2014 (7) TMI 994 - AT - Income Tax

Rejection of expenses on obtention of Keyman Insurance Policy Redemption amount already offered for taxation 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 - Following the decision in M/s. FC. Sondhi & Company (India) Pvt. Limited Versus Dy. Commr. of Income Tax 2014 (6) TMI 39 - ITAT AMRITSAR - 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. Rejection of the claim of expenditure of Rs. 3 lacs incurred on obtaining a "Keyman Insurance Policy".
2. The nature and eligibility of the Keyman Insurance Policy for tax deduction.

Detailed Analysis:

Issue 1: Rejection of the Claim of Expenditure
The assessee claimed a deduction of Rs. 3 lacs for the premium paid towards a Keyman Insurance Policy for Sh. Rajesh Kharbanda, which was debited under the head 'Insurance' in the Profit & Loss account. The Assessing Officer (AO) questioned the legitimacy of this claim, citing previous decisions by the CIT(A) that disallowed similar claims. The AO held that the policy in question, being a unit-linked plan, did not qualify as a Keyman Insurance Policy under clause (c) of Section 10(10D) of the Income Tax Act, and thus, the expenditure was not for business purposes. The CIT(A) upheld this view, referencing a similar case (M/s. Suri Sons) where the policy was deemed primarily an investment rather than a Keyman Insurance Policy. The Tribunal agreed with the AO and CIT(A), noting that the policies were investment plans with guaranteed returns and not pure life insurance policies, thus disallowing the expenditure.

Issue 2: Nature and Eligibility of the Keyman Insurance Policy
The key contention was whether the policies taken by the assessee qualified as Keyman Insurance Policies eligible for tax deduction. The AO and CIT(A) both concluded that the policies were investment-oriented, with only a nominal part of the premium covering life insurance, and thus did not meet the criteria for Keyman Insurance Policies. The Tribunal noted that the policies were unit-linked investment plans, not pure life insurance policies, and referred to the IRDA guidelines which specified that Keyman Insurance should be term assurance policies. The Tribunal emphasized that the policies did not fulfill the conditions of being purely life insurance as per the definition under the Income Tax Act and IRDA guidelines, thus confirming the disallowance of the expenditure.

Conclusion:
The Tribunal upheld the disallowance of the Rs. 3 lacs expenditure claimed by the assessee for the Keyman Insurance Policy, agreeing with the AO and CIT(A) that the policies were investment plans rather than pure life insurance policies, and thus not eligible for tax deduction under Section 37 of the Income Tax Act. The Tribunal's decision was consistent with previous rulings and the guidelines issued by the IRDA.