Tca/843/2013 Of Commissioner Of Income Tax v. M/S Soundarya Decorators P

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM: THE HON'BLE MR.JUSTICE M.DURAISWAMYAND THE HON'BLE MRS.JUSTICE T.V.THAMILSELVI Tax Case (Appeal) No.843 of 2013 Judgment reserved onJudgment pronounced on 26.03.202117.04.2021 Commissioner of Income tax,Chennai. .. Appellant M/s.Soundarya Decorators Pvt. Ltd26 Survey Nos.2 & 3,Porur Village, Kolathur,Chennai-600 047. .. Respondent PRAYER : Tax Case Appeal filed under Section 260 A of theIncome Tax Act, 1961, against the order of the Income-TaxAppellate Tribunal, Chennai Bench "C", dated 07.02.2013 inI.T.A.No.386/Mds/2011 for the assessment year 2005-2006,preferred against the order passed by the Commissioner of IncomeTax(Appeals)-V,Chennai-34dated15-12-2010madeinITA.No.525/09-10 preferred against the order passed by theAssistant Commissioner of Income Tax, Company Circle VI(3),Chennai-34, for the Assessment year 2005-2006. For Respondent : Mr.V.S.JayaKumar T.V.THAMILSELVI, J. This appeal has been filed by the Revenue under Section 260Aof the Income Tax Act, 1961, against the order of the Income-TaxAppellate Tribunal, Chennai Bench "C", dated 07.02.2013 inI.T.A.No.386/Mds/ 2011 for the assessment year 2005-2006. 2.The above Tax Case Appeal was admitted on the following https://hcservices.ecourts.gov.in/hcservices/ substantial Questions of law: “(i) Whether on facts and the circumstancesof the case, the Tribunal was right in holding thatthe assessee is eligible for deduction of entire sumpaid to the insurance company as premium on Key Maninsurance policy and is eligible for deduction underSection 37? (ii) Whether under the facts and circumstancesof the case, the Income Tac Appellate Tribunal wasright in not considering the restriction placed bythe insurance company on the sum assured in the caseof Key Man insurance policy and allowing the entirepremium including the sum assured in excess of suchrestriction? (iii) Whether based on material placed beforeit, the income Tax Appellate Tribunal could have cometo the conclusion that the entire premium is towardsthe sum assured on Key Man insurance policy, thoughinsurance company has placed restriction on the sumassured in the Key Man insurance policies?” 3. Heard Mr.J.Narayanaswamy, learned Senior Standing counselfor the appellant and Mr.V.S.Jayakumar learned counsel for theRespondent. 4. The facts reveal that, the assessee company has debited asum of Rs.2,39,61,737/- towards insurance under theadministrative expense, out of which, Rs.2,35,34,728/- relatesto expenses towards Keyman Insurance. The assessee is a PrivateLimited Company having less than 10 No. of share holders.According to the guidelines of LIC for Keyman Insurance, theconcern should be a profit making one and the profits for thelast three years should justify the cover being allowed and themaximum sum allowable is three times of average gross profit orfive times of average net profit whichever is lower. It ispertinent to note that for a minimum term of 10 years, theannual premium payable for a sum assured value ofRs.4,62,63,345/-, calculating @ 10% of the assured sum works outto only Rs.46,26,334/- per annum. However, the assesseecompany has claimed a sum of Rs.2,35,34,728/- as KeymanInsurance premium for the assessment year 2005-06. The assesseecompany was given an opportunity to rebut the same along withdocumentary evidence to substantiate its claim. 5. The assessee company in its submission has not provideddocument and / or fact that would justify that the expenditureis wholly and exclusively for the purpose of business. In orderto claim deduction under Section 37(1) of the I.T.Act, 1961, the 5. The assessee company in its submission has not provideddocument and / or fact that would justify that the expenditureis wholly and exclusively for the purpose of business. In orderto claim deduction under Section 37(1) of the I.T.Act, 1961, the nexus between the business and the expense has to be proved. Inthe absence of any explanation, the Assessing Officer did notaccept the contention of the assessee. In these circumstances,the Assessing Officer disallowed the expenditure and added thesaid amount to the total income of the assessee company.Aggrieved by the said order, the assessee has preferred anappeal in ITA No.525/09-10 before the Commissioner of Income Tax(Appeals) and the Commissioner of Income Tax, while disposing ofthe said appeal, relied upon the CBDT circular No.762, dated18.02.1998 and also the provisions of Section 10(10D) of the Actto conclude that there is no stipulation as to the restrictionof the premium paid and treated the premium paid for KeymanInsurance Company as business expenditure. 6. Accordingly the Commissioner for Income Tax, directed theAssessing officer to allow a sum of Rs.1,89,08,394/- by treatingthe entire premium paid as business expenditure. Aggrieved overthe order of the CIT (Appeals), the Revenue preferred an appealbefore the Income Tax Appellate Tribunal in ITA.No.386/Mds/2011with regard to Keyman Insurance premium and the Tribunalconfirmed the order of the CIT (Appeals) and dismissed theappeal. The main contention of the Revenue is that the Tribunalhad confirmed the order of the CIT (Appeals) without giving anyvalid reasons for following the circular. Challenging the saidimpugned order the Revenue has preferred this appeal. 7. The learned Senior Standing counsel appearing for theRevenue submitted that the Tribunal failed to appreciate that inview of the restrictions on the sum assured on Keyman Insurancepolicy, the entire premium cannot be considered as premiumtowards Keyman Insurance policy. He further submitted that theTribunal also erred in applying the circular No.762, dated18.02.1998 on the allowability of premium on Keyman Insurancepolicy while the issue before it was the quantum of deduction. 8. Per contra, the learned counsel for the respondent /assessee submitted that CIT(A) as well as the Tribunal was rightin holding that thus the premium on Keyman Insurance policy wasallowable as business expense under Section 37(1) of the Act. Insupport of his contentions, the learned counsel relied upon thefollowing judgments: (i) The Hon'ble Supreme Court in the case of Sassoon J.David& Co.P.Ltd. Vs. Commissioner of Income Tax reported in 1979(Volume 118) ITR 0261, held as follows:“20. The next contention urged on behalf ofthe Department was that since Davids and Tatas wereindirectly benefited by the retrenchment of theservices of he employees of the company and paymentof compensation to them and since there was no 8. Per contra, the learned counsel for the respondent /assessee submitted that CIT(A) as well as the Tribunal was rightin holding that thus the premium on Keyman Insurance policy wasallowable as business expense under Section 37(1) of the Act. Insupport of his contentions, the learned counsel relied upon thefollowing judgments: (i) The Hon'ble Supreme Court in the case of Sassoon J.David& Co.P.Ltd. Vs. Commissioner of Income Tax reported in 1979(Volume 118) ITR 0261, held as follows:“20. The next contention urged on behalf ofthe Department was that since Davids and Tatas wereindirectly benefited by the retrenchment of theservices of he employees of the company and paymentof compensation to them and since there was no necessity to retrench the services of all theemployees, the expenditure in question could not betreated as an expenditure laid out wholly andexclusively for the purposes of the company. It hasto be observed here that the expression “wholly andexclusively” used in s.10(2)(XV) of the Act does notmean “necessarily”. Ordinarily, it is for theassessee to decide whether any expenditure should beincurred in the course of his or its business. Suchexpenditure may be incurred voluntarily and withoutany necessity and if it is incurred for promoting thebusiness and to earn profits, the assessee can claimdeduction under s.10(2)(XV) of the Act even thoughthere was no compelling necessity to incur suchexpenditure. It is relevant to refer at this stage tothe legislative history of s.37 of the IT Act, 1961,which corresponds to s.10(2)(XV) of the Act. Anattempt was made in the IT Bill of 1961 to lay downthe “necessity” of the expenditure as a condition forclaiming deduction under s.37. Sec.37(1) in the Billread “any expenditure.... laid out or expended whollynecessarily and exclusively for the purposes of thebusiness or profession shall be allowed...” Theintroduction of the word “necessarily” in the abovesection resulted in public protest. Consequently,when s.37 was finally enacted into law, the word“necessarily” came to be dropped. The fact thatsomebody other than the assessee is also benefited bythe expenditure should not come in the way of anexpenditure being allowed by way of deduction unders.10(2) (XV) of the Act if it satisfies otherwise thetests laid down by law. This view is in accord withthe following observations made by this Court in CITvs. Chandulal Keshavlal & Co: (1960) 38 ITR 601 (SC):TC16R.507:” (ii) The Hon'ble Division Bench of the High Court of Punjaband Haryana in the case of Principal Commissioner of Income TaxVs Ramesh Steels, reported in 2016(Volume 384) ITR 0437(P&H),held as follows: “5.The issue is no longer res integra. TheBombay High Court delving into identical issue inCommissioner of Income Tax v. B.N.Exports (2010) 323ITR 178 after noticing the relevant statutoryprovisions and the Board Circular No.762 dated 18[th]February, 1998 issued by the Central Board of DirectTaxes on the issue had held that the premium paid fora 'Keyman Insurance Policy' is allowable as businessexpenditure under Section 37(1) of the Act. It was (ii) The Hon'ble Division Bench of the High Court of Punjaband Haryana in the case of Principal Commissioner of Income TaxVs Ramesh Steels, reported in 2016(Volume 384) ITR 0437(P&H),held as follows: “5.The issue is no longer res integra. TheBombay High Court delving into identical issue inCommissioner of Income Tax v. B.N.Exports (2010) 323ITR 178 after noticing the relevant statutoryprovisions and the Board Circular No.762 dated 18[th]February, 1998 issued by the Central Board of DirectTaxes on the issue had held that the premium paid fora 'Keyman Insurance Policy' is allowable as businessexpenditure under Section 37(1) of the Act. It was further noted that the object and purpose of the saidpolicy is to protect the business against a financialset back which may occur as a result of a prematuredeath, to the business or professional organization.There is no rational basis to confine the allowabilityof the expenditure incurred on the premium paidtowards such a policy only to a situation where thepolicy is in respect of the life of an employee. Thesaid policy when obtained to secure the life of apartner against a disruption of the business isequally for the benefit of the partnership businesswhich may be affected as a result of premature deathof a partner. Thus, the premium on the 'keymanInsurance Policy' of partner of the firm is wholly andexclusively for the purposes of business and isallowable as business expenditure. The relevantobservations read thus:- 4.In order to appreciate the submissionwhich has been made a reference to some of therelevant provisions of the Income Tax Act, 1961 wouldbe in order. Section 2(31) defines the expression“person” to include an individual, a Hindu UndividedFamily, a company, a firm, an AOP or a BOI whetherincorporated or not, a local authority and everyartificial juridical person, not falling within theprevious sub clauses. Consequently, for the purposesof taxation, a firm is regarded as a distinctassessable entity. Section 10 provides that incomputing the total income of any person for theprevious year, income falling within any of theclauses of the provision shall not included. Clause(10D) specifies to any sum received under a lifeinsurance policy, including a sum allocated by way ofbonus on such a policy other than, inter alia, “anysum received under a Keyman Insurance Policy”. TheExplanation to clause (10D) defines what is meant by aKeyman Insurnce Policy thus: “Keyman Insurnce Policy” means a life insurance policytaken by a person on the life of another person who isor was the employee of the first-mentioned person oris or was connected 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 InsurancePolicy forms a part of the total income and is liableto be offered to tax. For the purposes of Clause(10D), a Keyman Insurance Policy is a life Insurancepolicy taken by a person on the life of another person who is or was the employee of the person whosubscribes to the policy of the insurance or is or wasconnected in any manner whatsoever with the businessof the subscriber to the policy. In other words, aKeyman Insurance Policy for Clause (10D) is notconfined to a policy taken by a person on the life ofan employee, but also extends to an insurance policytaken with respect to the life of another who isconnected in any manner whatsoever with the businessof the subscriber. 6.The Central Board of Direct Taxes hasissued a circular on 18[th] February, 1998 (Circular762)[(1998) 145 CTR (St) 5] which clarifies the scopeand purpose of the provision. Paragraph 14.1 of thecircular states thus: who is or was the employee of the person whosubscribes to the policy of the insurance or is or wasconnected in any manner whatsoever with the businessof the subscriber to the policy. In other words, aKeyman Insurance Policy for Clause (10D) is notconfined to a policy taken by a person on the life ofan employee, but also extends to an insurance policytaken with respect to the life of another who isconnected in any manner whatsoever with the businessof the subscriber. 6.The Central Board of Direct Taxes hasissued a circular on 18[th] February, 1998 (Circular762)[(1998) 145 CTR (St) 5] which clarifies the scopeand purpose of the provision. Paragraph 14.1 of thecircular states thus: “14.1. A Key man Insurance policy of the LifeInsurance Corporation of India, etc., provides for ainsurance policy taken by a business organisation or aprofession organisation on the life of an employee, inorder to protect the business against the financialloss, which may occur from the employee's prematuredeath. The “Keyman” is as employee or a director,whose services are perceived to have a significanteffect on the profitability of the business. Thepremium is paid by the employer.” 7.The Circular notes that there werecertain doubts on the taxability of the income,including bonus, received from such policies and asregards whether the premium paid should be allowed ascapital or as revenue expenditure. The circularclarifies that the Act lays down the tax treatment fora Keyman Insurance Policy. The circular clarifies thatthe premium paid on a Keyman Insurance Policy. Thecircular clarifies that the premium paid on a keymanInsurance Policy is allowable as businessexpenditure.” (iii) The Hon'ble Division Bench of the High Court of Delhiin the case of Commissioner of Income Tax &ORS Vs Rajan Nanda &ORS., reported in 2012(Volume 349) ITR 8(Delhi), held asfollows: “25. After giving our due and thoughtfulconsideration to the submissions of the parties ofboth sides, we feel that the assessee has been ableto make out a case in its favour and order of theTribunal does not call for any interference. We arepersuaded by the following reasons in support of thisvies of ours: (i)The Department has itself allowed theexpenditure incurred on the premium paid for keymaninsurance policies in previous years as businessexpenditure under Section 37 of the Act. Right from1991-92 upto 1993-94 and thereafter even in respect ofAssessment year 1997-98, the expenditure was allowed.Though thereafter, the expenditure was disallowed, butagain the claim was accepted for the Assessment years2001-02 and 2002-03. Principle of consistency would,therefore, by applicable in such a case. (ii) The Tribunal has rightly referred to andrelied upon the CBDT's Circular dated 18.02.1998. ThisCircular is binding on the Income Tax Department,which categorically stipulates that premium on keymanpolicy should be allowed as business expenses. Theassessee would, naturally, take in to considerationsuch clarifications issued by the CBDT and would acton the basis thereof. When the assessee was given theimpression, by means of the aforesaid Circular, thatif expenditure is incurred on the keyman policy, itwould be treated as business expenditure. There is noreason for the Department to deviate therefrom when itcomes to the assessment. ......... (iv) The argument of Mr.N.P.Sahni, learnedcounsel for the Revenue that taking such keymaninsurance policy every year and thereafter assigningthe same to the beneficiaries may be treated ascolourable device, may not be correct. Though thisargument appears to be attractive when we look intothe fact that the assessee had been taking thepolicies and thereafter assigning the same year afteryear in favour of the beneficiaries, what cannot beignored that this course of action is permitted by theDepartment itself as stated in CBDT's Circular dated18.02.1998.” ......... (iv) The argument of Mr.N.P.Sahni, learnedcounsel for the Revenue that taking such keymaninsurance policy every year and thereafter assigningthe same to the beneficiaries may be treated ascolourable device, may not be correct. Though thisargument appears to be attractive when we look intothe fact that the assessee had been taking thepolicies and thereafter assigning the same year afteryear in favour of the beneficiaries, what cannot beignored that this course of action is permitted by theDepartment itself as stated in CBDT's Circular dated18.02.1998.” 9. Section 10(10D) of the Act deals with taxation of moneyreceived under the insurance policy. The issue that has to bedecided in this appeal is as to the question of expense incurredtowards the payment of insurance premium on a Keyman Insurancepolicy. The circular, which has been issued by the CBDT,clarifies the position by stipulating that the premium paid fora Keyman Insurance policy should be allowed as businessexpenditure. https://hcservices.ecourts.gov.in/hcservices/ premium paid by the assessee is concerned, the Tribunal, withoutgiving any acceptable finding, came to the conclusion that a sumof Rs.1,89,08,394/- should be treated as business expenditure.That apart, the assessee also failed to produce any documentaryevidence to justify their claim under Section 37(1) of the Act. 11. The learned Senior Standing Counsel for the appellantsubmitted that since the Commissioner of Income Tax (Appeals)as well as the Income Tax Appellate Tribunal have not consideredthe contentions of the revenue in entirety, it would beappropriate to remit the matter back to the Commissioner ofIncome Tax (Appeals) for fresh consideration. 12. On a reading of the orders passed by the Commissionerof Income Tax (Appeals) as well as the Income Tax AppellateTribunal, we are convinced that the Commissioner of Income Tax(Appeals) and the Tribunal have not considered the case of therevenue in a proper manner. Therefore, agreeing with thesubmissions made by the learned Senior Standing Counsel for theappellant, in the interest of justice, we are of the consideredview that the orders passed by the Commissioner of Income Tax(Appeals) and that of the Income Tax Appellate Tribunal areliable to be set aside and the matter should be remitted back tothe Commissioner of Income Tax (Appeals) for freshconsideration. 13. Accordingly, the orders passed by the Commissioner ofIncome Tax (Appeals) and the Income Tax Appellate Tribunal areset aside and the matter is remitted back to the Commissioner ofIncome Tax (Appeals) for fresh consideration. TheCommissioner of Income Tax (Appeals) shall decide the matterafresh, after taking into consideration the case of revenue aswell as the assessee and pass orders, on merits and inaccordance with law. 14. With the above observations, the Tax Case Appeal isallowed. No costs. Sd/- Assistant Registrar(CS-III) //True Copy// Sub Assistant Registrar rri To 1.Income Tax Appellate Tribunal "C" Bench, Chennai. https://hcservices.ecourts.gov.in/hcservices/ 2.The Commissioner of Income-Tax, Chennai. Chennai. 3.The Commissioner of Income Tax(Appeals)-V, Chennai-34. Chennai-34. 4.The Assistant Commissioner of Income Tax, Company Circle-VI(3), Chennai-34. Company Circle-VI(3), Chennai-34. 5.The Income Tax Officer(OSD), Company Circle VI(3), Chennai. Company Circle VI(3), Chennai. +1cc to Mr.J.Narayanaswamy, Advocate, S.R.No.23832+1cc to Mr.V.S.Jayakumar, Advocate, S.R.No.23487 Tax Case Appeal No.843 of 2013 PM(CO)CB(21/05/2021)