BACKGROUND

Section 10(10D) of the Income Tax Act, 1961 (Act) provides that any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than a sum received under a Keyman Insurance Policy, shall be exempt.
The Finance Act, 2013 introduced an amendment in the definition of ‘Keyman insurance policy’ provided vide the Explanation 1 of Section 10(10D) of the Act to include assignments (i.e. change in the nature of policy from Keyman Insurance Policy to other form of policy) made during the term of the policy. This amendment is applicable from 1 April 2014.

In this regard, recently, the Mumbai Tax Tribunal has held that the amendment in the definition of ‘Keyman Insurance Policy’ brought by the Finance Act, 2013 and made effective from 1 April 2014, cannot be retrospectively applied. Accordingly, the applicability of the exemption under section 10(10D) of the Act to keyman insurance policyholders depends on the effective date of the assignment. In this relation, the matter was remanded back to the Lower Authorities, i.e. Jurisdictional Tax Officer, to verify the effective date of assignment.

We, at BDO in India, have summarised the above ruling¹ and have provided our comments on the impact of this decision hereunder.

FACTS OF THE CASE

• The taxpayer is an individual who filed the Return of Income for Fiscal Year (FY) 2020-21, declaring total income at INR 2,35,97,540, wherein the taxpayer claimed maturity/redemption proceeds of an insurance policy amounting to INR 59,47,714 as exempt under section 10(10D) of the Act.

• During the course of assessment proceedings, the tax officer observed that proceeds in relation to maturity of ‘keyman insurance policy’ which was claimed to be assigned to taxpayer has been claimed as exempt under section 10(10D) of the Act though the tax at source (TDS) on such proceeds has been deducted by Life Insurance Corporation (LIC) on the premise that said maturity proceeds were not exempted as per the provisions of section 10(10D) of the Act.

• Accordingly, the Tax officer disallowed the claim of exemption of the taxpayer under section 10(10D) of the Act. Aggrieved by the Tax officer’s disallowances, the taxpayer filed an appeal before the First Appellate Authority, which rejected the contention of the taxpayer and upheld the disallowance made by the Tax officer.

• Thereafter, the taxpayer lodged an appeal before the Mumbai Tax Tribunal challenging the order passed by the First Appellate Authority wherein the counsel of the taxpayer submitted that the character of the policy underwent a transformation from 'Keyman Insurance Policy' to a regular 'Life Insurance Policy' subsequent to its assignment in the name of the taxpayer in the FY 2011-12  and upon the payment of surrender value of INR 21,68,375 by taxpayer.

• In view of the above, it was submitted that an amendment vide Finance Act, 2013 in section 10(10D) of the Act, applicable with effect from FY 2013-14, referring to the taxability of proceeds received under such policy even after its assignment, is not applicable in the present case. In other words, the proceeds received after assignment of such policy prior to the above-mentioned amendment are eligible for an exemption under Section 10(10D) of the Act. The contention for the said assignment was also supported with an endorsement made on the policy document dated 6 May 2011.

• However, from the perusal of the letter issued by LIC dated 28 March 2020, furnished by the tax authorities before Hon’ble bench members, it was observed that the policy in question did not qualify for the exemption under section 10(10D) of the Act. Further, it was observed that no contemporaneous request letter for assignment has been submitted or duly acknowledged by LIC supporting its assignment to the taxpayer.  

MUMBAI TAX TRIBUNAL’S RULING

The Mumbai Tax Tribunal allowed the ground raised by the taxpayer for statistical purposes, making the following key observations:

• Reliance was placed on various decisions of the Co-ordinate Benches of the tax tribunal and Honorable High Court² wherein it was held that the amendment by Finance Act 2013 in section 10(10D) of the Act cannot bring back the character of the policy as Keyman insurance policy as the amendment is effective from 1-04- 2014. In other words, the amendment to the definition of "Keyman Insurance Policy" brought by the Finance Act, 2013, is effective from 1 April 2014 and is prospective in nature.

• In view of the above, the effective date of assignment (i.e. date of change of nature of policy) of the said Keyman Insurance Policy is crucial to verify whether the insurance proceeds are eligible for exemption under section 10(10D) of the Act.  

• Further, in view of the contradictory evidence obtained from LIC by both the tax authorities and the taxpayer placed on record, the factual question regarding the genuineness and effective date of the alleged assignment can only be conclusively determined through confirmation by LIC itself.

• Basis the above, the case was remanded back to the tax officer for verification of date of effective assignment and the verification of relevant bank entries of the taxpayer to ensure the surrender value of INR 21,68,375 was actually paid after providing adequate opportunity of being heard.

BDO INDIA COMMENTS

This ruling clarifies that the amendment in the definition of ‘Keyman Insurance Policy’ is prospective in nature, and the date of assignment of the said Keyman Insurance Policy needs to be determined by the Life Insurance Companies to check whether the insurance proceeds are eligible for exemption under Section 10(10D) of the Act.

Thus, it is essential that both the taxpayers and the Life Insurance Companies maintain relevant documentation to substantiate the effective date of assignment to avoid any disputes related to the claim of exemption under section 10(10D) of the Act.

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¹Shripal Raj Lodha [TS-701-ITAT-2025(Mum)]
² Mumbai Bench "A", in the case of Mr. Autl Hirji Maru in ITA Nos. 2879 & 4064/Mum/2024
Indore Bench in the case of Smt. Harleen Kaur Bhatia vs. PCIT ((2020) 114 taxmann.com 183)
Hon'ble Delhi High Court in the case of C77 v. Rajan Nanda ([2012] 18 taxmann.com 98/205 Taxman 138/349 ITR 8 (Delhi))