Pr. Commissioner Of Income Tax-I, Ludhiana v. M/S Ramesh Steels, Ludhiana

ITA No. 437 of 2015 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 437 of 2015 (O&M) Date of Decision: 2.2.2016 Pr. Commissioner of Income Tax-I, Ludhiana ....Appellant. Versus M/s Ramesh Steels, Ludhiana ...Respondent. 1.Whether the Reporters of the local papers may be allowed to see the judgment?the judgment? 2.To be referred to the Reporters or not? YES3.Whether the judgment should be reported in the Digest?3.Whether the judgment should be reported in the Digest? CORAM:-HON'BLE MR. JUSTICE AJAY KUMAR MITTAL.HON'BLE MRS. JUSTICE RAJ RAHUL GARG. PRESENT: Mr. Rajesh Katoch, Advocate for the appellant. AJAY KUMAR MITTAL, J. 1.This appeal has been preferred by the revenue underSection 260A of the Income Tax Act, 1961 (in short “the Act”) against theorder dated 26.5.2015 (Annexure A-III) passed by the Income TaxAppellate Tribunal, Chandigarh Bench “A”, Chandigarh (hereinafterreferred to as “the Tribunal”) in ITA No. 757/Chd/2014, for theassessment year 2008-09, claiming the following substantial question oflaw:- Whether upon facts and circumstances of the case,the Hon'ble ITAT was right in law, in upholding thedecision of the Ld. CIT(A) in deleting the addition ofRs.1,27,49,983/- made by the Assessing Officer on account of premium paid on the life of partners anddebited to the profit and loss account as KeymanInsurance Premium of the assessee firm? 2.Put shortly, the facts necessary for adjudication of theinstant appeal as narrated therein may be noticed. The assessee filedits return of income on 21.10.2008 for the assessment year 2008-09 atnil income. The said return was processed under Section 143(1) of theAct on 13.3.2010. Subsequently, the case was selected for scrutiny andnotice under Section 143(2) of the Act was issued on 14.9.2009.Subsequently, notice under Section 142(1) of the Act was issued on7.1.2010 along with preliminary questionnaire and again notice dated28.4.2010 under Section 142(1) of the Act along with detailedquestionnaire was issued. The Assessing Officer vide order dated3.12.2010 (Annexure A-1) framed the assessment under Section 143(3)of the Act at nil income and made the additions of ` 21,52,812/- and` 1,27,49,983/- on account of disallowance of excess depreciation anddisallowance of premium paid on 'Keyman Insurance Policy' taken on lifeof the partners. Feeling aggrieved, the assessee filed an appeal beforethe Commissioner of Income Tax (Appeals) [for brevity “the CIT(A)”].The CIT(A) vide order dated 24.6.2014 (Annexure A-II) allowed theappeal and deleted the additions made by the Assessing Officer.Against the order, Annexure A-II, the revenue filed an appeal before theTribunal who vide order dated 26.5.2015 (Annexure A-III) upheld theorder of the CIT(A) and dismissed the appeal. Hence, the presentappeal by the revenue. 3.We have heard learned counsel for the revenue. 4.The primary issue that arises for consideration in this appeal is whether the premium paid for securing “Keyman Insurance Policy”whereby the premium had been paid to secure the life of a partneragainst disruption of the business that may result due to the prematuredeath of a partner would be admissible expenditure under Section 37 ofthe Act. 3.We have heard learned counsel for the revenue. 4.The primary issue that arises for consideration in this appeal is whether the premium paid for securing “Keyman Insurance Policy”whereby the premium had been paid to secure the life of a partneragainst disruption of the business that may result due to the prematuredeath of a partner would be admissible expenditure under Section 37 ofthe Act. 5.The issue is no longer res integra. The Bombay High Courtdelving into identical issue in Commissioner of Income Tax v. B.N.Exports (2010) 323 ITR 178 after noticing the relevant statutoryprovisions and the Board Circular No. 762 dated 18[th] February, 1998issued by the Central Board of Direct Taxes on the issue had held thatthe premium paid for a 'Keyman Insurance Policy' is allowable asbusiness expenditure under Section 37(1) of the Act. It was furthernoted that the object and purpose of the said policy is to protect thebusiness against a financial set back which may occur as a result of apremature death, to the business or professional organization. There isno rational basis to confine the allowability of the expenditure incurred onthe premium paid towards such a policy only to a situation where thepolicy is in respect of the life of an employee. The said policy whenobtained to secure the life of a partner against a disruption of thebusiness is equally for the benefit of the partnership business which maybe affected as a result of premature death of a partner. Thus, thepremium on the 'Keyman Insurance Policy' of partner of the firm is whollyand exclusively for the purposes of business and is allowable asbusiness expenditure. The relevant observations read thus:- 4. In order to appreciate the submission which hasbeen made a reference to some of the relevantprovisions of the Income Tax Act, 1961 would be inbeen made a reference to some of the relevantprovisions of the Income Tax Act, 1961 would be in order. Section 2(31) defines the expression "person"to include an individual, a Hindu Undivided Family, acompany, a firm, an AOP or a BOI whetherincorporated or not, a local authority and everyartificial juridical person, not falling within the previoussub clauses. Consequently, for the purposes oftaxation, a firm is regarded as a distinct assessableentity. Section 10 provides that in computing the totalincome of any person for the previous year, incomefalling within any of the clauses of the provision shallnot be included. Clause (10D) specifies to any sumreceived under a life insurance policy, including a sumallocated by way of bonus on such a policy other than,inter alia, "any sum received under a KeymanInsurance Policy". The Explanation to Clause (10D)defines what is meant by a Keyman Insurance Policythus : "Keyman Insurance Policy" means a lifeinsurance policy taken by a person on the life ofanother person who is or was the employee ofthe first-mentioned person or is or wasconnected in any manner whatsoever with thebusiness of the first mentioned person." 5. The effect of Clause (10D) is that a sumreceived under a life insurance policy is not to beincluded in computing the total income of any person.However, a sum received under a Keyman Insurance Policy forms a part of the total income and is liable tobe offered to tax. For the purposes of Clause (10D), aKeyman Insurance Policy is a life insurance policytaken by a person on the life of another person who isor was the employee of the person who subscribes tothe policy of insurance or is or was connected in anymanner whatsoever with the business of thesubscriber to the policy. In other words, a KeymanInsurance Policy for Clause (10D) is not confined to apolicy taken by a person on the life of an employee,but also extends to an insurance policy taken withrespect to the life of another who is connected in anymanner whatsoever with the business of thesubscriber. Policy forms a part of the total income and is liable tobe offered to tax. For the purposes of Clause (10D), aKeyman Insurance Policy is a life insurance policytaken by a person on the life of another person who isor was the employee of the person who subscribes tothe policy of insurance or is or was connected in anymanner whatsoever with the business of thesubscriber to the policy. In other words, a KeymanInsurance Policy for Clause (10D) is not confined to apolicy taken by a person on the life of an employee,but also extends to an insurance policy taken withrespect to the life of another who is connected in anymanner whatsoever with the business of thesubscriber. 6. The Central Board of Direct Taxes has issued acircular on 18th February, 1998 (Circular 762) [(1998)145 CTR (St) 5] which clarifies the scope and purposeof the provision. Paragraph 14.1 of the circular statesthus : "14.1 A Keyman Insurance Policy of the LifeInsurance Corporation of India, etc., providesfor an insurance policy taken by a businessorganisation or a professional organisation onthe life of an employee, in order to protect thebusiness against the financial loss, which mayoccur from the employee's premature death.The "Keyman" is an employee or a director, ITA No. 437 of 2015-6- whose services are perceived to have asignificant effect on the profitability of thebusiness. The premium is paid by theemployer."significant effect on the profitability of thebusiness. The premium is paid by theemployer." 7. The Circular notes that there were certaindoubts on the taxability of the income, includingbonus, received from such policies and as regardswhether the premium paid should be allowed ascapital or as revenue expenditure. The circularclarifies that the Act lays down the tax treatment for aKeyman Insurance Policy. The circular clarifies thatthe premium paid on a Keyman Insurance Policy isallowable as business expenditure.” doubts on the taxability of the income, includingbonus, received from such policies and as regardswhether the premium paid should be allowed ascapital or as revenue expenditure. The circularclarifies that the Act lays down the tax treatment for aKeyman Insurance Policy. The circular clarifies thatthe premium paid on a Keyman Insurance Policy isallowable as business expenditure.” 6. The conclusion recorded in para 9 is quoted as under:- 9. The effect of Section 10(10D) is that monies whichare received under a life insurance policy are notincluded in the computation of the total income of aperson for a previous year. However, any sumreceived under a Keyman Insurance Policy is to bereckoned while computing total income. For thatpurpose, a Keyman Insurance Policy means a lifeinsurance policy taken by a person on the life ofanother person who is or was in employment as wellas on a person on who is or was connected in anymanner whatsoever with the business of thesubscriber. The words "is or was connected in anymanner whatsoever with the business" of theare received under a life insurance policy are notincluded in the computation of the total income of aperson for a previous year. However, any sumreceived under a Keyman Insurance Policy is to bereckoned while computing total income. For thatpurpose, a Keyman Insurance Policy means a lifeinsurance policy taken by a person on the life ofanother person who is or was in employment as wellas on a person on who is or was connected in anymanner whatsoever with the business of thesubscriber. The words "is or was connected in anymanner whatsoever with the business" of the subscriber are wider that what would be subsumedunder a contract of employment. The latter partmakes it clear that a Keyman Insurance Policy for thepurposes of Clause (10D) is not confined to asituation where there is a contract of employment.Clause (10D) relates to the treatment for the purposeof taxation of moneys received under an insurancepolicy. In this appeal, the Court has to determine thequestion of expenditure incurred towards the paymentof insurance premium on a Keyman Insurance Policy.The circular which has been issued by the CentralBoard of Direct Taxes clarifies the position bystipulating that the premium paid for a KeymanInsurance Policy is allowable as businessexpenditure. In the present case, on the questionwhether the premium which was paid by the firmcould have been allowed as business expenditure,there is a finding of fact by the Tribunal that the firmhad not taken insurance for the personal benefit of thepartner, but for the benefit of the firm, in order toprotect itself against the set back that may be causedon account of the death of a partner. The object andpurpose of a Keyman Insurance Policy is to protectthe business against a financial set back which mayoccur, as a result of a premature death, to thebusiness or professional organization. There is norational basis to confine the allowability of the expenditure incurred on the premium paid towardssuch a policy only to a situation where the policy is inrespect of the life of an employee. A KeymanInsurance Policy is obtained on the life of a partner tosafeguard the firm against a disruption of the businessthat may result due to the premature death of apartner. Therefore, the expenditure which is laid outfor the payment of premium on such a policy isincurred wholly and exclusively for the purposes ofbusiness.” 7.Further, the Gujarat High Court has expressed the similarview in Commissioner of Income Tax v. Gem Art (2012) 252 CTR 451and also this Court in Commissioner of Income Tax-I, Ludhiana v. M/sLaj Exports, Ludhiana, ITA No. 251 of 2012 decided on 8.11.2013.8.In view of the above, there is no error in the approach of theTribunal in accepting the claim of the assessee. Accordingly, nosubstantial question of law arises in this appeal. Finding no merit in theappeal, the same is hereby dismissed. (AJAY KUMAR MITTAL) JUDGE February 2, 2016gbs (RAJ RAHUL GARG) JUDGE