The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has exempted an non-resident Indian (NRI) from paying any income tax on gains made on surrender of pension policy bought from ICICI Prudential Life Insurance Company. The individual had purchased the pension policy by paying Rs 1.2 crore and when she surrendered the policy, she got Rs 1.48 crore (Rs 1,48,62,603) on November 9, 2011.

She did not pay any income tax on these gains. However, the assessing officer (AO) added an income of Rs 1.48 crore to the individual’s total income. In response, she filed an appeal in CIT(A) and there it was ruled that the addition to her total income be reduced to Rs 28.6 lakh (Rs 28,62,600) (Rs 1.48 crore-Rs 1.2 crore).

However, she was not satisfied with this decision as she believed there should have been no addition to her income despite receiving a substantial income by surrendering the pension policy, hence filed an appeal in the Mumbai bench of ITAT.

The Mumbai bench of ITAT via an order dated December 12, 2023, quashed the CIT(A)’s order of adding the entire income of Rs 28.6 lakh and exempted her from paying any income tax.

“Based on the judgement, it seems that the Mumbai ITAT has ruled in favour of the Assessee. The Mumbai ITAT held that the additional amount (over and above the basic investment) received by the assessee on surrender of pension policy would be exempt from tax,” says Dr Suresh Surana, founder, RSM India, a tax and business consulting group.

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Why did she win against the Income Tax Department?

The income tax assessing officer (AO) and CIT (A) both had imposed the additional income upon her by charging it under section 80CCC (2) of the Income-tax Act, 1961. Section 80CCD (2) provides that any amount received on account of surrender of the annuity plan or as pension received from the annuity plan would constitute deemed income provided the taxpayer has claimed a deduction for contribution to such annuity plans/ pension funds in the previous years. ITAT, however, highlighted a key point which determines whether an individual can be charged for tax under section 80 CCD (2) or not. The key point is ‘if only’ a taxpayer claims deduction under section 80CCC then only proceeds from surrendered pension policy can be charged as income under section 80CCD (2).

“The ITAT held that chargeability under 80CCC is linked to deduction claimed by the assessee i.e. If no deduction is claimed, there is no chargeability under 80CCC (2). Since the assessee had not claimed any deduction under section 80CCC, she was entitled to claim complete tax exemption under section 10(10A) for commutation of pension received,” says Surana.

According to section 80CCC, an annual tax deduction up to Rs 1.5 lakh can be claimed by an individual if he/she contributes to any annuity plan (pension fund) of LIC or other insurance companies.

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What was the main reason that the taxpayer got full tax exemption?

ITAT ruled that the money the taxpayer received due to the surrender of pension policy would be charged under section 10 (10A). “The ITAT observed that the revenue could not establish that the assessee was in contravention of Section 80CCC (2),” says Surana. As a result, section 10 (10A) became applicable in this case.

Also read: NRI home buyer gets a relief from paying income tax on imposed income of Rs 40.45 lakh.

Why did the taxpayer get exemption from tax under section 10(10A)

Section 10(10A) provides for exemption of income in the case when commutation of pension if received from a fund referred to under section 10(23AAB) is exempt from tax.

“In the case law cited above, the assessee was allowed exemption under section 10(10A) because the pension fund surrendered by the assessee was an eligible pension fund referred to under section 10(23AAB). Thus, death and maturity are irrelevant for claiming such exemption under section 10(10A),” says Surana.

What was the reason for assessing officer to add income of Rs 1.48 crore?

The assessing officer had served a notice under section 148 for re-opening the taxpayer’s case on March 31, 2018. “Assessee did not file any income tax return (ITR) in compliance to notice under section 148. Further notice under section 142(1) were issued asking to file return and other relevant information vide dated: 04.09.2019, 10.10.2019, 18.10.2019 and 19.11.2019,” said the Income-tax department before ITAT.

However, when the final show cause notice issued on November 23, 2019 did not elicit any response, the tax department made a best judgement assessment and added the income of Rs 1.48 crore to the taxpayer’s total income.

When do tax deductions get reversed on eligible investments?

If a taxpayer withdraws his/her investments before the expiry of the lock-in period, the tax deduction claimed by the taxpayer would have to be reversed. “It would be deemed as income in the year such a lock -in period is violated,” says Surana. For instance, tax saving FDs have a lock-in period of 5 years thus, the deduction claimed would have to be reversed in case of violation of lock-in period.

However, in the case cited here, the taxpayer did not have to reverse any tax deduction benefit because the assessee had not claimed any deduction under section 80CCC (2). “The question of reversing the same does not arise. Thus, the rationale of the judgement is in accordance with provision of Section 80CCC (2),” says Surana.



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