TAXATION OF HERIDITARY LIC INSURANCE COMMISSION- A STUDY
SIVADAS CHETTOOR BCOM FCA LLM
The brief study in this article relates to some legal and taxation issues connected with the receipt of hereditary commission by nominee or legal heirs of the insurance agent when he/she dies. The discussion is restricted to agents of Life Insurance Corporation of India (LIC). Normally an insurance agent is required to nominate a person or persons to whom the LIC is obliged to pay the commission/renewal commission in the vent of the death of the agent. The commission may be related to the period till the death and also the commission that may be due after death. The subject matter of discussion in this article is confined to the commission becoming due after death (hereafter referred as “Hereditary Commission”).
The issue for discussion is whether the nominee is liable to pay tax on the hereditary commission paid to him by LIC. Is he liable to pay tax if he is not a legal heir of the deceased agent? Is he liable to pay only on the share of hereditary commission due to him as legal heir and tax on the remaining portion to be discharged by the other legal heirs? The issues become relevant since the Tax deduction Certificate (TDS certificate in Form 16A) is issued in the name of the nominee and therefore nominee is compelled to disclose the commission in his return so as to match the income. Issue may crop up if he exclude from his total income the share of other heirs or altogether omit if he is not even a legal heir.
POSITION OF NOMINEE OF A POLICY HOLDER
The legal position of a nominee has been succinctly explained by the Hon Supreme court in Sarabati Devi v Usha Devi 1984 AIR 346(SC) in the context of receipt by him on the death of a policy holder. It may be noted that section 39 of the Insurance Act 1938 makes provision for appointment of nominee or nominees by a policy holder. The nominee can be any person and need not necessarily be a legal heir. The policy holder may change the nominee at any time by informing the insurer in writing. In the event of death the policy amount is payable to the nominee. The Hon’ court made the following important observations.
In view of the above clear pronouncement by the Hon court it is to be concluded that nominee is only a receiver and he cannot get any title to the commission unless he himself is a legal heir with a further duty to pay the share of other heirs, if any, according to the law of succession to which the deceased policy holder is subject.
POSITION OF A NOMINEE OF AN INSURANCE AGENT
Is the position of a nominee of an LIC agent in any way different from the position of a nominee of a policy holder? This question should detain us for a while since the answer is not straight forward. My discussion in this article is confined to the legal position of nominee of agents of Life Insurance Corporation of India governed by the Life Insurance Corporation Act 1956, Insurance Act 1938 and the Life Insurance Corporation Agents Regulations 1972. The law relating to the appointment of nominee by an Insurance agent is provided in section 44 of the Insurance Act 1938 which applies to a LIC agent. Section 44(1) provides for payment of commission to the agent even after termination of the agency by the Insurance Company subject to certain conditions such as minimum number of years of service etc.
Section 44(2) provides for payment of commission even after the death of the agent. It reads like this -:
“Any commission payable to an insurance agent under the provisions of clause (b) and (c) of the proviso to sub-section (1) shall, notwithstanding the death of the agent, continue to be payable to his heirs for so long as such commission would have been payable had such insurance agent been alive.”
The Insurance Act is however silent on appointment of nominee by the agent and hence there is no provision as such regarding payment of commission to the nominee. As we have noted above section 44(1) provides payment of hereditary commission only to the legal heirs.
Please note that there can be two situations on the death of an agent. The commission earned and due to him till the date of death and commission becoming due thereafter. The commission due to him till death is assessable in the hands of the deceased and the legal heirs will have to file returns u/s 159 of the Income Tax Act. The issue for discussion in this article, however, is regarding the commission that is paid to nominee of the deceased agent which relates the period after the death.
PROVISIONS OF LIC AGENTS REGULATIONS 1972
The framing of the Life Insurance Corporation of India (Agents) Regulations 1972 however changed the legal position relating to payment of hereditary commission. Regulation 19(3) of Life Insurance Corporation of India (Agents) Regulation 1972 provides for payment of commission to a nominee or nominees after the death of the agent. In case no nominee is appointed the commission is payable to the legal heir or heirs and the entitlement to the commission is based on the law of succession applicable to the deceased agent. Hindu succession Act 1955 shall apply if the agent is a Hindu dying without a WILL. In the case of a Muslim the Mohammaden law would apply. In the case of a Christian, the Indian Succession Act 1925 shall apply. In all the cases if there is WILL executed by the deceased then succession shall only be in accordance with the provisions contained in the WILL.
B.M. MUNDKUR CASE
In B.M.Mundkur v Life Insurance Corporation of India and others AIR 1972 Mad 72 the Hon’ Madras High court dealt with the right to hereditary commission. The Hon’ court first made a reference to section 44(2) of the Insurance Act and noted that the hereditary commission is payable to legal heirs. Then the Hon’ court made a reference to Life Insurance Corporation Act 1956 (LIC Act) which was passed after the passing of Insurance Act 1938. Section 43 of the LIC Act provides that certain provisions of the Insurance Act 1938 as specified in that section would apply to LIC Act with such modifications as may be notified by the central government. As such the central government issued a notification No. GSR 734, dated 23-3-1958 which was further modified by Notification No G. S. R. 285 issued by the Government of India in the Ministry of Finance (Department of Economic Affairs) on 1-3-1962, and published in the Gazette of India dated 10-3-1962. This notification provided that to sub-section (2) of Section 44 of the Insurance Act, 1938, as made applicable to the Life Insurance Corporation of India, the following proviso shall be added--
"Provided that, where the agent has nominated in writing any person including social or charitable institution to receive the commission after his death and the nomination is registered in the records of the Corporation, the Commission shall be paid to the person so nominated, unless, before the payment is made, the nomination has been varied or cancelled and notice in writing of such variation or conciliation has been delivered to the Corporation."
Based on the above notification the Hon Madras High court came to the conclusion that the nominee alone has the right to enjoy the hereditary commission and he has no obligation to pay the same to the legal heirs. The reasoning given by the Hon’ court was that the statutory provision contained in the LIC Act read with the notification of 1962 shall override the ordinary law of succession. The above view of the Hon Madras High court has been approved by the Hon Supreme court also in Sarabati Devi v Usha Devi (supra). In other words the view taken by the apex court that right to policy amount on the death of the policy holder is with the legal heirs was not applied by the same court while dealing with issue relating to hereditary commission.
Thus while the right to enjoy the proceeds of the policy rests with legal heirs and not with the nominee, the hereditary commission of a deceased LIC agent belongs to the nominee and not with the legal heirs.
POSITION AFTER 1972
The author is of the opinion that the above legal position is applicable only up to the passing of the LIC agents Regulations (Agents) 1972 which came into force on 01-05-1972. As we have noted above the Regulation 19(3) specifically provides that the hereditary commission shall be payable to legal heirs or nominee. It may further be noted that the Hon’ Madras High court recognized the right of the nominee to enjoy the hereditary commission because of the specific provision in the 1962 notification which clearly granted the right to nominees only. But the 1972 Regulations changed the whole scenario and Regulation 19(3) is more or less similar to section 39 of the Insurance Act 1938 applicable to nominees of policy holders. The Hon Supreme court In Sarabati’s case has already held that right lies with the legal heirs and not with the nominee. Applying the very same reasoning and analogy to hereditary commission the author is of the opinion that the right to receive hereditary commission also lies with legal heirs after 01-05-1972 and nominee has no right except to receive the payment for the purpose of discharging LIC from its contractual obligations under the policy.
The above discussion leads to the conclusion that the tax liability is on the legal heirs of the deceased agent so far as hereditary commission which has become due after his death. If the nominee is the sole legal heir he will obviously be liable to pay tax on the whole amount. If he is only one among many legal heirs he has a statutory obligation to pay over the same to the other legal heirs retaining his share and paying tax on the same. Needless to say if he is not a legal heir then he has no liability at all since his capacity is only that of a mere receiver. The law of succession applicable to the deceased LIC agent has to be consulted for determination of the legal heirs. If there is a will the provisions therein would override the succession laws. Thus B.M.Mundkur is no longer a good law.
Tags :Income Tax