2014 (6) TMI 318 - AT - Income Tax

Nature of policy - Keyman Insurance Policy or is an investment policy transfer of the policy two day before completion of three years in favor of key partner - Maturity proceeds of insurance policy treated as taxable - Held that - Following M/s. F.C. Sondhi & Co. (India) Pvt. Ltd. v. DCIT, Range-1, Jalandhar 2014 (6) TMI 39 - ITAT AMRITSAR - policies are for the investment plan and are having guaranteed return and the premium paid by the assessee company to such Insurance Company after deducting for mortality cover and other administrative charges are to be put into investment plan as selected by the assessee company as far as the policies taken from ICICI Prudential are concerned Keyman Insurance Policy , a person purchasing life insurance can only do so to the extent of his insurable interest in the assured. CIT(A) was of the view that the assessee-firm has taken policy, which is 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. The claim shows that policy has not completed three years but in the present case the Policy has completed three years and the AO has rightly held that due to malafide intention of the assessee to evade payment of tax which has transferred two day before completion of three years - the assessee did not pay premium due on 31.03.2008 which shows that he intended to encash policy after completion of three years - there is assignment of policy for malafide purpose - the sum received under the policy is taxable in the hands of receiver of the sum - Since the firm could surrender policy at any time after retaining it atleast for three years - the assessee did not pay next premium due on 31.03.2008 - they intended to encash the policy immediately after completion of three years, which was encashed in its own hands and accordingly a circuitous route was adopted for fulfilling the requirement of the funds on one hand and not paying tax due on the other and - It is a colourful method adopted to evade tax as it was held in McDowell & Co. 1985 (4) TMI 64 - SUPREME Court - CIT(A) has ignored all the facts and accordingly the order of the CIT(A) is set aside Decided in favour of Revenue. Claim of expenses out of income from Business and profession Held that - CIT(A) was of the view that the assessee was engaged in the business of commodity trading which is mainly done by sitting in the office on telephone and directly linked to earning of income and in view of all other expenses, there was no infirmity in the order of the CIT(A) who has rightly restricted the disallowance at 10% - Decided against Revenue.

Summary

Issues Involved:
1. Taxability of Maturity Proceeds of Insurance Policy.
2. Nature of the Insurance Policy.
3. Disallowance of Business Expenses.

Issue-Wise Detailed Analysis:

1. Taxability of Maturity Proceeds of Insurance Policy:
The primary issue was whether the maturity proceeds of Rs. 59,14,720/- from an insurance policy should be taxable. The Assessing Officer (AO) argued that the assignment of the policy just two days before the completion of three years was a maneuver to avoid tax. The AO noted that the firm had taken a Keyman Insurance Policy, which was assigned to the assessee and then surrendered for proceeds. The AO held that the proceeds should be taxable as the assignment was done with the intent to evade tax. The CIT(A) disagreed, referencing the Delhi High Court's decision that upon assignment, the policy ceased to be a Keyman Insurance Policy and became a normal Life Insurance Policy, thus making the proceeds exempt under Section 10(10D). The Tribunal, however, reversed the CIT(A)'s decision, citing that the policy was an investment tool and the assignment was a sham transaction intended to avoid tax, thus making the proceeds taxable.

2. Nature of the Insurance Policy:
The AO and the Tribunal scrutinized the nature of the insurance policy, concluding it was an investment policy rather than a pure life insurance policy. The policy allowed investment in various funds, indicating it was an investment tool. The Tribunal referenced its decision in a similar case, emphasizing that the policy did not qualify as a Keyman Insurance Policy as defined under Section 10(10D) of the Income Tax Act. The Tribunal upheld the AO's view that the policy was primarily for investment purposes, and the premium paid was not allowable as a business expenditure.

3. Disallowance of Business Expenses:
The AO disallowed 50% of the claimed business expenses (petrol, car, business promotion, travel, and telephone expenses), considering them overstated and partly personal. The CIT(A) reduced the disallowance to 10%, reasoning that the assessee's business involved commodity trading, which primarily required telephone use. The Tribunal agreed with the CIT(A), finding the 10% disallowance reasonable and justified.

Conclusion:
The Tribunal's judgment addressed the taxability of the maturity proceeds, the nature of the insurance policy, and the disallowance of business expenses. It concluded that the maturity proceeds were taxable due to the policy being an investment tool and the assignment being a tax avoidance maneuver. It also upheld the 10% disallowance of business expenses as reasonable. The appeal by the Revenue was partly allowed.