Unit linked insurance policy (ULIP): 

ULIP is an instrument which provides for insurance and investment both. This is different from Life Insurance Policy (LIP) which is mainly for insurance. In case of LIP also we find several type of plans which provide opportunity of insurance and investment to some extent. In case it is based mainly on principal of insurance then premium is low, however, when it is based mainly on principal of investment then premium is higher.

 LIP, ULIP , EPF , PPF, small savings are used by general public as an easy means for saving and building up capital for future. These are in fact for small savers. In view of author, these should not be allowed to high net worth (HNI) people who use these instruments for tax saving.

Sums received on policies should be capital receipt:

Generally any insurance policy with differential schemes are for accumulation of capital and also to have risk covers. Sums received in the event of insured event that is death is life assured is  generally considered capital receipt.

Therefore, sums realized on surrender or maturity should also be considered as capital receipt.

However, due to misuse by some section of investors induced by insurers schemes were floated for single or limited but higher amount of premiums, lesser maturity period and to provide early redemption of such policies. This was considered as a tool of tax planning and restrictions were imposed in a manner to provide for exemption under section 10.10D subject to conditions imposed from time to time.

Thus it is a case that for misdeeds of few , all  including petty beneficiaries/ investors are also  considered with doubt of doing tax  avoidance through high premium life insurance policies.

The provision providing for exemption, thus, in a way treat ‘capital receipt’ as income and allow exemption subject to various conditions.

Treating a ‘capital receipt’ as income is not authorized for taxation on income under the Constitution of India. However, unless such provisions are challenged and struck down by Courts, the provisions have to be followed.

Section 10 (10D):

This section was inserted by the Finance (No. 2) Act, 1991 w.r.e.f. 01.04.1962 and has undergone several amendments with a view to impose more and more conditions to allow exemption. This is adversely affecting even small investors.

Unreasonable view taken by tax authorities:

Tax authorities ( AO) also took unreasonable view and when conditions of S.10.10D were viewed as  not complied with,  entire amount received was added to income ignoring the amount invested.

 Thus cost was also not allowed. In a case discussed hereafter, the ld. CIT(A) directed to compute gains under head capital gains and thus he allowed appeal partly.

 The revenue was not satisfied and preferred appeal before the ITAT. ITAT while upholding the order of Ld. CIT(A)  also held that the gains should be computed under head capital gains. ( it is implied that  costs with benefit of cost inflation index, applicable will be  allowable in case of long term capital asset.

Matter before ITAT APPEAL BY REVENUE:

2012 (10) TMI 85 - ITAT AHMEDABAD  THE ACIT, CIRCLE-7, AHMEDABAD VERSUS SHRI GIRISH HARIBHAI TRIVEDI I.T.A. No.2986/Ahd/2011 DECIDED VIDE ORDER  Dated: - 13 July 2012

In this case assessee purchased policy that was a unit linked insurance policy.

After considering facts the honorable Tribunal  has confirmed facts found by the CIT(A)  that in these kind of policy small portion of the investment goes towards providing the life cover and the residual portion is invested in  stocks and / or bonds.

In this case assessee claimed that surplus amount receive on maturity is exempt u/s 10(10D) of the Income Tax Act.

However, Ld.  AO treat the entire receipts as income under head income from other sources and did not even deduct the amount invested by the assessee..

On appeal of assessee ld. CIT(A) directed to compute income, if any, under the head ‘capital gains’.

Revenue preferred appeal before Tribunal. After considering facts, terms and conditions tribunal found fact that

1. Assessee purchased policy that was a unit linked insurance policy.
2. Assessee claimed exemption u/s 10.10D.
3. AO treated entire amount received as income from other sources.
4. Tribunal considered that in these kind of policy small portion of the investment goes towards providing the life cover and the residual portion is invested in a stocks or bonds. ( per author that means as instrument of investment) .
5.  Tribunal , therefore held that   surplus on maturity of the policy should be treated as capital gain and
6.  directed the Ld. AO to take the sale consideration of units as the amount received on account of maturity of the policy and the cost of investment as the amount invested by assessee over a period of time.

 Therefore,  the appeal was considered as  partly allowed because a computation has to be made by the AO under the head capital gains according to the applicable provisions.