2014 (6) TMI 431 - AT - Income Tax

Disallowance of partnership insurance premium Policies to be qualified as keyman insurance policies Held that - The assessee has paid the premium to the various insurance companies under the policy taken in the name of its two partners namely Mr. Nilesh K. Patel and Mrs. Jigna N. Patel - the assessee has filed only the receipt of premium paid towards the policies and in the absence of policy documents it is not possible to give a conclusive finding whether the policies in question are truly Keymen policies or not - It makes no difference if the policies are Keymen policy at the time when it was taken and subsequently if the policies are assigned in the name of Keymen/partners - the benefit received by the partners will be treated as income in the hands of the partners otherwise the benefit received by the firm is always taxable and that is why the expenditure of premium paid towards the Keymen policy is allowable u/s 37(1) of the Act being the expenditure incurred for the purpose of business of the assessee - the relevant record i.e. policy document has not been placed thus, the matter is required to be remitted back to the CIT(A) for examination Decided in favour of Assessee. Disallowance of transport charges Relevant details not properly appreciated Held that - The AO has disallowed 20% of the expenses made in cash to one party namely M/s Anil Bulk Mover India Pvt. Ltd. - the assessee has placed the details of transport expenses paid to M/s M/s Anil Bulk Mover India Pvt. Ltd and no such cash payment was made to this party - All the payments were made to the party after deduction of TDS - the AO has disallowed 20% of the expenses under wrong assumption of facts, whereas these expenses pertains to the payment made to various parties in small amounts ranging from few hundreds to thousands thus, the addition of transport charges is to be set aside Decided in favour of Assessee. Disallowance made u/s 36(1)(iii) of the Act - Interest on vehicle loan Held that - Interest expenditure on loan for purchase of car is an allowable business expenses - The interest expenses on loan is relating to the purchase of car and not actual use of car - The expenses which are for the purpose of acquiring a business asset and not incurred for actual use of the asset as it remained constant irrespective of the fact whether the business asset is also use for personal purposes - The assessee has already disallowed the other running expenses of the car at the rate of 20% on account of personal use and the disallowance of 20% of the interest paid on the loan taken for acquisition of car cannot be disallowed on account of personal use of the car because the interest expenditure is pre determined and it does not vary by the reason of actual use of car thus, the addition of interest expenses on loan for purchase of car is to be set aside Decided in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of partnership insurance premium.
2. Disallowance of transport charges.
3. Disallowance of interest on vehicle loan.

Detailed Analysis:

1. Disallowance of Partnership Insurance Premium:

The primary issue concerns the disallowance of Rs. 2,300,000 paid as a premium for Keyman insurance policies. The Assessing Officer (AO) disallowed this amount, arguing that the policies were Unit Linked Insurance Plans (ULIPs) and not term plans, thus not qualifying as Keyman insurance policies. The Commissioner of Income-tax (Appeal) [CIT(A)] upheld this disallowance. The assessee contended that the policies were taken for active partners and should be allowable under section 37 of the Income Tax Act. The assessee cited precedents, including CIT Vs. B.N. Exports and Pharma Search Vs. Assistant Commissioner of Income Tax, to support their claim. The Tribunal noted that neither the AO nor CIT(A) examined the policy documents to determine the true nature of the policies. The Tribunal remitted the issue back to CIT(A) to examine the policy documents and determine if they qualify as Keyman policies.

2. Disallowance of Transport Charges:

The second issue involves the disallowance of Rs. 38,078, which is 20% of the total transport charges of Rs. 190,391 paid in cash. The AO disallowed this amount assuming it was paid to a single party, M/s Anil Bulk Mover India Pvt. Ltd. The CIT(A) confirmed this disallowance. However, the assessee clarified that the amount was paid to various parties in small amounts and not to a single party. The Tribunal found that the AO's assumption was incorrect and deleted the disallowance of Rs. 38,078.

3. Disallowance of Interest on Vehicle Loan:

The final issue pertains to the disallowance of Rs. 15,040 as interest on a vehicle loan. The AO disallowed 20% of the interest on the loan, considering it as personal use. The CIT(A) enhanced the disallowance based on the correct loan amount. The assessee argued that interest on the loan should not be disallowed as it is not a running expense and is incurred for acquiring a business asset. The Tribunal agreed with the assessee, stating that interest expenditure on a loan for purchasing a business asset cannot be attributed to personal use. The Tribunal deleted the disallowance of Rs. 15,040.

Conclusion:

The Tribunal partly allowed the appeal, remitting the issue of the insurance premium back to CIT(A) for further examination, deleting the disallowance of transport charges, and deleting the disallowance of interest on the vehicle loan. The order was pronounced on 30-05-2014.