Tax on High Premium insurance policy maturity to be on sum received minus premium paid

Tax on maturity of High Premium insurance policy to be on sum received minus premium paid though TDS u/s 194DA is contemplated on the gross Amount paid – ITAT

ABCAUS Case Law Citation:
ABCAUS 3789 (2023) (08) ITAT

In the instant case, the assessee had challenged the order passed by the Commissioner of Income Tax (Appeals), NFAC in confirming the addition made on account of maturity of LIC Policy vide intimation passed u/s 143(1) of the Income Tax Act, 1961 (the Act).

The appellant assessee had got a High Premium LIC policy pre-matured. The Life Insurance Corporation of India had deducted the TDS @ 1% on the maturity amount u/s 194DA of the Act.  

The assessee declared the income as capital gain after applying indexation on the investment amount. The long-term capital gain was declared on the above calculation amount on which assessee paid tax @ 20%.

The AO CPC while processing the return rejected the assessee’s claim and added back the entire amount of maturity as total income of the assessee in the intimation sent u/s 143(1) of the Act.

Being aggrieved assessee filed an appeal before CIT(A).

The CIT(A) observed that the assessee had not submitted any reason as to why the LIC maturity proceeds were taken under the head capital gains? Also, there was no submission as to how the cost of acquisition was arrived at.

In the light of section 10(10D) and Section 194DA, the CIT(A) held that addition made by AO CPC was as per the discrepancy reflected in the return of income and Form 26AS. Hence the Intimation order made u/s 143(1) was correct.

The Tribunal noted that the section 194DA requires deduction of tax at source on the sum paid and section 143(1) requires adjustment towards addition of income and not of the sum paid.

It was further observed that the CBDT in its Circular No.07/2003 dated 05-09-2003 has given explanatory notes on the provisions relating to Finance Act, 2003. The Board has clarified the position regarding section10(10D) as under:

“The insurance policies with high premium and minimum risk covers are similar to deposits or bonds. With a view to ensure that such insurance policies are treated at par with other investment schemes, amendments have been made in section 88 and clause (10D) of section10. The existing clause (10D) of section 10 has been substituted so as to provide that the exemption available under the said clause shall not be allowed on any sum received under an insurance policy issued on or after the 1st day of April, 2003, in respect of which the premium payable in any of the years during the term of the policy, exceeds twenty per cent of the actual capital sum assured. In view of this, the income accruing on such policies (not including the premium paid by the assessee) shall become taxable. However, any sum received under such policy on the death of a person shall continue to remain exempt. The new provision also provides that the amounts received under sub-section (3) of section 80DD, shall not be exempt under this clause.”

The Tribunal noted that the quantum of taxable income, as explained in the Circular is: `the income accruing on such policies (not including the premium paid by the assessee).’

The Tribunal opined that though deduction of tax at source u/s 194DA is contemplated on the gross amount paid under a life insurance policy, but the income is such sum received as reduced by the amount of premium paid.

The Tribunal pointed out that Section 143(1) provides for making adjustment by way of `addition of income appearing in Form no. 26AS’ and not the ‘sum’ so appearing in the Form. Evidently, it is only the amount of income which can be added by means of adjustment u/s 143(1).

Reverting to the facts of the case, the ITAT opined that on the premature surrender of life insurance policy, the resultant income was after deduction of the amount of premium paid.

The Tribunal opined that this error calls for adjustment in the intimation u/s.143(1) of the Act and ordered accordingly. 

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