The Supreme Court has ruled that the Life Insurance Corporation of India has no power to issue a circular to levy a fee for recording in its data the assignment or transfer of a policy by a holder to another person as such an action is unconstitutional.

A fee cannot be charged through an administrative circular as it is a violation of Article 265 of the Constitution that mandates that no tax can be collected except by the authority of law. This means a levy can be imposed only through the legislative process sanctioned by the legislature and not the executive, the apex court said.

Under Section 38 of the Insurance Act, 1938, a person who holds a life insurance policy issued by LIC is entitled to transfer or assign the scheme with or without payment through an endorsement in the policy itself or by a separate instrument signed by the transferor or the assignor and attested by a witness.

A nominal fee of Re 1 is charged towards the issuance of a notice to the assignee mentioning the insured person’s intention to transfer.

However, LIC on April 24, 2006, imposed a registration charge of Rs 250 per assignment.

This was challenged by Dravya Finance Pvt Ltd, a finance company, before Bombay High Court on the ground that it was contrary to Section 38 of the Insurance Act and violative of Article 265 of the Constitution as a fee had been imposed without any authority of law. The high court upheld the plea.

LIC appealed in the apex court and argued that under sub-section 1 of Section 6 of the Insurance Act, the corporation has a duty to carry on life insurance business. It also cited sub-section 3 to point out that in the discharge of its functions, the insurer has to act in accordance with business principles.

A bench of Justices Abhay S. Oka and Sanjay Karol rejected the argument, saying: “Section 38 does not authorise the levy of any such fee in terms of sub-section (2) of Section 38…. It was specifically provided therein that the insurer can charge and levy a fee not exceeding Rs 1 for giving such acknowledgement..."

The bench said that under the amended Section 38 of the Insurance Act, which was brought into force on December 26, 2014, even the provision enabling the charging of a fee of Rs 1 for acknowledgement had been done away with.

"...The said regulations prohibit the levy of any fee for recording the assignment of policies. ... We find no error in the view taken by the high court that the appellant-insurer had no right to claim fees of Rs 250 for recording the endorsement of assignment or transfer," the court said.