Facts of the Case

The dispute in the present case arose in relation to the taxability of proceeds received from a Keyman Insurance Policy originally taken by Suruchi Foods Pvt. Ltd. in the name of its director.

The company had taken a Keyman Insurance Policy and paid the initial premiums. Subsequently, the policy was assigned to the director, after which the director continued to pay the remaining premiums personally.

Upon maturity of the policy, the director received the proceeds. The Assessing Officer treated the amount received as taxable income, contending that the proceeds from a Keyman Insurance Policy do not qualify for exemption under Section 10(10D) of the Income Tax Act.

The assessee disputed the addition and argued that once the policy had been assigned to the director and the remaining premiums were paid by him, the policy ceased to be a Keyman Insurance Policy and therefore the maturity proceeds should be treated as exempt under Section 10(10D).

The matter eventually reached the Income Tax Appellate Tribunal (ITAT), Delhi. 

Issues Involved

  1. Whether the maturity proceeds of a Keyman Insurance Policy assigned to the director are taxable under the Income Tax Act.
  2. Whether such proceeds are eligible for exemption under Section 10(10D).
  3. Whether assignment of the Keyman Insurance Policy to the director changes the character of the policy for tax purposes.

Petitioner’s Arguments (Assessee)

The assessee contended that:

  • The insurance policy was initially taken by the company but later assigned to the director.
  • After the assignment, the director paid the remaining premiums personally.
  • The assignment of the policy occurred prior to the amendment introduced with effect from Assessment Year 2014-15, which clarified the tax treatment of assigned Keyman Insurance Policies.
  • Therefore, the policy should no longer be treated as a Keyman Insurance Policy, and the maturity proceeds should qualify for exemption under Section 10(10D).

Without prejudice, the assessee also argued that even if the amount were considered taxable, only the net amount (after deducting premiums paid) should be taxed. 

Respondent’s Arguments (Revenue)

The Revenue argued that:

  • The policy was originally taken by the company as a Keyman Insurance Policy.
  • Therefore, the proceeds received from the policy were taxable in nature and not eligible for exemption.
  • The Assessing Officer maintained that the amount received on maturity should be assessed as income in the hands of the recipient.

Court Order / Findings

The Income Tax Appellate Tribunal (ITAT), Delhi examined the facts of the case, including the timing of the assignment of the policy and the payment of premiums.

The Tribunal observed that:

  • The Keyman Insurance Policy had been assigned to the director prior to the statutory amendment effective from AY 2014-15.
  • After assignment, the director paid the subsequent premiums personally.
  • Consequently, the policy could not continue to be treated as a Keyman Insurance Policy in the same manner as before assignment.

Based on these observations, the Tribunal held that the taxability of the maturity proceeds must be examined in light of the assignment and applicable law at the relevant time, and relief was granted accordingly.

Important Clarification

The Tribunal clarified that:

  • Assignment of a Keyman Insurance Policy can change its tax character, depending on the facts and timing of assignment.
  • Where such assignment occurs before the amendment effective from AY 2014-15, the proceeds may qualify for exemption under Section 10(10D) subject to the specific facts of the case.

  • provisions dealing with taxation of insurance proceeds under the Income Tax Act, 1961.

Link to download the order – https://itat.gov.in/public/files/upload/1703580788-ITA%203536%20&%20CO%20115%20-%20DCIT%20vs.%20Suruchi%20Foods%20P.%20Ltd.pdf

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