2010 (9) TMI 430 - AT - Income Tax

Insurance premium paid under Keyman Insurance Policy - The existence of employer-employee relationship is a sine-qua-non for the deductibility of keyman insurance premia - Expenditure on premia of keyman insurance for a firm on life of partners bestows personal benefits to the partners -The amount on claim or maturity under a keyman insurance policy is not exempt under section 10(10D) of the Income Tax Act when the company pays the premia, because in such situation the benefits received acquire the nature of capital receipts Gujarat High Court in the case of CIT v. Khodidas Motiram Panchal 1985 -TMI - 26497 has disallowed the claim of the assessee by treating the amount of premium paid in respect of Keyman s Insurance Policy as capital expenditure. However, in view of the subsequent position admitted by the Hon ble C.B.D.T. which is the highest body for tax administration in the country that Keyman s Insurance premium can be treated as an allowable expenditure the benefit given by the Circular to the assessee cannot be taken away on the basis of earlier legal pronouncement. It is an established position of law that benevolent circular are binding and the department is expected to follow the same in the spirit in which the same is issued by the C.B.D.T. Hon ble Bombay High Court in the case of B.N. Exports (2010 (3) TMI 186 - BOMBAY HIGH COURT) in similar facts and circumstances of the case held that where Keyman Insurance Policy was taken not for the personal benefit of the partner but for the benefit of the firm in order to protect itself against the set-back that may be caused on account of the death of the partner, the insurance premium was deductible. - AO directed to reconsider the issue in light of the decision of the Hon ble Bombay High Court in the case of B.N. Exports (2010 (3) TMI 186 - BOMBAY HIGH COURT) as per law

Summary

Issues Involved:
1. Deductibility of Keyman Insurance Premium paid by a partnership firm on the life of its partners.
2. Existence of an employer-employee relationship between the firm and its partners.
3. Classification of the insurance premium as capital or personal expenditure.
4. Applicability of CBDT Circular and judicial precedents.

Detailed Analysis:

1. Deductibility of Keyman Insurance Premium:
The primary issue revolves around whether the Keyman Insurance Premium paid by the partnership firm on the life of its partners is deductible under section 37(1) of the Income Tax Act, 1961. The Assessing Officer (A.O.) disallowed the deduction, arguing that the insurance benefits the partners personally, thereby classifying the expenditure as personal and non-deductible. The CIT(A) countered this by referencing the amendment to section 2(24)(xi) and the Insurance Regulatory and Development Authority Act (IRDA), 1999, which allows such deductions, emphasizing that the firm could have an insurable interest in the partners.

2. Employer-Employee Relationship:
The A.O. maintained that for the Keyman Insurance Premium to be deductible, there must be an employer-employee relationship between the firm and the insured individual. Since partners are not employees but constituents of the firm, this relationship does not exist, making the premium non-deductible. The CIT(A) refuted this by interpreting the Explanation to section 10(10D), which does not strictly require an employer-employee relationship but includes individuals connected to the business.

3. Classification of Expenditure:
The A.O. classified the insurance premium as capital expenditure, referencing the Gujarat High Court's decision in CIT v. Khodidas Motiram Panchal, which stated that such premiums are capital expenditures aimed at securing liquid cash for the firm. The CIT(A) argued that the subsequent amendment to section 2(24)(xi) and the IRDA Act's provisions allow such premiums to be treated as business expenditures, thus deductible under section 37(1).

4. Applicability of CBDT Circular and Judicial Precedents:
The CIT(A) and the Tribunal referenced the CBDT Circular and judicial precedents, particularly the Bombay High Court's decision in CIT v. B.N. Exports, which allowed the deduction of Keyman Insurance Premiums paid for partners, provided the insurance was for the firm's benefit. The Tribunal noted that the A.O. did not adequately verify whether the insurance was for the firm's benefit or the partner's personal benefit and remanded the issue back to the A.O. for proper verification in light of the Bombay High Court's ruling.

Conclusion:
The Tribunal concluded that the A.O. must reassess the deductibility of the Keyman Insurance Premium by verifying if the insurance was for the firm's benefit, as per the Bombay High Court's decision in B.N. Exports. The Tribunal emphasized that benevolent circulars from the CBDT are binding and should be followed in the spirit intended. The case was thus remanded for further examination, allowing the appeal for statistical purposes. The order was signed, dated, and pronounced on 30th September 2010.