2025 (6) TMI 478 - AT - Income Tax

Deduction claimed u/s 10(10D) - receipt on maturity of LIC policy after assignment of key man insurance policy in favour of assessee - genuineness and effective date of the alleged assignment - HELD THAT - The factual question regarding the genuineness and effective date of the alleged assignment can only be conclusively determined through verification by the LIC itself. Accordingly we deem it just and appropriate to set aside the findings of CIT(Appeals) on this issue and restore the matter to the file of AO for the limited purpose of conducting a factual verification. AO shall obtain confirmation from LIC as to whether the assignment was duly effected in favour of the assessee on 06.05.2011 or on any other date and whether such assignment was supported by a formal request letter from the company and acknowledged by LIC. The assessee shall furnish a copy of such request letter if available along with any agreement entered into for the assignment of the policy. According the Ground No.2 of the appeal of the assessee is allowed for statistical purposes. Unexplained cash deposits - assessee argued that the cash was sourced from earlier withdrawals - HELD THAT - While the assessee has asserted that the cash deposit was sourced from earlier withdrawals this explanation must be subject to a reasoned evaluation after accounting for the likely utilisation of cash towards household or marriage-related expenses. Accordingly we deem it appropriate to set aside the impugned order of the CIT(A) to the extent it relates to this issue and restore the matter to the file of the AO. AO shall verify the claim of the assessee by examining the pattern of cash withdrawals and household expenditure and estimating the quantum of cash utilised for household or marriage-related expenses during the relevant period and whether sufficient unutilised cash was available on hand to justify the deposit of Rs. 30 lakhs on 17.03.2021. Assessee shall be at liberty to furnish any additional documentary evidence in support of his claim including proof of marriage-related arrangements cancellations and any other relevant explanation for cash retention and utilization. Ground No. 3 of the appeal of the assessee accordingly allowed for the statistical purposes.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the maturity proceeds of Rs. 59,47,714/- from a Keyman Insurance Policy assigned to the assessee qualify for exemption under Section 10(10D) of the Income Tax Act, 1961, given the assignment was purportedly made prior to the amendment of the definition of "Keyman Insurance Policy" by the Finance Act, 2013, effective from assessment year 2014-15;

(b) Whether the addition of Rs. 30,00,000/- made under Section 69A of the Act as unexplained cash deposits in the assessee's bank account is justified, considering the assessee's explanation that the cash was sourced from earlier withdrawals;

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Exemption under Section 10(10D) for maturity proceeds of assigned Keyman Insurance Policy

Relevant legal framework and precedents: Section 10(10D) of the Income Tax Act exempts proceeds from life insurance policies from taxable income, subject to certain conditions. The Finance Act, 2013 amended Explanation 1 to Section 10(10D) to include policies assigned during the term of the policy within the definition of "Keyman Insurance Policy," thereby denying exemption to such assigned policies. The amendment was effective from assessment year 2014-15 onwards.

Precedents relied upon include the decisions of coordinate benches of the ITAT in Mr. Autl Hirji Maru and Smt. Harleen Kaur Bhatia, which held that the 2013 amendment is prospective and does not apply retrospectively to assignments made prior to 1 April 2014. The Hon'ble Delhi High Court decision in CIT vs. Rajan Nanda was also cited, which observed that assignment of a keyman policy leads to its conversion into a regular life insurance policy.

Court's interpretation and reasoning: The Tribunal acknowledged that the policy was originally a Keyman Insurance Policy obtained by the company on 24.03.2000, with the assessee as the keyman. The assessee contended that the policy was assigned to him on 06.05.2011, evidenced by an endorsement on the policy document. The Tribunal noted that the Finance Act, 2013 amendment is prospective and does not affect assignments made before 1 April 2014.

The Departmental Representative challenged the genuineness and effective date of the assignment, relying on a letter from LIC dated 28.03.2020 stating that the policy did not qualify for exemption and that tax was deducted at source, implying non-acceptance of assignment by LIC.

Key evidence and findings: The assessee produced an endorsement dated 06.05.2011 on the policy document indicating assignment. The Revenue relied on LIC's communication denying exemption and non-acknowledgment of assignment. No contemporaneous assignment request letter or tripartite agreement was filed by the assessee, and LIC's confirmation of assignment was absent.

Application of law to facts: Given the conflicting evidence, the Tribunal held that the factual question of the assignment's genuineness and effective date requires verification by LIC. The Tribunal directed the Assessing Officer to obtain confirmation from LIC regarding the assignment's date and acceptance, verify the payment of surrender value by the assessee to the company, and examine premium payment records and identity of the premium payer.

Treatment of competing arguments: The Tribunal balanced the assessee's documentary evidence against the Revenue's reliance on LIC's denial and absence of corroborative documents. It refrained from making a final conclusion on the exemption issue and instead remanded the matter for factual verification.

Conclusions: The Tribunal allowed Ground No. 2 of the appeal for statistical purposes, setting aside the CIT(A)'s order on this issue and directing fresh verification and adjudication by the Assessing Officer.

Issue (b): Addition of Rs. 30,00,000/- as unexplained cash deposits under Section 69A

Relevant legal framework and precedents: Section 69A of the Income Tax Act empowers the Assessing Officer to make additions where cash credits or unexplained deposits in bank accounts remain unexplained by the assessee. The burden lies on the assessee to satisfactorily explain the source and nature of such deposits.

Court's interpretation and reasoning: The assessee explained that the Rs. 30 lakhs cash deposit made on 17.03.2021 was sourced from earlier cash withdrawals from bank accounts in 2020 and early 2021, which were initially withdrawn to meet expenses related to his son's marriage that was later postponed due to the COVID-19 pandemic. The assessee produced bank statements showing withdrawals of Rs. 10 lakhs on 22.01.2020, Rs. 8 lakhs on 23.01.2020, Rs. 10 lakhs on 05.03.2020, and Rs. 10 lakhs on 28.01.2021.

The Revenue contended that the assessee failed to explain the use of cash withdrawn during the intervening period, noting that the assessee continued to withdraw monthly household expenses in smaller amounts prior to these large withdrawals but did not show corresponding withdrawals thereafter. The Revenue also pointed out the lack of documentary evidence such as hotel bookings, cancellations, PAN details, receipts, or proof of refund to substantiate the marriage-related expenditure claim. The Revenue further noted the assessee's residence in a metropolitan city with adequate banking facilities, making retention of large cash sums implausible.

Key evidence and findings: The CIT(A) rejected the assessee's claim primarily due to absence of credible documentary evidence supporting the source and use of the cash. The CIT(A) observed that the cash withdrawals pattern was inconsistent with household expenses and that the assessee failed to provide proof of marriage-related arrangements or cancellations.

Application of law to facts: The Tribunal noted the conflicting explanations and the need for a reasoned evaluation of the withdrawals vis-`a-vis household or marriage-related expenses. It emphasized the necessity for the Assessing Officer to examine the pattern of cash withdrawals, estimate the cash utilized for household or marriage expenses, and determine whether sufficient unutilized cash was available to justify the deposit.

Treatment of competing arguments: The Tribunal acknowledged the assessee's explanation but also recognized the Revenue's concerns regarding lack of corroborative evidence and inconsistencies in withdrawal patterns. It found that a conclusive determination required further inquiry and verification.

Conclusions: The Tribunal set aside the CIT(A)'s order on this issue and remanded the matter to the Assessing Officer for fresh adjudication after verification of the source and utilization of cash, allowing the assessee to furnish additional documentary evidence such as proof of marriage-related arrangements and cancellations. Ground No. 3 of the appeal was allowed for statistical purposes.

Issue (c): General and procedural grounds

The Tribunal dismissed the general grounds of appeal as they were either not specific or lacked substantive merit.

3. SIGNIFICANT HOLDINGS

"The amendment to the definition of "Keyman Insurance Policy" brought by the Finance Act, 2013, and made effective from 01.04.2014, is prospective in nature."

"Once there is assignment, it leads to conversion and the character of the policy changes."

"The factual question regarding the genuineness and effective date of the alleged assignment can only be conclusively determined through verification by the LIC itself."

"The Assessing Officer shall obtain confirmation from LIC as to whether the assignment was duly effected in favour of the assessee on 06.05.2011 or on any other date, and whether such assignment was supported by a formal request letter from the company and acknowledged by LIC."

"The assessee shall furnish a copy of such request letter, if available, along with any agreement entered into for the assignment of the policy."

"The Assessing Officer shall verify whether the sum of Rs. 21,68,375/- claimed to be the surrender value paid by the assessee to the company was actually paid, by examining the relevant entries in the assessee's bank account."

"The Assessing Officer shall verify the claim of the assessee by examining the pattern of cash withdrawals and household expenditure; estimating the quantum of cash utilised for household or marriage-related expenses during the relevant period; and determining whether sufficient unutilised cash was available on hand to justify the deposit of Rs. 30 lakhs on 17.03.2021."

"The assessee shall be at liberty to furnish any additional documentary evidence in support of his claim, including proof of marriage-related arrangements, cancellations, and any other relevant explanation for cash retention and utilisation."

Final determinations on each issue were deferred pending factual verification, with the Tribunal allowing the appeal on Grounds No. 2 and 3 for statistical purposes and remanding the matters for fresh adjudication in accordance with law.

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