2014 (6) TMI 39 - AT - Income Tax

Disallowance of premium paid for Keyman Insurance Policies investment plans with accompanying insurance benefits - AO was of the view that the assessee has invested in Unit Linked Insurance Plan under Keyman Insurance Plan and it is not Keyman Insurance Policy as per the meaning given in the Income Tax Act - Held that - As per definition of Keyman Insurance Policy , a person purchasing life insurance can only do so to the extent of his insurable interest in the assured - the policies have been taken from Unit Linked Investment Plan is investment plan, premium of which has been put into growth fund and it is not a Pure Life Insurance Policy on the life of another person - the policy itself does not fall under the definition of Keyman Insurance Police as defined under explanation to clause (c) of section 10(10D) of the Act - Unit Linked Insurance Plan, an Investment Plan, the purpose of which is guaranteed returns on the premium amount through investment in Units and Unit Linked Insurance Plan for which the premium is paid though wrongly claimed as an expenditure, which is not allowable as an expenditure - The Circular of IRDA has clarified the position and the arguments made by the ld. counsel that it is prospective in nature, cannot be accepted since the circular is clarificatory in nature. It is not a term Assurance Policy Plan as per IRDA guidelines - A nominal amount is being charged for mortality charges for life cover and balance amount has been deployed to purchase Units as per assessee s choice - only a fraction of the total premium is meant for risk premium, the balance is for the deployment of purchase of units i.e. Investment in Units which in fact, cannot be claimed as business expenditure, which query, has never been explained by the assessee - It does not fulfill the condition of policy taken by a person on the life of another person as per definition of explanation to clause (c) of section 10(10D) of the Act thus, there was no infirmity in the order of the CIT(A) who has rightly upheld the order of AO Decided against Assessee.

Summary

Issues Involved:
1. Disallowance of premium paid for Keyman Insurance Policies.
2. Nature and classification of Keyman Insurance Policies as per Income Tax Act and IRDA guidelines.
3. Allowability of premium paid under Keyman Insurance Policies as business expenditure.

Issue-wise Analysis:

1. Disallowance of Premium Paid for Keyman Insurance Policies:
The primary issue in the appeal was whether the premium paid for Keyman Insurance Policies amounting to Rs.59,96,356/- should be allowed as a deduction. The assessee claimed the deduction under the head Keyman Insurance Policy in the profit and loss account. The Assessing Officer (AO) disallowed the deduction, arguing that the policies taken were Unit Linked Insurance Plans (ULIPs) and not pure life insurance policies as defined under the Income Tax Act.

2. Nature and Classification of Keyman Insurance Policies:
The AO examined the terms and conditions of the policies and found that they were investment plans with guaranteed returns rather than pure life insurance policies. The policies from ICICI Prudential and LIC were Unit Linked Insurance Plans, where premiums were allocated to investment funds after deducting mortality and administrative charges. The AO referred to IRDA circulars dated 27.04.2005 and 30.01.2006, which clarified that Keyman Insurance Policies should be term assurance policies and not endowment or unit-linked plans. The IRDA circulars emphasized that insurance cover under Keyman Policies should not be wider than term assurance.

3. Allowability of Premium Paid under Keyman Insurance Policies as Business Expenditure:
The AO concluded that the policies taken by the assessee did not qualify as Keyman Insurance Policies under the Income Tax Act. The policies were primarily investment plans with a nominal portion allocated for life cover. The AO disallowed the premium paid, stating it was not an allowable business expenditure. The CIT(A) upheld the AO's decision, agreeing that the policies were investment vehicles rather than pure life insurance policies. The CIT(A) also noted that the policies did not provide significant benefits to the business in case of the death of the insured, which is a key feature of Keyman Insurance Policies.

Conclusion:
The tribunal upheld the disallowance of the premium paid for the Keyman Insurance Policies. It agreed with the lower authorities that the policies were investment plans and did not meet the criteria of Keyman Insurance Policies as per the Income Tax Act and IRDA guidelines. The tribunal found no infirmity in the orders of the AO and CIT(A) and dismissed the appeal of the assessee. The tribunal emphasized that the policies were not pure life insurance policies and the premium paid could not be allowed as a business expenditure.