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2014 (2) TMI 835 - AT - Income TaxDisallowance of payment of premium under Keyman Insurance Policy The decision in ITO Versus Ashoka Dyeing & Printing Mills 2010 (9) TMI 430 - ITAT, AHMEDABAD followed - Held that - The existence of employer-employee relationship is a sine-qua-non for the deductibility of keyman insurance premia - CIT(A) held that maturity or surrender amount under the Keyman Insurance Policy was not exempted but taxable as Salaries u/s.17(3)(ii) of the Act or as Profits and Gains of Business u/s.28(vi) or as income from Other Sources u/s.56(2)(iv) of the Act in the hands of the recipient - the legislature did not intend that such premium be allowed only where employer employee relationship existed - the disallowance made on account of premium paid towards Keyman Insurance Policy in respect of partner of the appellant firm is set aside. 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 decided against Revenue.
Issues:
1. Disallowance of payment of premium of keyman insurance policy of partner's life. 2. Whether the disallowance of the premium payment was justified under the Income Tax Act, 1961. Analysis: 1. The appeal by the Revenue challenged the deletion of an addition of Rs.13,61,461 made by the Assessing Officer on account of disallowance of payment of premium of keyman insurance policy of a partner's life for the Assessment Year 2006-07. The Commissioner of Income Tax (Appeals) decided in favor of the assessee, citing a similar decision by the Hon'ble ITAT, Mumbai bench in the case of Modi Motors. The CIT(A) concluded that the disallowance made on account of the premium paid towards the Keyman Insurance Policy in respect of the partner of the appellant firm should be deleted. 2. The key issue revolved around whether the premium payment for the Keyman Insurance Policy was allowable as a deduction under the Income Tax Act. The Assessing Officer disallowed the claim based on the absence of an employer-employee relationship and distinct separation between the firm and the partners. However, the ITAT, in the assessee's own case for AY 2005-06, observed that where the Keyman Insurance Policy was taken for the benefit of the firm to protect itself against potential setbacks due to the death of a partner, the insurance premium was deductible. The ITAT directed the Assessing Officer to reconsider the issue in light of the decision of the Hon'ble Bombay High Court in a similar case, emphasizing that the expenditure on the premium was incurred wholly and exclusively for the purposes of business. 3. The ITAT, Ahmedabad, dismissed the Revenue's appeal, following the previous decision in the assessee's case for AY 2005-06. The Tribunal upheld that the Keyman Insurance Policy was not taken for the individual benefit of the partners but for the benefit of the firm, as all partners were actively involved in the business. The claim of deduction for the expenditure on the Keyman Insurance Policy premium in the name of partners was allowed as a revenue expenditure, emphasizing the business purpose behind the insurance policy. 4. The judgment highlighted the importance of the business purpose behind the Keyman Insurance Policy in determining the deductibility of the premium payment. The decision emphasized that the insurance was taken to safeguard the firm against potential disruptions due to the death of a partner, aligning with the business interests of the partnership. The ITAT's ruling focused on the commercial necessity and business protection aspect of the insurance policy, leading to the allowance of the deduction for the premium payment.
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