2006 (6) TMI 200 - AT - Income Tax

Issues Involved:
1. Disallowance of payment towards Keyman Insurance Policy premium under Section 14A of the Income-tax Act, 1961.
2. Taxability of the amount received on surrender of Keyman Insurance Policy under Section 41(1) and Section 28(vi) of the Income-tax Act, 1961.

Detailed Analysis:

1. Disallowance of Payment towards Keyman Insurance Policy Premium under Section 14A:

The primary issue in this appeal is whether the learned CIT(A) was right in denying the deduction of Rs. 12,70,838 paid as premium towards a Keyman Insurance Policy, invoking the provisions of Section 14A of the Income-tax Act, 1961. The assessee contended that the expenditure should be allowable as it was incurred for business purposes.

Before the Tribunal, the learned counsel for the assessee argued that the amendments to Sections 2(24)(xi), 10(10D), 17(3)(ii), 28(vi), and 56(2)(iv) were effective from 1-10-1996, and thus any sum received before this date should not be taxable. The counsel relied on the decision of the Hon'ble Bombay High Court in CIT v. Mirza Ataullaha Baig, which held that amendments are applicable from the first day of the assessment year following the amendment date.

The learned counsel also cited the decision of the Hon'ble Supreme Court in Polyflex (India) (P.) Ltd. v. CIT, which interpreted the words "benefit by way of remission or cessation" in Section 41(1). The counsel argued that since no amount was refunded or any benefit received by way of remission or cessation, Section 41(1) should not apply.

Regarding Section 14A, the learned counsel referred to the ITAT Mumbai Bench's decision in Asstt. CIT v. Dakshesh S. Shah, where it was held that expenditure incurred in earning income exempt from tax is not deductible. The counsel contended that the dividend income was not exempt but taxed indirectly in the hands of the company, and thus the interest on borrowed funds for investment in shares should be deductible.

The learned Departmental Representative (DR) argued that since the expenditure was incurred in the past, it should be taxable under Section 28 read with Section 41(1). The DR also pointed out that Section 14A clearly applies as the income from the Keyman Insurance Policy was not included in the total income, and thus the related expenditure should not be allowed.

The Tribunal noted that the issue of taxation of the amount received on surrender of the Keyman Insurance Policy was not before them as the CIT(A) had decided in favor of the assessee, and the revenue had not appealed. However, the Tribunal discussed the issue to clarify the legal position.

The Tribunal referred to various judicial decisions, including CIT v. Orkay Silk Mills (P.) Ltd., Shakti Raj Films Distributors v. CIT, and CIT v. Scindhia Steam Navigation Co. Ltd., to establish that amendments to substantive law apply from the assessment year following the amendment date.

The Tribunal concluded that Section 28(vi) applies from 1-10-1996, meaning it applies to the assessment year 1997-98 for income earned in the financial year 1996-97. Thus, the amount received on surrender of the Keyman Insurance Policy was taxable under Section 28(vi) for the assessment year 1997-98.

Regarding the disallowance under Section 14A, the Tribunal held that since the income from the Keyman Insurance Policy was not included in the total income, the expenditure incurred on the premium was not allowable as a deduction. The Tribunal relied on the decision in Dakshesh S. Shah, which supported the disallowance of expenditure related to exempt income.

In conclusion, the Tribunal dismissed the appeal of the assessee, upholding the disallowance of Rs. 12,70,838 under Section 14A.

2. Taxability of the Amount Received on Surrender of Keyman Insurance Policy:

The Tribunal clarified that the issue of taxation of the amount received on surrender of the Keyman Insurance Policy was not before them as the CIT(A) had decided in favor of the assessee, and the revenue had not appealed. However, the Tribunal discussed the issue to clarify the legal position.

The Tribunal also noted that since Section 28(vi) specifically deals with the matter, the provisions of Section 41(1) were not applicable to the receipt from the Keyman Insurance Policy.

In summary, the Tribunal upheld the disallowance of the premium payment under Section 14A and clarified the taxability of the amount received on surrender of the Keyman Insurance Policy under Section 28(vi).

Conclusion:

The appeal of the assessee was dismissed, and the disallowance of Rs. 12,70,838 under Section 14A was upheld. The Tribunal also clarified that the amount received on surrender of the Keyman Insurance Policy was taxable under Section 28(vi) for the assessment year 1997-98.

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