2011 (12) TMI 392 - HC - Income Tax

Key man insurance policy - Tax planning versus Tax evasion - AO disallowed the premium paid - CBDT's Circular dated 18.2.1998. - held that - expenditure incurred on the premium paid for keyman insurance policies in previous years as business expenditure under Section 37 allowed - When the assessee was given the impression, by means of the aforesaid Circular, that if expenditure is incurred on the keyman policy, it would be treated as business expenditure. There is no reason for the Department to deviate therefrom when it comes to the assessment. - No doubt, the object of a keyman insurance policy is to enable business organizations to insure the life of a keyman in order to protect the business against the financial loss which may occur in the likely eventuality of premature death. Such an expenditure is treated as business expenditure by the Department itself and recognized as such in Circular dated 18.2.1998. The expenditure is to be seen at the time it is incurred. Merely because the policy was assigned after sometime would not mean that the expenditure incurred in the first instance would lose the flavour of it being 'business expenditure'. - Decided in favor of assessee. Whether on the facts and circumstances of the case, there was any justification to tax the difference between the premium paid by the employer and the surrender value paid by the employee to the employer at the time of assignment of the policy and whether it could be taxed in the year of assignment? - held that - Section 17(3)(ii) of the Act would come into pay only when the policy is assigned by the employer to the employment as employer cannot be taxed under this Section, which is applicable only to the employee. - no particular amount was received by these Director assessees on assignment. Clause (ii) of subsection (3) of Section 17 taxes any sum received in a Keyman policy insurance . The word received assumes significance. - it was only the surrender value of the policy at the time of assignment or the sum received by an individual at the time of retirement, which is taxable. - Insofar as assignment is concerned, at that time surrender value was paid by the Director and therefore, nothing could be taxed. Therefore, from any angle, matter is to be looked into, this component cannot be taxed at the hands of the Director assesses as mentioned. Maturity value of the insurance policy received bv the assessee - held that - Once there is no assignment of company/employer in favour of the individual, the character of the insurance policy changes and it gets converted into an ordinary policy. Contracting parties also change inasmuch as after the assignment which is accepted by the insurance, the contract is now between the insurance company and the individual and not the company/employer which initially took the policy. No doubt, the parties here, viz., the company as well as the individual taken huge benefit of these provisions, but it cannot be treated as the case of tax evasion. It is a case of arranging the affairs in such a manner as to avail the state exemption as provided in Section 10(10D) of the Act. Law is clear. Every assessee has right to plan its affairs in such a manner which may result in payment of least tax possible, albeit, in conformity with the provisions of Act. - Nothing can be read in Section 10(10D) of the Act, which is not specifically provided because any attempt in that behalf as contended by Revenue would be tantamount to legislation and not interpretation. - Decided in favor of assessee and against the revenue.

Issues Involved:
1. Whether the premium paid by the company on keyman insurance policies is allowable as business expenditure.
2. Whether the difference between the premium paid by the employer and the surrender value paid by the employee at the time of assignment of the policy is taxable.
3. Whether the maturity value received by the employee on the insurance policy is taxable.

Issue 1: Allowability of Premium Paid on Keyman Insurance Policies as Business Expenditure

The Assessing Officer (AO) disallowed the premium paid by the company on keyman insurance policies, considering it a colorable device to claim business expenditure. The CIT (A) and the Tribunal, however, allowed it as business expenditure. The Revenue argued that the modus operandi adopted by the company was to benefit the keymen, not for business purposes, and contravened the LIC's scheme. The Tribunal relied on CBDT's Circular No.762 dated 18th February 1998, which allows such premium as business expenditure. The High Court upheld the Tribunal's decision, emphasizing the principle of consistency, the binding nature of the CBDT Circular, and judicial precedents. The court concluded that the expenditure incurred on keyman insurance policies is allowable as business expenditure under Section 37 of the Act.

Issue 2: Taxability of Difference Between Premium Paid by Employer and Surrender Value Paid by Employee

The AO treated the difference between the premium paid by the company and the surrender value paid by the employee at the time of assignment as taxable income. The CIT (A) held it as 'salary' under Section 17 of the Act, but the Tribunal reversed this decision, stating no taxable event occurred at the time of assignment. The High Court agreed with the Tribunal, noting that no sum was "received" under the Keyman insurance policy at the time of assignment. The court emphasized that taxability under Section 17(3)(ii) requires actual receipt of the amount, which did not occur in this case. Thus, the difference between the premium paid by the employer and the surrender value paid by the employee is not taxable.

Issue 3: Taxability of Maturity Value Received by Employee

The Tribunal held that the Keyman insurance policy, after assignment, assumed the character of an ordinary insurance policy. The Revenue argued that the maturity value received should be taxable. The High Court upheld the Tribunal's view, noting that the assignment led to the conversion of the policy into an ordinary policy, and the maturity value received by the employee is exempt under Section 10(10D) of the Act. The court emphasized that the law permits such assignment, and once the policy is assigned, it does not remain a Keyman policy. Therefore, the maturity value received by the employee is not taxable.

Conclusion:

The High Court dismissed the Revenue's appeals and allowed the assessees' appeals, holding that the premium paid on keyman insurance policies is allowable as business expenditure, the difference between the premium paid by the employer and the surrender value paid by the employee is not taxable, and the maturity value received by the employee on the insurance policy is exempt from tax.

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