2023 (8) TMI 879 - AT - Income Tax

Tax Tribunal: Insurance redemption = capital gains w/ indexation, limits on exemptions clarified. ULIPs like mutual funds.

Subhash Tandon Versus ITO, Ward-43 (1), New Delhi.

The Tribunal allowed the assessee's appeal, directing the tax treatment of the redemption amount from insurance policies as capital gains with indexation. ... Characterization of receipts - exemption u/s 10(10D) - Amount received on redemption/maturity of unit linked insurance scheme - to be taxed under the head “income from other sources” or 'capital gain' as claimed by the assessee - HELD THAT:- Lower authorities have mis-directed themselves by not considering the distinction between the ordinary life insurance scheme and ULIP. In the assessee’s case, it is unit linked insurance scheme and is related to the units of mutual fund allotted to the assessee in respect of the money paid by him. CIT(A) ought to have considered the issue from that perspective since the transactions are akin to mutual fund therefore, deserves same treatment. Merely, because life is insured by the transaction would not alter basic character of transaction. CBDT has issued a circular regarding exemption u/s 10(10D) which provides exemption qua the life insurance schemes. It is pertinent to note that a new provision has been inserted w.e.f. 01.04.2021 by Finance Act, 2021 i.e. Section 45(1B) [objective of inserting of this provision is stated to subject the matured/redeemed amount to tax which otherwise was exempt u/s 10(10D)] Hence, it can be construed the receipt fell under the head “capital gains” but not under “income from other sources”. We therefore, direct the AO to allow indexation and tax the amount under the head “capital gains”. The grounds raised by the assessee are allowed. Issues Involved:The judgment involves the issue of whether the redemption amount of insurance policies should be taxed as income from other sources or as long-term capital gain after deducting the indexed cost of investment. It also addresses the question of whether the exemption under section 10(10D) of the Income Tax Act applies to the case at hand.Comprehensive details of the judgment for each issue involved:1. Tax Treatment of Redemption Amount:The appellant contested the tax treatment of the redemption amount from insurance policies, arguing that it should be considered as capital gains after allowing for indexation. However, the authorities taxed the amount under the head 'income from other sources' based on section 10(10D) of the Act. The CIT(A) upheld this decision, stating that the exemption under section 10(10D) does not apply in cases where the premium paid exceeds certain limits. The CIT(A) concluded that the entire maturity amount is taxable under income from other sources if the premium exceeds the specified limits.2. ULIPs and Capital Gains:The Tribunal noted that the lower authorities failed to distinguish between ordinary life insurance schemes and Unit Linked Insurance Plans (ULIPs). In the case at hand, the investment was in a ULIP related to mutual fund units, deserving a treatment similar to mutual funds. The Tribunal emphasized that the presence of life insurance in the transaction does not change its fundamental character. Referring to a circular by CBDT and a new provision in the Finance Act, the Tribunal directed the AO to allow indexation and tax the amount under the head 'capital gains' instead of 'income from other sources.'3. Impact of New Provision:The Tribunal discussed the insertion of a new provision, Section 45(1B) of the Act, which subjects amounts received under ULIPs to tax as capital gains if the exemption under section 10(10D) does not apply. This provision aims to tax matured/redeemed amounts that were previously exempt. The Tribunal concluded that the redemption amount in this case should be taxed as capital gains, not as income from other sources, and directed the AO to allow indexation for the calculation.In conclusion, the Tribunal allowed the appeal of the assessee, directing the tax treatment of the redemption amount as capital gains with indexation.