2018 (8) TMI 849 - AT - Income Tax

Claim of expenditure u/s 37(1) - medical insurance premium paid for the family members of the employees of the company - wholly and exclusively for the purposes of business of the assessee - Even otherwise since the employees had not offered what amounted to be perquisites in their hands u/s. 17(2)(iv), he was of the view that these were not business expenses qualifying for deduction u/s. 37(1) - Held that - The record reveals that the assessee had paid the insurance premiums of the employees family members in terms of employment Rules framed by the assessee-company there for. Therefore, it can hardly be said that the impugned expenditure were not incurred wholly and exclusively for the purpose of business, which is the real intent of Section 37(1) of the IT Act. The ld. Authorities below appear to have rejected the claim of the assessee that these payments were in the nature of perquisites to the employees as contemplated under sub-clause (iv) of section 17(2) of the IT Act, according to which any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee, shall be included in perquisites. However, in view of proviso (iii) & (iv) appended to this section clearly prohibit the application of section 17(2) in certain eventualities as contained in these provisos. Claim of expenses allowed as business expenditure - Decided in favor of assessee.

Summary

Issues Involved:
1. Legality and factual correctness of the CIT(A)'s order.
2. Allowability of medical insurance premium paid for family members of employees under Section 37(1) of the Income Tax Act, 1961.
3. Entitlement to consequential relief.

Issue-wise Detailed Analysis:

1. Legality and Factual Correctness of the CIT(A)'s Order:
The appellant challenged the order of the CIT(A)-V, Delhi, dated 27.11.2015, on the grounds that it was bad in law and on facts. The CIT(A) had sustained the disallowance of ? 1,205,531 made by the Assessing Officer (AO) concerning the medical insurance premium paid for the family members of the employees. The CIT(A) concluded that such expenditure, although incurred under contractual obligations with employees, could not be said to have been incurred wholly and exclusively for business purposes.

2. Allowability of Medical Insurance Premium under Section 37(1):
The appellant, engaged in the business of Design & Engineering, manufacturing, and trading of vertical Roller Grinding Mill Systems & Components, had claimed an amount of ? 15,48,654 as medical insurance expenditure. The AO disallowed this claim, arguing that the insurance premiums were paid for the relatives of key managerial persons and their distant family members, which did not qualify as business expenses under Section 37(1).

The appellant contended that the expenditure was incurred wholly and exclusively for business purposes, citing several Supreme Court decisions, including CIT v. Indian Molasses Co. (P.) Ltd., J.K. Cotton Mfrs. Ltd. v. CIT, and Sassoon J. David & Co. (P) Ltd. v. CIT. The appellant argued that the insurance cover for employees and their family members was a contractual obligation, as stipulated in employment contracts, and aimed at increasing employee productivity by keeping them satisfied.

The appellant also addressed the AO's observation regarding the insurance of distant family members, noting that only ? 32,274 was paid for such relatives and had already been disallowed voluntarily. The appellant emphasized that under clause (iv) of the proviso to section 17(2)(viii), such premiums are considered non-taxable perquisites.

3. Entitlement to Consequential Relief:
The appellant sought any consequential relief that might arise from the grounds of appeal. The appellant highlighted that a similar disallowance in AY 2009-10 was partially upheld by the CIT(A), who allowed the claim for insurance paid for family members of employees but disallowed premiums paid for distant relatives.

Tribunal's Findings:
The Tribunal found considerable substance in the appellant's contentions. It noted that the insurance premiums were paid in terms of employment rules framed by the company, indicating that the expenditure was incurred wholly and exclusively for business purposes. The Tribunal observed that the lower authorities could not substantiate their claim that the payments had no nexus with the business of the assessee. The Tribunal also acknowledged that some payments are made under business expediency, even if they do not directly bear on income earning.

The Tribunal rejected the lower authorities' findings that these payments were not business expenses qualifying for deduction under Section 37(1). It concluded that the impugned claim of the assessee was justified and allowed the appeal.

Conclusion:
The Tribunal allowed the appeal, pronouncing the order in the open court on 13th August 2018. The medical insurance premium expenditure was deemed allowable under Section 37(1) of the Income Tax Act, 1961, as it was incurred wholly and exclusively for business purposes.