BISHISTA BAGCHI,KOLKATA vs. DCIT, CPC, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” (Virtual Court Hearing) BENCH KOLKATA Before Shri Sanjay Garg, Judicial Member I.T.A. No.540/Kol/2021 Assessment Year: 2017-18 Bishista Bagchi..........................………………............................…….…………….....Appellant 3C, Santosh Garden, 8, Ekdalia Road, Ballygunj, Kolkata. [PAN:AYAPB6940J] vs. DCIT, CPC, Bengaluru………….…..…...............……........……...…..……………Respondent Appearances by: Shri Indranil Banerjee, AR,appeared on behalf of the appellant. Shri Gautam Mondal, Addl. CIT-DR,appeared on behalf of the Respondent. Date of concluding the hearing :January 31, 2022 Date of pronouncing the order : March 15, 2022 Hearing through Video Conferencing ORDER The present appeal has been preferred by the assessee against the order dated 07.10.2021 of the National Faceless Appeal Centre [hereinafter referred to as‘CIT(A)’] passed u/s 250 of the Income Tax Act(hereinafter referred to as the ‘Act’). The assessee in this appeal has taken the following grounds of appeal:

“1. That on the facts and circumstances of the case, the Appeal Order, passed by the Ld. FirstAppellate Authority, for being founded on flawed, superficial, irrational reasonings, both inregard to Quantum and the Head of income, is liable to be reversed, modified and brought inconformity to the treatment and quantification, prescribed by the pertinent provisions of law.(Tax effect - Rs. 287566.00) 2. That on the facts and circumstances of the case and in law, the Ld. First Appellate Authorityhas erred in viewing that Single Insurance Life Insurance Policy, named Bajaj AllianzeInvest gain Policy, on its maturity, has given rise to "Other Sources" Income only, ratherthan "Long Term Capital Gain" and accordingly, his determination of income at Rs.836523/-(the surplus over premium paid), instead of the long term capital loss of Rs.326569/- (thenegative surplus based on indexed cost) is contrary to both reason and law.(Tax effect - As above) 3. That on the facts and circumstances of the case and in law, the Ld. First Appellate Authority,while negating the claim of taxability of the income from Single Premium Insurance Policyunder the head "Long Term Capital Gain" and accordingly, the emergence of Loss ofRs.326569/- (on deduction of indexed cost of premium), should have appreciated theirinvestment oriented features and thus, not have arbitrarily referred to

I.T.A. No.540/Kol/2021 Assessment Year: 2017-18 Bishista Bagchi Pension Fundcontribution related Sec.80CCC(2), to justify his stand.(Tax effect-As above) 4.That on the facts and circumstances of the case and in law, even otherwise, the Ld. FirstAppellate Authority ought to have appreciated that single/high premium policies, despitetheir exclusion from the ambit of exemption, vide cl. (c) of sec. 10(10OD), have alwaysremained and retained the character of a, "Capital Asset" and therefore, deserved taxationunder the head "Capital Gain" only as per provisions applicable thereto.(Tax effect -As above) 5. Even otherwise, the Ld. Appellate Authority while arbitrarily concluding the taxability ofSingle Premium Insurance Policy only under the head "Other Sources", ought to haveappreciated that, vide Sec. 56(2)(iv) / Sec. 2(24)(xi) such income head specifies maturity ofKeyman Insurance Policy (with all Bonus and other accretions) only, implying theinapplicability thereof to other kinds of Life Insurance Policies.(Tax effect- As above) 6. The Appellant craves leave to go for additional grounds, withdraw, modify, supplement, etc.any or all of the existing grounds, either before or during the Appeal Hearing. 2. The relevant issue which requires adjudication in this appeal is as to whether (i) a life insurance policy is a capital asset and whether (ii) proceeds of a maturity of a single/double premium life insurance policy are to be assessed as “Long-term capital gain” (LTCG) or under the head “Income from other sources”.

I.T.A. No.540/Kol/2021 Assessment Year: 2017-18 Bishista Bagchi observed that since the assessee had not taken any deduction of the premium amount paid in assessment years 2007-08 and 2008-09, therefore, the taxable income of the assessee will be arrived by deducting of the said amount of premium out of the maturity amount. The relevant part of the order of the CIT(A) is reproduced as under:

“5. I have considered the facts of the case and the appellant's submissions. The Grounds of appeal are decided in the following paragraphs. 6. The Ground of appeal 1 to 4 are effectively against the treatment of the Insurance Maturity proceeds as an income from other source and not income from capital gain. Hence, these grounds are taken up and decided together. 6.1. I have gone through the documents furnished before me which include the Policy Schedule in the name of the appellant, the copies of two Policy Premium Payment Receipts aggregating to Rs. 9,87,549/- and the working of the Long Term Capital Gain on the maturity proceeds. It is observed from the Policy Schedule that Thedate of commencement of policy is 21.04.2006, sum assured is Rs. 13,00,000/- and the premium paying term is of 2 years. The above premiums were subsequently paid and the policy matured on 21.04.2016. During the year under consideration, the appellant received a sum of Rs. 17,77,790/- after TDS(Gross Rs. 18,14,072/-) from Bajaj Allianz Insurance Co. on account of the above policy. 6.2 In view of the limitations imposed by the section 10(10D) of the Act, the appellant computed Long Term Capital Gain on the proceeds received by her and after taking benefit of indexation for the premiums paid in the F.Ys 2006-07 and 2007-08, declared a long term loss of Rs.3,26,569/- in the return of income. The CPC while processing the return, disallowed the same and made an addition of Rs. 18,14,072/- under the head income from other sources. 6.3 It appears that the CPC made the above adjustment on account of the fact that as per Form 26AS, TDS was effected u/s. 194DA of the Act on the above payment of the maturity proceeds. The moot question here is, whether an insurance policy is a capital asset or not.It is observed that the insurance policy taken by the appellant is in the nature of apension policy wherein a sum assured is given at the end of the maturity term. The monies received from encashed pension policies do not come under the purview of exempted income as per section 10(10A) of the I.T. Act. These are in the nature of income liable for taxation u/s.56 of the Act. It is an insurance policy and not anasset. The policy holder buys a policy to cover certain risks and not the asset per se. The policy entitles the holder to certain events, which is the general feature of any insurance policy. Unlike mutual funds, the policy cannot be split into smaller units, and cannot be transferred or s a. The policy holdercannot alienate or hypothecate the underlying units/assets which are purchased by Insurance Company. The policy/pension plan is not tradable. It can only be surrendered to the Insurance Company itself or the policy holder has to wait till the happening of the contingent event/or non happening of the contingent event. Thus, the pension policy is not an asset and the assessee is not entitled to any indexation for which only a capital asset is eligible. It is contract of insurance hedging against certain risks and is also regulated by IRDA. There is no specific exemption to this amount. The amount is thus taxable. The yearly premium is in the nature of non-business expenses done by the assessee. This is not a payment to acquire any asset but is only an expense to insure himself/herself to get pension after a certain age. 3

I.T.A. No.540/Kol/2021 Assessment Year: 2017-18 Bishista Bagchi Further, the issue of taxability of the maturity value of pension policy is covered by the provisions of Section 80CCC(2) of the Income Tax Act, 1961.ln view of the above, the proceeds from the maturity of a pension policy will be taxed as under: (i) Full maturity value will be taxable u/s.56 of the Act where appellant has claimed any deduction under chapter VI-A of the Act in any year for premium paid in respect of said pension policy as per provisions of section 80CCC(2) of the Act. (ii) The accretion value (Maturity Value-Premium paid) will be taxable u/s. 58 of the Act where appellant has not claimeddeduction under chapter VI-A of the Act for premium paid in respect of said pension policy. 6.4 The ascertain the taxability of the maturity proceeds, a notice of hearing was issued to the appellant requesting to furnish the following details- "On perusal of the submissions made by you, it is seen that payments for the premiums suggesting toRs. 9,87,549/- against your Insurance Policy were made in the F. Vs. 2006- 07 and 2007-08. In thisregard, please state whether any tax deduction has been claimed against these premium payments inthe respective A. Ys. 2007-08 and 2008-09. If yes, then please provide the amount of the tax deduction claimed. 6.5 In response, the appellant has filed the following reply: "... in relation to the assessment years of 2007-08 and 2008-09, no tax deduction as regards the corresponding premium payments Rs. 4,91,269 and Rs. 4,96,280 respectively has been claimed, given its Investment character only. The appellant sincerely believes that in the light of the previous submission as well as the present clarification, the merit of the Appeal would be kindly upheld." In view of the above submission, as the appellant has not taken any deduction in the AYs. 2007-08 and 2008-09, it is held that the accretion value (Maturity Value - Premium paid) which comes out to Rs. 8,26,523 (Rs. 18,14,072/- minus Rs.9,87,549)will be taxable u/s.56 of the Act. 6.6 I have also gone through the decision of Hon'ble ITA T Ahmedabad relied upon by the appellant in the case of GirishHaribhaiTrivedi in ITA no. 2986/Ahd/2011 dated 13.07.2012wherein it is held that the insurance policy the proceeds of which are not exempt u/s. 10(100) of the Act, is a capital asset and the surplus on the maturity of the policy is to be treated as capital gains. However, the above case law is distinguishable from the instant case on the basis of facts and is also not binding on the AO of the appellant. The main reason for relief in GirishHaribhaiTrivedi(supra)was that the policy taken by the appellant was a unit linked insurance policy wherein a small portion of the investment goes for insurance and the rest is invested in mutual funds and the appellant had option to switch from one fund to another fund. Further, at the time of maturity the investor is paid the amount equivalent to the value of the units invested in mutual funds and since no STT was paid, it was categorized as a capita asset. But the facts in the instant caseare completely different. The appellant has taken is a pure single premium insurance policy which has not been invested in mutual funds and the policy holder gets a assured value on maturity. In light of the above, the case law stands distinguished. 6.7 In Ground no.4, the appellant has also contended that the AO erred in widening the scope of section 10(10D) of the Act and bringing to tax the insurance proceeds under the head of income from other sources. The contention of the appellant has been considered

I.T.A. No.540/Kol/2021 Assessment Year: 2017-18 Bishista Bagchi and found to be misplaced. As discussed above in Para 6.3, the insurance policy taken by the appellant is in the nature of a pension policy wherein a sum assured is given at the end of the maturity term. The monies received from encashed pension policies do not come under the purview of exempted income as per section 1)910A) of the I.T Act. These are in the nature of income liable for taxation u/s. 56 of the Act. Hence, the AO has correctly brought to tax the insurance proceeds under the head of income from other sources. 6.8 In light of the above, I hereby restrict the addition at Rs. 8,23,523/- made by the AOunder the head income from other sources and upheld the disallowance of loss made by the AO. Accordingly, Ground nos. 1 to 4 are 'Partly Allowed' in above terms.” Being aggrieved by the above order of the ld. CIT(A), the assessee has come in appeal before this Tribunal. 5. I have heard the rival contentions of both the parties and also gone through the records. The assessee purchased a life insurance policy no.00204468150 in the year 2006 with sum assured of Rs.13,00,000/- with its date of commencement on 21.04.2016 and maturity date 21.04.2016. The annual premium payable was Rs.4,91,269/- but the premium paying term was initial two (2) years only. The assessee as per terms of the policy, paid the premium amounts of Rs.4,91,269/- and Rs.4,96,280/- in the month of April 2006 and August 2007 respectively. Therefore, the total premium paid was Rs.9,87,49/-. The term of the policy was 10 years. Though the sum assured on the life of the assessee was Rs.13,00,000/-, however, the assessee received a maturity amount of the policy at Rs.18,14,072/-.

In view of the above undisputed facts of the case, considering the amount of premium paid, the sum assured on the life and the actual maturity value received by the assessee, it is apparent that there were two elements embedded in the policy. Firstly, the hedging of the risk of life and related benefits as are available under a simple life insurance policy; secondly, the element of investment.

I.T.A. No.540/Kol/2021 Assessment Year: 2017-18 Bishista Bagchi Section 10 : “In computing the total income of a previous year of any person, any income falling within following clauses shall not be included: [(10D) any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than- (a) any sum received under sub-section (3) of section 80DD or sub-section (3) of section 80DDA or (b) any sum received under a Keyman insurance policy; or (c) any sum received under an insurance policy issued on or after the 1stday of April, 2003 [but on or before the 31st day of March, 2012] in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured [; or] (d) any sum received under an insurance policy issued on or after the 1st day of April, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured:] Provided that the provisions of [sub-clauses (c) and (d)] shall not apply to any sum received on the death of a person: Provided further that for the purpose of calculating the actual capital sum assured under 30[sub-clause (c)], effect shall be given to the[Explanation to sub-section (3) of section 80C or the Explanation to sub-section (2A) of section 88, as the case may be] ...........” The memorandum explaining the provisions of Finance Bill, 2003 explains the rationale behind substitution of the original section 10(10D) with the substitution as under:

“Under the existing provisions contained in clause (10D) of section 10, any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, (other than any sum received under the a plicyfro the medical treatment, training and rehabilitation of a handicapped dependent u/s 80DDA or any sum received under the a Keyman insurance policy), is exempt. Under the existing provisions of section 88, a deduction from the income tax payable is allowed to an individual or a Hindu undivided family (HUF), in respect of any sums paid or deposited in PPF, GPE, NST, insurance premia, etc. The deduction is allowed at specified percentage of such sums. The insurance policies with high premium and minimum risk cover are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, it is proposed to rationalise the tax concessions available to such policies. It is therefore, proposed to substitute the clause (10D) of section 10, so as to provide that the exemption available under thesaid clause shallnot be allowed on any sum received under an insurance policy in respect ofwhich the premium paid in any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured. However, anysum received under such policyon the death of a person shall continue to be exempt. It is also proposed to clarify that the value of any premiums

I.T.A. No.540/Kol/2021 Assessment Year: 2017-18 Bishista Bagchi agreed to he returned or of any benefit by way of bonus orotherwise, over and above the sum actually assured, which is to be or may be receivedunder the policy by any person, shall not be taken into account for the purpose ofcalculating the actual capital sum assured under this clause. The new provision alsoprovides that the amounts received under sub-section (3) of section 80DD, shall not beexempt under this clause ", It is also proposed to insert a new sub-section (2A) in section 88 which seeks to providethat the deduction in respect of the sumspaid or deposited as premium under an insurancepolicy shall be available only on so much of the premium or other payment made on aninsurance policy, other than a contract for a deferred annuity, as is not in excess of twentypercent of the actual sum assured. It is also proposed to clarify that the value of any premiums agreed to be returned or ofany benefit by way of bonus or otherwise, over and above the sum actually assured,which is to be or may be received under the policy by any person, shall not be taken intoaccount for the purpose of calculating the actual capital sum assured under this clause. The proposed amendment will take effect from 1st April 2004 and will accordingly, apply in relation to the assessment year 2004-05 and subsequent years. [Clauses 6 and 41].” As per the explanation given by the Government in Memorandum of Finance Bill 2003, the Government has taken note of the present day insurance policies with high premium and minimum risk covered,which are akin to deposits or bonds. It has been further explained that with a view to ensure that such insurance policies are treated at par with other investments. Accordingly, section 10(10D) has been substituted to provide that exemption earlier available in respect of any sum received under life insurance policy shall not be allowed on any sum received under a insurance policy in respect of which the premium paid in any of the years during the term of policy exceeds 20% of the actual capital sum assured. The purpose of bringing the aforesaid amendment/substitution of section 10(10D) was apparent that the Government did not intend to pass the exemption benefit of maturity sum received in respect of insurance policies in which the purpose of investment was embedded along with insurance. Therefore, it has been specifically held that these types of policies are similar to investments and bonds.

On the same line, the new sub-section (2A) in section 88 has been inserted providing that the deduction in respect any premium or other payment paid on an insurance policy will not be allowed in excess of 20% of the actual capital sum assured.

A perusal of the aforesaid provisions introduced w.e.f. 01.04.2004 would show that any sum paid in excess of 20% of the sum assured on an insurance policy is treated towards

I.T.A. No.540/Kol/2021 Assessment Year: 2017-18 Bishista Bagchi investment, however, deduction from the amount of income tax is available in respect of any sum of premium which is upto 20% of the sum assured.

Now, coming to the definition of the capital asset u/s 2(14) of the Act defines capital asset as under:

“(14) ‘capital asset’ means: (a) property of any kind held by an assessee, whether or not connected with his business or profession; (b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992), (c) any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof,] but does not include- (i) any stock-in-trade [other than the securities referred to in sub-clause (b)], consumable stores or raw materials held for the purposes of his business or profession; (ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but exclude,- (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings; (e) sculptures; or (f) any work of art. [Explanation] For the purposes of this sub-clause, “jewellery” includes- (a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel; (b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel. [Explanation 2: For the purposes of this clause- (a) the expression “Foreign Institutional Investor” shall have the meaning assigned to it in clause (a) of the Explanation to section 115AD; (b) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956),] (ii) agricultural land in India, not being land situate-

I.T.A. No.540/Kol/2021 Assessment Year: 2017-18 Bishista Bagchi (a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand ; or (b) in any area within the distance, measured aerially,- (I) not being more than two kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten thousand but not exceeding one lakh; or (II) not being more than six kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than one lakh but not exceeding ten lakh; or (III) not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a) and which has a population of more than ten lakh. Explanation: For the purposes of this sub-clause, “population” means the population according to the last preceding census of which the relevant figures have been published before the first day of the previous year; (iv) 6½ per cent Gold Bonds, 1977, [or 7 per cent Gold Bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;] (v) Special Bearer Bonds, 1991, issued by the Central Government;] (vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 [or deposit certificates issued under the Gold Monetisation Scheme, 2015 notified by the Central Government.] [Explanation: For the removal of doubts, it is hereby clarified that “property” includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.]” So, as per section 2(24) of the Act, capital assetmeansproperty of any kind held by an assessee, including any unit linked insurance policy to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof except stock in trade, personal effects etc., the agricultural land and gold bonds and special bearer bonds as mentioned therein.

The Parliament while substituting section 10(10D) and inserting section (2A) to section 88 has denied the benefit of exemption and deduction in respect of policies, which are similar to deposits/investments and also has treated the premium paid over and above of 20% of the sum assured towards investment and not towards insurance or hedging of life risk. In view of the above, it can be safely assumed that the amount of premium paid by the assessee, which was more than 20% of the sum assured was, in fact, investment made by the assessee. However, it is pertinent to note here that as per section 10(10D)(d), 9

I.T.A. No.540/Kol/2021 Assessment Year: 2017-18 Bishista Bagchi entire maturity amount received including sum assured has been excluded of the policies in respect of premium payable for any of the years exceeds 20% of the sum assured. Meaning thereby, the exclusion is not for any amount received over and above the sum assured, rather the entire amount received under the policy has been excluded. Therefore, the entire maturity value/gains at the time of extinguishment of the rights of the assessee in the said policy i.e. on the date of maturity are liable to be treated as capital gains. However, while computing the capital gains, the cost of acquisition will be taken the amount paid towards premium minus 20% of the sum assured, which amount shall be treated as not part of the investment rather towards the cost of hedging of risk under the insurance policy, for which a deduction is already available to that extent under sub section (2A) to section 88 and thereafter, indexation is to be allowed accordingly. 7. In view of the above discussion, the appeal of the assessee is treated as partly allowed. Kolkata, the 15th March, 2022. Sd/- [Sanjay Garg] Judicial Member

Dated: 15.03.2022. RS Copy of the order forwarded to: 1. Bishista Bagchi 2. DCIT, CPC, Bengaluru 3. CIT(A)- 4. CIT- , 5. CIT(DR),

//True copy// By order Assistant Registrar, Kolkata Benches