2021 (4) TMI 797 - HC - Income Tax

Eligibility of deduction of entire sum paid to the insurance company as premium on Key Man insurance policy under Section 37 - CIT(A) as well as the Tribunal held that thus the premium on Keyman Insurance policy was allowable as business expense under Section 37(1) - HELD THAT - Section 10(10D) of the Act deals with taxation of money received under the insurance policy. The issue that has to be decided in this appeal is as to the question of expense incurred towards the payment of insurance premium on a Keyman Insurance policy. The circular, which has been issued by the CBDT, clarifies the position by stipulating that the premium paid for a Keyman Insurance policy should be allowed as business expenditure. In the case on hand, with regard to the insurance premium paid by the assessee is concerned, the Tribunal, without giving any acceptable finding, came to the conclusion that a sum of ₹ 1,89,08,394/- should be treated as business expenditure. That apart, the assessee also failed to produce any documentary evidence to justify their claim under Section 37(1) . On a reading of the orders passed by the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal, we are convinced that the Commissioner of Income Tax (Appeals) and the Tribunal have not considered the case of the revenue in a proper manner. Therefore, agreeing with the submissions made by the learned Senior Standing Counsel for the appellant, in the interest of justice, we are of the considered view that the orders passed by the Commissioner of Income Tax (Appeals) and that of the Income Tax Appellate Tribunal are liable to be set aside and the matter should be remitted back to the Commissioner of Income Tax (Appeals) for fresh consideration.

Issues Involved:
1. Eligibility for deduction of the entire sum paid as premium on Keyman insurance policy under Section 37 of the Income Tax Act, 1961.
2. Consideration of restrictions placed by the insurance company on the sum assured in the Keyman insurance policy.
3. Tribunal's conclusion on the entire premium being towards the sum assured despite restrictions by the insurance company.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction of Entire Sum Paid as Premium on Keyman Insurance Policy:
The primary issue revolves around whether the assessee is eligible for the deduction of the entire sum paid as premium on Keyman insurance policy under Section 37 of the Income Tax Act, 1961. The Tribunal held that the assessee is eligible for such a deduction. The Revenue contended that the Tribunal failed to appreciate the restrictions on the sum assured and thus the entire premium cannot be considered as premium towards Keyman insurance policy. The Commissioner of Income Tax (Appeals) and the Tribunal relied on CBDT Circular No.762, dated 18.02.1998, which clarifies that the premium paid for a Keyman insurance policy should be allowed as business expenditure.

2. Consideration of Restrictions Placed by the Insurance Company:
The Revenue argued that the Tribunal did not consider the restrictions placed by the insurance company on the sum assured in the Keyman insurance policy. The insurance guidelines stipulated that the maximum sum allowable is three times the average gross profit or five times the average net profit, whichever is lower. Despite this, the assessee claimed a significantly higher sum as Keyman insurance premium. The Assessing Officer disallowed the expenditure due to the lack of documentary evidence justifying the expense as wholly and exclusively for business purposes.

3. Tribunal's Conclusion on the Entire Premium:
The Tribunal concluded that the entire premium should be treated as business expenditure without providing an acceptable finding or considering the restrictions placed by the insurance company. The Revenue challenged this conclusion, arguing that the Tribunal applied the CBDT circular on the allowability of premium without addressing the quantum of deduction issue. The Tribunal's decision was based on precedents where courts held that the premium on Keyman insurance policy is allowable as business expenditure under Section 37(1) of the Act.

Remittance for Fresh Consideration:
The High Court found that the Commissioner of Income Tax (Appeals) and the Tribunal did not consider the Revenue's contentions properly. It agreed with the Revenue's submission that the matter should be remitted back for fresh consideration. The orders passed by the Commissioner of Income Tax (Appeals) and the Tribunal were set aside, and the case was remitted back to the Commissioner of Income Tax (Appeals) for a fresh decision, taking into account the case of both the Revenue and the assessee.

Conclusion:
The High Court allowed the Tax Case Appeal, set aside the orders of the Commissioner of Income Tax (Appeals) and the Tribunal, and remitted the matter back to the Commissioner of Income Tax (Appeals) for fresh consideration, ensuring that both the Revenue's and the assessee's cases are adequately considered. No costs were imposed.

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