Investment in ULIP Policy treated as “Capital Asset” u/s 2(14) of Income Tax Act, Accretion on Surrender of Policy Taxable under “Income from Capital Gains” & Not “Income from Other Sources”: ITAT

The Income Tax Appellate Tribunal (ITAT), Mumbai bench has held that the investment in the Unit Linked Insurance Policy (ULIP) of Life Insurance Corporation of India (LIC) shall be treated as a “Capital Asset” under Section 2(14) of the Income Tax Act, 1961 and the accretion on surrender of the policy shall be taxable under the head “Income from Capital Gains” and not under “Income from Other Sources”.

The assessee is an individual and has filed his return of income declaring a total income of Rs.5,52,030/- and the return was processed under Section 143(1) of the Income Tax Act.

The assessee’s case was reopened under Section 147 of the Income Tax Act by the issue of notice under Section 148 of the Income Tax Act.

An assessment order was passed under Section 147 of the Income Tax Act wherein the Assessing Officer (AO) determined the total income by making an addition as ‘income from other sources’ under Section 56 of the Act and disallowance of the loss claimed.

Assessee filed appeal before the CIT(A), who confirmed the additions made by AO on the ground that Section 2(14)(c) of the Income Tax Act is with effect from 01.04.2021 and does not apply retrospectively.

The CIT(A) held that surrender proceeds of ULIP to be taxed under the head ‘income from other sources’ by invoking the provision of Section 56(1) of the Income Tax Act and confirmed the disallowance of long term capital loss along with the indexation benefit.

The assessee filed appeal before the ITAT challenging the assessment order passed by CIT(A) under Section 250 of the Income Tax Act, 1961.

The appellant assessee, Mihir K. Jhaveri, challenged the grounds of reopening the assessment and the addition made on the accretion in the value of the policy received on surrender, as well as the disallowance of long-term capital gain by not treating the ULIP policy of LIC as ‘capital asset’ within the meaning of Section 2(14) of the Act.

The assessee highlighted that the notice issued under Section 148 of the Income Tax Act, 1961, was barred by limitation.

The assessee also contended that the treatment of ULIP as 'income from other sources' and the disallowance of the claimed capital loss by the revenue is incorrect and liable to be set aside.

The assessee did not have a representation during the proceedings, and thus the bench proceeded to hear the case based on the submissions of the Revenue, CIT(Appeals), Mumbai represented by Smt. Mahita Nair.

The bench examined Section 2(14)(c) of the Act, which defines a capital asset and includes any ULIP to which the exemption under Section 10D does not apply.

The bench observed that the assessee had paid a premium exceeding the limit specified under the fourth proviso to Section 10(10D) of the Income Tax Act.

The bench also pointed out that the Finance Act, 2021, specifically stated the investment in a unit-linked insurance policy as a 'capital asset.'

The two-member bench comprising of Shri Prashant Maharishi (Accountant Member) and Ms Kavitha Rajagopal (Judicial Member) held that ULIP shall come under the purview of ‘capital asset’ as per section 2(14) of the Income Tax Act, 1961 and directed the AO to tax the accretion on surrender of the policy under the head 'income from capital gains' instead of 'income from other sources.'

In result, the bench allowed the appeal filed by the assessee.

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