ITAT Delhi Holds Foreign NRI Life Policy Outside Black Money Act; Section 10(10D) Exemption Upheld

Background and Context

The Delhi Bench of the Income Tax Appellate Tribunal in Sarvesh Naidu Vs DDIT (Inv.)-1 (ITAT Delhi) examined whether maturity proceeds from a foreign life insurance policy, originally taken while the assessee was a non-resident, could be brought to tax as undisclosed foreign income under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (“Black Money Act”), and whether exemption under Section 10(10D) of the Income Tax Act 1961 could be denied merely because the insurer was a foreign company.

The Tribunal ultimately decided in favour of the assessee, setting aside the addition of ₹40,03,212.78 made under the Black Money Act and recognising exemption under Section 10(10D) on the maturity proceeds received from the foreign life insurance policy.

Key Legal Questions

The appeal before the ITAT essentially revolved around two core issues:

1. Black Money Act – Undisclosed Asset/Income

   • Whether the sum of ₹40,03,212.78 (being maturity proceeds of a foreign life insurance policy) could be assessed as “undisclosed foreign income” or “undisclosed asset located outside India” under Section 10(3) read with Section 2(11) and Section 4(1)(a) of the Black Money Act, when:
     • The policy was purchased during the assessee’s non-resident period from income not chargeable to tax in India, and
     • Subsequent premiums were paid from disclosed and taxed salary income in India.

2. Exemption under Section 10(10D)

   • Whether exemption under Section 10(10D) of the Income Tax Act is confined only to policies issued by Indian insurers, by importing the definition of “insurer” from Section 2(28BB), or whether it covers any life insurance policy, including those issued by foreign insurance companies.

Brief Facts of the Case

Employment and Residential Status

• The assessee was employed in Dubai, UAE from April 2001 and remained a non-resident for Indian tax purposes up to July 2007.
• After returning to India in July 2007, he took up employment with Pathways World School, Gurugram and continued to file regular income tax returns thereafter.

Foreign Insurance Policy

• On 04.03.2005, during his non-resident period, the assessee, jointly with his wife, obtained a life insurance policy from Scottish Life International / Royal London, which later became RL360 Insurance Company Ltd., Isle of Man.
• The annual premium was 8898 USD, paid initially out of his Dubai salary, which was not chargeable to tax in India.
• After returning to India, he continued to pay policy premiums from his Indian salary through disclosed bank accounts (first Citi Bank, then HDFC Bank), strictly in accordance with foreign exchange rules.

Maturity of the Policy and Receipt of Proceeds

• The policy matured and the assessee received USD 52,896.76, equivalent to ₹35,25,453.18, on 24.06.2016, directly into his HDFC Bank account in India.
• For Assessment Year 2017-18, the assessee:
  • Declared salary income of ₹86,09,880,
  • Reflected tax deducted at source of ₹24,72,453,
  • Paid additional self-assessment tax of ₹2,600, and
  • Did not offer the maturity amount to tax, claiming it as exempt under Section 10(10D).

Assessment Proceedings under the Black Money Act

Stand of the Assessing Officer

During proceedings under the Black Money Act, the Assessing Officer (DDIT) proceeded on two main lines of reasoning:

1. Restriction of Section 10(10D) Exemption to Indian Insurers

   • By reading Section 10(10D) along with Section 2(28BB) (which defines “insurer” with reference to an insurance company under the Insurance Act, 1938), the Assessing Officer held that the exemption under Section 10(10D) is available only where the insurer is an Indian company.
   • On this basis, since RL360 Insurance Company Ltd. was a foreign entity, the Assessing Officer denied the exemption and treated the maturity proceeds as taxable.

2. Treatment as Undisclosed Foreign Income under Black Money Act

   • The Assessing Officer invoked Section 4(1)(a) of the Black Money Act to hold that the assessee had earned income from a source located outside India and had not disclosed such income in the return of income.
   • He took the view that, for the Black Money Act, the non-disclosure of receipt in the return of income is sufficient to characterise it as undisclosed foreign income, irrespective of whether the amount is otherwise chargeable to tax under the Income Tax Act.
   • Accordingly, an addition of ₹40,03,212.78 was made as undisclosed foreign income for the year of receipt.

Findings of the CIT(A)

• On appeal, the CIT(A) upheld the action of the Assessing Officer.
• The CIT(A) agreed that:
  • The policy and maturity proceeds fell within the scope of the Black Money Act as an undisclosed foreign asset/income, and
  • The exemption under Section 10(10D) could not be allowed since the policy was issued by a foreign insurer.

Arguments Advanced by the Assessee Before ITAT