2025 (5) TMI 867 - AT - Income Tax

Characterization of receipts - taxability of the gains arising from the surrender of LIC policy under the head Income from Other Sources instead of Capital Gains - HELD THAT - ULIP is a combination of insurance and investment product wherein part of the premium paid is invested in various fund options such as equity debt or a mix of both. Therefore ULIP has all the attributes of a capital asset though now specifically included in the definition of the term provided u/s 2(14) of the Act. Thus the fact that the ULIP is now treated as capital asset under section 2(14) of the Act further substantiates the claim of the assessee that the accretion on the surrender of ULIP is taxable under the head Capital Gains since the legislature has also now recognised the fact that the ULIP is a capital asset. As evident from the record that the yearly premium payable exceeds the monetary limit provided in the 4th and 5th proviso to section 10(10D) of the Act. We find that similar findings were rendered in Mihir K Jhaveri 2023 (8) TMI 276 - ITAT MUMBAI - Accordingly we do not find any merit in the aforesaid submission of the learned DR. Thus we are of the considered view that the LIC Market Plus-1 Policy in which the assessee invested comes under the purview of capital asset and therefore the income accrued to the assessee from the surrender of the said policy is taxable under the head Capital Gains . Accordingly Ground raised in assessee s appeal is allowed. Disallowance of exemption claimed u/s 54 - assessee has sold two residential properties and invested the capital gains in one residential flat - HELD THAT - We find that while deciding the issue whether the exemption u/s 54 of the Act will be available in case capital gain arising from the sale of more than one residential house is invested in one residential house the coordinate bench of the Tribunal in Ranjit Vithaldas 2012 (7) TMI 586 - ITAT MUMBAI held that there is no restriction that capital gain arising from sale of more than one residential house cannot be invested in one residential house. No merit in the findings of the lower authorities that since the assessee has sold two residential house properties the exemption u/s 54 of the Act is not available to the assessee. As the assessee has been found to have constructed a new house property within a period of 3 years from date of transfer of the original asset and since the amount of capital gains was also deposited by the assessee in the Capital Gains Scheme Account in compliance with the provisions of section 54(2) we are of the considered view that the assessee rightly claimed exemption u/s 54 of the Act. Accordingly the AO is directed to grant the exemption claimed by the assessee under section 54 of the Act. Ground No.3 raised in assessee s appeal is allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the reopening of assessment under section 148 of the Income Tax Act was justified and whether the Commissioner of Income Tax (Appeals) erred in confirming the reopening without examining the merits and facts of the case.

2. Whether the income received from the premature surrender of the LIC Market Plus-1 Policy is taxable under the head "Income from Other Sources" or under the head "Capital Gains".

3. Whether the deduction claimed under section 54 of the Income Tax Act, relating to exemption on capital gains arising from sale of residential property and reinvestment in a new residential property, was rightly disallowed by the Assessing Officer and upheld by the CIT(A).

Issue-wise Detailed Analysis:

Issue 2: Taxability of Gains from Surrender of LIC Market Plus-1 Policy

Relevant Legal Framework and Precedents: The primary statutory provisions considered are sections 2(14), 10(10D), 10(23AAB), 54, 56, 80-CCC(1), and 80-CCC(2) of the Income Tax Act, 1961. Section 2(14) defines "capital asset," section 10(10D) provides exemption on sums received under life insurance policies subject to conditions, and section 80-CCC deals with deductions and taxation related to pension funds. The Finance Act, 2021 amendments to section 2(14) and section 10(10D) were also considered, particularly the inclusion of Unit Linked Insurance Plans (ULIPs) as capital assets from 01/04/2021. Judicial pronouncements by coordinate benches, including Mihir K Jhaveri vs. CIT, were referenced.

Court's Interpretation and Reasoning: The Assessing Officer (AO) treated the proceeds from the surrender of the LIC Market Plus-1 Policy, an annuity/deferred pension plan, as income taxable under section 80-CCC(2), adding the excess of maturity value over investment value to income. The CIT(A) partially agreed but held that since no deduction under section 80-CCC(1) was claimed, section 80-CCC(2) addition was not applicable. Instead, CIT(A) taxed the amount under section 56 as income from other sources, relying on the premise that the policy was a life insurance policy and not a capital asset under section 2(14), and that the premium exceeded 20% of the sum assured, thus excluding exemption under section 10(10D).

The Tribunal examined the policy document and found that the LIC Market Plus-1 Policy was a ULIP, involving investment in various fund options (Bond Fund, Secured Fund, Balanced Fund, Growth Fund) at Net Asset Value, hence possessing attributes of a capital asset. The Tribunal rejected CIT(A)'s treatment of the policy proceeds as income from other sources, holding that ULIPs qualify as capital assets under section 2(14), even before the 2021 amendment, because of their investment nature. The Tribunal further reasoned that the 2021 amendment merely clarified and codified the existing position, aiming to curb misuse of exemption under section 10(10D) by high-net-worth investors paying large premiums. The Tribunal relied on the legislative intent and judicial precedents to conclude that accretion on surrender of ULIP is taxable under the head "Capital Gains".

Key Evidence and Findings: The policy document (UIN: 512L249V01) showing unit-linked investment, the premium amount, and surrender proceeds were crucial. The absence of deduction claimed under section 80-CCC(1) was noted. The Tribunal also considered the legislative history and explanatory memorandum of the Finance Act, 2021.

Application of Law to Facts: Given the ULIP nature of the policy and the legislative intent, the Tribunal applied the capital gains provisions rather than income from other sources. The premium exceeding limits excluded exemption under section 10(10D), but did not alter the character of the asset as a capital asset.

Treatment of Competing Arguments: The Department's argument that the 2021 amendment was prospective and thus not applicable to the assessment year was rejected, as the Tribunal held that the amendment clarified existing law rather than creating new law. The CIT(A)'s reliance on section 56 and section 10(10D) exceptions was overruled.

Conclusions: The Tribunal set aside the impugned order on this issue and held that the income from surrender of the LIC Market Plus-1 Policy is taxable under the head "Capital Gains". Ground No. 2 was allowed.

Issue 3: Disallowance of Deduction under Section 54 on Capital Gains Exemption

Relevant Legal Framework and Precedents: Section 54 provides exemption from capital gains tax if the capital gains arising from the sale of a residential property are reinvested in the purchase or construction of a new residential house within prescribed time limits. The Capital Gains Account Scheme, 1988 (Rule 10) regulates deposits and withdrawals related to such exemptions. Judicial precedents, including Nilufer Sayed vs. ITO and DCIT vs. Ranjit Vithaldas, were considered.

Court's Interpretation and Reasoning: The AO disallowed the exemption on two grounds: (i) the assessee sold two residential properties but claimed exemption as if only one was sold, and (ii) the new property was not constructed within the stipulated time as the agreement was executed only 10 days before the 3-year deadline, and possession was much later. The CIT(A) upheld these findings, doubting the genuineness of the deposit in the Capital Gains Account Scheme and the source of payments to the builder and for stamp duty.

The Tribunal examined the evidence including the Capital Gains Account Scheme deposit receipt from State Bank of India dated 24/02/2016, confirming the deposit of INR 1,07,33,165 before filing the return. The Tribunal observed that Rule 10 restricts withdrawals to purchase/construction of new residential property, supporting the genuineness of the transactions. The Tribunal rejected CIT(A)'s suspicion about the deposit and payments, noting lack of contrary evidence.

Regarding the sale of two properties, the Tribunal relied on the coordinate bench decision in DCIT vs. Ranjit Vithaldas, which held that exemption under section 54 is available even if capital gains arise from sale of more than one residential house, provided the gains are invested in a new residential house within prescribed time. The Tribunal distinguished the Nilufer Sayed decision relied upon by CIT(A), which dealt with investment of capital gains in multiple houses, whereas here, gains from two properties were invested in one house.

On the timing issue, the Tribunal accepted the CIT(A)'s factual finding that the agreement for the new property was registered within 3 years from the date of sale of old properties, and the assessee became owner on the date of registration, which satisfies the statutory requirement. The possession date was held immaterial for the purpose of section 54.

Key Evidence and Findings: The Capital Gains Account Scheme deposit certificate, sale deeds, allotment letter dated 03/08/2015, agreement dated 02/02/2019, and payment receipts were critical. The Tribunal also noted absence of any appeal or cross-objection by the Revenue challenging CIT(A)'s finding on construction timeline.

Application of Law to Facts: The Tribunal applied section 54 and related rules liberally to uphold exemption, emphasizing compliance with deposit and investment conditions, and the legislative intent to encourage reinvestment of capital gains in residential property.

Treatment of Competing Arguments: The Tribunal rejected the Revenue's doubts on deposit authenticity and timing of new property acquisition. It also overruled CIT(A)'s reliance on Nilufer Sayed and upheld the principle from Ranjit Vithaldas allowing exemption on capital gains from multiple properties invested in a single new property.

Conclusions: The Tribunal directed the AO to grant exemption of INR 1,07,33,165 under section 54. Ground No. 3 was allowed.

Issue 1: Validity of Reopening under Section 148

This ground was general in nature and was not separately adjudicated by the Tribunal.

Significant Holdings:

"The LIC Market Plus-1 Policy, in which the assessee invested, comes under the purview of 'capital asset', and therefore the income accrued to the assessee from the surrender of the said policy is taxable under the head 'Capital Gains'."

"The mere fact that the aforesaid amendment was brought in the statute by Finance Act, 2021, with effect from 01/04/2021, the same cannot lead to the conclusion that prior to the aforesaid amendment the accretion from the surrender of ULIP was not taxable under the head 'Capital Gains'. ULIP has all the attributes of a capital asset."

"There is no restriction that capital gain arising from sale of more than one residential house cannot be invested in one residential house. The exemption u/s 54 is available if capital gain arising from transfer of a residential house is invested in a new residential house within the prescribed time limit."

"Since the amount of capital gains was deposited by the assessee in the Capital Gains Scheme Account in compliance with the provisions of section 54(2) of the Act and the new house property was constructed within the prescribed period, the exemption under section 54 is rightly claimed."