2025 (7) TMI 1505 - AT - Income Tax

Exemption u/s. 10(10D) - appellant had received maturity proceeds from life insurance policy upon its surrender - denial of exemption as single premium payable in the first year was Rs. 5 lacs which is more than 20% of the actual capital sum assured - HELD THAT - Essentially the determination whether such receipt from insurance policy would form part of the total income or not is based on the premium payable. However the facts emanating from record are that the assessee had surrendered entire insurance policy and the said provision of Section 10(10D) of the Act does not encompass within its boundary of such facts which pertains to the assessee before this bench. In a recent decision of Sanjeev Kumar c/o M/s Raj Kumar Associates vs. ITO Ward 2(3)(2) Bulandshahr 2023 (10) TMI 1027 - ITAT DELHI held that CIT(A) has upheld the part addition without mentioning any charging section and impliedly adopting section 69 of the Act in the line of assessment order. Therefore respectfully following the proposition rendered by the Hon ble Jurisdictional High Court of Allahabad in the case of Sarika Jain 2017 (7) TMI 870 - ALLAHABAD HIGH COURT - have no hesitation to hold that the addition made by the AO by mentioning incorrect and irrelevant charging section is not sustainable and valid being bad in law Since entire addition has been made on the wrong appreciation of facts and inappropriate application of legal provision therefore such addition are in the nature of perverse arbitrary and bad in law and is liable to be deleted. Assessee appeal allowed.

Summary

ISSUES:

Whether maturity proceeds received on surrender of a life insurance policy issued before 01.04.2012 are exempt under section 10(10D) of the Income Tax Act, 1961 despite the premium payable exceeding 20% of the actual capital sum assured.Whether an upward adjustment made by the Central Processing Centre (CPC) under section 143(1) based on TDS reflected in Form 26AS is valid when it involves legal interpretation and factual verification.Whether the CPC's adjustment without providing reasons or opportunity of hearing violates principles of natural justice.Whether wrongful deduction of TDS under section 194DA by the insurance company on exempt maturity proceeds affects the taxability of such income.Whether the provisions of section 80C(5) apply to the surrendered insurance policy in question.Whether delay in filing the appeal against the intimation under section 143(1) can be condoned.

RULINGS / HOLDINGS:

The maturity proceeds received on surrender of the life insurance policy issued on 31.03.2011 are exempt under section 10(10D) of the Act because the restrictive provisions of section 10(10D)(c) do not apply to surrendered policies; the policy was surrendered after more than five years, and the premium payable exceeding 20% is irrelevant in such surrender cases.The CPC exceeded its jurisdiction in making an upward adjustment under section 143(1) based solely on TDS information in Form 26AS, as such adjustments involving "legal interpretation and factual clarification" fall beyond the scope of prima facie adjustments permissible under sub-clauses (0) to (vi) of section 143(1)(a) and require scrutiny assessment under section 143(3).The adjustment made by CPC without providing detailed reasons or opportunity of hearing violates the principles of natural justice and is procedurally defective.Wrongful deduction of TDS by the insurance company under section 194DA on exempt maturity proceeds is a mistake by the deductor and cannot be used to penalize the assessee; Form 26AS is not conclusive proof of taxable income.The provisions of section 80C(5) do not apply as the policy was surrendered after more than two years from commencement, and thus no premium is deemed as income under this section.The delay in filing the appeal against the intimation under section 143(1) is condoned on grounds found genuine and acceptable.Accordingly, the addition of Rs. 7,41,718/- made by CPC under section 143(1) is held to be erroneous, arbitrary, and liable to be deleted; the appeal is allowed.

RATIONALE:

The court applied the statutory provisions of section 10(10D) of the Income Tax Act, 1961, emphasizing the distinction between policies issued before and after 01.04.2012 and the applicability of premium thresholds only to policies not surrendered.The court relied on the principle that CPC's powers under section 143(1) are limited to prima facie adjustments and cannot extend to issues requiring legal interpretation or factual adjudication, which must be addressed through scrutiny assessments under section 143(3) or reassessment under section 147.Precedents were cited, including decisions of coordinate benches and the High Court, reinforcing that additions made beyond the scope of the appeal or without proper jurisdiction are invalid and that procedural fairness demands reasoned orders and opportunity to be heard.The court recognized that TDS deduction errors by third parties (insurance companies) do not translate into taxable income for the assessee and that Form 26AS is only a reconciliation tool, not determinative of taxability.The constitutional principle under Article 265, that no tax shall be levied or collected except by authority of law, was invoked to underscore the illegality of taxing exempt income.The court noted the absence of any rectification or regular assessment order under section 143(3), confirming that the CPC's adjustment was unilateral and beyond its jurisdiction.The decision reflects a doctrinal affirmation that surrender of policies and related maturity proceeds must be assessed in light of the specific statutory provisions applicable to such cases, avoiding mechanical application of premium percentage tests designed for other circumstances.