2016 (5) TMI 353 - AT - Income Tax

Addition of insurance premium - Held that - Payment towards insurance premium under keyman policy is for the benefit of assessee s company from any risk that it may sustain by losing the valuable services of their directors and its senior staff from any eventuality by any accident or death made by the AO and as held by the Hon ble High Court Bombay in the case of COMMISSIONER OF INCOME TAX vs. B.N. EXPORTS reported 2010 (3) TMI 186 - BOMBAY HIGH COURT it is an expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of business. Therefore, the order of the CIT-A is justified in deleting the addition made by the AO.- Decided in favour of assessee Disallowance towards excess remuneration paid to one of the directors of the assessee company - Held that - The said Sunil Kumar being one of the directors of assessee company is directly covered under the persons referred in clause (b) 40A(2) of the Act and hence therefore, whatever may be the payment is in the opinion of AO in excessive or unreasonable shall not be allowed as a deduction. However, keeping in view that the services rendered by Sunil Kumar resulted in the business worth ₹ 614.86 lakhs, we find ourselves in agreement with the ld. CIT(A) that the remuneration paid to him cannot be considered as excessive or unreasonable to attract the provision of section 40A(2)(b). - Decided in favour of assessee Disallowance of expenditure incurred towards club memberships - Held that - The expenditure paid to club and did not bring into existence an asset or advantage for the enduring benefit of the business of assessee to treat the same as capital expenditure. The club expenditure, it only facilitates smooth and efficient running of a business of the assessee. Therefore, club expenditure paid for staff is an allowable expenditure.- Decided in favour of assessee Addition on account of cesstion of the liability u/s 41(1) - Held that - In the present the AO noted that the assessee admitted that the amount of ₹ 43,571/- has remained as unclaimed by creditors for a considerable period of time. Therefore the fact remains undisputed that the liability carried forward for many years and there was no cessation or remission in the case on hand. There are two conditions are to be fulfilled in order to attract provisions of Section 41 (1) of the Act, i.e cessation or remission and it should be of previous year and that those two conditions were missing in this case under consideration.- Decided in favour of assessee

Issues Involved:
1. Deletion of addition of insurance premium of ?45,00,000/-
2. Deletion of addition of a part of Director's salary amounting to ?10,00,000/-
3. Deletion of addition of ?27,168/- as club expense
4. Disallowance of ?1,82,917/- towards prior period expenses
5. Addition of ?43,571/- towards Sundry Creditors as deemed income under Section 41(1) of IT Act, 1961

Issue-wise Detailed Analysis:

1. Deletion of Addition of Insurance Premium of ?45,00,000/-:
The Revenue contended that the CIT(A) erred in deleting the addition of ?45,00,000/- paid as insurance premium for directors under a keyman insurance policy. The AO added this amount to the total income of the assessee, questioning the benefit derived from the directors' services. The CIT(A), however, allowed the deduction, relying on case law and CBDT circular No. 762, which clarified that such premiums are allowable business deductions. The Tribunal upheld the CIT(A)'s decision, citing the Hon'ble Bombay High Court's judgment in COMMISSIONER OF INCOME TAX vs. B.N. EXPORTS, which affirmed that premiums paid for keyman insurance policies are business expenditures. The Tribunal concluded that the payment was made to protect the company from potential losses due to the directors' untimely death, thus dismissing the Revenue's ground.

2. Deletion of Addition of a Part of Director's Salary Amounting to ?10,00,000/-:
The AO disallowed ?10,00,000/- of the director's remuneration, deeming it excessive and unreasonable. The CIT(A) found the director's qualifications and contributions justified the remuneration, noting his role in generating significant business. The Tribunal concurred, referencing Section 40A(2)(a), which allows disallowance of excessive payments to related persons. However, given the director's substantial business contributions, the Tribunal agreed with the CIT(A) that the remuneration was not excessive or unreasonable, thus dismissing the Revenue's ground.

3. Deletion of Addition of ?27,168/- as Club Expense:
The AO disallowed club membership expenses, questioning their business relevance. The CIT(A) allowed the deduction, citing case law that such expenses facilitate business operations. The Tribunal upheld this view, referencing Section 37 and decisions like COMMISSIONER OF INCOME TAX vs. SAMTEL COLOR LTD and DEPUTY COMMISSIONER OF INCOME TAX vs. BANK OF AMERICA SECURITIES (INDIA) (P) LTD, which affirmed that club membership fees incurred for business purposes are allowable deductions. The Tribunal concluded that the expenses were for business facilitation, not capital expenditure, thus dismissing the Revenue's ground.

4. Disallowance of ?1,82,917/- Towards Prior Period Expenses:
This issue was not pursued by the assessee during the proceedings, and the ground was dismissed as not pressed.

5. Addition of ?43,571/- Towards Sundry Creditors as Deemed Income Under Section 41(1) of IT Act, 1961:
The AO added ?43,571/- to the income, considering it a ceased liability. The CIT(A) upheld this, citing the assessee's failure to prove the liability's existence. The Tribunal, however, referenced a prior decision (ITA1345/KOL/2011) which clarified that Section 41(1) applies only if there is remission or cessation of liability within the relevant assessment year. In this case, the liability was carried forward without remission or cessation during the relevant year. Therefore, the Tribunal concluded that the addition was not justified under Section 41(1), thus allowing the assessee's ground.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection. The key points of contention were resolved in favor of the assessee, emphasizing the importance of substantiating business-related expenses and adhering to statutory provisions for disallowances and additions.

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