Income Tax Appellate Tribunal - Ahmedabad
Ashoka Dyeing & Printing Mills, Surat vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "C
"C"
BEFORE SHRI MUKUL SHRAWAT,
SHRAWAT, JUDICIAL MEMBER AND SHRI
N.S.SAINI,
N.S.SAINI, ACCOUNTANT MEMBER
Date of hearing : 23-9 10 Drafted on: 23-9-10
ITA No.3691/AHD/2008
Assessment Year :2005-06
Income Tax Officer, Vs. M/s. Ashoka Dyeing &
Ward 6(1), Printing Mills
Aayakar Bhavan, 261-B, GIDC Pandesara,
Majura Gate, Surat.
Surat.
PAN/GIR No. :AAEFA 2678 Q
(APPELLANT) .. (RESPONDENT)
Appellant by : Shri Shelly Jindal,
CIT(Learned Departmental
Representative)
Respondent by: None
ORDER
PER N.S.SAINI , ACCOUNTANT MEMBER :-
This is an appeal filed by the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-IV, Surat, dated 18-8-2008.
2. The sole ground of appeal of the Revenue reads as under :-
"On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals)-IV, Surat has erred in deleting the addition of `.14,38,100/- made by the Assessing Officer on the ground of disallowed insurance premium paid under "Keyman Insurance Policy."
3. The brief facts of the case are that the A.O. observed that in view of the legislature 'Keyman' is either an employee of the organization or any other salaried person who is a key person in the organization. Consequently, the Keyman insurance is an -2- insurance policy where the proposer as well as the premium payer is the employer, the life to be insured is that of the employee, and the benefit, in case of a claim, goes to the employer. The existence of employer-employee relationship is a sine-qua-non for the deductibility of keyman insurance premia.
4. However, such kind of a relationship is conspicuously absent between the partnership firm and the partners. The partners constitute the firm. The firm has only an artificial identity under the Income Tax Act, 1961. In effect, any expenditure on life insurance of partners, by whatever name called (including Keyman Policy), by the firm goes to insure the partners only. Since the partners and the firm are inextricably linked, by the channel of Keyman insurance, the partners insure themselves only. Unlike a Company where the employee/director and the employer are two different persons, in the firm the partners and the firm are inseparable. Hence, expenditure on premia of keyman insurance for a firm on life of partners bestows personal benefits to the partners. The firm makes outlays on itself; hence, the premia becomes a personal expenditure. Any personal expenditure is not deductible under section 37(1) of the Income tax Act,1961.
5. Without prejudice to the arguments of above Para; further, the amount on claim or maturity under a keyman insurance policy is not exempt under section 10(10D) of the Income Tax Act when the company pays the premia, because in such situation the benefits received acquire the nature of capital receipts. Hence logically the expenditure on premia partake the nature of capital expenditure and any capital expenditure is not deductible under section 37(1) of the Income Tax Act,1961.
-3-6. In respect of such types of insurance in partnership firms, the jurisdictional Gujarat High Court in the case of CIT v. Khodidas Motiram Panchal(1986) 161 ITR-99 (Guj.) has denied the allowability of premia by adopting the following ratio:
"....the contention that the expenditure is in the nature of capital expenditure is well-founded. By taking out these insurance policies, the assessee-firm desires to ensure the availability of liquid cash for payment to the legal representatives of the deceased partner in the event the surviving partners desire to continue the firm. When the share of the deceased partner is paid off, the shares of the surviving partners in the assets of the firm can be augmented. What is, therefore, sought to be acquired is capital, that is, liquid cash needed for buying the share of the deceased partner by paying off his legal representatives. If the amount received from the insurance company on the demise of the partner is a capital asset like any other amount borrowed by the partnership firm from third parties, what the partnership firm expends for acquiring that capital asset can only be said to be capital expenditure within the meaning of Sec. 37(1) of the Act."
7. Hence, the sole purpose of taking out these insurance policies is to secure liquid cash at the time it will be needed to pay off the legal representatives of the deceased partner. If the amount paid by way of insurance premia is for securing this liquid cash, a capital asset, then the expenditure incurred therefore could only be said to be in the nature of capital expenditure. Therefore, the Keyman insurance premia can not deductible under sec. 37(1).Hence the position of law as regards to non-deductibility of premium is clear as per the jurisdictional High Court.
8. In addition, the Life Insurance Corporation of India (LIC) has designed 'Keyman Insurance 'to enable companies and partnership firms to indemnify themselves against the loss or reduction of future earnings that may result from death or -4- registration of the keyman. According to that the keyman cannot be given if • he has a share, equal to or more than 51% in the firm • is family (spouse and minor children) has a share equal to or more than 70%of the capital in the firm.
• the company is incurring losses consistently and • the keyman is illiterate.
These are the rules laid down by the LIC for its own administration and procedure. The firm in the instant case fails to fulfill these conditions, as one partner has 90% of the share and another is his wife with10% of share.
9. However, notwithstanding anything, even if the above conditions are fulfilled and a partner is treated as Keyman, the Income Tax Act, 1961 would not permit the deduction in respect of Keyman Insurance premium because of the reasons discussed above.
10. Last but not the least, the law relating to deductibility of the premium on Keyman policy has been settled as such premium is not deductible for 'partnership firms' where no employee-employer relationship exists between the firm and the partners. This position has been clarified in Board's Circular No.762 as quoted by the Ld. A.R. and mentioned above.
"A Keyman Insurance policy of the life Insurance Corporation of India, etc. provides for an insurance policy -5- 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."
11. As per the spirit and letter of the Board Circular, the partnership firms are not eligible for deduction in respect of any premium paid as Keyman insurance premium on life of partner on account of the want of any employee-employer relationship and absence of distinct separation between the firm and the partners.
12. Hence the following emerge from the above discussion regarding the deductibility of premium paid on partner's life:
• The partner is not a Keyman of the firm, but constitutes the Firm • There is no employee-employer relationship between the firm and the partner.
• The expenditure by the firm on the premium for insurance of Keyman is a capital expenditure.
• The expenditure by the firm on the premium for insurance of Keyman is a personal expenditure by the partners.
13. On account of the reasons discussed above, the deduction of Rs.14,38,100/- claimed with regard to the premium of Keyman Insurance policy on life of partners is disallowed and added back to the taxable income.
-6-14. On appeal, the ld. C.I.T.(A) held as under :-
" I have considered the submissions and find that the decision of Hon'ble Gujarat High Court relied upon by the Learned Assessing Officer pertains to A.Y. 1971-
72.Subsequent to that Section 2(24)(xi) was amended with effect from 1-10-1996 by the Finance Act,1996 as a result of which anysum received under a Keyman Insurance policy including the sum allocated by way of bonus on such policy would form part of the total income and the expression Keyman Insurance Policy has the same meaning assignede to it in the explanation-2 in the clause 10-D of Section 10 which says that any sum received under a Keyman Insurance Policy would form part of a person. It is also important to note that firm is an artificial entity constituted by the partners who are separate entities although jointly and severally liable to the firm but a partnership firm would have an insurable interest if by the death of any partner, it will sustain a loss or a pecuniary liability. I have also gone through the Insurance Regulatory and Development Authority Act (IRDA), 1999 which specifically allows reduction of insurance premium under partnership insurance as expenses under section 37(1) of the I.T. Act. It is seen that the amendment to Sec. 2(24)(xi) has resulted in an amount received on maturity or on the death of a partner under the Keyman Insurance Scheme as income chargeable to tax. Bythe same logic, the premium paid for obtaining such insurance policy would be an expenditure allowable under section 37(1) of the I. T. Act. Further, the Learned Assessing Officer's observation that such premium could be allowed only if an employee-employer relationship existed between the premium payer and the Keyman is also without merits since as per Explanationm to Section 10(10D). "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 first mentioned person". In the instant case, the first mentioned person is the partnership firm while the policy has been taken on the life of the partner who is the second mentioned person. Therefore, the Learned Assessing Officer's action in disallowing the insurance premium paid by the firm under Keyman -7- Insurance policy is not in order and the addition is directed to be deleted. The CBDT circular read in its entirety is also in favour of the appellant."
15. The AR submitted that the issue regarding premium paid for Keyman Insurance Policy for the partner of the firm is covered by the decision of Bombay High Court in the case of C.I.T. vs. M/s. B.N. Exports (2010)323 ITR-178 (Bom) and by the order of the Ahmedabad Bench of the Tribunal dated 6-3-
2009 in the case of ACIT VS.M/S.Gem Art ITA No.1722/Ahd/.2008 for the A.Y. 2005-06 & ACIT VS.M/S.Gem Art ITA No.2725/Ahd/.2007 for the A.Y. 2004-05 ORDER DT. 26-3-2010 Therefore, following the same the appeal of the assessee is allowed.
16. The Learned Departmental Representative on the other hand supported the orders of the lower authorities.
17. We have heard the rival submissions and perused the materials available on record. In the instant case the A.O. has disallowed the claim of the assessee for deduction of premium of Rs.14,38,100/-under Keyman Insurance Policy for the reason that the expenses were incurred on the life of the partner and there was no employer-employee relationship and absence of distinct separation between the firm and the partners. In appeal, the CIT (A) confirmed the disallowance. We find that the Hon'ble Bombay High Court in the case of B.N. Exports (supra) in similar facts and circumstances of the case held that where Keyman Insurance Policy was taken not for the personal benefit of the partner but for the benefit of the firm in order to protect itself against the set-back that may be caused on account of the death of the partner, the insurance premium was deductible.
-8-The relevant portion of the Bombay High Court decision is extracted hereunder :
"In this appeal, the Court has to determine the question of expenditure incurred towards the payment of insurance premium on a Keyman Insurance Policy. The circular which has been issued by the Central Board of Direct Taxes clarifies the position by stipulating that the premium paid for a Keyman Insurance Policy is allowable as business expenditure. In the present case, on the question whether the premium which was paid by the firm could have been allowed as business expenditure. There is a finding of fact by the Tribunal that the firm had not taken insurance for the personal benefit of the partner, but for the benefit of the firm, in order to protect itself against the set back that may be caused on account of the death of a partner. The object and purpose of a Keyman Insurance Policy is to protect the business against a financial set back which may occur, as a result of a premature death, to the business or professional organization. There is no rational basis to confine the allowability of the expenditure incurred on the premium paid towards such a policy only to a situation where the policy is in respect of the life of an employee. A Keyman Insurance Policy is obtained on the life of a partner to safeguard the firm against a disruption of the business that may result due to the premature death of a partner. Therefore, the expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of business."
18. We find that both the parties before us has not brought any material which could show that the Keyman insurance policy was taken for the benefit of the business of the partnership firm to protect it from disruption of business on the death of the person on whose life Keyman's Insurance was taken or the same was taken for the benefit of the individual partner on whose life such insurance was taken. In the circumstances in our considered opinion it shall be in the interest of justice to restore this issue back to the file of the Learned Assessing Officer for proper verification. The Learned Assessing Officer is directed to reconsider the issue in light of -9- the decision of the Hon'ble Bombay High Court in the case of B.N. Exports (supra) as per law after allowing reasonable opportunity of hearing to the assessee.
19. Before parting with the issue we would also like to observe that the Learned Assessing Officer has relied upon the decision of the Hon'ble Gujarat High Court in the case of Khodidas Motiram, Panchal (supra) for disallowing the claim of the assessee firm. We find that in the aforesaid decision the Hon'ble High Court has disallowed the claim of the assessee by treating the amount of premium paid in respect of Keyman's Insurance Policy as capital expenditure. However, in view of the subsequent position admitted by the Hon'ble C.B.D.T. which is the highest body for tax administration in the country that Keyman's Insurance premium can be treated as an allowable expenditure the benefit given by the Circular to the assessee cannot be taken away on the basis of earlier legal pronouncement. It is an established position of law that benevolent circular are binding and the department is expected to follow the same in the spirit in which the same is issued by the C.B.D.T. Therefore, this ground of the appeal is allowed for statistical purposes.
Order signed, dated and pronounced in the Court on 30th day of September,2010.
Sd/- Sd/- (MUKUL SHRAWAT) ( N.S. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad: On this 30th day of September, 2010 Patki
- 10 -
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT Concerned
4. The ld. CIT(Appeals)-IV,Surat.
5. The DR, Ahmedabad Bench
6. The Guard File.
BY ORDER, स᭜यािपत ᮧित //True Copy// (Dy./Asstt.Registrar), ITAT, Ahmedabad Date Initials
1. Draft dictated on 24-9-2010 ------------
2. Draft Placed before authority 24-9-2010 ------------
3. Draft proposed & placed Before the Second Member 29-9-2010 ---------JM
4. Draft discussed/approved By Second Member 29-9-2010 --------JM/AM
5. Approved Draft comes to P.S 30-9-2010 --------
6. Kept for pronouncement on 30-9-2010 --------
7. File sent to the Bench Clerk 30-9-2010 ---------
8. Date on which file goes to the ------------ ----------
9. Date of dispatch of Order ------------ ----------