2010 (3) TMI 186 - HC - Income Tax

Business Expenditure- The Income-tax Appellate Tribunal confirmed the findings of the Commissioner of Income-tax (Appeals). The Tribunal held that the expenditure incurred by the assessee, which is a partnership firm, in paying the premium for a Keyman insurance policy obtained by the firm on the life of its partner must be regarded as expenditure incurred wholly and exclusively for the business of the firm. In holding thus, the Tribunal relied upon a circular issued by the Central Board of Direct Taxes on February 18, 1998 (Circular 762 1998 230 ITR (St.) 12) and on its decision in the case of ITO v. Thakur Vaidyanath Aiyer and Co. 1984 7 ITD 9 (Mum). Accordingly, the Tribunal deleted an addition of ₹ 31,68,775 towards the insurance premium paid by the firm on a Key- man insurance policy. The contention of the Revenue before the court is that in law a partnership firm has no separate existence from its partners since a partnership firm is not a juristic entity. Moreover, it has been urged before the court that there is nor relationship of employer and employee between a firm and its partners, there being no contract of service. Held that-dismissing the appeal, that there was a finding of fact by the Tribunal that the firm had not taken insurance for the personal benefit of the partner, but for the benefit of the firm, in order to protect itself against the setback that may be caused on account of the death of the partner. The insurance premium was deductable.

Summary

Issues:
- Whether the Income-tax Appellate Tribunal was justified in confirming the deletion of an addition of Rs. 31,68,775 being insurance premium paid by the assessee-firm on a Keyman insurance policy.

Analysis:
The High Court of Bombay dealt with an appeal by the Revenue under section 260A of the Income-tax Act, 1961, concerning the assessment year 2004-05. The core issue revolved around the deletion of an addition of Rs. 31,68,775, which was the insurance premium paid by a partnership firm on a Keyman insurance policy. The Income-tax Appellate Tribunal upheld the deletion, stating that the expenditure on the insurance policy was wholly and exclusively for the business of the firm. The Tribunal relied on Circular 762 and a previous decision to support its stance.

The Revenue contended that a partnership firm does not have a separate existence from its partners and argued against the relationship of employer and employee between a firm and its partners due to the absence of a contract of service. The court analyzed relevant provisions of the Income-tax Act, highlighting that a firm is considered a distinct assessable entity for taxation purposes. The court delved into the definition of a Keyman insurance policy and its tax treatment under section 10(10D).

Moreover, the court referred to Circular 762, emphasizing that the premium paid on a Keyman insurance policy is allowable as business expenditure. The Revenue's argument, citing a Supreme Court judgment, was countered by the court's interpretation that a partnership firm is a distinct assessable entity for tax purposes, separate from its partners. The court concluded that the expenditure on the Keyman insurance policy was incurred for the business's benefit, aiming to protect the firm against financial setbacks due to the premature death of a partner.

In the final judgment, the court dismissed the Revenue's appeal, stating that it did not raise any substantial question of law. The decision was made based on the finding that the expenditure on the Keyman insurance policy was wholly and exclusively for the business's purposes. No costs were awarded in this matter.

Therefore, the High Court of Bombay upheld the Tribunal's decision, affirming the deletion of the addition of the insurance premium paid by the partnership firm on the Keyman insurance policy, as it was deemed a legitimate business expenditure safeguarding the firm's interests.