the policy is taxable. The assessee offered the same to tax under the head “Capital Gains”, while the lower authorities have taxed the same under the head “Income from Other Sources”.

From the record, we further find that in order to treat the income arising from the surrender of the policy as taxable under the head “Income from Other Sources”, the learned CIT(A) referred to the provisions of section 2(14) of the Act and held that since life insurance policy is not included within the definition of capital asset under section 2(14) of the Act, therefore the sum received from the life insurance policy (other than ULIP) is taxable under the head “Income from Other Sources”. Since the LIC policy in which the assessee has invested has been found to be a ULIP and not merely a life insurance policy, we do not find any merit in the findings of the learned CIT(A) in treating the same as not covered under the provisions of section 2(14) of the Act.

During the hearing, the learned Departmental Representative (“learned DR”) raised a plea that the amendment by the Finance Act, 2021 to section 2(14) of the Act, whereby ULIP is considered to be a capital asset, was made with effect from 01/04/2021, and therefore, the same is not applicable to the year under consideration. Thus, it was submitted that, accordingly, the accretion from the surrender of the policy will be taxable only under the head "Income from Other Sources" during the year under consideration. From the perusal of the memorandum explaining the provisions of the Finance Act, 2021, we find that the amendment was brought in to overcome the mischief of high-net-worth individuals claiming exemption under section 10(10D) of the Act by investing in ULIP with a huge premium. Since allowing the exemption to policies with huge premium was defeating the legislative intent as the legislature intended to provide benefit to small and genuine cases of life insurance, vide aforesaid amendment, the amount of premium payable for claiming the benefit under section 10(10D) of the Act was restricted to INR 2,50,000. Accordingly, corresponding amendment was also made in the definition of “capital asset” under section 2(14) of the Act, and it was provided that a ULIP [to which exemption under clause (10D) of section 10 of the Act does not apply on account of the applicability of the 4th and 5th proviso] the same shall be considered as a “capital asset” under clause (14) of section 2 of the Act. Thus, we are of the considered view that the mere fact that the aforesaid amendment was brought in the statute by Finance Act, 2012, with effect from 01/04/2021, the same cannot lead to the conclusion that prior to the aforesaid amendment the accretion from the surrender of ULIP was not taxable under the head “Capital Gains”. At this stage, it is pertinent to note that ULIP is a combination of insurance and investment product, wherein part of the premium paid is invested in various fund options, such as equity, debt, or a mix of both. Therefore, ULIP has all the attributes of a capital asset, though now specifically included in the definition of the term provided under section 2(14) of the Act. Thus, the fact that the ULIP is now treated as “capital asset” under section 2(14) of the Act further substantiates the claim of the assessee that the accretion on the surrender of ULIP is taxable under the head “Capital Gains”, since the legislature has also now recognised the fact that the ULIP is a capital asset. Further, it is evident from the record that the yearly premium payable exceeds the monetary limit provided in the 4th and 5th proviso to section 10(10D) of the Act. We find that similar findings were rendered by the coordinate bench of the Tribunal in Mihir K Jhaveri vs. CIT, in ITA No. 21/Mum./2023, for the assessment year 2014-15 vide order dated 20/05/2023. Accordingly, we do not find any merit in the aforesaid submission of the learned DR.

Therefore, in view of the facts and circumstances of the present case, legal position and judicial pronouncements as noted above, we are of the considered view that the LIC Market Plus-1 Policy, in which the assessee invested, comes under the purview of “capital asset”, and therefore the income accrued to the assessee from the surrender of the said policy is taxable under the head “Capital Gains”. Accordingly, the impugned order on this issue is set aside, and Ground No. 2 raised in assessee’s appeal is allowed.

The issue arising in Ground No. 3, raised in assessee’s appeal, pertains to the disallowance of exemption claimed under section 54 of the Act.

The brief facts of the case pertaining to this issue, as emanating from the record, are: During the re-assessment proceedings, in addition to the reasons recorded for reopening (i.e. proceeds from the LIC pension plan), it was observed that the assessee also indulged in the transactions relating to immovable properties during the year under consideration. It was noticed that the assessee sold two immovable properties during the year under consideration, and claimed an exemption under section 54 of the Act. Accordingly, the assessee was asked to explain the capital gains earned on the sale of the immovable properties. In response, the assessee submitted that he deposited an amount of INR 1,07,23,165 in the Capital Gains Scheme Account, and subsequently, invested the long-term capital gains for the purchase of a new residential house on 02/02/2019.

The AO, vide assessment order passed under section 147 read with section 144C(3) of the Act, held that as per the provisions of the Act, prevailing during the year under consideration, the exemption on long-term capital gains was limited to the sale of only one house property, however, the assessee has claimed the exemption of long-term capital gains on the sale proceeds of two residential properties. Further, the AO noted that the assessee sold both immovable properties on 18/02/2016, and therefore, the assessee was required to either purchase the new residential property either one year before or two years after the transfer of the original asset or construct a residential house within a period of 3 years from the date of transfer of the original asset. From the submission of the assessee, the AO observed that the assessee entered into an agreement with the builder, Ajmera Reality and Infra India Ltd, on 02/02/2019. Thus, the AO held that at the time of agreement, only 10 days were left, i.e. from 02/02/2019 to 18/02/2019, to construct a new residential house as per the provisions of the Act, which is beyond the practical capacity of any person to construct a new house within 10 days of the agreement. The AO further noted the fact that the builder completed the project on 26/12/2022, and the possession of the property was handed over to the assessee on 26/12/2021. Accordingly, the AO held that the assessee failed to construct the new property within the stipulated time provided under section 54 of the Act. Hence, the exemption in respect of long-term capital gains earned by the assessee on account of the transfer of the residential properties was disallowed, and the said long-term capital gains amounting to INR 1,07,33,165 was added to the total income of the assessee.

The learned CIT(A), vide impugned order, dismissed the ground raised by the assessee on this issue and upheld the disallowance of exemption claimed under section 54 of the Act. The relevant findings of the learned CIT(A) pertaining to this issue are reproduced as follows: –

We have considered the submissions of both sides and perused the material available on record. In the present case, during the year under consideration, the assessee sold two immovable properties, i.e. Flat No. 1502 and Flat No. 1503, on 18/02/2016 for a sale consideration of INR 53,25,000 and INR 3,10,50,000 and earned capital gains of INR 20,41,836 and INR 1,04,54,734, respectively. There is no dispute regarding the aforesaid facts. As per the assessee, he purchased a new residential flat in Ajmera Treon, ‘B’ Wing, Wadala Link Road, Wadala East, from Ajmera Reality and Infra Ltd for a total consideration of INR 6,35,64,750. The agreement in respect of the aforesaid property was registered on 02/02/2019, however, the allotment letter was issued by the builder to the assessee on 03/08/2015, and INR 64,20,014 was paid by the assessee as an advance amount. Further, an amount of INR 1,07,33,165 was deposited by the assessee under the Capital Gain Scheme Account with State Bank of India on 24/02/2016 out of the total capital gains of INR 1,24,96,570 earned by him. Accordingly, the assessee claimed an exemption of INR 1,07,23,165 under section 54 of the Act.

From the perusal of the documents placed on record in the factual paper book, we find that the State Bank of India vide letter dated 25/02/2016, forming part of the paper book on Page 71, certified that an amount of INR 1,07,33,165 was credited to the Capgain Savings Bank Account No. 35547113854 on 24/02/2016. Since the said deposit was made in the Capital Gain Scheme Account before the date of furnishing the return of income under section 139 of the Act, it is evident that there was a sufficient compliance with the provisions of section 54(2) of the Act. It is further pertinent to note that as per Rule 10 of the Capital Gains Accounts Scheme, 1988, the amount withdrawn from the account in the Scheme can only be utilised for the purpose of purchase of the new residential house property as required in section 54(1) of the Act. Therefore, we do not find any basis in the findings of the learned CIT(A) in para 7.3.3 of the impugned order in doubting the deposits in the Capital Gains Scheme Account and payments therefrom by the assessee.

In para 7.3.4 of the impugned order, the learned CIT(A) held that the benefit of section 54 of the Act is only available when the assessee sells one residential property. Since, in the present case, the assessee has sold two residential properties on 18/02/2016, therefore, the learned CIT(A) held that the benefit under section 54 of the Act could not be given to the assessee. In this regard, the learned CIT(A) placed reliance upon the decision of the coordinate bench of the Tribunal in Nilufer Sayed vs. ITO, reported in [2021] 126 Taxmann.com 173 (Mum-Trib.). From the perusal of the aforesaid decision, we find that the Tribunal was analysing the provisions of section 54 of the Act in the facts wherein the taxpayer invested the capital gains earned from the sale of the residential property in two flats. Therefore, in view of the fact that prior to the amendment by the Finance (No. 2) Act, 2014, section 54 of the Act required the assessee to purchase or construct “a residential house”, the Tribunal decided the issue in favour of the taxpayer and held that the taxpayer would be eligible to claim exemption under section 54 on account of investment made in both flats for the assessment year 2011-12. However, in the present case, such is not the fact, and instead, the assessee has sold two residential properties and invested the capital gains in one residential flat.

We find that while deciding the issue whether the exemption under section 54 of the Act will be available, in case capital gain arising from the sale of more than one residential house is invested in one residential house, the coordinate bench of the Tribunal in DCIT vs. Ranjit Vithaldas, reported in [2012] 23 taxmann.com 226 (Mumbai), held that there is no restriction that capital gain arising from sale of more than one residential house cannot be invested in one residential house. The relevant findings of the coordinate bench, in the aforesaid decision, are reproduced as follows: –

Therefore, respectfully following the aforesaid decision of the coordinate bench of the Tribunal, we do not find any merit in the findings of the lower authorities that since the assessee has sold two residential house properties, the exemption under section 54 of the Act is not available to the assessee.

As noted elsewhere, the exemption under section 54 of the Act is available only if the assessee either purchases the new residential property either one year before or two years after the transfer of the original asset or constructs a residential house within a period of 3 years from the date of transfer of the original asset. From the record, it is evident that the AO, vide assessment order, held that the assessee failed to construct a residential house within a period of 3 years from the date of the transfer of the original asset. However, on the other hand, the learned CIT(A), in para-7.3.5 of the impugned order, agreed that the assessee constructed a new house property within a period of 3 years from the end of the date of sale of two old properties, i.e., 18/02/2016, as the sale agreement in respect of the new flat was registered with Sub-Registrar on 02/02/2019 and the assessee became the owner of the property as on the date of the sale deed, which falls within the period of 3 years from the date of the transfer of the original asset. At this stage, it is worth noting that the Revenue has neither filed an appeal nor has it filed any cross-objection or petition under Rule 27 of the ITAT Rules, 1963, objecting to the aforesaid findings of the learned CIT(A). Thus, the factual finding of the learned CIT(A) that the assessee constructed a new house property within a period of 3 years from the date of sale of the original asset is now undisputed and uncontroverted.

Therefore, in the facts and circumstances of the present case, as the assessee has been found to have constructed a new house property within a period of 3 years from date of transfer of the original asset, and since the amount of capital gains was also deposited by the assessee in the Capital Gains Scheme Account in compliance with the provisions of section 54(2) of the Act, we are of the considered view that the assessee rightly claimed exemption under section 54 of the Act. Accordingly, the AO is directed to grant the exemption of INR 1,07,33,165 claimed by the assessee under section 54 of the Act. As a result, Ground No.3 raised in assessee’s appeal is allowed.

The application dated 12/11/2024 filed by the assessee seeking admission of additional grounds of appeal was not pressed during the hearing. Therefore, the same is dismissed as not pressed.

In the result, the appeal by the assessee is allowed.