2012 (12) TMI 806 - AT - Income Tax

Disallowance of Premium paid for Keyman Insurance Policy Held that - The object and purpose of a keyman insurance policy is to protect the business against a financial set back which may occur, as a result of a premature death, to the business or professional organization. There is no rational basis to confine the allowability of the expenditure incurred on the premium paid towards such a policy only to a situation where the policy is in respect of the life of an employee. It safeguard the firm against a disruption of the business that may result due to the premature death of a partner. Therefore, the expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of business - Disallowance made by the AO is directed to be deleted - in favour of assessee. Foreign Traveling Expenditure - Held that - Entire Expenditure on foreign traveling was on account of business exigencies and the countries traveled i.e. USA and Canada represent 80% of the turnover of the assessee firm and same countries have been visited on a continuous basis year after year to maintain the business relation and to expand the same. It was further submitted that the fringe benefit tax (FBT) @ 5% on entire expenditure on foreign traveling had been paid separately to take care of any possible personal use of the funds of the firm while on foreign tour and the partners have traveled individually and not alongwith their families so as to suggest personal use of funds of the firms. Any disallowance in addition to fringe benefit tax has to be based on concrete evidence available with the AO and in case of estimation specific reasons need to be brought on record like an unusual increase in foreign traveling expenses especially the unvouched expenses vis-avis last year/years - appeal of the Revenue is dismissed.

Summary

Issues:
1. Deletion of addition made on account of keyman insurance premium.
2. Disallowance of foreign travel expenses.

Analysis:

Issue 1: Deletion of addition made on account of keyman insurance premium:
The Revenue appealed against the deletion of an addition of Rs. 11,80,685 made by the Assessing Officer on the keyman insurance premium paid on the life of a partner. The Assessing Officer disallowed the expenditure, citing that the insurance policy should be taken by one person on the life of another person, indicating separate legal entities. The CIT (Appeals) allowed the claim based on various tribunal decisions and the CBDT circular, supported by the Hon'ble Bombay High Court's ruling in CIT Vs. B.N. Exports. The Tribunal concurred with the CIT (Appeals) based on legal interpretations distinguishing partnership firms and partners as separate entities under the Income Tax Act, emphasizing the critical role of partners in the firm's functioning and the need for keyman insurance to protect the business in case of a partner's untimely demise.

Issue 2: Disallowance of foreign travel expenses:
The Revenue challenged the disallowance of Rs. 2,44,072 on foreign travel expenses by the Assessing Officer, who disallowed 25% for personal use by partners. The CIT (Appeals) allowed the entire claim, noting that the travel was essential for business relations and expansion, with partners traveling individually to countries representing a significant portion of the firm's turnover. The CIT (Appeals) emphasized the regularity and business nature of the tours, with partners not engaging in personal activities, supported by the payment of fringe benefit tax. The Tribunal upheld the CIT (Appeals) decision, highlighting the lack of concrete evidence for disallowance beyond fringe benefit tax and dismissing the Revenue's appeal.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT (Appeals) decisions on both issues related to the keyman insurance premium and foreign travel expenses, based on legal interpretations, factual analysis, and judicial precedents.

This summary provides a detailed analysis of the legal judgment involving the deletion of additions on keyman insurance premium and disallowance of foreign travel expenses, outlining the arguments, decisions, and rationale presented in the case.