2025 (9) TMI 644 - AT - Income Tax

Market-Linked Insurance Policy can be a capital asset under section 2(14)(a); premature withdrawal treated as capital gain or loss

Balbirsingh Balwantsingh Versus DCIT, CC-3 (1) (1), Mumbai

ITAT Mumbai (AT) allowed the appeal, holding that a Market-Linked Insurance Policy can qualify as a 'capital asset' under section 2(14)(a) notwithstanding ... Long term capital loss on the amount received as (premature withdrawal) of ULIP - treating ULIP as “capital asset” is only from w.e.f. 2021 - HELD THAT:- Treatment of appellant of ULIP as “capital asset” for A.Y. 2016-17, the impugned A.Y. is incorrect. Unless, the ULIP is treated as “capital asset”, the provisions of “Income from Capital Gains” cannot be pressed into service. So, CIT(A) has correctly decided the issue by holding that the differential amount as taxable under the head “income from other sources”, subject to arithmetical computation by Ld. AO. The principle laid down here is “difference” between amount paid by appellant and received by appellant is taxable as “Income from Other Sources”, and not “capital gain” because the amendment on which appellant relies is applicable for A.Y. 2021-22 onwards, and not for A.Y. 2016-17. Appellant is not eligible to take shelter under the above decision of Coordinate Bench. But, section 2(14)(a) says “capital asset” means property of any kind held by appellant, whether or not connected with his business or profession. So, here the ‘Insurance Policy” where the benefit under section 10(10D) was not taken, can come under section 2(14)(a) and the same is treated as ‘capital asset’. Once, the Market Linked Insurance Policy is treated as capital asset, the consequential computation of capital gains/loss will follow. Hence, appellant is entitled to treat the amount received as capital gains/loss, as the case may be. Assessee appeal allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts received on premature surrender/withdrawal of a Unit Linked Insurance Policy (ULIP) for Assessment Year 2016-17 can be characterised and taxed as income under the head 'Capital Gains' (with indexation) or must be taxed under the head 'Income from Other Sources'. 2. Whether the statutory amendment treating ULIPs as 'capital asset' under section 2(14)(c) (Finance Act 2021) has retrospective operation such that it applies to earlier assessment years (specifically A.Y. 2016-17). 3. Whether an insurance policy in which exemption under section 10(10D) was not available or not availed can be treated as a 'capital asset' under section 2(14)(a) for purposes of capital gains taxation in years prior to the 2021 amendment. 4. Whether decisions of coordinate benches holding amounts from ULIPs to be capital gains (with indexation) are applicable where facts differ (single large premium or post-policy maturity receipt vs. annual premiums and premature surrender). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of ULIP surrender proceeds for A.Y. 2016-17: capital gains vs. other sources Legal framework: Taxation heads are determined by characterisation of receipt. Capital gains provisions apply only where the asset falls within definition of 'capital asset' under section 2(14). Exemption provisions under section 10(10D) and the provisos to section 10(10B) inform whether receipts are tax-exempt or whether policy is outside capital gains treatment in particular contexts. Precedent treatment: The appellant relied on a coordinate-bench ITAT decision which treated ULIP proceeds as capital gains in that distinct factual matrix. The Tribunal distinguishes that decision on facts (single large premium > Rs. 2.5 lakh and post-maturity receipt) from the present case (annual premiums of Rs. 1.8 lakh, premature surrender). Interpretation and reasoning: The Tribunal observes there is no dispute that the statutory amendment by Finance Act 2021 treating ULIPs as capital asset (section 2(14)(c)) is prospective (w.e.f. A.Y. 2021-22). For A.Y. 2016-17 the amendment does not apply. Consequently, prima facie the capital gains head cannot be invoked on the basis of that amendment for the impugned year. Given this, the learned CIT(A)'s approach of treating the difference between amounts paid and amount received on premature surrender as income under 'Income from Other Sources' is legally sustainable, subject to arithmetical computation by the Assessing Officer. Ratio vs. Obiter: Ratio - where statutory amendment creating or clarifying that ULIPs are capital assets is explicitly prospective, it cannot be used to recharacterise receipts in prior years; therefore, for periods before amendment, capital gains provisions are not automatically available on that basis. Obiter - observations on the general tax treatment of surrender proceeds where facts differ (e.g., premium thresholds, policy maturity) serve as explanatory distinctions. Conclusion: Absent alternative ground to treat the ULIP as a capital asset for A.Y. 2016-17, the differential amount on premature surrender is taxable as 'Income from Other Sources'. Issue 2 - Effect of Finance Act 2021 amendment to section 2(14): temporal operation and impact Legal framework: Legislative amendments are effective from the date or assessment year specified by the enacting statute; retrospective application is not presumed unless expressly provided. Finance Act 2021 amendment to section 2(14)(c) treats market-linked insurance policies as capital assets w.e.f. A.Y. 2021-22. Precedent treatment: The Tribunal relies on the settled rule that prospective amendments cannot be applied to earlier assessment years and distinguishes decisions that benefitted taxpayers on post-amendment or differing factual bases. Interpretation and reasoning: The Tribunal affirms that treating ULIPs as capital assets by reference to the 2021 amendment is not available for A.Y. 2016-17. Thus, the appellant's reliance on that amendment to claim indexation and long-term capital loss for the impugned year is unsustainable. Ratio vs. Obiter: Ratio - the 2021 amendment cannot be applied retroactively; thus taxpayers cannot invoke it for earlier assessment years. Obiter - distinguishing features (single premium, policy maturity) used to differentiate other decisions are explanatory. Conclusion: The Finance Act 2021 amendment to section 2(14) cannot be invoked for A.Y. 2016-17; its effect begins A.Y. 2021-22 and forward. Issue 3 - Whether an insurance policy (where section 10(10D) benefit was not taken) can be treated as 'capital asset' under section 2(14)(a) notwithstanding the absence of the 2021 amendment Legal framework: Section 2(14)(a) defines 'capital asset' as 'property of any kind held by the assessee'. The statutory definition is broad and encompasses property unless expressly excluded. The interplay of exemptions (section 10(10D)) and capital asset definition must be considered. Precedent treatment: Coordinate-bench authority treating ULIP proceeds as capital gains was distinguished on facts; however, the Tribunal examines whether the general definition in section 2(14)(a) independently permits capital asset treatment where exemption under section 10(10D) was not availed. Interpretation and reasoning: The Tribunal reasons that an insurance policy in respect of which benefit under section 10(10D) was not taken may be regarded as 'capital asset' under the general definition of section 2(14)(a). If so characterised, the consequential computation under capital gains provisions (including indexation where applicable to the assessment year) would follow. The Tribunal thus finds that notwithstanding the non-retrospective 2021 amendment, the specific factual circumstance that exemption under section 10(10D) was not claimed permits treating the policy as a capital asset for the impugned year. Ratio vs. Obiter: Ratio - where an insurance policy does not attract exemption under section 10(10D) and otherwise qualifies as 'property of any kind held by the assessee', it can be treated as a 'capital asset' under section 2(14)(a), and capital gains computation principles apply; this can be relied upon independent of the 2021 amendment. Obiter - comments comparing premium thresholds and maturity timing to other decisions are explanatory distinctions. Conclusion: The Tribunal concludes that the insurance policy in the present facts can be treated as a capital asset under section 2(14)(a) because the exemption under section 10(10D) was not taken; accordingly, the appellant is entitled to treat the amount received on surrender as capital gains/loss and to apply indexation and consequential computation as applicable. Issue 4 - Applicability of coordinate-bench decisions and factual distinctions (premium amount, premature surrender vs. post-maturity) Legal framework: Decisions of coordinate benches are persuasive but must be applied only where facts and legal questions substantially align; differences in material facts permit distinction. Precedent treatment: The appellant relied on a coordinate-bench decision where a single premium > Rs. 2.5 lakh and post-maturity receipt led to capital asset treatment; the Tribunal distinguishes that decision based on premium quantum and timing of receipt. Interpretation and reasoning: The Tribunal observes that in the cited decision the premium exceeded limits in provisos to section 10(10B)/10(10D) and the receipt followed policy maturity, while in the present case premiums were Rs. 1.8 lakh p.a. and the receipt arose on premature surrender. These factual differences justify not following the coordinate-bench decision as directly applicable. Nonetheless, the Tribunal reaches its own conclusion on capital asset characterisation under section 2(14)(a) because exemption under 10(10D) was not availed. Ratio vs. Obiter: Ratio - coordinate-bench rulings must be applied on matching facts; material factual distinctions can justify non-application. Obiter - discussion of premium thresholds as a determinative factor is explanatory context. Conclusion: The coordinate-bench decision relied upon is distinguishable on material facts and is not controlling for the present case; the Tribunal applies statutory definition of 'capital asset' to reach its decision. Final Disposition The Tribunal allows the appeal, holding that the insurance policy (ULIP) in which exemption under section 10(10D) was not taken qualifies as a 'capital asset' under section 2(14)(a) and that the appellant is entitled to treat the surrender proceeds as capital gains/loss with consequential computation (including indexation where applicable). The Tribunal nevertheless affirms that the 2021 amendment to section 2(14) is prospective from A.Y. 2021-22 and cannot be relied upon retroactively for A.Y. 2016-17; the capital-asset characterisation in this case is grounded in section 2(14)(a) on the facts that exemption under section 10(10D) was not availed.