Taxpublishers.in - Monday Corner Answer to the Quiz for the week (26 Aug 2024)

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Quiz for the week (26 Aug 2024): Teja (P) Ltd purchased a keyman insurance policy for Rs.2 crore in the financial year 2013-14 and the term of the policy was for 12 years with annual premium of Rs.18 lakhs. The policy was taken on Navneet one of the directors of the company who is also in employment with the company by means of an employment agreement. Navneet retired in July,2024 and the company assigned the policy in favour of him which is to mature in October, 2024. Decide the tax consequence of the transaction of subscribing to the keyman insurance policy by the company and assignment of the same in favour of the director-cum-employee. Best Answer : For the query posed one has to refer to section 10(10D) of the Act which exempts the receipt of proceeds from life insurance policy from income- tax and it reads as under: Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy is exempt, other than – (a) any sum received under section 80DD(3) or section 80 DDA(3); or (b) any sum received under Keyman insurance policy; or (c) any sum received under an insurance policy issued on or after the 1st day of April,2003 but on or before the 31st Day of March,2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 20% of the actual capital sum assured; or (d) any sum received under an insurance policy issued on or after the 1st day of April,2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 10% of the actual capital sum assured. Explanation 1 to the section says “Keyman insurance policy “means a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration. As regards payment of premium in respect of Keyman insurance policy by the company, it is eligible for deduction as business deduction under section 37 of the Act. Consequently, receipt of maturity proceeds would be taxable as income since it is very clearly stated as exception to section 10(10D). The issue which requires resolution is about assignment of policy before maturity and taxability of the same. In Allu Arvind Babu v. Asst.CIT (2020) 122 taxmann.com 66 (Mad) the assessee received assignment of keyman insurance policy and admitted the surrender value as perquisite and the excess amount received was not admitted as income by citing section 10(10D) exemption. The assessee relied on CIT v. Rajan Nanda. [2012] 18 taxmann.com 98/349 ITR 008 (Del.) and CIT v. Prashant J Agarwal [2016] 75 taxmann.com 54 (Bom). It was held by Madras High Court that on the basis of section 10(10D) of the Act, with its Explanation 1, the clear position of law which emerges is that the character of the Keyman Insurance Policy does not get converted into ordinary Life Insurance Policy despite its assignment and therefore, any benefit accruing to the employee upon its surrender or encashment will be taxable in the hands of the Employee as "perquisite". The amount received by the employee after retirement is also taxable in the hands of recipient Navneet. However, if the policy is not encashed or surrendered then till such time of maturity, it would not be exigible to tax. Akash Bhagat Siliguri

Quiz for the week (26 Aug 2024):

Teja (P) Ltd purchased a keyman insurance policy for Rs.2 crore in the financial year 2013-14 and the term of the policy was for 12 years with annual premium of Rs.18 lakhs. The policy was taken on Navneet one of the directors of the company who is also in employment with the company by means of an employment agreement. Navneet retired in July,2024 and the company assigned the policy in favour of him which is to mature in October, 2024. Decide the tax consequence of the transaction of subscribing to the keyman insurance policy by the company and assignment of the same in favour of the director-cum-employee.

Best Answer :

For the query posed one has to refer to section 10(10D) of the Act which exempts the receipt of proceeds from life insurance policy from income- tax and it reads as under:

Any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy is exempt, other than –

      (a) any sum received under section 80DD(3) or section 80 DDA(3); or
      (b) any sum received under Keyman insurance policy; or
      (c) any sum received under an insurance policy issued on or after the 1st day of April,2003 but on or before the 31st Day of March,2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 20% of the actual capital sum assured; or
      (d) any sum received under an insurance policy issued on or after the 1st day of April,2012 in respect of which the premium payable for any of the years during the term of the policy exceeds 10% of the actual capital sum assured.

Explanation 1 to the section says “Keyman insurance policy “means a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person and includes such policy which has been assigned to a person, at any time during the term of the policy, with or without any consideration.

As regards payment of premium in respect of Keyman insurance policy by the company, it is eligible for deduction as business deduction under section 37 of the Act. Consequently, receipt of maturity proceeds would be taxable as income since it is very clearly stated as exception to section 10(10D).

The issue which requires resolution is about assignment of policy before maturity and taxability of the same. In Allu Arvind Babu v. Asst.CIT (2020) 122 taxmann.com 66 (Mad) the assessee received assignment of keyman insurance policy and admitted the surrender value as perquisite and the excess amount received was not admitted as income by citing section 10(10D) exemption. The assessee relied on CIT v. Rajan Nanda. [2012] 18 taxmann.com 98/349 ITR 008 (Del.) and CIT v. Prashant J Agarwal [2016] 75 taxmann.com 54 (Bom). It was held by Madras High Court that on the basis of section 10(10D) of the Act, with its Explanation 1, the clear position of law which emerges is that the character of the Keyman Insurance Policy does not get converted into ordinary Life Insurance Policy despite its assignment and therefore, any benefit accruing to the employee upon its surrender or encashment will be taxable in the hands of the Employee as "perquisite".

The amount received by the employee after retirement is also taxable in the hands of recipient Navneet. However, if the policy is not encashed or surrendered then till such time of maturity, it would not be exigible to tax.

Akash Bhagat
Siliguri