2015 (9) TMI 798 - AT - Income Tax

Disallowance towards premium of keyman insurance policies - Held that - The keyman insurance policy is a defined concept and as long as it meets the requirements of this definition the terminology given by the insurers have no relevance for the purposes of the Income Tax Act. All that is necessary is that it should be a life insurance policy whether pure life insurance policy or not- as such criterion is not set out anywhere in the stature and it should be taken on the life of a person who is or has been an employee of the assessee or any other person who is or was connected in any manner whatsoever with the business of the assessee. These conditions are clearly satisfied on the facts of the case before us. What can be sold as a life insurance policy taken by a business entity for its employee former employee or any other person important for business of such an entity is between the insurance regulator and insurance service provider. However once it has been sold as a life insurance policy on the keyman to the business as long as it is in the nature of life insurance policy whether pure life cover or term cover or a growth or guaranteed return policy it is eligible for coverage of Section 10(10D). It is not open to us to infer the words which are not there on the statute and then proceed to give life and effect to the same. When benefit of policy was assigned to the insured the policy cannot be said to be for the benefit of the assessee firm. We see no merits in these objections to the commercial expediency. As for the fall in turnover the benefit of an expenditure cannot be by any stretch of logic relevant to determine its commercial expediency and in any case. Such a benefit of hindsight cannot be available at the point of time when business decisions are made; more often than not these are the tools of post mortem of events rather than inputs for the decision making. As for the statement made by the employees of the insurance companies nothing turns on these statements. What constitutes a keyman insurance policy under section 10(10D) is not dependent on what is it treated even by the insurer; as long as the assesse is allowed to take life insurance policy on its keymen as have been undisputedly taken in this case the same satisfies the requirement of Section 10(10D). In view of these detailed discussions as also bearing in mind entirety of the case we uphold the grievance of the assessee and delete the impugned disallowance - Decided in favour of assessee.

Issues Involved:

1. Disallowance of premium paid on Keyman Insurance Policies.
2. Applicability of Section 14A.
3. Bifurcation of Keyman Insurance Policy premium.
4. Permissibility of adjudicating new aspects not raised by parties.
5. Applicability of decisions from coordinate benches.
6. Necessity for referring the case to a special bench.

Detailed Analysis:

1. Disallowance of Premium Paid on Keyman Insurance Policies:

The primary grievance of the assessee was the disallowance of Rs. 1,49,99,922 towards the premium of Keyman Insurance Policies. The Assessing Officer (AO) disallowed the claim on the grounds that the insurance policy in question was a "unit linked endowment assurance plan" rather than a pure life insurance policy. The AO argued that the policy was an investment plan, not a Keyman Insurance Policy as defined by the Income Tax Act. Additionally, the AO held that a partner of the firm cannot be considered a 'keyman' and referred to an IRDA circular warning against misuse of such policies. The CIT(A) upheld the AO's decision, leading the assessee to appeal further.

The tribunal examined the definition of Keyman Insurance Policy under Section 10(10D) of the Income Tax Act, which includes any life insurance policy taken by a person on the life of another person connected with the business. The tribunal found that the policy in question met this definition and noted that the IRDA guidelines, which the AO relied upon, do not have a bearing on the interpretation of the Income Tax Act. The tribunal also referred to the decision in Shri Nidhi Corporation, which held that even non-pure life insurance policies qualify as Keyman Insurance Policies.

2. Applicability of Section 14A:

The tribunal addressed whether Section 14A, which disallows expenses related to tax-exempt income, applied to this case. Both parties agreed that Section 14A did not apply because the receipts from the insurance policy were not exempt under Section 10(10D). Consequently, no disallowance could be made on the grounds that the policy premium resulted in tax-exempt income.

3. Bifurcation of Keyman Insurance Policy Premium:

The tribunal considered whether it was permissible to bifurcate the Keyman Insurance Policy premium into risk premium and investment components. Given that Section 14A did not apply, the tribunal found this question academic and did not address it further.

4. Permissibility of Adjudicating New Aspects Not Raised by Parties:

The tribunal deliberated whether it could address new aspects not raised by the parties, particularly in light of the Special Bench decision in Tata Communications Ltd. The tribunal decided to focus on the core issue of whether the premium paid on the Keyman Insurance Policy could be allowed, without delving into new aspects.

5. Applicability of Decisions from Coordinate Benches:

The tribunal examined the applicability of decisions from coordinate benches, specifically Shri Nidhi Corporation and Emdee Apparel. The tribunal found that the decision in F C Sondhi & Co, which the department relied upon, did not constitute a binding judicial precedent as it was per incuriam, i.e., it overlooked earlier decisions on the same issue. The tribunal emphasized the importance of consistency and uniformity in judicial decisions and followed the precedent set by Shri Nidhi Corporation.

6. Necessity for Referring the Case to a Special Bench:

The tribunal considered whether the case should be referred to a special bench. Given the lack of conflicting binding judicial precedents, the tribunal found no necessity for such a referral.

Conclusion:

The tribunal concluded that the premium paid on the Keyman Insurance Policy met the requirements of Section 10(10D) and should be allowed as a deduction. The tribunal rejected the AO's objections regarding the commercial expediency of the policy and the applicability of IRDA guidelines. The appeal was allowed, and the disallowance of Rs. 1,49,99,922 was deleted.

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