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TMI Blog2010 (9) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... oyee relationship is a sine-qua-non for the deductibility of keyman insurance premia. 4. However, such kind of a relationship is conspicuously absent between the partnership firm and the partners. The partners constitute the firm. The firm has only an artificial identity under the Income Tax Act, 1961. In effect, any expenditure on life insurance of partners, by whatever name called (including Keyman Policy), by the firm goes to insure the partners only. Since the partners and the firm are inextricably linked, by the channel of Keyman insurance, the partners insure themselves only. Unlike a Company where the employee/director and the employer are two different persons, in the firm the partners and the firm are inseparable. Hence, expenditure on premia of keyman insurance for a firm on life of partners bestows personal benefits to the partners. The firm makes outlays on itself; hence, the premia becomes a personal expenditure. Any personal expenditure is not deductible under section 37(1) of the Income tax Act, 1961. 5. Without prejudice to the arguments of above Para; further, the amount on claim or maturity under a keyman insurance policy is not exempt under section 10(10D) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he keyman cannot be given if l he has a share, equal to or more than 51% in the firm l is family (spouse and minor children) has a share equal to or more than 70%of the capital in the firm. l the company is incurring losses consistently and l the keyman is illiterate. These are the rules laid down by the LIC for its own administration and procedure. The firm in the instant case fails to fulfil these conditions, as one partner has 90% of the share and another is his wife with 10% of share. 9. However, notwithstanding anything, even if the above conditions are fulfilled and a partner is treated as Keyman, the Income Tax Act, 1961 would not permit the deduction in respect of Keyman Insurance premium because of the reasons discussed above. 10. Last but not the least, the law relating to deductibility of the premium on Keyman policy has been settled as such premium is not deductible for 'partnership firms' where no employee-employer relationship exists between the firm and the partners. This position has been clarified in Board's Circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of a person. It is also important to note that firm is an artificial entity constituted by the partners who are separate entities although jointly and severally liable to the firm but a partnership firm would have an insurable interest if by the death of any partner, it will sustain a loss or a pecuniary liability. I have also gone through the Insurance Regulatory and Development Authority Act (IRDA), 1999 which specifically allows reduction of insurance premium under partnership insurance as expenses under section 37(1) of the I.T. Act. It is seen that the amendment to section 2(24)(xi) has resulted in an amount received on maturity or on the death of a partner under the Keyman Insurance Scheme as income chargeable to tax. By the same logic, the premium paid for obtaining such insurance policy would be an expenditure allowable under section 37(1) of the I.T. Act. Further, the Learned Assessing Officer's observation that such premium could be allowed only if an employee-employer relationship existed between the premium payer and the Keyman is also without merits since as per Explanation to section 10(10D). "Keyman Insurance Policy means a Life insurance policy taken by a person o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Central Board of Direct Taxes clarifies the position by stipulating that the premium paid for a Keyman Insurance Policy is allowable as business expenditure. In the present case, on the question whether the premium which was paid by the firm could have been allowed as business expenditure. There is 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 set back that may be caused on account of the death 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 premium 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. Therefore, the expenditure which is laid out for the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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