An Indian citizen living in Dubai has recently triumphed in a tax dispute over life insurance proceeds, as ruled by the Income Tax Appellate Tribunal (ITAT). The Tribunal decided that the maturity benefits from the policy would not be classified as undisclosed foreign income under the Black Money Act.

Tax Dispute Overview

In the case concerning Sarvesh Naidu for the Assessment Year 2017-18, the Delhi Bench of ITAT overturned a ₹40.03 lakh addition imposed by the tax authorities under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The Tribunal further clarified that denying the exemption under Section 10(10D) of the Income-tax Act just because the policy was issued by a foreign insurer was not justified.

Naidu’s case began when he received a payout of $52,896.76 (approximately ₹35.25 lakh) following the maturity of his life insurance policy in 2016. He did not report this amount as taxable income for AY 2017-18, claiming exemption based on Section 10(10D) of the Income Tax Act. However, the tax authorities disagreed and classified the payout as an undisclosed foreign asset under the Black Money Act, questioning the validity of the exemption due to the policy’s foreign origin.

Background of the Insurance Policy

Naidu worked in Dubai from April 2001 and remained a non-resident for taxation purposes until July 2007. During his time there, he, along with his wife, took out a life insurance policy from Scottish Life International, based in the Isle of Man, which later became RL360 Insurance Company Ltd. The policy, initiated on March 4, 2005, involved an annual premium of $8,898, paid from his Dubai salary.

After returning to India, Naidu continued to pay the policy premiums utilizing his income, which was taxable in India. The tribunal noted that subsequent payments were made through his Indian bank accounts, notably the HDFC Bank, as he no longer held an overseas bank account upon his return.

The central question for the Tribunal was whether assets acquired while an individual was a non-resident, using income that evaded Indian tax, could later be treated as undisclosed foreign assets.

Legal Clarifications by the ITAT

The ITAT ultimately found that Naidu had satisfactorily explained the source of the premium payments. The initial premiums came from his salary earned in Dubai, which was not subject to Indian taxation at the time. Furthermore, premium payments made after his return to India came from his taxable salary.

The Tribunal also referenced CBDT Circular No. 13/2015, which clarifies that if a person acquires a foreign asset while being a non-resident and utilizes income that is not taxable in India, the asset should not be classified as an undisclosed foreign asset under the Black Money Act. Therefore, the Tribunal ruled that mere possession of a foreign insurance policy does not render it an undisclosed foreign asset if the source of funding is transparent.

Additionally, the ITAT rejected the tax department’s narrow interpretation of Section 10(10D), clarifying that the exemption does not rely on whether the policy is issued by a domestic insurer. The Tribunal emphasized that a sound and commonsensical approach needs to be taken when interpreting tax provisions related to foreign assets.

In conclusion, Naidu’s appeal was upheld, leading to the dismissal of the ₹40.03 lakh addition. This case serves as an essential reference for NRIs, especially those who possess foreign insurance policies or assets acquired while residing abroad. It highlights that not all assets owned overseas will automatically be considered undisclosed foreign assets if their origins are traceable and not taxable in India.