Income Tax Appellate Tribunal - Chandigarh
Paramount Impex, Ludhiana vs Assessee on 2 February, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI H.L.KARWA, VICE PRESIDENT
AND MS. RANO JAIN, ACCOUNTANT MEMBER
ITA No.862 /Chd/2015
(Assessment Year : 2005-06)
M/s Paramount Impex, Vs. The A.C.I.T. ,
D 202-203, Phase VII, Circle-1,
Focal Point, Ludhiana. Ludhiana.
PAN: AAEFP3160G
(Appellant) (Respondent)
Appellant by : Shri Sudhir Sehgal
Respondent by : Shri Jitender Kumar
Date of hearing : 28.01.2016
Date of Pronouncement : 02.02.2016
O R D E R
PER RANO JAIN, A.M. :
The appeal filed by the assessee is directed against the order of learned Commissioner of Income Tax (Appeals)-1, Ludhiana dated 24.9.2015 for assessment year 2005-06. . The appeal before the CIT (Appeals) was against the order of the Assessing Officer made under section 143(3) r.w.s. 147 of the Income Tax Act, 1961 (in short 'the Act').
2. The only issue is with regard to disallowance of an amount of Rs.11,80,685/- claimed by the assessee on 2 account of keyman insurance on the life of Shri Rakesh Kapoor, one of the partners of the assessee firm. For making the disallowance, the contentions of the Assessing Officer were two fold. The first reason for disallowance was that there is no evidence to show that the policy is a keyman insurance and the second was that the partners are not independent and distinct from the firm and they cannot be termed as another persons within section 10(10D) of the Act.
3. Before the learned CIT (Appeals), besides making elaborate submissions as to how the firm and partners are two distinct entities it was also submitted that the I.T.A.T., Chandigarh Bench in assessee's own case for assessment year 2008-09, in ITA No.371/Chd/2012 dated 5.6.2012, had decided he issue in favour of the assessee. The learned CIT (Appeals), dismissed the appeal of the assessee stating that the I.T.A.T. had decided the appeal in favour of the assessee only on the issue that the firm and partners are two distinct entities for the purposes of section 10(10D) of the Act, while the issue whether the policy is keyman insurance policy or not was not decided by the I.T.A.T.
4. Aggrieved, the assessee has come in appeal before us, raising the following grounds of appeal :
"1. That the Worthy Commissioner of Income Tax (Appeals) has erred in confirming the action of the Assessing Officer in reopening the case by issuing notice u/s 148 of the Income Tax Act, 1961.3
2. Without prejudice to the above ground No.1, the Worthy CIT (A) has erred in upholding that the policy taken by the assessee firm is not a Keyman Insurance Policy and is a personal life insurance policy.
3. That the Worthy CIT (A) has erred in upholding the addition of Rs. 11,80,685/- made by the Assessing Officer in respect of Keyman Insurance Policy premium on the life of the partner, Sh. Rakesh Kapoor as claimed in the profit and loss account.
4. That the addition as above has been upheld by the Worthy CIT (A) against the facts and circumstances of the case and detailed submissions filed before her during the course of hearing has not been considered properly.
5. That the appellant craves leave to add or amend any grounds of appeal before the appeal is finally heard or disposed off."
5. The learned counsel for the assessee besides relying on the order of the I.T.A.T. in assessee's own case for assessment year 2008-09, also showed us a copy of the policy document, whereby it was certified by the insurance office that the policy is in relation to a 'keyman'.
6. The learned D.R. relied on the order of the learned CIT (Appeals).
7. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. ON the issue whether the policy is in fact a keyman insurance policy, from the policy document, no doubt remain that this is a keyman insurance policy. Further, the perusal of the order of the I.T.A.T., Chandigarh Bench in assessee's own case for assessment year 2008-09, we 4 see that the issue has been dealt at page 3, paras 6 and 7 as under :
6. We have heard the rival contentions and perused the record. The issue raised vide ground Nos.l and 2 by the Revenue are against the allowability of claim of expenditure of keyman insurance premium paid by the assessee firm on the lives of its partners. The Assessing Officer disallowed the claim of the assessee in view of the provisions of section 10(10D) of the Act and the ratio laid down by the Apex Court in Malabar Fisheries Company (supra). The CIT (Appeals) allowed the claim of the assessee in view of the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. B.N. Exports [ 3 2 3 I T R 1 7 8 ( B o m )] o b s e r v i n g a s u n d e r :
"4. I have considered the facts of the case and the basis of disallowance made by the AO and also the arguments of the AR on the issue. The main logic behind AO's conclusion is that the partnership firm and the partners don't constitute two separate legal persons and therefore the provisions of Section 10(10D) were not applicable in the case of partnership firm taking keyman insurance policy. The AO's view gains strength from the judgement of Apex Court in the case of Malabar Fisheries Company Vs. CIT 120 ITR 49. The AR on the other hand has argued that partnership from and the partners are two separate legal persons under the I.T.Act 1961 and separate assessment of income is done in the case of both the persons. It was further submitted it is only under the general law that partnership firm and the partners are considered as same and therefore the specific legal identity of the partnership firm as distinct from the partners as created by the Income Tax Act could not be ignored. The AR also placed reliance on the decision of Mumbai Tribunal in the case of ITO Modi Motors 27 SOT 476 wherein it has been held that partners are mind, heart and body of firm due to which the firm is able to conduct its business and therefore the keyman insurance policy on the life of partners was allowable expenditure. The AR also placed reliance on the judgement of Hon'ble Bombay High Court in the case of CIT Vs. B.N. Exports 232 ITR 178 wherein the Hon'ble High Court has disagreed with 5 the stand of the revenue that the partnership firm and the partners can not be considered as separate entities. The AO's reliance upon the decision of Hon'ble Apex Court in the case of Malabar Fisheries (Supra) is misplaced as the judgement of Hon'ble Court is on the issue of allowance development rebate and the observations that partnership firm and its partner are the same is in context of the distribution of assets of the firm. The observations of the Hon'ble Court given in an entirely different context can not be applied to the facts of the case under consideration as the issue is totally different in the sense that the survival of partners is critical to the efficient working of the firm and in the case of sudden demise of working partner. The business of the firm could suffer tremendously so as to make an attempt to ensure the losses by taking keyman insurance policy. Further the Hon'ble Bombay High Court has referred to the decision of Hon'ble Apex Court in the case Bist & sons Vs. CIT 116 ITR 131 wherein it has been held that firm is a separate assessable entity distinct from its partner under the I.T.Act 1961. The observations of Hon'ble Bombay High Court on this issue are as under:-
"For the purpose of Section 10(10D), a keyman insurance policy means a life insurance policy taken by a person on the life of another person who is or was in employment as well as on a person who is or was connected in any manner whatsoever with the business of the subscriber. The word "is or was connected in any manner whatsoever with the business" of the subscriber are wider than what would be subsumed under a contract of employment. The latter part makes it clear that a keyman insurance policy for the purposes of cl. (10D) is not confined to a situation where there is a contract of employment. Circular No. 762, dt. 18th Feb., 1998 issued by the CBDT clarifies the position by stipulating that the premium paid for a keyman insurance policy is allowable as business expenditure. There is a finding of fact by the tribunal that the firm had not take 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 death of a partner. The object and purpose of a keyman insurance icy is to protect the business against a 6 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. Hence, the appeal by the revenue does not raise any substantial question of law."
In view of the detailed analysis of the facts of the case and direct judicial pronouncement on the issue, the disallowance made by the AO is directed to be deleted."
7. Following the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. B.N. Exports (supra) we are in agreement with the order of CIT (Appeals) in allowing the claim of expenditure of keyman insurance premium paid by the assessee firm on the lives of its partners. Ground Nos.1 and 2 raised by the Revenue are thus dismissed."
8. Respectfully following the order of the I.T.A.T., we hereby direct the Assessing Officer to delete the addition made by him.
9. In it is grounds of appeal, the assessee has also challenged the validity of reopening by issuing notice under section 148 of the Act. Since we have allowed relief to the assessee while adjudicating other grounds of appeal, this ground becomes academic and we do not find 7 any need to adjudicate the same.
10. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on this 2nd day of February, 2016.
Sd/- Sd/- (H.L. KARWA) (RANO JAIN) VICE PRESIDENT ACCOUNTANT MEMBER Dated : 2 n d February, 2016 *Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
Assistant Registrar, ITAT, Chandigarh