Exclusion from insurance policy exemption: assigned keyman policies retain non-exempt status so maturity is taxable.

Whether exemption for insurance receipts applies where a keyman policy was assigned: the Tribunal applied the clarificatory Explanation inserted into the statute, treating a policy assigned during its term as remaining a keyman policy; following the Madras HC view, the assignment did not alter the policy's character and the assessee received no consideration, so the maturity proceeds fall within the statutory exclusion from exemption and are taxable in the assessee's hands.

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Issues: Whether the maturity amount received under a keyman insurance policy assigned to the assessee is taxable in the hands of the assessee for Assessment Year 2017-18 (i.e., whether exemption under Section 10(10D) of the Income-tax Act, 1961 is available).

Analysis: Section 10(10D) excludes certain sums from exemption including amounts under a keyman insurance policy; Explanation 1 to Section 10(10D) (inserted w.e.f. 01.04.2013) clarifies that a keyman insurance policy includes a policy assigned to a person at any time during its term. The Tribunal examined the timing of purchase (2001-02), assignment (24.03.2011) and maturity, and considered authoritative decisions. The Madras High Court in Allu Arvind Babu held that Explanation 1 is clarificatory and applies retrospectively such that the character of a keyman policy does not change on assignment and amounts on surrender/maturity are taxable as perquisite; the Tribunal followed that view and distinguished the earlier Delhi High Court decision in Rajan Nanda in light of the statutory explanation. On the facts, the policy remained a keyman insurance policy notwithstanding assignment and the assessee did not pay consideration; therefore the maturity receipt falls within the exclusion from exemption under Section 10(10D) as clarified by Explanation 1.

Conclusion: The maturity amount received on the keyman insurance policy is taxable in the hands of the assessee; the question is answered in favour of the Revenue and against the assessee.

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