2016 (3) TMI 1225 - AT - Income Tax

Revision u/s 263 - premium paid by the assessee on the life insurance of its key man being the partner of the firm disallowed - Held that - On the perusal of the cover note issued by the insurers it is very clear that the policies are Keyman insurance policies, whether these are term policies or not is not a question to be decided by any of the revenue authorities. We are in total disagreement with the CIT in holding that the premium paid by the assessee on the Keyman insurance policies are not allowable in view of the fact that the policies are not the valid policies. The policies are issued by the insurer and premiums are being paid as per the policy terms and conditions. There is no condition of the Income Tax Act which has been not complied with while making payment of these premiums. Therefore the premium paid by the assessee on the life insurance of its key man being the partner of the firm are therefore allowable expenditure. Since the issue of allowability of premium on accrual basis has not been dealt with by the CIT in his order, we do not find any need to adjudicate the same. Otherwise also we see that in the original assessment the assessing officer has placed a specific query regarding the Keyman insurance policy premium paid by the assessee vide its note sheet entry and a detailed reply has been filed by the assessee together with the relevant evidences. Thus the assessing officer has made enquiry regarding the Keyman insurance which had been duly replied by the assessee. The AO was open to the issue of Keyman insurance and has applied his mind while allowing this expenditure to the assessee. The order passed by the CIT under section 263 of the Act is not as per law - Decided in favour of assessee.

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act, 1961.
2. Validity of Keyman Insurance Policy and its deduction.
3. Allegation of change of opinion by the Commissioner of Income Tax (CIT).
4. Relevance of previous CIT's decision on the same issue.
5. Applicability of Insurance Regulatory and Development Authority (IRDA) circulars.
6. Adequacy of enquiry by the Assessing Officer (AO).

Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act, 1961:
The CIT issued a notice under Section 263, questioning the deduction of Rs. 14,99,998/- claimed as insurance charges for Keyman Insurance Policies. The CIT considered the assessment order erroneous and prejudicial to the interest of revenue. The assessee argued that the AO had already examined this issue during the original assessment proceedings, thus CIT's assumption of jurisdiction under Section 263 was erroneous.

2. Validity of Keyman Insurance Policy and its deduction:
The CIT disallowed the deduction claimed for Keyman Insurance Policies, arguing that the policies did not qualify as Keyman Insurance Policies according to IRDA guidelines. The assessee contended that the policies were indeed Keyman Insurance Policies, as evidenced by certificates from ICICI Prudential and that the premium paid should be allowed as a business expenditure under Section 10(10D) and Circular No. 762 dated 18.02.1998.

3. Allegation of change of opinion by the Commissioner of Income Tax (CIT):
The assessee argued that the CIT's action was based on a change of opinion, which is not permissible. The CIT had previously accepted the same policies as Keyman Insurance Policies in the earlier assessment year, thus contradicting his current stance.

4. Relevance of previous CIT's decision on the same issue:
The assessee highlighted that in the previous assessment year, the CIT had dropped proceedings under Section 263 on the same issue, accepting the policies as Keyman Insurance Policies. This inconsistency was pointed out to argue against the CIT's current decision.

5. Applicability of Insurance Regulatory and Development Authority (IRDA) circulars:
The CIT referred to IRDA circulars which stated that Keyman Insurance Policies should only be term insurance policies. The CIT used these circulars to argue that the policies in question did not qualify for deduction. However, the tribunal noted that the Income Tax Act is an independent code and the allowability of expenditure should be based on its provisions, not on IRDA guidelines.

6. Adequacy of enquiry by the Assessing Officer (AO):
The tribunal observed that the AO had made specific enquiries about the Keyman Insurance Policies during the original assessment. The AO had received detailed replies and relevant evidence from the assessee. Thus, it was concluded that the AO had applied his mind and the enquiry was adequate.

Conclusion:
The tribunal held that the CIT's order under Section 263 was not in accordance with the law and quashed it. The tribunal emphasized that the AO had conducted a proper enquiry and that the Keyman Insurance Policies were valid for deduction under the Income Tax Act. The appeal of the assessee was allowed, and the tribunal concluded that the premium paid for the Keyman Insurance Policies was an allowable business expenditure.

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