2021 (2) TMI 272 - AT - Income Tax

Expenditure Allowable u/s 37(1) - Disallowance of medical insurance premium paid for the family members of the employees of the company - such expenditure though incurred in terms of contractual obligation with the employees, however, it cannot be stated to have been incurred wholly and exclusively for the purpose of the business of the assessee - HELD THAT - As decided in assessee's own case 2018 (8) TMI 849 - ITAT DELHI 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) 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 applicability of section 17(2) in certain eventualities as contained in these provisions - Decided in favour of assessee.

Summary

Issues: Disallowance of medical insurance premium for family members of employees as a business expense.

Analysis:
1. The appeal was filed against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2012-13, regarding the disallowance of medical insurance premium paid for employees' family members as a business expense.

2. The Assessing Officer disallowed ?12,44,970, stating it was not incurred wholly and exclusively for the business. The CIT(A) upheld this decision, leading to the appeal.

3. The assessee argued that a similar claim was allowed in previous years based on a co-ordinate bench's decision. The issue was deemed in favor of the assessee for previous assessment years as well.

4. The tribunal noted the nature of the assessee's business and the disallowed amount in dispute. The previous co-ordinate bench's decision favored the assessee's claim, emphasizing the nexus between the expenditure and business purpose.

5. The tribunal found that the disallowance lacked justification based on the provisions of Section 37(1) of the Income Tax Act. It highlighted that the insurance premiums were paid as per employment rules, showing a clear business connection. The tribunal disagreed with the lower authorities' reasoning for disallowance.

6. Referring to the decision of the co-ordinate bench for a subsequent assessment year, the tribunal directed the Assessing Officer to delete the disallowance of ?12,44,970 related to medical insurance premiums for employees' family members.

7. Consequently, the appeal was allowed in favor of the assessee, based on the precedent set by the co-ordinate bench and the lack of justification for disallowance.