Tolerance of an act requires an independent contractual obligation, so retained lapsed-policy premiums are not separately taxable.

Premiums retained when life-insurance policies lapse or are repudiated for non-payment or misdeclaration do not constitute consideration for agreeing to tolerate an act under Section 66E(e) of the Finance Act, 1994. Such retention is an incident of the original insurance contract, which becomes void or lapses on specified defaults, rather than consideration for an independent obligation to tolerate those defaults. A declared service requires a specific contractual obligation to refrain from, tolerate, or do an act, with a direct nexus between that obligation and the consideration. Taxing retained premiums separately would also result in double taxation. Accordingly, the service-tax demand, interest and penalties are unsustainable.

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Issues: Whether premiums retained on lapse or repudiation of life-insurance policies for non-payment of premium or misdeclaration constitute consideration for a declared service of agreeing to tolerate an act under Section 66E(e) of the Finance Act, 1994.

Analysis: The insurance contract became void or lapsed upon the specified defaults, with no surrender value or benefit becoming payable where the policy was not revived. Retention of amounts already paid was an incident of the original insurance arrangement and not a distinct agreement under which the insurer undertook, for consideration, to tolerate a default or situation. A declared service under Section 66E(e) requires an independent contractual obligation specifically covering the act of refraining, tolerating, or doing an act, together with a necessary nexus and flow of consideration for that obligation. Treating the retained premium as consideration for a separate declared service would also result in double taxation.

Conclusion: The retained premiums are not taxable as consideration for agreeing to tolerate an act; the service-tax demand, interest, and penalties are unsustainable.

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