2015 (12) TMI 1752 - AT - Income Tax

Deduction u/s 80C - Disallowance of premium paid to LIC under Employer- Employee Scheme for treating the same as capital expenditure - close ended fund with a lock in period of 3 years - remand back

Issues Involved:
1. Disallowance of premium paid to LIC under "Employer-Employee Scheme" as capital expenditure.
2. Deletion of disallowance of speculation loss on account of cancellation of foreign currency forward contract by treating it as trading loss.

Detailed Analysis:

1. Disallowance of Premium Paid to LIC under "Employer-Employee Scheme" as Capital Expenditure:

Facts and Arguments:
The assessee company paid premiums to LIC under the "Employer-Employee Scheme" for two directors. The Assessing Officer (AO) disallowed the premiums as capital expenditure, arguing it was a close-ended fund with a lock-in period of three years and not a term policy. The AO also contended that the premiums paid for shareholders were not supported by any specific rules or directions from the CBDT.

CIT(Appeals) Observations:
The CIT(Appeals) upheld the AO's disallowance, stating:
- The investment was a close-ended fund with a lock-in period of three years.
- It was not a term policy and did not provide life coverage.
- The expenditure was incurred for shareholders, not employees.
- No specific CBDT instructions supported the claim as revenue expenditure.

Tribunal's Analysis:
The Tribunal noted that:
- Keyman Insurance Policy premiums are allowable deductions under Section 37(1) of the Income Tax Act, 1961.
- CBDT Circular No.762 dated 18.2.1998 supports the deduction of premiums paid for Keyman Insurance Policies.
- Directors of a company can be considered employees, making the premiums paid allowable under the scheme.

The Tribunal referenced the ITAT Bilaspur Bench decision in Sunita Finlease Ltd. Vs DCIT, which held that premiums paid on Keyman Insurance Policies should be allowed as business expenditure. The Tribunal concluded that the premiums paid by the assessee company for the directors are covered by the CBDT Circular and allowed the appeals of the assessee.

2. Deletion of Disallowance of Speculation Loss on Account of Cancellation of Foreign Currency Forward Contract by Treating it as Trading Loss:

Facts and Arguments:
The assessee, engaged in manufacturing garments and wind power generation, claimed a loss of Rs. 1,06,61,901 due to the cancellation of foreign currency forward contracts. The AO disallowed this as a speculation loss, arguing it was not a trading loss.

CIT(Appeals) Observations:
The CIT(Appeals) followed the Tribunal's earlier decision in the assessee's case for the assessment year 2006-07, where it was held that forex transactions by an exporter are not speculative transactions but business losses. The CIT(Appeals) allowed the assessee's appeal, treating the loss as a business loss.

Tribunal's Analysis:
The Tribunal reviewed the decision of the co-ordinate Bench in the assessee's case and other relevant cases, including:
- CIT v. Badridas Gauridu (P) Ltd, where the Bombay High Court held that forex transactions by an exporter are business losses.
- DCIT v. Asvini Fisheries Pvt Ltd, where it was held that forex contracts entered into by an exporter are not speculative transactions.

The Tribunal concluded that the forex derivative transactions should be considered in proportion to the export turnover. If the transactions exceed the export turnover, the excess should be treated as speculative loss. The Tribunal remanded the issue back to the AO for fresh consideration, directing the AO to distinguish between completed transactions and prematurely canceled contracts.

Conclusion:
The Tribunal allowed the assessee's appeals regarding the disallowance of premiums paid to LIC under the "Employer-Employee Scheme" and remanded the issue of speculation loss on forex contracts back to the AO for fresh consideration. The appeals of the assessee were allowed, and the Revenue's appeal was allowed for statistical purposes.

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