2016 (4) TMI 1196 - AT - Income Tax

Premium paid towards keyman insurance policy - whether Keyman falls within the definition laid down in the Explanation below section 10(10D) - Held that - The premium paid on the keyman insurance policy is to be allowed as business expenditure. The only thing to be seen is whether the Keyman falls within the definition laid down in the Explanation below section 10(10D). The Explanation states that Explanation For the purposes of this clause Keyman insurance policy means a life insurance policy taken by a person on the life of another person 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-mentioned person. As per the Explanation the only requirement is that Keyman should be an employee or a director and/or should be connected in some manner with the business of the firm. The premium under such policy has been categorically declared by the Board to be allowable as deduction specifically in view of the fact that the maturity amount receivable under the policy is no longer exempt from tax. It is a cardinal principle that where any income is subject to tax the expenditure incurred on earning of such income would be allowable. The Board has merely reiterated this principle. We uphold the action of the ld. CIT(A) in holding that on redemption/withdrawal of the amount under the above policy will have to be taken as income in the hands of the company as business income u/s 28(vi) in the relevant year and as such there will be double taxation if the said amount is disallowed ACIT, 2(1) Ujjain vs. M/s. Shriji Polymers Private Limited Ujjain 2017 (2) TMI 1106 - MADHYA PRADESH HIGH COURT and added to the income under present assessment year. Our interference is not required. Disallowance of commission u/s 40A(2)(a) and 40A(2)(b) - Held that - AO has not given emphasis on the nature and scope of the work and the services rendered. Section 40A(2) itself makes it apparent that regard must be had to the fair market value of the services as well as to the legitimate needs of the business . These two criteria are satisfied and hence no disallowance is warranted. Tribunal was not correct in law in upholding the disallowance out of the remuneration paid by the assessee to ACIT, 2(1) Ujjain vs. M/s. Shriji Polymers Private Limited Ujjain SP by invoking the provisions of section 40A(2) of the Act. Accordingly the High Court deleted the addition made and allowed the appeal. We therefore uphold the action of the ld. CIT(A) in deleting the addition.

Summary

Issues Involved:
1. Relief of ?49,75,054/- directed by CIT(A).
2. Authenticity of Keyman Insurance Policy.
3. Nominee details in the Keyman Insurance Policy.
4. Qualification of the policyholders as Keymen.
5. Disallowance of ?23,23,241/- commission under Section 40A(2)(a) and 40A(2)(b) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Relief of ?49,75,054/- Directed by CIT(A):
The Revenue challenged the CIT(A)'s decision to allow a relief of ?49,75,054/- to the assessee, which was initially disallowed by the AO as premium paid towards a Keyman Insurance Policy. The AO had rejected the claim due to the absence of documentary evidence proving the policy's existence and the keyman status of the directors.

2. Authenticity of Keyman Insurance Policy:
The AO disallowed the premium payment of ?49,75,054/- on the grounds that the assessee failed to submit the insurance policy document. The CIT(A), however, accepted the policy document submitted later and allowed the relief. The Tribunal upheld the CIT(A)'s decision, referencing CBDT Circular No. 762 and various ITAT decisions, which clarified that premium paid on a Keyman Insurance Policy is allowable as a business expenditure.

3. Nominee Details in the Keyman Insurance Policy:
The Revenue contended that the nominee for the policy was an individual and not the company, questioning the legitimacy of the policy as a Keyman Insurance Policy. The Tribunal found that the policy was taken to protect the business against potential financial loss due to the directors' premature death or termination, thus qualifying as a Keyman Insurance Policy.

4. Qualification of the Policyholders as Keymen:
The AO questioned the qualifications of the directors, Arpit Bangur and Shweta Jajoo, to be considered keymen. The Tribunal noted that Arpit Bangur, a graduate engineer from IIT Roorkee, and Shweta Jajoo, a B.Com graduate handling administrative and HR functions, played vital roles in the company’s operations. The Tribunal upheld that their qualifications and contributions justified their status as keymen.

5. Disallowance of ?23,23,241/- Commission under Section 40A(2)(a) and 40A(2)(b):
The AO restricted the commission payments to related parties, citing that higher rates were paid compared to unrelated parties. The CIT(A) deleted the addition, emphasizing the fair market value of services and legitimate business needs. The Tribunal agreed, noting that the AO did not adequately consider the nature and scope of services rendered. The Tribunal referenced case laws, including the Delhi High Court’s decision in Hive Communication (P.) Ltd. v. CIT, to support that the legitimate needs of the business and the benefit derived must be considered from the viewpoint of a prudent businessman. The Tribunal upheld the CIT(A)'s deletion of the disallowance.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decisions on both the Keyman Insurance Policy premium and the commission payments. The Tribunal emphasized that the expenditures were legitimate business expenses and should be allowed as deductions. The order was pronounced in the open court on 22nd April, 2016.