CA H. N. Motiwalla

Query No. 1:

Mr. X took Life Insurance Policy in 2009, whose capital sum assured on death was ₹ 5,00,000/-. He paid yearly premium of ₹ 24,020/-, He surrender the policy in 2022 and got ₹ 7,84,460/- Whether the said sum is exempt or taxable under the head “Income from Other Source”?

Answer

Chapter III of the Income tax Act 1961 defines Income which do not form part of total Income. It exclude certain types of income from the ambit of “total income”.

Section 10 of the Act, provides that in computing the total income of the previous year of any person, any income falling within any of the following clauses shall not be included:

(10D) any sum received under the Life Insurance Policy including the sum allocated by way of bonus on such policy other than –

1. —————–
2. ——————–
3. Any sum received under an insurance policy issued on or after the 1st day of April 2003 but on or the 31st day of March 2012 in respect of which the premium payable for any of the years during the term of policy exceeds twenty percent of the actual capital sum assured, or
4.  —————–

Thus it is clear from the query that capital sum assured was ₹ 5,00,000/- and premium paid was ₹ 24,020/- p.a. , thus premium was more than 20% of the capital sum. Therefore the sum received at ₹ 7,84,460/- is taxable under the head “Income from other source” as policy was taken in 2009 i.e. after April 01,2003 and before March 31,2012.

Query No. 2:

Commissioner paid to foreign agent with regard to export sales is liable for TDS under section 195 of the Act ?

Answer:

A foreign agent of an Indian exporter operates in his own country and no part of his income arises in India. Usually his commission is remitted directly to him and is therefore not received by or on his behalf in India. Such an agent is not liable to Indian income tax”.

The above passage has been reiterated in Circular No. 23 of 1969, dated July 23, 1969 and Circular no. 53 of 1953 and was also reproduced and endorsed by the Supreme Court in CIT v. Toshoku Ltd, [125 ITR 525] though in that case, the payment was made subsequent to the credit in the books with the result that the Income tax Department argued, that it was a case of receipt of income in India. Even this argument was found to be a mistaken one in the following words:

“In the instant case, the non resident assessee did not carry on any business operations in the taxable territories. They acted as selling agent outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from the abroad does not amount to an operation carried out by the assessee in India as contemplated by clause (a) of the explanation to section 9(1)(i) of the Act The Commission amounts which were earned by the non resident assessee for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore right in answering the question against the department.

Even in a case where the non resident was found to be a regular agent, the Allahabad High Court found that the Commission earned by the foreign agent was not taxable following the decision of the Apex Court in CIT v. Toshoku Ltd.. in CIT v. Schriner Airways B. V. [182 ITR 42].

Query No. 3:

Sec 45(5A) of IT Act, when there is a transfer of capital asset land or Building or both, the capital gains shall be chargeable to income tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority . When the land owner enters into development agreement with the builder whether the benefit of sec. 45(5A) can be availed? If part completion certificate is received, whether proportionate capital gain ought to be taxed?

Answer

Section 45(5A) reads as under

“(5A) Notwithstanding anything contained in sub-section (1), where the capital gain arises to an assessee, being an individual or a Hindu undivided family, from the transfer of a capital asset, being land or building or both, under a specified agreement, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority; and for the purposes of section 48, the stamp duty value, on the date of issue of the said certificate, of his share, being land or building or both in the project, as increased by the consideration received in cash, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset” :

The Bombay High Court in Chatyrbhuj Dwarkadas Kapadia [260 ITR 362], In that case, it was held that a transfer can be said to have taken place on the date of the development agreement, if the terms of the agreement indicate a passing of the complete control over the property. Thus a development agreement coupled with handing over possession and an irrevocable power of attorney in favour of the developer could indicative of a transfer. However, there can be no absolute rule that the date of the development agreement is the date of transfer. The issue turns on the reading of the terms of the contract and an analysis of the facts, to determine whether it can said that there is a passing of complete control over the property”.

Thus from the above, it is clear that when the land owner enters into development agreement with the builder section 45(5A) is applicable and part completion certificate is sufficient to calculate proportionate capital gain.