ITAT deletes ₹40 lakh tax addition in Dubai life insurance case

Sarvesh Naidu, who worked in Dubai from April 2001 until July 2007, received ₹35.25 lakh ($52,896.76) when his foreign life insurance policy matured in 2016. The policy was jointly purchased with his wife on March 4, 2005, from Scottish Life International (later RL360 Insurance Company Ltd), with annual premiums of $8,898. Initially, premiums were paid from Naidu's Dubai salary during his non-resident period, which was not taxable in India. After returning to India in July 2007, subsequent premiums were paid from his taxable Indian salary through Indian bank accounts including Citi Bank and later HDFC Bank, with no overseas bank account maintained after his return. The policy eventually matured and the proceeds were credited to his HDFC Bank account on June 24, 2016.

The tax department treated the maturity proceeds as an undisclosed foreign asset under the Black Money Act, questioning the applicability of Section 10(10D) exemption because the policy was issued by a foreign insurer. The Assessing Officer made an addition of ₹40.03 lakh based on this interpretation, despite Naidu's claim that the exemption applied since the policy was purchased while he was a non-resident using income not taxable in India. The key issue before the tribunal was whether an asset purchased while the taxpayer was a non-resident, using income that was not taxable in India, could subsequently be treated as an undisclosed foreign asset. The tribunal noted that the source of the premium payments had been explained, with initial premiums paid from Dubai salary during non-resident period and subsequent payments from taxable Indian salary.

The ITAT referred to CBDT Circular No. 13/2015 dated July 6, 2015, which clarifies that where a person acquired a foreign asset while being a non-resident using income that was not chargeable to tax in India, the asset would not be treated as an undisclosed foreign asset under the Black Money Act. The tribunal held that the foreign insurance policy could not be treated as an undisclosed foreign asset merely because it was held abroad, and consequently allowed Naidu's appeal. The ruling is particularly relevant to NRIs and returning NRIs who hold insurance policies or other foreign assets acquired while working overseas, indicating that overseas assets are not automatically undisclosed foreign assets under the Black Money Act if their source can be explained. This case establishes important precedent for taxpayers who acquired foreign assets while non-residents using income not taxable in India.

The ITAT's ruling establishes important precedent for taxpayers who acquired foreign assets while non-residents using income not taxable in India. The case demonstrates that the source of funds used to acquire overseas assets is crucial in determining their tax treatment, and that subsequent taxability of premium payments after returning to India does not automatically disqualify the original exemption. For taxpayers facing disputes over foreign assets acquired during non-resident periods, this ruling underscores the importance of explaining the source of funds and maintaining proper documentation of income sources during different tax residency periods. The ruling is particularly significant for NRIs who purchased assets while working overseas using income that was not taxable in India, as it clarifies that such assets cannot be treated as undisclosed foreign assets merely because they were held abroad. This case reinforces the principle that ownership and documentation of foreign assets acquired during non-resident periods are critical factors in determining their tax treatment.