Income Tax Appellate Tribunal - Delhi
Radha Raj Ispat Pvt. Ltd.,, New Delhi vs Department Of Income Tax on 17 December, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `F': NEW DELHI
BEFORE SHRI C.L.SETHI, JM & SHRI K.G. BANSAL, AM
I.T. A. No.986/Del of 2010
Assessment Year: 2006-07
Income-tax Officer, M/s Radha Raj Ispat (P) Ltd.
Ward 15(1), New Delhi. vs 5190, Lahori Gate, Delhi.
Appellant Respondent
Appellant by: Shri H.K. Lal, DR
Respondent by: Shri Vinod Kumar Bindal and
Ms Sweety Kothari
ORDER
PER C.L. SETHI, JM:
The revenue is in appeal against the order dated 17.12.2009 passed by the learned CIT(A) in the matter of an assessment made u/s 143(3) of the Income-tax Act, 1961 (the Act) pertaining to Asstt. Year 2006-07.
2. The grounds raised by the revenue are as under:-
"1. That on facts and circumstances of the case and in law the ld. CIT(A) erred in deleting the addition of Rs.75,00,000/- made by AO on account of expenditure towards keyman insurance policy in the name of two working directors.
2. That on facts and circumstances of the case and in law the ld. CIT(A) erred in appreciating the fact that the business decisions taken by said 2 employees required approval of the other director of the company, therefore, it cannot be said that these employees are key persons of the company and the said expenditure cannot be allowed."
3. From the grounds, it emerges that the only issue involved in this appeal is with regard to the claim of Rs.75 lacs made by the assessee on account of deduction towards payment of premium on keyman insurance policy of its two working directors/employees, namely, Ms. Priyanka Mittal and Mrs. Binita Gupta.
4. In the course of assessment proceedings, the assessee vide order sheet dated 12.11.2008 was asked to justify the claim of keyman insurance policy of Rs.75 lacs along with evidence in support. The assessee vide letter dated 21.11.08 furnished the evidence of payment of keyman insurance premium of Rs.75 lacs as under:
Priyanka Mittal Rs.37.50 lacs
Binital Mittal Rs.37.50 lacs
5. The AO again vide order sheet dated 26.11.2008 asked the assessee to show cause as to why the keyman insurance premium paid be allowed as business expenses as the same is not incurred for insurance of any of the keyman of the assessee, namely, Directors, MD or CEO of the company. The assessee then vide letter dated 5.12.2008 submitted as under: 3
"The assessee paid the premium for Keyman insurance policy for Ms. Priyanka Mittal and Mrs. Binita Gupta who are the key managerial personnel of the company. They are the employees of the assessee company and receiving salary from the assessee company, which verifiable from the copy of return submitted as per above para for the year under consideration. Therefore, said expense is fully allowable."
The assessee was again asked to explain as to what are the specific contribution of the persons in the business of the assessee company and why the same be allowed. The assessee vide letter dated 16.12.2008 submitted as under:
"In regard to your query relating to managerial functions performed by the above said employees of the company, it is stated that Ms Priyanka Mittal and Mrs. Binita Gupta are involved in day to day functioning of the assessee company. All the business decisions of the assessee company taken by them and said expense should be allowed."
AO then examined and considered the assessee's explanation and came to the view that assessee's claim was not acceptable. The reason given by the AO may be summarized as under:
(i) That the expenses claimed under keyman insurance policy as per Board's circular on the premium paid on lives of Priyanka Mittal and Binita Gupta, could not be allowed inasmuch as Priyanaka 4 Mittal and Binita Gupta were neither director nor managing director nor held any managerial post.
(ii) From the circular No.762 dated 18.2.98, it was clear that premium on insurance policy is allowable in order to protect the business against the financial loss, which may occur through the employees' pre-mature death and the keyman is an employee or a director, whose services are perceived to have a significant effect on the profitability of the business. Thus, the prime factor which determines the allowability or otherwise is "to protect business against financial loss and service perceived to have a significant effect on the profitability of the business". However, in the present case Ms Priyanka Mittal and Mrs. Binita Gupta cannot definitely be treated as keyman or key person, inasmuch as, they are involved only in day-to-day functioning of the assessee company, but on the business decisions of the assessee company is taken by them with the approval of the directors, and it makes it clear that these two ladies are not key person as their decisions are always subject to the approval of the directors.5
(iii) The expenses on account of keyman insurance policy cannot be said to be laid out wholly and exclusively for assessee's business as per Memorandum of Association.
(iv) Expenses on account of keyman insurance cannot be allowed u/s 37(1) of the Act as the main business of the assessee company is not as per the main object mentioned in Memorandum of Association, for which the company was incorporated.
(v) There was no supporting evidence of employer or employee relationship inasmuch as, the salary paid to these two persons were paid in lumpsum as against normal periodical payment generally paid to employees. The lumpsum payment to these two persons indicates that there was no employer-employee relationship, and assessee's claim is after-thought, and purportedly made only to show it look like that aforesaid two persons are the employees of the assessee company while the facts remain otherwise.
The AO then summarized the reasons for disallowing the assessee's claim as under:
(i) Persons insured are not the keypersons as discussed above and also as per the spirit of the CBDT circular.6
(ii) Expenses on account of keyman insurance policy of Rs.75 lacs cannot be set to be laid out wholly and exclusively for assessee's business as per MOA.
(iii) Expenses on account of keyman insurance policy cannot be allowed u/s 37(1) as the main business of the assessee company is not as per the main object for which the company has been incorporated.
(iv) There is no supporting evidence of Employer and Employee relationship unrelated to assessee's business is disallowed and added to the income of the assessee."
6. Being aggrieved, the assessee preferred an appeal before the ld. CIT(A). Before the CIT(A), the assessee submitted that the AO's assertions that there was no employer-employee relationship between the assessee and the two persons, on whose life the insurance cover was taken, is totally based on surmises and conjectures. It was further pointed out that Ms. Priyanka Mittal, aged 20 years was an MBA from USA qualified in 1998 from University of Southern California and Mrs. Binita Gupta aged 38 years had BA degree from Delhi University and had been managing the business of the assessee from earlier years. He has also pointed out that both these two persons were directors as could be verified from Form No.32 filed with Registrar of Companies on 134.1.2006. It was, thus, submitted that both the persons were not only the directors of the assessee company but were also the key directors of the assessee company, and, thus, the amount paid for the 7 keyman's insurance policy on their lives is fully allowable as per the decisions given below:
(i) Sunita Finlease Ltd. vs DCIT (2008) 8 DTR(Bilaspur)(Trib) 183;
(ii) P.G. Electronics vs ITO (2005) 98 TTJ(Del) 896
7. After considering the AO's order and assessee's submissions and the position of law as well as the CBDT Circular No.762 dated 18.8.98, the CIT(A) allowed the assessee's claim and reversed the AO's order. The order of CIT(A), thus, runs as under:
"I have carefully considered the assessment order and the submissions made by the ld. AR on the above issue. It is argued by the ld. AR that the impugned amount of Rs.75 lacs was paid by the appellant company on account of Keyman Insurance Policy obtained on the life of Ms Priyanak Mittal and Mrs Binita Gupta. It is argued that the said persons are employed as salaried Directors in the appellant company. The AR has filed copy of Form No.32 filed with the ROC on 13.1.2006 as per which Ms Priyanka Mittal and Mrs. Binita Gupta who were earlier Addl. Director of the company since 31.01.2005 were appointed as Directors at the AGM held on 30.9.2005. It is submitted by the ld. AR that the above copy of Form No.32 was also submitted to the AO on the last date of assessment proceedings. The appellant has also filed copies of returns of income alongwith statements of income filed by the said Ms Mittal and Mrs. Gupta for AY 2006-07 showing salary income of Rs.1,50,000/- each received from the appellant 8 company along with certificates dated 1.4.2006 issued by the said company in this regard. It is also argued that both the above directors are qualified persons, being MBA from the University of South California and graduate from University of Delhi respectively, and have been managing the business of the appellant company and as such qualify as key persons of the company for the purpose of Keyman Insurance Policy as envisaged vide CBDT Circular No.762 dated 18.2.1998. It is also argued that the business of the appellant as per Memorandum of Association includes buying, selling and dealing in shares etc as per clause 44 of the said MOA. A copy of the said MOA is also filed by the ld. AR. It is argued that the appellant company has significant turnover ranging from Rs.9.90 crores in AY 2006-07 and rising upto Rs.19.37 crores in AY 2008-09, which would not have been possible but for the services rendered by the above mentioned employee Directors. I have gone through the Circular No.762 dated 18.2.1998 issued by the CBDT containing Explanatory Notes to Finance (No.2) Act, 1996. Para 14 of the said circular makes it clear that a Keyman Insurance Policy of the LIC of Indian provides for an insurance policy taken by a business organization on the life of an employee, in order to protect the business against the financial loss, which may occur from the employees' premature death. The 'Keyman' is defined in the Circular as "an employee or a director, whose services are perceived to have a significant effect on the profitability of the business". The premium paid by the employer on such policy is to be allowed as business expenditure as per the Circular. It is also clarified that the sums received by the said organization on such policy shall be taxed as business profit. Therefore, considering the facts of the case as discussed above, I am of the view 9 that the claim of the appellant is squarely covered by the aforesaid circular of the CBDT and hence cannot be rejected. The case laws relied upon by the appellant also support this view. Further, I find that the AO has not disputed the fact that the appellant company has subscribed to Keyman Insurance Policies in respect of the above two employees and has paid the impugned amount as premium on such policies and that the said employees are involved in a day to day functioning of the appellant company and all the business decisions are taken by them, although subject to approve of other directors. Having accepted the above facts, disallowance of the said amount of expenditure by the AO on various irrelevant and flimsy grounds certainly amounts to denial of justice and hence the same cannot be sustained. The addition of Rs.75 lacs on this ground is, therefore, deleted."
8. Hence, the department is in appeal.
9. The learned DR submitted that the insurance policy taken on the lives of Ms Priyanka Mittal and Mrs. Binita Gupta had no significant effect on the profitability of the assessee's business, they being merely an ordinary employee doing certain work as per the direction of the Board of Directors. He, therefore, supported the order of AO in disallowing the assessee's claim of payment of keyman's insurance policy on the lives of Ms Priyanka Mittal and Mrs. Binita Gupta.
10. The learned counsel for the assessee, on the other hand, reiterated all the facts and contentions that were placed before the authorities below. The 10 learned counsel for the assessee pointed out that Ms Priyanka Mittal and Mrs. Binita Gupta were appointed as confirmed directors at the AGM held on 30.9.2005. He, therefore, contended that both the ladies were keyman having a significant role in the carrying on the business activity of the assessee company. It was further pointed out that both the ladies are qualified, capable of undertaking the various functions and activities necessary for carrying on the assessee's business smoothly and profitably. It was further contended that both the ladies were paid salary amounting to Rs.1,50,000/- each, which has been assessed to tax as income under the head 'salary'. He, therefore, submitted that in the light of the scope of Circular No.762 dated 18.2.98, the premium paid on keyman insurance policy on the lives of these two ladies is to be treated as business expenses within the meaning of Section 37 of the Act. A further fact was highlighted that as and when the assessee company received the maturity amount along with the profit in respect of the aforesaid two policies taken on the lives of these two ladies in question, the amount has been included in the income of the assessee company in that relevant year. Therefore, the order of the CIT(A) was supported by the learned counsel for the assessee.
11. We have heard both the parties and have carefully perused the material on record. In this case, the assessee paid premium on keyman 11 insurance policy taken in the name of two ladies and an amount of Rs.75 lacs was claimed as business deduction. The AO has disallowed the same by giving various reasons, as already discussed above. However, the learned CIT(A) has deleted the addition. The learned CIT(A) has taken into account the admitted position that these two ladies were earlier appointed as additional directors of the company on 31.1.2005, which was subsequently confirmed as director at the AGM held on 31.9.2005. This fact is fully established from the copy of Form No.32 filed with the ROC on 13.1.2006. Both these ladies are qualified persons, being MBA from the University of South California and graduate from University of Delhi respectively. They have been paid salary of Rs.1,50,000/- each in the relevant financial year. They have been rendering services to the assessee company in the course of carrying on its business activities. Therefore, the AO's finding that they are not employees or they have no significant role to play in the business activities of the assessee company, is not correct. The AO has not brought any material except by drawing presumption that there were no employer and employee relationship between the assessee company, and these two ladies. Therefore, in the light of Board's Circular No.762 dated 18.2.98, these two ladies are to be treated as an employee or a director, whose services had significant effect on the smooth functioning and profitability of 12 the assessee's business. It is pertinent to note that the policies, which were taken on the lives of these two ladies, were matured on 16.9.2008 having total maturity/surrender value of Rs.3,07,07,846/-, which had been included as income by the assessee in the Financial Year 2008-09, as would be evident from the Profit & Loss Account for the year ended on 31st March, 2009 where the income of Rs.3,07,07,846/- has been included as keyman's insurance receipts. Therefore, it is not the case where the assessee has tried to evade any payment of due taxes so as to disbelieve the assessee's claim as bogus or not maintainable. It is not in dispute that the maturity amount of Rs.3,07,07,846/- has been included in the income for the purpose of assessment under the Income-tax Act. Further, the business of buying, selling and dealing in shares is also a part of assessee's object as would be clear from clause 44 of the Memorandum of Association of the assessee company, and, therefore, AO's contention that the business that is carried on by the assessee is not as per object of the assessee company, is not correct. Therefore, there is no reason to disallow the assessee's claim of deduction towards payment of premium on keyman's insurance policy of its two directors, namely, Ms Priyanka Mittal and Mrs. Binita Gupta. The learned CIT(A) has rightly appreciated the facts of the case and allowed the 13 assessee's claim. In this view of the matter, we, therefore, uphold the order of CIT(A).
12. In the result, the appeal filed by the revenue is dismissed.
13. This decision was pronounced in the Open Court on 11th June, 2010.
(K.G. BANSAL) (C.L. SETHI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 11th June, 2010
Vijay
Copy to:
1. Appellant.
2. Respondent.
3. CIT
4. CIT(A)-XVIII, New Delhi
5. DR Assistant Registrar