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

The CIT(A) has erred in confirming the amount received from LIC (under pension scheme policy) under the head income from other source instead of capital gain without considering the facts and circumstances of the case.

The CIT(A) has erred in disallowing the deduction of 1,07,33,165/- towards the amount deposited in SBI capital gain account scheme within the time limit against the capital gain on sale of residential property by the appellant without considering the facts and circumstances of the case.”

Ground No. 1 is general in nature, and therefore, the same needs no separate adjudication.

The issue arising in Ground No. 2, raised in assessee’s appeal, pertains to taxability of the gains arising from the surrender of LIC policy under the head “Income from Other Sources” instead of “Capital Gains”.

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is an individual and filed his return of income for the year under consideration in the capacity of a non-resident Indian declaring a total income of INR 2,40,670. Thereafter, the assessee filed the revised return of income on 31/03/2018, declaring a total income of INR 5,11,880. The return filed by the assessee was processed under section 143(1) of the Act. Subsequently, on the basis of the information received from ITO (I & CI), Unit-2(1), Mumbai, wherein it was reported that the assessee has prematurely surrendered the pension policy of M/s Life Insurance Corporation of India in the year under consideration for an amount of INR 88,56,026, proceedings under section 147 of the Act were initiated and notice under section 148 of the Act was issued on 31/03/2021. In response to notice issued under section 148 of the Act, the assessee filed a letter submitting the copy of the return filed in response to notice issued under section 148 of the 3

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 4

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 5

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 6

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 7

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 8

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. 14. 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 9

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: – 10

3.4 The AO has denied deduction u/s 54 for one more reason that the appellant has sold two residential properties and the deduction u/s 54 is available in respect of sale of only one property. In this regard reference to decision of ITAT, Mumbai in the case of Nilufer Sayed v. ITO [2021] 126 taxmann.com 173 (Mumbai - Trib.) is relevant.

3.5 The A.O. called for information u/s. 133(6) from the builder and the builder informed that the possession was given on 26.11.2021. The A.O. has taken a view that agreement for construction of the house was entered into by the appellant with the builder on 02.02.2019, therefore, it was not possible to the assessee to construct the new residential property by 18.02.2019, the date on which the assessee was required to construct the new residential property as per provisions of Section 54 of the Act. The sale agreement has been registered with Sub