Income Tax Appellate Tribunal - Ahmedabad
Prakash Chemicals Agencies Pvt.Ltd.,, ... vs Department Of Income Tax on 7 March, 2012
-1-
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "B"
Before SHRI D K TYAGI - JUDICIAL MEMBER
And SHRI T R MEENA - ACCOUNTANT MEMBER
ITA no.1771/Ahd/2009
(Assessment Year:-2006-07)
The Deputy V/s M/s Prakash Chemical
Commissioner of Income- Agencies Pvt. Ltd.,
tax, Circle-4, Baroda Induchacha House, Opp.
Chhani Octroi Naka,
Baroda
PAN: AACCP 6646 G
[Appellant] [Respondent]
Revenue by :- Shri Samir Tekriwal, Sr. DR
Assessee by:- Shri Mehul K Patel, AR
Date of Hearing:- 07-03-2012
Date of Pronouncement:- 30-03-2012
ORDER
PER D K TYAGI (JM):- This appeal filed by Revenue is directed against an order dated 23-03-2009 passed by the Learned Commissioner of Income-tax (Appeals)-III, Baroda [hereinafter referred to as the "learned CIT(A)"] for Assessment Year 2006-
07. The only ground raised by the Revenue reads as under:-
"On the facts and in the circumstances of the case and in law the learned CIT(A) erred in allowing Keyman Insurance premium amounting to Rs.25 lakhs, overlooking the fact that the expenditure was disallowable u/s 37(1) of the Income Tax Act, 1961, as the assessee could not establish that the payment was wholly and exclusively for the purpose of the assessee's business."2
2 The facts of the case are that in its P&L Account, the assessee has debited keyman insurance amounting to Rs.25,00,000/-. The assessee was requested to state why the same should be allowed as business expenditure. The assessee has given the details of premium paid as under vide its letter dated 10-11-2008:-
[a] Manish Shah Rs. 2,00,000
[b] Pinakin Shah Rs. 2,00,000
[c] Chirag Shah Rs. 2,00,000
[d] Atul Shah m Rs. 2,00,000
[e] Hitesh Shah Rs. 2,00,000
[f] Hardik Shah Rs. 2,00,000
[g] Dilip Shah Rs.13,00.000
----------------
Total Rs.25,00.000
Before the AO, it was stated by the assessee that keyman insurance premium is allowable u/s. 37(1) of the Act. However, the AO did not accept the submission made by the assessee and disallowed the claim by observing as under:-
"6.2 I have considered the contention of the assessee. The same is not tenable. To decide that a person is a key person or not, the following aspects should be seen -
[a] Key person is an employee and or an executive I director [working director] [b] Any employee with specialist skills and defined and identifiable responsibilities may be a key person;
[c] Any employee who contributes substantially to the profits of the company/firm and whose loss would affect those profits, is a key person.
6.3 Further, before deciding whether a person is a key person for an organization, some of things that have to be seen are that the company's standing, its financials, its profitability, key person's role in 3 the organization, key person's expertise in the field the company is carrying on the business, loss the company will incur in case of death of such a key person and his/her replacement cost.
6.4 Under the Income-tax Act [section 10(10D), "key person insurance policy" means a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first mentioned person.
6.5 Explanation to the CBDT circular has defined "keyman insurance policy" as under: -
For the purposes of this clause, "keyman insurance policy"
means a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first mentioned person.
6.6 As per explanatory notes on provisions relating to direct taxes, a Keyman Insurance Policy, of the Life Insurance Corporation of India, etc. provides for an insurance policy taken by a business organization or1 a professional organization on the life of an employee, in order to protect the business against the financial loss, which may occur from the employee's premature death. The "Keyman" is an employee or a director, whose services are perceived to have a significant effect on the profitability of the business. The premium is paid by the employer.
6.7 In the instant case, the assessee has not been able to even furnish the details of the person on whom the keyman insurance policy has been taken and what to talk of other aspects as mentioned herein above. In the case of Swadeshi Cotton Mills Co. [63 ITR 57, 60], the apex court has held that merely because of the existence of an agreement between the assessee and his employee for payment of certain remuneration and the fact of actual payment, the Assessing Officer was not bound to hold that the payment was made wholly and exclusively for the purposes of business. It was open to him to consider all the relevant factors. The payment of commission to the directors was held to be for extra commercial reason on account of the fact that (1) the directors did not render any special service in the relevant year; (2) the management of the company was done by managing agent and very little was done by the directors; (3) much 4 lesser remuneration paid in earlier years was not considered as inadequate by the directors and (4) the increase in the company's profits was due to the control of cloth having been lifted and not any special exertion by the directors. On this basis, the disallowance of commission paid at the rate 1% of net profit in addition to monthly remuneration was confirmed by the Supreme Court. Further, in this case, the assessee has not paid any remuneration to directors. It is also to mention here that the assessee is an authorized dealer and indenting agent of Gujarat Alkalies & Chemicals Ltd. a public sector undertaking of the Government of Gujarat and also engaged in trading of chemicals and related products. Therefore, there is no need of expertise to run the business of the assessee company. In these circumstances, and in absence of any details furnished by the assessee, the keyman insurance premium paid by the assessee amounting to Rs.25,00,000 is disallowed and added back to the total income of the assessee."
3 On appeal, the learned CIT(A) deleted the addition with the following observations:-
"established as to how these persons are Keyman on whose life, Keyman Insurance Policy^ were taken. However, the appellant submitted that by letter dated 5-12-2008 given to the Assessing Officer enclosed as Annexure-D to the submission given in appeal, the details of persons, date of joining, nature of work done by them were given to prove that the insurance premium paid is for the persons who are either employees or directors handling key functions. The two persons namely Manish K. Shah and Dilip K. Shah are employees on whose life premium of Rs.15 lacs were paid. Other five persons are directors handling various aspects of business on whose life total Rs.10 lacs premium was paid. The appellant also mentioned that it is wrong on the part of the Assessing Officer that no expertise is needed in running the business of the company since the appellant is authorized dealer of GACL and involved in trading of chemicals. The day today business is carried on by the assessee and the assessee only knows the vagaries of the business. The appellant also strongly relied upon the Circular of CBDT regarding taxation of Keyman Insurance policy. The Keyman Insurance Policy can be taken in the name of another person who is an employee or was connected in any manner with the business of the appellant. It is not in dispute that two of the directors namely Dilip K. Shah and Manish K. Shah are employees of 5 the appellant and they are covered by the relevant provisions governing Keyman Insurance Policy. Other persons are directors handling some of the business activity of the appellant company and therefore covered by the clause "other persons connected with business". The appellant also referred Circular No.762 of CBDT in which it is clearly mentioned that the keyman is an employee or a director. The premium paid on the Keyman Insurance Policy is specifically, allowed in the said Circular. The appellant referred the decision in the case of Sunita Finlease Ltd in which ITAT held that Keyman Insurance Premium is an allowable business expense and the same is to be allowed by the Assessing Officer subject to the verification of premium paid. Similar view was expressed by the Delhi ITAT in the case of P.G Electronics. The Mumbai ITAT in its latest decision in the case of Modi Motors held that for allowing Keyman Insurance premium, there is no necessity of employer-employee relationship. Considering these decisions and facts of the case, it is clear that the Keyman Insurance premium paid by the appellant is allowable as business expenses. Accordingly the addition made by the AO is deleted."
4 Aggrieved by the order of the learned CIT(A), the Revenue is now in appeal before us. The learned DR supported the order of the AO.
5 The learned counsel of the assessee supported the order of the learned CIT(A) and submitted that the issue is covered in favour of the assessee by the decision of ITAT in the cases of Sunita Finlease Ltd. as well as the decision of the ITAT Delhi Bench in the case of P G Electronics (supra). The learned counsel of the assessee also referred to Circular No.762 [copy of placed at page 22 of the PB]. The learned counsel further relied upon the following decisions of ITAT:-
[i] ACIT vs. Prakash Chemical Agencies (P) Ltd. [ITA No.63/Ahd/2011, order dated 09-12-2011 for AY 2007-08] 6 [ii] DCIT vs. M/s Prakash Chemical Pvt. Ltd. [ITA No.172/Ahd/2-11, order dated 14-10-2011 for AY 2007-08]
6 We have heard both the parties and perused the record. We have also gone through various decisions referred to by the learned CIT(A) in his order as well as the decisions relied upon by the learned counsel of the assessee before us. We find that the issue is covered in favour of the assessee by the decision of the ITAT Ahmedabad Bench in the assessee's own case for AY 2007- 08 in ITA No. 63/Ahd/2011, order dated 09-12-2011, wherein the Tribunal, has held as under:-
"5. In the present case, a clear finding is given by the Ld. CIT(A) that two persons namely, Mr. Sudip Shah and Mr. Dilip Shah are employed and the assessee paid the premium of Rs.25 lakhs for them and other six persons are directors handling various aspects of business on whose life total Rs.12 lakh premium was paid. It is also noted by Ld. CIT(A) on page-34 of his order that it was submitted by assessee before him that by letter dated 05-12-2008 given to the AO, copy of which submitted before Ld. CIT(A) also, the details of persons, date of joining, nature of work done by them were given to the AO to prove that Keyman insurance premium was paid for those persons, who are either employee or director handling key functions. Ld. CIT(A) also considered the Board's Circular No. 762. In the light of these facts, this issue is squarely covered in favour of the assessee by the Tribunal decision cited by Ld. AR of the assessee relevant portion of which has been already reproduced above, and hence, by respectfully following the Tribunal decision, we decide the issue in favour of the assessee and decline to interfere in the order of Ld. CIT(A)."
Respectfully following the aforesaid decision of the ITAT in the assessee's own case for AY 2007-08, we decide the issue in favour of the assessee.
77 In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the court today on 30-03-2012 Sd/- Sd/-
(T R MEENA) (D K TYAGI)
ACCOUNTANT MEMBER JUDICI AL MEMBER
Date : 30-03-2012
Copy of the order forwarded to:
1. M/s Prakash Chemical Agencies Pvt. Ltd., Induchacha House, Opp. Chhani Octroi Naka, Baroda
2. The Deputy Commissioner of Income-tax, Circle-4, Baroda
3. CIT concerned
4. CIT(A)-III, Baroda
5. DR, ITAT, Ahmedabad Bench-B, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD