2019 (1) TMI 1212 - HC - Income Tax

Disallowance of Keyman Insurance Policy - premium paid by the assessee as Keyman Insurance Premium would not qualify for expenditure - Whether the said policy is personal insurance policy or Keyman Inusrance Policy? - Held that - The issue of allowance of expenditure toward Keyman Insurance Premium taken out by the partnership firm in case of its partners, is no longer res integra. This Court in the case of Commissioner of Income Tax Vs. B.N. Exports 2010 (3) TMI 186 - BOMBAY HIGH COURT has examined such an issue and held that the insurance policy taken out to protect the interest of the partnership firm against disruption in case of sudden death of partner, would be an allowable expenditure. The Tribunal had in fact relied on this decision while dismissing the Revenue s appeal. In view of the decisions of the various High Courts, the Central Board of Direct Taxes had also issued a Circular bearing No. 38/16 dated 22.11.2016 accepting such a view, making a particular reference to the decision of the Punjab & Haryana High Court in case of M/s. Ramesh Steels (2016 (5) TMI 1155 - PUNJAB & HARYANA HIGH COURT). The Tribunal has also relied on this circular. Therefore, the Revenue s objection in law is not sustainable. Even if we permit the Revenue to travel beyond what was argued before the Tribunal, the question whether the policy was a Keyman Policy or not has been held on facts against the Revenue by CIT(A). As noted, the CIT(A) in fact recorded that the Assessing Officer had no material to hold to the contrary. No question of law, therefore, arises. Addition u/s 14A - Held that - Disallowance of an expenditure offered by the assessee for earning income exempt from tax which Tribunal accepted. Question No. 3 is an element of the same question where the Revenue argued that such disallowance cannot be discarded in relation to the shares held by the assessee by way of stock in trade. At the outset, we may record that this question does not arise out of the impugned order of the Tribunal since the Tribunal has not given any final finding on this aspect. Disallowance to net interest expenditure - Held that - Tribunal while giving further relief to the assessee noted that the assessee had offered voluntary disallowance and that the assessee had otherwise also had sufficient interest free funds for making investment in tax exempt investments. Thus, this is an essential question of fact.

Summary

Issues:
1. Whether the Tribunal was justified in deleting the addition made on account of disallowance of Keyman Insurance Policy?
2. Whether the Tribunal was justified in deleting the addition made by the Assessing Officer u/S. 14A of the Income Tax Act?
3. Whether the Tribunal was justified in allowing the appeal of the assessee without appreciating the fact that disallowance can be made even though shares yielding exempt income have been kept as stock in trade?

Analysis:

Issue 1:
The appellant, a partnership firm, claimed expenditure for payments towards Keyman Insurance Policy. The Assessing Officer contended that the policy was not a Keyman Insurance Policy. However, the CIT(A) reversed this decision, stating that it was indeed a Keyman Insurance Policy. The Tribunal dismissed the Revenue's appeal, citing precedents and a circular from the Central Board of Direct Taxes. The High Court found that the Revenue's objection was unsustainable as the policy was held to be a Keyman Policy on facts, and no question of law arose. The appeal was dismissed.

Issue 2:
The second issue involved the Revenue's objection to the disallowance of expenditure under Section 14A of the Income Tax Act by the Assessing Officer. The CIT(A) limited the disallowance to net interest expenditure, which the Tribunal further reduced based on the voluntary disallowance by the assessee and the availability of interest-free funds for investments. The High Court noted this as a question of fact, and no question of law was found to arise. Consequently, the appeal was dismissed.

Issue 3:
Regarding the third issue, which overlapped with the second, the Revenue contested the disallowance of expenditure offered by the assessee for earning tax-exempt income. The Tribunal did not provide a final finding on this aspect, leading the High Court to conclude that this question did not arise from the Tribunal's order. As a result, the High Court did not address this issue in detail, and the appeal was dismissed.

In conclusion, the High Court upheld the Tribunal's decisions, finding no merit in the Revenue's objections and dismissing the Tax Appeal.