2025 (6) TMI 230 - AT - Income Tax

Maturity proceeds receipts from Max Life Insurance ULIP plan - whether exempt u/s.10(10D) OR chargeable under the head Income from other sources - HELD THAT - Contention that the sale of ULIP as capital gains raised by the assessee was not examined by the Lower Authorities specially with reference to the decision rendered in the case of Mihir K. Jhaveri 2023 (8) TMI 276 - ITAT MUMBAI which considered the amendment to Section 2(14)(c) of the Act. Therefore in the interest of justice we deem it fit to set-aside the matter back to the file of Jurisdictional Assessing Officer to consider the issue afresh and pass orders in accordance with law by providing opportunity of hearing to the assessee. Appeal filed by the Assessee is allowed for statistical purpose.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal are:

• Whether the reopening of the assessment under section 147 read with section 143(3) of the Income Tax Act, 1961, was valid and sustainable.
• Whether the maturity proceeds received from the surrender of the Unit Linked Insurance Policy (ULIP) are exempt from tax under section 10(10D) of the Act.
• Whether the difference between the premium paid and the surrender value of the ULIP should be taxed as income under the head "Income from other sources" or as "Capital gains" under the Income Tax Act.
• The applicability and interpretation of amendments introduced by the Finance Act, 2021, particularly the insertion of provisos to section 10(10D) and the amendment to the definition of "Capital asset" under section 2(14) of the Act.
• The relevance and binding nature of earlier judicial precedents, including the decision of the Ahmedabad Tribunal in Shri Girish Haribhai Trivedi and the Mumbai Tribunal in Mihir K. Jhaveri, in determining the tax treatment of ULIP maturity proceeds.

2. ISSUE-WISE DETAILED ANALYSIS

Validity of Reassessment under Section 147 r.w.s. 143(3)

Legal Framework and Precedents: Section 147 of the Income Tax Act empowers the Assessing Officer (AO) to reopen an assessment if there is reason to believe that income has escaped assessment. Section 143(3) relates to the assessment procedure. The reopening must be based on valid reasons and within the prescribed time limits.

Court's Interpretation and Reasoning: The Tribunal noted the assessee's appeal against the reopening but did not delve deeply into the validity of reopening itself. The appeal against the reopening was raised but ultimately held to be academic in nature due to the Tribunal's decision on the merits of the taxability issue.

Key Findings: The Tribunal did not quash the reopening order but allowed the appeal on merits, rendering the challenge to reopening academic.

Exemption under Section 10(10D) of the Act for ULIP Maturity Proceeds

Legal Framework and Precedents: Section 10(10D) exempts any sum received under a life insurance policy, including bonuses, from taxation, subject to certain exceptions. The provisos inserted by the Finance Act, 2021, limit exemption where premiums exceed specified percentages of the sum assured.

Court's Interpretation and Reasoning: The Commissioner of Income Tax (Appeals) (CIT(A)) held that the assessee was not eligible for exemption under section 10(10D) because the premium paid exceeded 20% of the sum assured. The CIT(A) rejected the assessee's reliance on the fourth and fifth provisos to section 10(10D) introduced by the Finance Act, 2021, as these amendments were not applicable to the assessment year 2016-17.

Application of Law to Facts: The ULIP under consideration was issued before the effective date of the provisos (1.4.2021), so the exemption under section 10(10D) was not available due to premium limits. Therefore, the maturity proceeds were not exempt.

Competing Arguments: The assessee argued for exemption relying on the provisos, but the CIT(A) and the Tribunal noted these were not applicable for the relevant assessment year.

Conclusion: The exemption claim was rightly rejected for the assessment year 2016-17.

Taxability of ULIP Maturity Proceeds: Capital Gains or Income from Other Sources?

Legal Framework and Precedents: Section 2(14) defines "Capital asset." Prior to the Finance Act, 2021 amendment, ULIPs were not specifically included within this definition. The Finance Act, 2021 inserted clause (c) to section 2(14), including certain ULIPs as capital assets, specifically those to which exemption under section 10(10D) does not apply due to the fourth and fifth provisos.

Court's Interpretation and Reasoning by CIT(A): The CIT(A) held that since the ULIP was issued before 1.2.2021 and did not fall within the scope of the amended section 10(10D) provisos, the ULIP did not qualify as a capital asset under section 2(14). Therefore, the maturity proceeds were taxable under "Income from other sources."

The CIT(A) also distinguished the Ahmedabad Tribunal decision in Shri Girish Haribhai Trivedi, which treated ULIP proceeds as capital gains by equating ULIPs to mutual funds. The CIT(A) emphasized that ULIPs and mutual funds are distinct financial products regulated by different authorities (IRDAI for ULIPs and SEBI for mutual funds), and the earlier decision did not consider the 2021 amendment.

Assessee's Arguments and Reliance on Mumbai Tribunal Decision: The assessee relied on the recent Mumbai Tribunal decision in Mihir K. Jhaveri, which held that ULIPs constitute capital assets under the amended section 2(14)(c) and that gains on surrender should be taxed as capital gains. The Mumbai Tribunal observed that the assessee had paid premiums exceeding the prescribed limits and thus the ULIP fell within the amended definition of capital asset.

Key Evidence and Findings: The Tribunal noted that the Mumbai Tribunal decision was not considered by the lower authorities. The Mumbai Tribunal's reasoning was based on the legislative intent behind the 2021 amendment, which specifically included certain ULIPs as capital assets to be taxed under capital gains.

Application of Law to Facts: The ULIP in the present case was issued before 1.2.2021 and the premium exceeded the limits prescribed by the provisos. The Tribunal observed that the amendment to section 2(14) was intended to bring specified ULIPs within the capital asset definition, but the ULIP under consideration did not fall within this category due to issuance date.

Treatment of Competing Arguments: The Tribunal acknowledged the conflicting views and the evolution of law through the 2021 amendment and recent judicial decisions. It found that the lower authorities had not examined the Mumbai Tribunal decision and the amendment's impact.

Conclusion: The Tribunal set aside the matter to the Assessing Officer for fresh consideration in light of the Mumbai Tribunal decision and the amendment to section 2(14), directing the AO to pass orders afresh after providing the assessee an opportunity of hearing.

3. SIGNIFICANT HOLDINGS

The Tribunal's crucial legal reasoning includes the following verbatim excerpts:

"From said amendment which is wef. 01.04 2021, it is evident that the legislature in their own wisdom has not brought all the 'Unit link Insurance Policy' within the definition of 'Capital asset', but has brought only such 'Unit linked Insurance policy' to which sec 10(10D) of the Act does not apply on account of the applicability of the fourth and fifth proviso thereof, within the definition 'Capital asset'... and it is an admitted fact that the ULIPs under considerations were not issued on or after the 0151 day of February, 2021 and therefore are not covered under said fourth and fifth proviso to sec 10(10D) of the Act."

"...the said decision of the Hon'ble Ahmedabad was rendered on 13.07.2012 and therefore had no occasion to consider and adjudicate the said amendment brought in sec 2(14) by the Finance Act 2021."

"...the Mumbai Tribunal in the case of Mihir K. Jhaveri... held 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'."

Core principles established:

• The exemption under section 10(10D) is subject to provisos introduced by the Finance Act, 2021, which apply only to policies issued on or after 1.2.2021.
• The definition of "Capital asset" under section 2(14) was amended by the Finance Act, 2021, to include only those ULIPs to which the exemption under section 10(10D) does not apply due to the new provisos.
• ULIPs issued prior to 1.2.2021 and not covered by the provisos are not capital assets and their surrender proceeds are taxable under "Income from other sources."
• Judicial precedents prior to the 2021 amendment, which treated ULIPs as mutual funds or capital assets, are distinguishable and not binding on post-amendment interpretation.
• The Tribunal recognized the need for fresh adjudication in light of recent judicial pronouncements and legislative amendments.

Final determinations on each issue:

• The reopening of assessment was not quashed but challenge was rendered academic.
• The exemption under section 10(10D) was not available to the assessee for the relevant assessment year due to premium exceeding prescribed limits and the non-applicability of the 2021 provisos.
• The CIT(A) correctly held that the ULIP maturity proceeds were taxable under "Income from other sources" and not as capital gains for the assessment year 2016-17.
• However, the Tribunal, considering the recent Mumbai Tribunal decision and the 2021 amendment to section 2(14), set aside the matter for fresh consideration by the AO to ensure the assessee's claim is examined in light of current law and judicial precedents.