2015 (8) TMI 1464 - AT - Income Tax

Entitlement for deduction on account of Keyman insurance policy taken on the life of two partners - allowable deduction u/s.37(1) - Held that - This issue has been settled by the Hon ble jurisdictional High Court in CIT vs B.N. Exports (2010 (3) TMI 186 - BOMBAY HIGH COURT) by holding that, for claiming business expenditure u/s 10(10D) read with section 37 of the Act, insurance premium on Keyman insurance policy to ensure life of a partner and effect of Circular No.762 (supra), is an allowable deduction. The object and purpose of Keyman insurance policy is to protect the business against a financial setback which may occur as a result of premature death, to the business or professional organization and further a Keyman Insurance Policy is obtained on the life of a Keyman including partner to safeguard the firm against disruption of business. - Decided in favour of assessee Disallowance of interest should be made u/s 14A with reference to net interest only - Held that - the assessee duly explained its version with the help of the documentary evidence. It is noted that while computing the disallowance u/s 14A read with Rule-8D of the Rules, the Assessing Officer considered the payments to partners. The term interest has been defined u/s 2(28A) which means, interest payable in respect of any money borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized. The capital contributed by the partner is neither money borrowed nor debt incurred by the assessee, thus, we find no infirmity in the conclusion drawn by the ld. Commissioner of Income Tax (Appeals), resultantly. - Decided against revenue

Summary

Issues Involved:
1. Allowability of Keyman Insurance Premium as a business expense.
2. Disallowance of interest under Section 14A with reference to net interest.
3. Disallowance of expenses under Section 14A read with Rule 8D(2) of the Income Tax Rules.

Issue-wise Detailed Analysis:

1. Allowability of Keyman Insurance Premium as a business expense:

The first issue raised by the Revenue pertains to the allowability of premium paid by the assessee as Keyman insurance premium instead of personal insurance premium, as treated by the Assessing Officer. The Revenue argued that Keyman insurance premium is only payable to the employee and not to the partner. However, the assessee contended that the issue is covered in their favor by the decision of the Mumbai Bench of the Tribunal in the case of ITO vs M/s N.D. Nissar and B.N.Exports 323 ITR 178 (Bom.).

Upon consideration, the Tribunal noted that in the case of the assessee, for A.Y. 2004-05, it was held that the assessee is entitled to deduction on account of Keyman insurance policy taken on the life of two partners. The Tribunal relied on various decisions, including P.G. Electronics vs. ITO and the CBDT Circular No. 762 dated 18/02/1998, which clarified that the premium paid on Keyman Insurance Policy is allowed as business expenditure. The Hon'ble jurisdictional High Court in CIT vs B.N. Exports (2010) 323 ITR 178 (Bom.) also supported this view, stating that the purpose of Keyman insurance policy is to protect the business against financial setbacks due to the premature death of a key person, including partners. Thus, the Tribunal affirmed the stand of the Commissioner of Income Tax (Appeals), allowing the deduction of the Keyman insurance premium.

2. Disallowance of interest under Section 14A with reference to net interest:

The next issue raised by the Revenue pertains to the disallowance of interest under Section 14A with reference to net interest only. The assessee argued that the Assessing Officer neither discussed the facts nor recorded any satisfaction regarding the correctness of the claim of expenses made by the assessee. It was also contended that the dividend income was earned on shares and securities held as stock in trade, thus Section 14A is not applicable.

The Tribunal observed that the Assessing Officer did not doubt the correctness of the claim made by the assessee. The shares and securities were held as stock in trade, and the capital contributed by the partners was neither money borrowed nor debt incurred by the assessee. The Tribunal upheld the order of the Commissioner of Income Tax (Appeals), directing the Assessing Officer to calculate the disallowance under Rule-8D on the basis of net interest and not gross interest. Therefore, the appeal of the Revenue was dismissed.

3. Disallowance of expenses under Section 14A read with Rule 8D(2) of the Income Tax Rules:

The assessee's appeal pertained to the partial confirmation of the disallowance of Rs. 14,25,250 under Section 14A read with Rule 8D(2). The assessee argued that the shares and securities were held as stock in trade and the interest paid to partners on their capital should not be considered while computing the disallowance under Rule-8D(2)(ii).

The Tribunal noted that the Assessing Officer notionally disallowed Rs. 14,25,250 by applying Rule 8D, despite the assessee voluntarily disallowing 10% of the dividend income as expenses incurred for earning tax-free income. The interest was paid on the capital of partners introduced for business purposes, and there was no nexus established between the capital/borrowed funds and the purchase consideration paid by the assessee. The Tribunal found merit in the assessee's argument, stating that the disallowance cannot exceed the income earned by the assessee firm. Thus, the appeal of the assessee was allowed.

Conclusion:

Finally, the Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, affirming the decisions of the Commissioner of Income Tax (Appeals) regarding the allowability of Keyman insurance premium and the disallowance of interest under Section 14A with reference to net interest. The Tribunal also found merit in the assessee's argument regarding the disallowance of expenses under Section 14A read with Rule 8D(2).