Salary: Perquisite/Profit in lieu of salary: S/s 15 and 17: Keyman Insurance policy for employee/directors: Assignment of policy to employee/director receiving surrender value: Difference between actual premia paid and surrender value not assessable as salary:

The employer company took keyman insurance policies on the lives of two employees/directors in different years. After paying premia for a certain period, they were assigned to the two employees/directors receiving the surrender value from them. For the remaining period of the policies, the insurance premia were paid by the assignees. The Assessing Officer held that the difference between the premia paid by the employer and the surrender value paid by the employee is the benefit to be taxed in the hands of the employees. The Tribunal deleted the addition and held that merely by assignment in a particular year when the policy was still continuing, no taxable event had taken place and, therefore, no tax could be charged. It also held that the amount in question could not be taxed as perquisite so as to fall within the scope of section 17(3).

On appeal by the Revenue, Delhi High Court upheld the decision of the Tribunal and held as under:

“i) Explanation to section 10(10D) gives the meaning to “keyman insurance policy” and only that sum received under this policy would be treated as income. Sub-clause (ii) of clause (3) of section 17 taxes “any sum received in a keyman insurance policy”. The word “received” assumes significance. The Legislature in its wisdom thought to tax only that payment, which is received by the employee assessee under the keyman insurance policy. The purport of sub-clause (ii) is all together different. Such an amount due or received by the assessee has to be : (a) before joining any employment; or (b) after cessation of its employment. No such contingency occurred when the keyman insurance policy was assigned by the company in favour of the director assessee. The tax event did not occur, as no such amount was received at the time of assignment of the policy by the company as employer to the director assessee, as employee. The amounts were not taxable in the hands of the directors.

ii) There is no prohibition on the assignment or conversion of keyman insurance under the Act. Once there is an assignment, it leads to conversion and the character of the policy changes. The Insurance Company had itself clarified that on assignment, it does not remain a keyman policy and gets converted into an ordinary policy. Hence, the policy in question was not a keyman insurance policy and when it matured, the advantage drawn therefrom was not taxable.”