2012 (11) TMI 798 - AT - Income Tax

Addition on account of insurance premium paid under the Keyman Insurance Scheme on the life of its partner AO observed that the assessee had claimed this amount as revenue expenditure which was not allowable since the benefit of the insurance is in the nature of capital receipt and so the expenditure would also be capital expenditure Held that - Premium paid for obtaining such insurance policy would be an expenditure allowable u/s 37(1) of the I.T. Act - as pet 1 Explanation to Section 10 (10D), Keyman Insurance Policy means a Life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of first mentioned person - first mentioned person is the partnership firm while the policy has been taken on the life o the partner who is the second mentioned person addition deleted In favor of assessee Disallowance on account of sales commission alleged that the assessee was unable to provide the proof of services rendered Held that - Genuineness of the commission paid stands established and the AO has nowhere given a finding that the same was excessive or unreasonable - payment made to the parties is genuine, after verification from two persons to whom commission was paid. This finding of fact was not disputed by the Revenue in favor of assessee Disallowance on account of salary payment alleged that since the books of accounts were not produced having been destroyed in the floods, there was no way of verifying the genuineness of claim of salary which was mostly paid in cash Held that - Salary was being paid to staff and to the deliveryman and the salary was paid in cash since the staff normally did not have any Bank account - payment would be made by cash to the employees and there is no statutory requirement of salary to be paid by cheque, especially to lowly paid employees addition deleted in favor of assessee

Summary

Issues:
1. Deletion of addition of insurance premium under Keyman Insurance Scheme.
2. Deletion of disallowance of sales commission.
3. Deletion of disallowance of salary payment.

Deletion of addition of insurance premium under Keyman Insurance Scheme:
The issue revolved around the AO's disallowance of an insurance premium claimed as revenue expenditure by the assessee under the Keyman Insurance Scheme. The AO contended that the benefit was capital in nature, relying on legal precedents and circulars. However, the CIT(A) directed deletion of the addition, citing amendments in the relevant sections and the IRDA Act, allowing the premium as an expense under Section 37(1) of the IT Act. The ITAT upheld the CIT(A)'s decision, referencing a previous case where a similar addition was deleted, thus ruling in favor of the assessee.

Deletion of disallowance of sales commission:
The AO disallowed a sales commission paid by the assessee, questioning the lack of proof of services rendered. The CIT(A) overturned this disallowance, noting that the commission was paid to increase sales, following common practices in the wholesale medicine market. The CIT(A) found the explanation provided by the assessee valid, supported by the fact that the commission was distributed equally among recipients and that the payment was genuine. The ITAT upheld the CIT(A)'s decision, emphasizing the genuineness of the commission payment.

Deletion of disallowance of salary payment:
The AO disallowed a portion of the salary payment made in cash due to lack of verifiable records post a flood incident. The CIT(A) disagreed with this disallowance, stating that the payment in cash to low-wage employees was common practice and not subject to mandatory cheque payment. The CIT(A) found the AO's reasoning unconvincing and directed deletion of the disallowance. The ITAT upheld the CIT(A)'s decision, noting that the AO's rationale was not sustainable, as there was no statutory requirement for low-wage salary payments to be made by cheque.

In conclusion, the ITAT dismissed the Revenue's appeal in all three grounds, upholding the CIT(A)'s decisions in favor of the assessee regarding the deletion of the insurance premium addition, sales commission disallowance, and salary payment disallowance.