Keyman Insurance Policy surrender value not taxable in AY 2008-09. Appeal partly allowed.

The Tribunal held that the surrender value of Rs. 44.78 lakhs from the Keyman Insurance Policy was not taxable in the Assessment Year (AY) 2008-09 as there was no actual receipt of the amount during that year. The appeal was partially allowed, dismissing the grounds related to the legality of the proceedings and the impact of Fringe Benefit Tax (FBT). The order was issued on 24/03/2017.

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Issues Involved:
1. Legality of the notice issued under Section 148 of the Income Tax Act, 1961.
2. Taxability of the surrender value of the Keyman Insurance Policy assigned to the assessee.
3. Impact of Fringe Benefit Tax (FBT) paid by the firm on the surrender value of the Keyman Insurance Policy.

Detailed Analysis:

1. Legality of the Notice Issued Under Section 148:
The assessee challenged the action of the Assessing Officer (AO) in issuing a notice under Section 148, arguing it was bad in law. The AO had reopened the assessment based on the grounds that the surrender value of the Keyman Insurance Policy assigned to the assessee was taxable. The assessee objected to the reopening, but the AO proceeded with the assessment, leading to the present appeal.

2. Taxability of the Surrender Value of the Keyman Insurance Policy:
The primary issue was whether the surrender value of Rs. 44.78 lakhs, determined at the time of the policy's assignment, was taxable in the hands of the assessee during the Assessment Year (AY) 2008-09. The AO added this amount to the assessee's income, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].

The assessee argued that no sum was "received" during the AY 2008-09, as required by Section 2(24)(xi) of the Income Tax Act, 1961. The term "received" implies actual receipt of money, which did not occur during the year of assignment. The assessee cited various judicial precedents, including the Supreme Court's decision in CIT vs. Ashok Bhai Chiman Bhai, to support the interpretation that income is taxable only when it is actually received.

The Tribunal agreed with the assessee, stating that the taxable event is the actual receipt of the surrender value, which occurred in the subsequent financial year when the policy was surrendered, and not at the time of assignment. The Tribunal referred to the Delhi High Court's decision in CIT vs. Rajan Nanda, which held that no income could be charged to tax at the time of assignment as no amount was received.

The Tribunal also noted that the legislative amendment in Finance Act, 2013, which included assigned policies within the definition of Keyman Insurance Policies, was prospective and applicable from AY 2014-15 onwards. Therefore, it could not be applied retrospectively to the AY 2008-09.

3. Impact of Fringe Benefit Tax (FBT) Paid by the Firm:
The assessee contended that the firm had already paid FBT on the surrender value, and thus, the same amount could not be taxed again in the hands of the assessee. However, since the Tribunal decided the main issue on the basis of actual receipt of the surrender value, it did not find it necessary to examine this alternate ground.

Conclusion:
The Tribunal concluded that the surrender value of Rs. 44.78 lakhs could not be brought to tax in the AY 2008-09 in the absence of actual receipt of the amount. The appeal filed by the assessee was partly allowed, and the grounds related to the legality of the proceedings and the impact of FBT became infructuous and were dismissed. The order was pronounced in the open court on 24/03/2017.

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