INCOME TAX ACT, 1961

Section 10(10D)

Exemption under section 10(10D) - Allowability - Keyman insurance policy assigned in favour of assessee during tenure of policy -

Firm by name Sharmeen Transport Company had taken keyman insurance policy in the name of assessee on 22-2-2005 and after payment of initial premium, the policy was assigned to the assessee on 2-6-2009 and which was matured on 10-12-2015 and maturity amount has been received by the assessee on 20-2-2015 of Rs. 7.34 crores. As per AO amendment to Explanation (1) to section 10(10D) a Keyman Insurance Policy would not change its character even if there was any assignment in favour of assessee during the tenure of policy. Since in the case of the assessee policy matured after amendment came into force, it would not come within the purview of section 10(10D). According to assessee, as per section 10(10D) the maturity value of insurance amount, except keyman insurance policy was not taxable. He submitted that since keyman insurance policy was assigned in favour of the assessee on 2-6-2009, which was prior to 1-4-2014, therefore, keyman insurance policy was converted into an ordinary insurance policy prior to amendment to Explanation 1 to section 10(10D) which was prospective, and not applicable to case of assessee. Held: By Finance Act, 2012, with effect from 1-4-2003, Explanation 1 to section 10(10D) was inserted explaining the expression 'Keyman Insurance Policy'. A reading of the aforesaid Explanation would make it clear that a Keyman Insurance Policy, even if, assigned to a person at any time during the term of the Policy, would not change its nature and character, but would still remain a Keyman Insurance Policy. Thus, after amendment to Explanation-1, a Keyman Insurance Policy even on assignment would remain such, hence, would come within the exception provided under section 10(10D)(b), therefore, would not be eligible for exemption under section 10(10D). The object of the aforesaid amendment has been further clarified by CBDT in Circular No. 3 of 2014, dated 21-1-2014, by stating that by taking advantage of the legal loophole in the provision of section 10(10D), exemption was claimed in cases wherein though originally Policies were Keyman Insurance Policy, but during its term it was assigned to some other person. The Circular makes it clear that with a view to plug such loophole and check such practices to avoid payment of tax, the provision of section 10(10D) of the Act was amended to provide that Keyman Insurance Policy assigned during its term shall continue to be treated as a Keyman Insurance Policy, hence, would not be eligible for exemption under section 10(10D). No doubt, the amendment to Explanation-1 to section 10(10D) was applicable from the assessment year 2014-15. In the instant case, undisputedly, Policy was assigned in the name of assessee on 2-6-2009, whereas, it matured on 10-2-2015, i.e., during the previous year relevant to assessment year 2015-16. Thus, it is very much clear that at the time of maturity of the Keyman Insurance Policy, the amendment to section 10(101D) by way of Explanation-1, had already been made effective, therefore, would be applicable. That being the case, maturity value received on Keyman Insurance Policy would be taxable in the hands of the assessee.

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