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TMI Blog2014 (6) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... ure, which is not allowable as an expenditure - The Circular of IRDA has clarified the position and the arguments made by the ld. counsel that it is prospective in nature, cannot be accepted since the circular is clarificatory in nature. It is not a ‘term Assurance Policy Plan” as per IRDA guidelines - A nominal amount is being charged for mortality charges for life cover and balance amount has been deployed to purchase Units as per assessee’s choice - only a fraction of the total premium is meant for risk premium, the balance is for the deployment of purchase of units i.e. Investment in Units which in fact, cannot be claimed as business expenditure, which query, has never been explained by the assessee - It does not fulfill the condition of policy taken by a person on the life of another person as per definition of explanation to clause (c) of section 10(10D) of the Act – thus, there was no infirmity in the order of the CIT(A) who has rightly upheld the order of AO – Decided against Assessee. - I.T.A. No. 117(Asr)/2010 - - - Dated:- 21-4-2014 - Sh. H. S. Sidhu And Sh. B. P. Jain,JJ. For the Appellant : Sh. Sandeep Vijh, CA For the Respondent : Sh. Tarsem Lal, D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be recovered by cancellation of Units, as per the policy document of the Insurance Company. In the case of the policy of guaranteed additions of LIC Policy, document is not legible and the assessee did not furnish the legible copy. However, on the perusal of first page which is somewhat legible, it could be made out that premium for main plan is Rs.19,91,265/- and sum assured is Rs.56,00,000/-, whereas Accident Benefit Premium is Rs.4250/- for Accident Benefit Sum Assured at Rs.25,00,000/-. Thus, the main purpose of the three policies taken by the assessee was investment of the premium accounts in Units after deducting mortality charges and other administrative expenses. 2.2. Further, on perusal of the contents of the policy issued by the Insurance Company, it was found that the policy taken is Unit Linked Insurance Plan. In view of the fact that the assessee has taken Unit Linked Insurance Plan , the assessee was asked to explain justify the claim of deduction under the head Keyman Insurance Policy in its profit and loss account vide order sheet noting dated 31.10.2008 letter dated 03.11.2009. The assessee has stated vide letter dated 12.11.2008 that it is eligible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t there is no mention of Keyman Insurance Policy in the Policy document. 6.2. Premium Life. It is a limited premium payment unit linked insurance plan: a)` The Plan: Premium Life is a limited premium payment unit linked insurance plan. The premiums net of all the charges are invested in a fund of the assessee s choice. b) Being a unit linked life insurance policy, the Policy holder has the option to allocate the Premiums and any Top-up Single Premium paid by him among one or more of the Plan(s) for purchase of units thereof. c) The Policy enables the policyholder to participate only in the investment performance of the Plan, to the extent of allocated units. (d) Mortality charges; These charges are calculated on a yearly basis, but deducted every month from the units allocated. Mortality charges are put for the risk calculated (for Life Cover) depending upon the age and the mortality rating, as applicable). Mortality charges for annual premium of Rs.2,00,000/- has been calculated at Rs.2,510/- in the policy document. (e) The assessee has option to increase/decrease in the premium and thus can invest in Units accordingly. Any increase or decrease in the premium s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onvenience is reproduced as under: 8.4. Thus, the insurance regulator has categorically barred selling the keyman policy through endowment or unit-linked plans. It has said the keyman insurance cover can be sold only through term assurance, which combines life, accident and disability insurance policies to protect business of a company from the death or disablement of a key employee. All the insurers are advised strictly to ensure that where the premium for the insurance on the life of an employee is paid by the employer, or where the premium on the life of a partner is paid by another partner or by the partnership firm, the scope of cover is not wider than term assurance. Insurance Regulatory and Development Authority (RDA) said in its circular. The rough stance of IRDA came after it found that some insurers had flouted its circular issued in April, 2005 and continued to sell partnership insurance through endowment or unit linked plans. Insurers should not lose sight of the basic principle that person purchasing life insurance can only do so to the extent of his insurable interest in the life assured, the circular said. An employer buying keyman insurance for his own be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circular of IRDA, a copy of which has been provided to us, it will not override the provision of Income Tax Act. Though the guidelines of IRDA will not affect the provisions of the Income Tax Act. It has been clarified by the insurance company that the date as mentioned in the circular of IRDA will apply after 10.05.2005. (h) We are, however, of the view that as per the Income Tax Act, once a policy has been issued as a Keyman policy, the benefits of the same shall be available to the assessee and the circular of IRDA which does not override the Income Tax Act shall have not affect. (i) As far as the choice of investment in the case of policies of ICICI Prudential are concerned, the appropriate form which provided by the insurance company was signed and handed over to them. 2.5. Further the AO observed that the assessee admits that policies are Unit Linked and since these are on the life of the person and it will not affect the real nature of the policy. But the assessee did not respond to the violation of the basic principle that a person purchasing life insurance can only do so to the extent of his insurable interest in the assured, the meaning of Keyman Insurance Poli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission of the assessee is summarized here:- (i) The assessee firm has taken policy, the type of which is Unit Linked Insurance Plan an Investment Plan. The purpose of Guaranteed Returns on the premium amount through investment in Units. It was claimed as Keyman Policy and amount of premium of Rs.59,96,355/- per annum has been claimed as deduction. ii) The policy taken as Unit Linked Insurance Plan an investment Plan of ICICI Prudential Jeevan Shree-I of LIC of Guaranteed returns and profits and not Keyman Insurance Policy as per definition of Keyman Insurance Policy, explanation to clause (c) to section 10(10D) of the I.T. Act. It is not Term Assurance Plan policy as per IRDA Guidelines, for the policy to be qualified as Keyman Insurance Policy. iii) A nominal amount is being charged for mortality charges for life cover and the balance amount has been deployed to purchase Units as per clients choice. Status of the policy, contents, terms conditions mentioned therein established that the plan is Unit Linked Insurance Plan Plan with Guaranteed Return and not Term Assurance Plan i.e. Policy on life as per definition of the I.T.Act as well as Circular issued by the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced certain additional evidences which were admitted and forwarded to the A.O. and comments taken and thereafter the ld. CIT(A) confirmed the action of the A.O. The order of the ld. CIT(A) in paras 2.5 to 2.14 for the sake of convenience is reproduced as under: 2.5. I have considered the rival submissions carefully. Sub-section (10D) of section 10 of the I.T.Act exempts any sum received under a life insurance policy from the ambit of the total income of a person. Certain exceptions to this general exemption are, however, provided in the sub-section. The sub-section is extracted below: 10. Incomes not included in total income. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included. (10D) any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than (a) any sum received under sub-section (3) of section 80DD or subsection (3) of section 80DDA; or (b) any sum received under a Keyman insurance policy; or (c) any sum received under an insurance policy issued on or after the 1st day of April, 2003 [but on or before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profitability of the business. The premium is paid by the employer. 14.2. There were some doubts on the taxability of the income including bonus etc. from such policy and also regarding the treatment of the premium paid whether it should be allowed as a capital expenditure or as a revenue expenditure. The Act, therefore, lays down the tax treatment of the Keyman Insurance Policy. 14.3. Clause (10D) of section 10 of the Income-tax Act, exempts certain income from tax. The Act, amends clause (10DD) of section 10 to exclude any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy for this purpose. 14.4. The Act also lays down that the sums received by the said organization on such policies, be taxed as business profit; the surrender value of the policy, endorsed in favour of the employee (keyman), or the sum received by him at the time of retirement be taken as profits in lieu of salary for tax purposes; and in case of other persons having no employeremployee relationship, the surrender value of the policy or the sum received under the policy be taken as income from other sources and taxed accordingly. The premium pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n insured. The Circular advised all insurers to ensure that the scope of cover purchased by an employer or a firm was not wider than a Term Assurance. 2.9. In my opinion, the AO s contention that a Keyman Insurance Policy is one which is of the nature of a term insurance policy has force. The IRDA Circular dated 27.4.2005, after noting that certain aberrations had taken place in the issue of policies as Keyman Policies, issued a directive that henceforth only Term Insurance Policies should be issued as Keyman Insurance Cover. In the IRDA Circular dated 30.1.2006 the IRDA noted that aberrations in the form of issue of unit linked or endowment policies to firms on the life of partners had taken place. The IRDA noted that the employer or the firm could not provide insurable interest beyond a certain cover protecting against the death of the key employee or partner. It was stated that the scope of cover in Keyman Policies should not wider that that under Term Assurance . 2.9.1 The IRDA has been established through the Insurance Regulatory and Development Authority Act, 1999. Under section 14(1) of this Act, the IRDA has the duty to regulate, promote and ensure orderly growth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies try to give another interpretation which is not in consonance with the interpretation by the Regulatory Authority. 2.9.3. The appellant has also contested the reliance on the Circular issued by IRDA on the ground that compliance to other Acts could not be examined for the purpose of claiming benefits under the Act. The decisions relied upon by the appellant do support the proposition put forth by the appellant. However, here the question is not whether there is compliance to the Circular of IRDA or not. As noted above, the issue is whether the Keyman Policy issued by the Insurance Company is a Life Insurance Policy. If a term is defined in the Act and deduction thereof is prescribed, as in the case of bad debts, non performing assets, or depreciation, there would be no need to look to other Acts for deciding the allowance of an expenditure or of taxing a receipt as income. However, in my humble opinion, if allowance has been provided in the Act for certain payments and the nature of the payment is not clearly defined in the Act but it is so defined in the other Act or explained by the Statutory Regulatory Authority for that Act, the interpretation in the other Act should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst and the insurance cover comes as an additional benefit. The policies are predominantly investment policies with a small portion of the premium paid for actual life cover. Under the cover of such a small proportion of the premium for life cover, the appellant has claimed that this is a life insurance policy. This is the kind of aberration which has apparently been referred to in the IRDA Circulars dated 27.4.2005 and 30.1.2006. By linking a small portion of the premium to the life cover, a substantial deduction on account of Keyman Insurance Policy has been sought to be claimed as deduction u/s 37(1) of the Act. The intent and purpose of the Keyman Insurance Policies envisaged in the IT. Act and clarified by the IRDA cannot be lost sight of while determining whether the payment made as premium was actually for a keyman insurance policy. Circular No.762 (supra) clarifies that a Keyman Insurance Policy is that which is taken for the benefit of the employer or of the Company which is likely to occur on the death of the person insured. Thus, it is the benefit to a business on the death of the person insured which is one of the paramount features or the key ingredients to determine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplaining what a Keyman Insurance Policy means will also affect the policies issued prior to 10.5.2005. In fact, the IRDA specifically mentioned that there had been aberrations in the matter of sale of Keyman Insurance in the Circular dated 27.4.2005, which indicates that all was not well in the policies issued prior to the date of Circular. 2.13. The appellant has contended that manner of investment of life insurance policy would not affect the allowability of premium. In my opinion, this has a significant effect of the issue at hand. A Keyman Insurance Policy is for the benefit of the employer. If there is risk involved in the investment, it is obviously not going to benefit the employer and the manner of investment by the Insurance Company, therefore, does determine whether the Keyman Insurance Policy is a proper life Insurance Policy or not. An Insurance Policy, which is designed to insure against the risk of death should not normally be subject to the vagaries of the stock market or investment decisions. 2.14. For the reasons discussed above, I uphold the action of the AO in denying deduction of the premium paid as Keyman Insurance Policies. Ground No.2 of appeal is reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 561 (Raj), Swedish East India Co. vs. CIT 133 ITR 407 and Indian Hotels vs. ITO 245 ITR 538 (SC). 4.1. He argued that the Ld. CIT(A) has failed to appreciate that despite the fact that RBI has the power to regulate Non-Banking Finance Companies and the authority to regulate maintenance of accounts in terms of provision for Non Performing Assets, the same is not an allowable expense for computing income under the Income Tax Act. He relied upon the decisions in the case of TVS Finance Services vs. JCIT reported at 23 DTR 33 ( Madras) and in the case of Southern Technologies Ltd. vs. JCIT reported at 320 ITR 577, which are available in the written submissions placed on record. He further relied upon the decisions of various courts of law with regard to the meaning of Life Insurance and with regard to referring to circulars of IRDA as under: Smt. Tarulata Shyam Ors. vs. CIT 108 ITR 345 (SC) Orissa State Warehousing Corpn. vs. CIT 237 ITR 589 (SC) Dilharshankar C. Bhachech vs. CED 158 ITR 238 (SC) Elel Hotels Investment Ltd. vs. UOI 178 ITR 140 (SC) Mittal Cold Storage vs. CIT 159 ITR 18 (MP) 4.2. He further argued that the Ld. CIT(A) has observed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... life insurance policies issued as Keyman Insurance policies by insurance companies have to be accepted as such. To take an anology, if loan is sanctioned by bank in violation of lending norms, the amount borrowed will still be treated as a loan and its character will not change. No restriction has been placed in Section 10(10D) that policies where funds are invested as per direction of the company are not be treated as Keyman Insurance Policies and these conditions cannot be inferred. The Ld. CIT(A) has has in para 2.11 stated that there is an accident benefit of Rs.25 lakhs with a premium of Rs.4,250/- relating to the policy issued by LIC and that being so the premium amount for sum assured is not only for mortality cover but the investment also. The Ld. CIT(A) has failed to appreciate the difference between accident insurance and life insurance and wrongly concluded that the policy does not fall within the definition of Keyman as explained by IRDA. The premium of Rs.4,250/- relates to accidental insurance. The Ld. CIT(A) has in para No.2.12 accepted that the IRDA circular had prohibited the issue of Keyman Insurance Policies unless they were term insurance policies only after 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as deduction. Accordingly, cases relied upon by the Ld. counsel for the assessee before the authorities bellow and before this Bench, are not applicable. It is purely a case of investment and there is nothing brought on record by the assessee before any of the authorities below or during arguments before this Bench that Insurance so taken is strictly on the Life Insurance where the assessee has opted for investment options. Moreover, as confirmed in para 10(f) of AO s order that the policies taken are not exactly in the nature of Life Insurance Payments. In the facts and circumstances, the Ld. DR prayed to confirm the order of the ld. CIT(A). 6. We have heard the rival contentions and perused the facts of the case. The assessee has taken three policies one from ICICI Prudential (Life time), second from ICICI Prudential (Premium Life ) and third from Jeevan Shree-I. As stated in para 2 of AO s order reproduced hereinabove, there is no dispute to the fact that the assessee-company has given option of choosing the investment plan out of four investment plans offered by the Insurance Company. In the case of Jeevan Shree-I issued by L.I.C. of India, which is the policy with guara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nit Linked Investment Plan is investment plan, premium of which has been put into growth fund and it is not a Pure Life Insurance Policy on the life of another person. Therefore, the policy itself does not fall under the definition of Keyman Insurance Police as defined under explanation to clause (c) of section 10(10D) of the Act. The findings of the ld. CIT(A) and that of the A.O. in this regard are reasoned one and we find no infirmity in the orders of both the authorities below, in particular, the findings of the A.O. which have been confirmed by the ld. CIT(A) i.e. the findings of the AO in paras 6.1, 6.2 6.3. with reference to the Circular of IRDA and the order of the A.O. in para 11, which are well reasoned one and we concur with the views of the ld. CIT(A) and that of the A.O. We find no infirmity in the order of the ld. CIT(A) in this regard, who has rightly confirmed the action of the A.O. The arguments of ld. counsel for the assessee before the authorities below were mainly that the Insurance Policies are Keyman Insurance Policies taken on the life of a person and even otherwise also invest the funds available with them in debt/stock etc, which cannot be the deciding fa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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