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TMI Blog2010 (3) TMI 186X X X X Extracts X X X X X X X X Extracts X X X X ..... 31,68,775 being insurance premium paid by the asses- see-firm on a Keyman insurance policy?" 2. The issue before the court pertains to the assessment year 2004-05. 3. By its order dated January 29, 2009, 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a Keyman insurance policy". The Explanation to clause (10D) defines what is meant by a Keyman insurance policy thus: "Keyman insurance policy" means a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in arly manner whatsoever with the business of the first mentioned person." 6. The effect of clause (10D) is that a sum received under a life insurance policy is not to be included in computing the total income of any person. However, a sum received under a Keyman insurance policy forms a part of the total income and is liable to be offered to tax. For the purposes of clause (10D), a Keyman insurance policy is a life insurance policy taken b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act lays down the tax treatment for a Keyman insurance policy. The circular clarifies that the premium paid on a Keyrnan insurance policy is allowable as business expenditure. 9. The contention of counsel appearing on behalf of the Revenue is that there is no contract of service between a partnership firm and a partner and a partner cannot be regarded as being an employee of the partnership firm. In order to support the submission reliance was sought to be placed on a judgment of the Supreme Court in CIT v. Chidambaram Pillai [1977] 106 ITR 292. In the case before the Supreme Court, the respondents who were partners of a partnership firm were entitled in addition to their share in the profits, to salaries for service rendered to the fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x liability. It may be, as is quite often said, that a firm is merely a compendious description of the individuals who carry on the partnership business. But under the Income-tax Act, a firm is a distinct assessable entity. Section 3 of the Indian Income-tax Act, 1922, treats it as such, and the entire process of computation of the income of a firm proceeds on the basis that it is a distinct assessable entity. In that respect it is distinct even from its partners: CIT v. A. W. Figgies and Co. [1953] 24 1TR 405 (SC)." 10. The effect of section 10(10D) is that monies which are received under a life insurance policy are not included in the computation of the total income of a person for a previous year. However, any sum received under a Keyma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eath of a partner. The object and purpose of a Keyman insurance policy is to protect the business against, a financial set back which may occur, as a result of a premature death, to the business or professional organization. There is no rational basis to confine the allowability of the expenditure incurred on the pre mium paid towards such a policy only to a situatiOn where the policy is in respect of the life of an employee. A Keyman insurance policy is obtained on the life of a partner to safeguard the firm against a disruption of the business that may result due to the premature death of a partner. There fore, the expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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