A life insurance policy worth Rs 50 lakh can raise questions about the source of funds if the investment does not match the income reported in the income tax return. In such cases, taxpayers may need to establish where the money came from and who actually made the investment.
This issue came up in the case of Pratibha Singh of Shimla, who claimed that a Rs 50 lakh investment in a life insurance policy was not made from her personal funds. She argued that the money belonged to the Hindu Undivided Family, or HUF, of her late husband, Virbhadra Singh, and was routed through an insurance agent.
However, the Income Tax Appellate Tribunal, Chandigarh Bench, was not convinced by the explanation. It found that the taxpayer had failed to produce sufficient documentary evidence to establish that the money came from the HUF.
In its order pronounced on February 25, 2026, the tribunal dismissed her appeal and upheld the addition of Rs 50 lakh as unexplained investment under Section 69 of the Income Tax Act.
Why did the Income Tax Department question the Rs 50 lakh LIC investment?
The case relates to assessment year 2009-10. Singh had filed her income tax return declaring an income of Rs 4.81 lakh.
The Income Tax Department subsequently received information from the Life Insurance Corporation of India that she had invested Rs 50 lakh in a life insurance policy during the relevant financial year.
The investment prompted the Assessing Officer to question the source of the money, as it was significantly higher than the income declared in her return.
The tax officer reopened the assessment under Section 147 of the Income Tax Act. Singh challenged the reopening before the Himachal Pradesh High Court, but the court upheld the validity of the proceedings. The tribunal noted that the reopening issue had already been decided and could not be reopened before it.
During the assessment, Singh argued that she had not made the investment from her personal income. According to her, the money belonged to the HUF, which allegedly earned income from an orchard.
She claimed that the funds were handled by Anand Chauhan, an LIC agent, under a memorandum of understanding related to the management of orchard income. The money was allegedly routed through the agent before being used to buy the policy in her name.
The Assessing Officer, however, was not satisfied with this explanation.
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Why did the tax officer reject the HUF explanation?
One of the main issues was the timing of the transactions.
According to the assessment order, the alleged memorandum of understanding between the HUF and the LIC agent was dated June 15, 2008.
However, the tax officer found that the agent had received Rs 5 lakh each on June 7 and June 13, 2008, from Universal Apple Associated. The agent then invested Rs 10 lakh in LIC on June 19, 2008.
This meant that the money had started moving before the date of the alleged agreement.
The Assessing Officer treated this as a reason to question the genuineness of the arrangement. The tribunal also noted that the memorandum of understanding was not produced before the Assessing Officer, the Commissioner of Income Tax Appeals or the tribunal.
Singh maintained that the investment was made from the HUF’s agricultural income. But the tribunal found that the claim was not backed by adequate records.
The order noted that the taxpayer had not produced books of account, records of agricultural produce sales, a cash book or a cash flow statement to show that the HUF had the funds available to make the Rs 50 lakh investment.
The tribunal also observed that owning orchard land does not, by itself, establish that the owner generated enough income or had sufficient liquid funds to make a large investment.
Why did the tribunal hold the taxpayer responsible?
Singh argued that an HUF is a separate taxable entity under the Income Tax Act. Therefore, if the money belonged to the HUF, she said, the addition should not have been made in her individual hands.
She also argued that the tax department should have treated the addition as protective because proceedings relating to the HUF were pending separately.
The tribunal rejected these arguments.
It noted that the existence of an HUF does not automatically establish that an investment made in the name of an individual belongs to the family. The taxpayer had to provide evidence showing that the funds originated from the HUF and were used to make the investment.
The tribunal also considered the fact that the LIC policy stood in Singh’s name. She was the life assured and the beneficiary entitled to receive the maturity proceeds.
In the absence of reliable evidence establishing the HUF as the source of funds, the tribunal held that the investment could be treated as belonging to Singh for tax purposes.
The tribunal further said that a taxpayer cannot insist on a protective assessment merely by disputing ownership of an investment. A protective assessment is generally used by the tax department when there is uncertainty about the person in whose hands the income should be assessed.
In this case, the Assessing Officer had concluded that the investment belonged to Singh. The tribunal found no reason to interfere with that conclusion.
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What does the ruling mean for taxpayers?
The ruling highlights the importance of maintaining records to establish the source of a large investment, particularly when the investment is made in an individual’s name but the funds are claimed to belong to a family or another taxable entity.
Dinkar Sharma, partner at Jotwani Associates, said, “When an investment is made in an individual’s name, the taxpayer should be able to support any claim that the money came from an HUF with clear documentary evidence showing the source and movement of funds.”
For taxpayers, the key lesson is that stating that money came from agricultural income, family savings or an HUF may not be enough. Supporting documents can be important when the Income Tax Department asks questions about the source of an investment.
Records such as bank statements, books of account, agricultural income details, sale proceeds and a clear trail of fund transfers can help establish the source of money.
In Singh’s case, the tribunal found that the claimed source had not been proved. It therefore upheld the Rs 50 lakh addition under Section 69 and dismissed the appeal.
The order also records that the tax department had treated bank deposits of Rs 10.80 lakh as unexplained during the assessment. However, Singh told the tribunal that she was challenging only the Rs 50 lakh LIC investment addition. The tribunal’s decision on the appeal was therefore focused on that issue.
Disclaimer: This article is based on the Income Tax Appellate Tribunal’s order in the case of Pratibha Singh for assessment year 2009-10. It is intended for general information and should not be treated as legal or tax advice. The outcome of a tax dispute depends on the facts, evidence and applicable law in each case. Taxpayers should consult a qualified tax professional for advice on their individual circumstances.
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This article was first uploaded on October twenty, twenty twenty-six, at forty-five minutes past six in the evening.
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