2010 (8) TMI 1022 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of Rs. 11,00,000/- on account of premium paid under Keyman Insurance Policy (KIP).
2. Disallowance of Rs. 2,27,328/- being 1/5th of expenses relating to vehicle and telephone.

Summary:

Issue 1: Disallowance of Rs. 11,00,000/- on account of premium paid under Keyman Insurance Policy (KIP)

The assessee contested the disallowance of Rs. 11,00,000/- being premium paid towards KIP. The AO disallowed the premium, arguing that it was not allowable as revenue expenditure due to the absence of an employer-employee relationship between the firm and its partners. The AO cited CBDT Circular No.762 and the Gujarat High Court decision in CIT Vs Khodidas Motiram Panchal, concluding that the premium was a capital expenditure.

The CIT(A) upheld the AO's decision, stating that partners are not merely connected to the firm but constitute the firm, thus any KIP taken by the firm would amount to personal expenditure. The CIT(A) rejected the assessee's argument that the premium should be allowed as business expenditure under section 28(vi) of the IT Act.

The Tribunal, however, referred to the Bombay High Court decision in CIT Vs B. N. Exports and ITAT Ahmedabad Bench in M/s. Gem Art, which held that KIP premiums paid for partners are allowable as business expenditure. The Tribunal found that the KIP was obtained for the benefit of the firm and not for the personal benefit of the partners. Consequently, the Tribunal allowed the premium of Rs. 10,00,000/- paid for Mr. Ashishbhai M. Amin as revenue expenditure but confirmed the disallowance of Rs. 1,00,000/- paid for the sleeping partner.

Issue 2: Disallowance of Rs. 2,27,328/- being 1/5th of expenses relating to vehicle and telephone

The AO disallowed one-fifth of the vehicle and telephone expenses, considering them personal in nature. The CIT(A) confirmed this disallowance. The Tribunal upheld the decision, noting that no evidence was provided to show that these expenses were exclusively for business purposes. Thus, the disallowance of Rs. 2,27,328/- was sustained.

Conclusion:

The appeal was partly allowed. The disallowance of Rs. 10,00,000/- for KIP premium was deleted, while the disallowance of Rs. 1,00,000/- for the sleeping partner and Rs. 2,27,328/- for vehicle and telephone expenses was confirmed.