Income Tax Appellate Tribunal - Ahmedabad
Parshwa Lam & Core Industries, Baroda vs Assessee on 26 October, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD
"B" BENCH
Before: Shri D.K. Tyagi, Judicial Member and
Shri T.R. Meena, Accountant Member
I.T.A. No.1415/Ahd/2012
A.Y. 2005-06
M/s Parshwa lam & Core Industries, Vs. The Income Tax
104, Fatehsag ar Complex, Officer,
Fatehg unj, Ward-2(4)
Vadod ara-390002 Vadodara
Appellant Respondent
Department by : Shri D.G. Pansari, Sr. D.R.
Assessee by : Shri Vipul K. Shah, A.R.
Date of hearing : 26.10.2012
Date of p ronouncement : 30.11.2012
आदे श/ORDER
PER : D.K. TYAGI, JUDICIAL MEMBER
This is assessee's appeal against the order of ld. CIT(A)-III, Baroda dated 26.03.2012.
2. Assessee has taken following effective grounds of appeal:-
"1. That the ld. CIT(A) has erred in law and on fact in confirming the order passed by the A.O. in disallowing 20% of expenses on depreciation on car, car repairing & maintenance and petrol and car expense amounting to Rs.9,900/-, 11,740/- and Rs.17,600/- treating non business purpose.
2. That the ld. CIT(A) has erred in law and on fact in confirming the order passed by the A.O. in disallowing premium paid of Rs.3,59,600/- towards Keyman Insurance Policy."
3. Ground No.1 relates to disallowance of 20% of expenses on depreciation on car, car repairing and maintenance and petrol amounting to Rs.9900/-, Rs.11,740/- and 11,600/- respectively.
I.T.A. No.1415/Ahd/2012 A.Y. 2005-06 2
4. The A.O., during the assessment proceedings observed that the assessee had claimed depreciation of Rs.49,567/- on car, car repair and maintenance charges of Rs.58,683/- and petrol and car expenses of Rs.20,028/-. The assessee did not maintain any log book/trip register in this regard. Therefore, the A.O. asked the assessee to explain as to why 20% of these expenses should not be disallowed. Since the assessee did not object to the proposed disallowance the A.O. disallowed 20% of these expenses and added to the total income of the assessee. Ld. CIT(A) following the decision of Bombay High Court in the case of Ramesh Chandra & Co. 168 ITR 375 confirmed the disallowance made by the A.O. as the assessee agreed for this disallowance before the A.O.
5. At the time of hearing also nothing substantial was argued to deviate us from the finding of ld. CIT(A) hence the order passed by him is hereby upheld. This ground of the assessee is dismissed.
6. Ground No.2 relates to disallowance of the premium of Rs.3,59,600/- paid towards Keyman Insurance Policy.
7. The A.O., during the assessment proceedings observed that though the assessee has paid premium of Rs.3,59,600/- towards Keyman Insurance Policy in respect of Shri Vipul M Magia and Shri Piyush M Mehta, the partners of the firm, the policies were not nominated in favour of the assessee firm. Therefore, the A.O. asked the assessee to explain as to why this expenditure should not be disallowed as the same is in the nature of personal expenses. The assessee's contention was that the premium was paid towards the life of the Keyman of the firm and cited CBDT circular No.762 dated 18.02.1998 and stated that section 10(10D) had been amended and the amount received on I.T.A. No.1415/Ahd/2012 A.Y. 2005-06 3 surrendered value of the policy will be out of bracket of the exemption and accordingly be taxed and the premium paid on the keymen insurance policy is to be allowed as business expenditure. This explanation was not acceptable to the A.O. on the following grounds:-
"(i) The A.O. held that the proceedings of the said policy were to be received by 'others' in the case of policy of Shri Vipul Mahasukhbhai Mehta and not by the firm.
(ii) LIC of India had specifically devised this policy for public and private companies, who are having technically qualified persons and who contribute substantially for the building up/growth of the company as well as increasing the profit ratio of the said entities.
But, in the present case the partners are only graduates.
(iii) The partners are not the employees of the firm but they are the owners of the business carried on by the firm and therefore, there does not employer employee relationship. Hence, there is no payment by the employer to the employees as mentioned in the Board's Circular No.762 dated 18.02.1998.
(iv)In this case both the partners who were insured under the Keyman Insurance Policy are only graduates i.e., having degree of B. Com. They are neither technically sound nor possessing any technical or extra-ordinary degree. Further the activity of the business also does not require the services of the skilled persons. The assessee has employed 15 persons and has paid salary amounting to Rs.1,40,600/-. The object of the Keymen Insurance is to indemnify the business entities from the loss of earning likely to result from the death of an important employee. The immediate replacement of the Keyment upon such eventuality of the demise of important employee may not be possible. It might take some time for such entity to fill in the void created by the demise of such Keymen. It might also incur a heavy cost for filling of such vacuum. The amount of Keymen Insurance is estimated to be the monetary value of the likely setback to the profit of the organization due to the demise of the Keymen. As far as the restrictive covenants propagated by LIC in this regard are concerned, they mainly relate to exclusion of those companies who are engaged in trading from the scope of Keymen Insurance policy, non availability of supplementary benefits like DAB/EPDB/Term-rider etc. Premia paid under the said keymen insurance policy are ordinarily allowable under the provision of section 37(1) of the I.T. Act with the rider that the proceeds of the policy in the hands of the firm will be treated as business income and will be taxed under the head profits and gains of business or profession under section 28 of the I.T. Act. Moreover, in both the I.T.A. No.1415/Ahd/2012 A.Y. 2005-06 4 cases the nominations has been made in favour of other persons then the firm which factor does not make the policy taken by the firm to fall under the genre of keymen insurance policy." In view of the above, the A.O. disallowed the payment of premium of Rs.3,59,660/- on the Keyman Insurance policy of partners treating the same as non-business expenditure and added to the total income of the assessee.
8. Before ld. CIT(A) the assessee's submission was that both the working partners were having B. Com. Degree and having substantial role in the business of the firm and were contributing substantially for the building up/ growth of the firm as well as increasing profit ratio of the firm. It was further submitted that the premium paid by firm in respect of Keyman Insurance Policies on the life of the working partners was allowable as business expenditure as the employer-employee relationship is not essential for allowing deduction of premium on Keyman Insurance Policy. For making this submission reliance was placed on the decision of Hon'ble Bombay High Court in the case of CIT vs. B.N. Export [37 DTR 381. 231 CTR 227] and in the decision of ITAT, Mumbai in the caswe of Modi Motors [126 TTJ (Mum.) 495. Ld. CIT(A) however, confirmed the action of the A.O.
9. At the time of hearing both the parties agreed that the issue is now covered in favour of the assessee and against the revenue by the decision of the jurisdictional High Court in the case of CIT vs. Gem Art in Tax Appeal No.1739 of 2009 dated 13th March, 2012 wherein following was held:-
"In computing the total income of a previous year of any person as per Section 10(10)D any sum received under a Keyman insurance policy is not to be included "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- I.T.A. No.1415/Ahd/2012 A.Y. 2005-06 5 mentioned person and going through the Explanation given in the said section the partner definitely comes within the purview of the person who is connected with in any manner whatsoever with the business of the firm - The premium paid on the Keyman Insurance Policy is allowed as business expenditure as the amendment had taken effect from October 1, 1996 - in favour of assessee."
10. In view of the above, the addition made by the A.O. and sustained by ld. CIT(A) is hereby deleted. This ground of the assessee is allowed.
11. In the result, assessee's appeal is partly allowed.
Order pronounced in open Court on 30.11.2012
Sd/- Sd/-
(T.R. Meena) (D.K. Tyagi)
Accountant Member Judicial Member
True copy
N.K. Chaudhary, Sr. P.S.
Copy of the Order forwarded to:
1. The applicant
2. The Respondent
3. The CIT Concerned
4. The Ld. CIT (Appeals)
5. The DR, Ahmedabad
6. The Guard File
By order
AR,ITAT,Ahmedabad