Income Tax Appellate Tribunal - Delhi
P.G. Electronics vs Income Tax Officer on 7 October, 2005
Equivalent citations: (2005)98TTJ(DELHI)896
ORDER
R.V. Easwar, Vice President
1. This appeal by the assessee is directed against the order passed by the CIT(A) on 13th March, 2002 under Section 263 of the Act for the asst. yr. 1998-99. Nobody appeared on behalf of the assessee though the notice has been served on the assessee as per the AD card placed on record. I, therefore, proceed to dispose of the appeal on the basis of the record and after hearing the learned Departmental Representative.
2. The assessee is a partnership firm, engaged in the business of manufacture and sale of electronic and electric goods. In the assessment completed under Section 143(3), the AO allowed deduction in respect of the insurance premium of Rs. 87,840 paid in respect of Shn Anurag Gupta, one of the partners, under the "Keyman Insurance Scheme". The CIT considered the allowance of the premium as business expenditure to be erroneous insofar as it is prejudicial to the interest of the Revenue. He, therefore, took proceedings for revising the assessment under Section 263 and invited the assessee's objections. The assessee seems to have started (supported) the allowance of the expenditure with reference to an order of the Bombay Bench of the Tribunal in ITA No. 1747/D/81 (sic). The CIT, however, observed that the decision would apply only to certain situation, that it cannot be held that all premia paid by the firm in respect of the insurance of the lives of the partners irrespective of the other facts and circumstances are allowable as a deduction and proceeded to distinguish the facts of the assessee's case form the facts in the case before the Tribunal. He noted that in the present case, there was no provision in the partnership deed providing for payment of life insurance premium for the life of the partner and nothing was also brought on record to show that the partner concerned nad some special or technical qualification which would have enabled the firm to execute its business efficiently. The CIT further noted that it is not known as to whether there was any liability on the part of the partner to refund the amount of premium in case he retired or resigned from the firm. In these circumstances, he directed the AO to withdraw the deduction allowed and thus enhanced the assessment by Rs.. 87,840.
3. It is against the aforesaid order of the CIT that the assessee is in appeal before the Tribunal. I have considered the matter in. the light of the order of the IT authorities and the arguments of the learned Departmental Representative. In the grounds of appeal it is stated by the assessee that the success of a business organisation greatly depends on one or more keymen because of their leadership ability, long experience or technical skill, that such a person may even be a partner of the firm, that absence of such a partner will be a significant loss to the firm, and, therefore, the premia paid under the Keyman Insurance Scheme was allowable under Section 37(1). It was also pointed out that there was only two partners, of which Anurag Gupta was the keyman and the main tool for the profitability of the firm. In ground No. 6, it is stated that a supplementary deed has been executed reflecting the clause relating to keyman insurance. In ground No. 7, it is stated that supplementary deed shows that the partners have agreed to pay commission on insurance premium on the life of Anurag Gupta.
4. I have carefully considered the matter. Various amendments were made to the IT Act, 1961, simultaneously by the Finance (No. 2) Act, 1996, w.e.f. 1st Oct., 1996 relating to the subject of Keyman Insurance Policy. Clause (xi) was inserted to Section 2(24), which defined "income", to include any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy. Sub-section (10D) to Section 10 was inserted to exempt any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy other than sums received under a Keyman Insurance Policy. The Explanation inserted below the sub-section defined a "Keyman Insurance Policy" to mean 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. Clause (ii) of Sub-section (3) of Section 17 was amended to include any sum received under the Keyman Insurance Policy, including the sum allocated by way of bonus on such policy, as "profits in lieu of salary" of the employee, taxable under the head "salaries". Clause (vi) was inserted to Section 28 to provide that any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy will be charged to tax under the head "profits and gains of business or profession". However, Clause (iv) to Sub-section (2) to Section 56, also inserted by the same amending Act, provided that if the sum received under the Keyman policy is not taxed under the head "salaries" or "profits and gains of business or profession", then it will be taxed under the head "income from other sources".
5. The above amendments, all w.e.f. 1st Oct., 1996, were explained by Circular No. 762, dt. 18th Feb., 1998, issued by the CBDT as follows:
"Taxation of a sum received under the Keyman Insurance Policy 14.1 A Keyman Insurance Policy of the Life Insurance Corporation of India, etc., provides for an insurance policy taken by a business organization or 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.
14.2 There were some doubts on the taxability of the income including bonus, etc., from such policy and also regarding the treatment of the premium paid--whether it should be allowed as a capital expenditure or as a revenue expenditure. The Finance (No. 2) Act, 1996, therefore, lays down the tax treatment of the Keyman Insurance Policy.
14.3 Clause (10D) of Section 10 of the IT Act exempts certain income from tax. The Finance (No. 2) Act, 1996, amends Clause (10D) of Section 10 to exclude any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy for this purpose.
14.4 The Finance (No. 2) Act, 1996, also lays down that the sums received by the said organization on such policies, be taxed as business profits; the surrender value of the policy, endorsed in favour of the employee (Keyman), or the sum received by him at the time of retirement be taken as "profits in lieu of salary" for tax purposes; and in case of other persons having no employer-employee relationship, the surrender value of the policy or the sum received under the policy be taken as income from other sources and taxed accordingly. The premium paid on the Keyman Insurance Policy is allowed as business expenditure.
14.5 The amendments take effect from the 1st day of October, 1996."
It may be seen from para 14.2 of the circular that the Board was aware of the doubts relating to the treatment of the premium paid in respect of a Keyman Insurance Policy issued by the LIC of India and has accordingly clarified, to put the doubts at rest, in the last sentence of para 14.4 that "The premium paid on the Keyman Insurance Policy is allowed as business expenditure".
6. In the light of the above amendments and the circular clarifying the position relating to the allowability of the premium paid on Keyman Insurance Policy, the CIT, in my view, was not justified in directing the AO to disallow the premium paid by the assessee-firm in respect of the life of partner Anurag Gupta, assured under the Keyman Insurance Policy. There is no doubt regarding the fact that the policy is a Keyman Insurance Policy, as can be seen from para 2 of the order of the CIT. Therefore, the order of the CIT cannot be sustained as it runs counter to the amendments made to the Act as clarified by the circular issued by the CBDT. It is well-settled that circulars issued by the CBDT regarding the execution of the Act are binding on the IT authorities. The amended law is applicable to the year under consideration. The CIT was, therefore, not justified in assuming jurisdiction to revise the assessment under Section 263, contrary to the law and circular issued by the Board. He could not have considered the assessment erroneous since the allowance of the premium as a deduction as business expenditure was in conformity with the circular of the Board which was binding on the AO. Even on merits, his view that the premium paid on Keyman Insurance Policy should be disallowed is not tenable, also because of the circular cited above. I therefore cancel the order under Section 263 on both counts and allow the appeal.