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2005 (10) TMI 226 - AT - Income TaxOrder passed by CIT u/s 263 - Erroneous And Prejudicial Order - sum received under Keyman Insurance Policy charged to tax under which income head out of 5 source of income head - HELD THAT - Various amendments were made to the IT Act 1961 simultaneously by the Finance (No.2) Act 1996 w.e.f. 1st Oct. 1996 relating to the subject of Keyman Insurance Policy. Thus in the light of the amendments and the circular clarifying the position relating to the allowability of the premium paid on Keyman Insurance Policy the CIT in my view was not justified in directing the AO to disallow the premium paid by the assessee-firm in respect of the life of partner Anurag Gupta assured under the Keyman Insurance Policy. There is no doubt regarding the fact that the policy is a Keyman Insurance Policy as can be seen from para 2 of the order of the CIT. Therefore the order of the CIT cannot be sustained as it runs counter to the amendments made to the Act as clarified by the circular issued by the CBDT. It is well-settled that circulars issued by the CBDT regarding the execution of the Act are binding on the IT authorities. The amended law is applicable to the year under consideration The CIT was therefore not justified in assuming jurisdiction to revise the assessment u/s 263 contrary to the law and circular issued by the Board. He could not have considered the assessment erroneous since the allowance of the premium as a deduction as business expenditure was in conformity with the circular of the Board which was binding on the AO. Even on merits his view that the premium paid on Keyman Insurance Policy should be disallowed is not tenable also because of the circular cited above. I therefore cancel the order u/s 263 on both counts and allow the appeal.
Issues:
1. Allowance of insurance premium as business expenditure under Keyman Insurance Scheme. 2. Jurisdiction of CIT to revise assessment under section 263. 3. Applicability of circular issued by CBDT regarding Keyman Insurance Policy. Issue 1: Allowance of insurance premium as business expenditure under Keyman Insurance Scheme: The case involved an appeal against an order by the CIT(A) under section 263 of the Income Tax Act for the assessment year 1998-99. The assessee, a partnership firm engaged in manufacturing and selling electronic goods, had claimed a deduction for insurance premium paid under the Keyman Insurance Scheme for one of the partners. The CIT considered this deduction as erroneous and directed the AO to withdraw it, thereby enhancing the assessment by the amount of the premium. The assessee contended that the premium was allowable under section 37(1) as the partner was crucial for the firm's profitability. The Tribunal analyzed the relevant amendments to the IT Act, particularly those related to Keyman Insurance Policy, and a circular issued by the CBDT clarifying the treatment of such premiums. The Tribunal concluded that the CIT was not justified in disallowing the premium as business expenditure, as it was in line with the amendments and the CBDT circular. The Tribunal emphasized that circulars issued by the CBDT are binding on IT authorities and overturned the CIT's decision, allowing the appeal. Issue 2: Jurisdiction of CIT to revise assessment under section 263: The Tribunal examined whether the CIT had the jurisdiction to revise the assessment under section 263. It noted that the CIT's decision to disallow the insurance premium deduction was not sustainable as it contradicted the law and circulars issued by the CBDT. The Tribunal highlighted that the circular had clarified the allowability of premiums paid under Keyman Insurance Policy as business expenditure. Therefore, the Tribunal concluded that the CIT had exceeded his jurisdiction in revising the assessment and directing the disallowance of the premium. The Tribunal emphasized that the assessment was not erroneous as it aligned with the CBDT circular, making the CIT's intervention unwarranted. Issue 3: Applicability of circular issued by CBDT regarding Keyman Insurance Policy: The Tribunal extensively discussed the circular issued by the CBDT regarding the taxation and treatment of Keyman Insurance Policy premiums. The circular clarified that premiums paid under Keyman Insurance Policy were allowed as business expenditure. The Tribunal emphasized the binding nature of CBDT circulars on IT authorities and highlighted that the CIT's decision to disallow the premium was contrary to the CBDT circular. The Tribunal concluded that the premium paid by the assessee-firm for the partner's Keyman Insurance Policy was allowable as business expenditure, as per the CBDT circular and the relevant amendments to the IT Act. Consequently, the Tribunal canceled the CIT's order under section 263 and allowed the appeal in favor of the assessee. This detailed analysis of the judgment provides a comprehensive overview of the issues involved, the Tribunal's reasoning, and the ultimate decision in favor of the assessee regarding the allowance of insurance premium as business expenditure under the Keyman Insurance Scheme.
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