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TMI Blog2014 (7) TMI 994X X X X Extracts X X X X X X X X Extracts X X X X ..... ny). The Ld. Counsel was asked to justify this claim of deduction of Rs. 3 lacs for premium paid towards keyman insurance policy as this issue had cropped up in various assessments in this charge and had been upheld by worthy CIT(A) Jalandhar in two cases till date. 3.1. The reply of assessee before the AO was as under: "Attention is drawn to clause (b) of section 10(10D) which provides that any sum received under life insurance policy, including the sum allocated by way of bonus on such policy, shall be exempt other than any sum were received under keyman insurance policy, shall be exempt other than any sum were received under keyman insurance policy. Company has paid sum of Rs. 3 lacs on keyman insurance policy of Sh. Rajesh Kharbanda (JMD) which has been claimed as expense allowable under section 37 of IT Act. The amount due on maturity of this policy has been received back in AY 2010-11 and is being offered for taxation in year of receipt. Payment of premium for keyman insurance cover is allowable as a business expense. The law permits deferment of payment of tax on this amount. This amount cannot be taxed twice. The claim of payment of premium is genuine w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Policy on the life of one life of the partner. It is, rather, a policy for investing funds by the assessee in units with an assurance of guaranteed returns and coverage on life of one of the partners as added incentives. (ii) The assignment of the policy to Sh. Sanjeev Suri on 22.11.2007 shows that the assessee would not derive any benefit out of the policy. No reason for such assignment has been given. The premiums paid, are thus, not wholly and exclusively for the purpose of assessee's business." 10. Before reaching to the above conclusion, all aspects of the policy and legal proportions were discussed in the details in the above order which need not be repeated/ Facts being parimaterial, I find no reason to deviate from the findings of my Ld. predecessor for what he held in the case of M/s. Suri Sons wherein he has elaborately discussed the issue and held that the expense was not incurred for the business of assessee. Going along with him, I also hereby hold that the expense of Rs. 3,00,000/- in case of assessee is to be disallowed as not being for the purpose of business of assessee and uphold the action of AO in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rudential Insurance Company and the LIC has undertaken guaranteed addition for five years and later on with profits. Out of total premium amount, mortality charges is nominal and depends upon the death benefits. Mortality charges, in the case of ICICI Prudential policies are being recovered on the date of commencement of the policy and on each monthly due date while the policy remains in force and 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 Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and thus can invest in Units accordingly. Any increase or decrease in the premium shall not lead to any increase or decrease in the Death. f) There are four plans and the investment objectives of all the tour plans alongwith indicate portfolio Allocation are given in the policy document. g) The policy document states that investment in the units is subject to market risk. h) The Insurance charge that includes the amount of insurance cover shall be recovered out of premium amount and on each monthly due date by cancellation of units. i) Tax benefits would be available as per the prevailing Tax Laws and subject to conditions u/s 80C, 80D and 10(10D) of the I.T. Act. j) Copy of first premium receipt shows Type of Policy as Keyman but 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 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in plan is Rs. 56 lacs. c) The accident benefit premium is of Rs. 4,250/- separately calculated for accident benefit sum assured of Rs. 25 lacs and charges. d) As per the guaranteed additions undertaken by the Insurance Company, it is mentioned that a guaranteed addition of Rs. 50 per thousand. Sum assured will be made to the sum assured at the end of the each policy year for each year's premium paid for first five years. e) After the completion of five years the policy shall participate in profits of "with profits assurance policy". f) Policy is not the term assurance policy and not on the life of another person. It is a investment plan with guaranteed additions and with profits. g) Thus, the LIC will invest the premium amount for guaranteed additions/guaranteed returns. h) There is no mention of "Keyman Insurance Policy" in the policy document. This is not a term assurance plan and as such does not fit into the definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is available at pages 10 & 11 of AO's order, which is reproduced as under: "10. The assessee has submitted reply vide letter dated 12.11.2008:- (a) "Regarding the Keyman Insurance Premium paid, it is submitted that the premium works out to Rs. 59,96,365/- and not Rs. 60,00,000/-. It has been suggested by you that since our keyman policies are unit linked insurance plans, these are not keyman insurance policies in view of the circular of IRDA. In view of the above, it has been stated that the policy taken is unit linked insurance and consequently the premium paid is proposed to be disallowed. (b) It is further submitted that as far as the keyman insurance policies are concerned, these are on the life of a person and this is clearly mentioned on the face of the policies which have already been filed earlier. (c) The mode in which the amount is to be invested by the insurance company. The insurance companies even otherwise invest the funds available with them in debt/stock etc. and this cannot be the deciding fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c) to section 10(10D) of the I.T.Act i.e. policy on life as asked and pointed out vide order sheet noting dated 31.10.2008. The scope of cover should not be wider than term assurance. Status of the policy, contents, terms & conditions mentioned therein established that the plan is Unit Linked Insurance Plan 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 IRDA. 2.6 The assessee further claims that policy has been issued prior to issue of Circular by the IRDA. The policy of Unit Linked Insurance Plan is not "Keyman Insurance Policy" as per the provisions of the I.T. Act as discussed above and these provisions of the I.T.Act are in place when the policy has been taken by the assessee. In the brochure also, the Insurance Company does not claim of any such benefit except tax benefit u/s 80C of the I.T.Act. The Circular issued by the IRDA warning insurers confirm that the fact that "Term Assurance Plan under Keyman Insurance Policy and not Unit Linked Endowment Assurance Plan would be eligible for deduction." The assessee further admits that policies are not exactly in the nature of life insurance pol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 IRDA. 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 cannot be taken for business expenditure. The assessee did not reply to this vital specific issue of nominal mortality charges for life cover and balance huge amount in the investment in units. The assessee firm has been asked to prove that the policy taken is Keyman as per definition given in I.T.Act i.e. policy taken by a person on the life of another person & also fulfilling the terms and conditions laid down by the IRDA in this regard, necessity and expediency of the person being Keyman and the policy taken for the benefit of the assessee company but the assessee failed to prove that. iv) It does not fulfill the condition of policy taken by a person on the life of another person as per definition of Keyman in the I.T. Act, i.e. pure life insurance as also admitted by the assessee in its submission. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny 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 the 31st day of March, 2012] in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured Provided that the provisions of [sub-clauses (c) and (d)] sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia, etc. provides for an insurance policy taken by a business organization or a professional organization on the life of an employee, in order to protect the business against the financial loss, which may occur from the employees' premature death. The 'Keyman' is an employee or a director, whose services are perceived to have a significant effect on 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. &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld henceforth be issued as Keyman Insurance Cover. On 30.1.2006 the IRDA issued another Circular in it was noted that despite the Circular dated 27.4.2005, certain insurers were still selling partnership insurances through endowment or Unit Linked Plans disregarding the spirit behind the earlier Circular. It was informed that a persons purchasing Life Insurance could only do so to the extent of his insurable interest in the person insured and that an employer buying Keyman Insurance for his own benefit or a partner of a firm buying insurance on the life of another partner for own benefit could not provide insurable interest beyond a certain cover protecting against death of the person 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 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that any payment for use of the land of airport, whether it was on landing or parking of the aircraft in the airport, would amount to payment of "rent". The Hon'ble High Court based their decision on the definition of the word "rent" in section 194I of the Act where any payment for use of land etc., by whatever name called, is included in the definition of "rent". The issue in the present case is somewhat different. Though the term "Keyman Insurance Policy" has been defined in section 10(10D) of the Act, the term "Life Insurance" has not been so defined in the Act. Under the circumstances, the interpretation of the term "Life Insurance" in the context of Keyman Insurance Policy by Insurance Regulatory Authority assumes much greater importance and would prevail in a situation where the Insurance Companies 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the policies are basically investment vehicles in which money can be paid at regular intervals by the policy holder and the policy holder can ask the insurance company to invest the money in different Funds depending upon the risk appetite of the policy holder. This is like the insurance company acting as Mutual Fund which invests money in the stock markets and gives units to the investor to represent his investment. The company is levying charges (which are deducted from the premium) which are similar to those levied by Mutual Fund Companies as entry and exist loads. The company alongwith the investment, provides insurance cover to the investor and the premium for providing the life cover is deducted from the funds invested by the investor on a regular basis. The returns on such policies are subject to market risks. These are schemes where the decision of investment is made first 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 insuran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Policy as explained by the IRDA. The appellant's reliance on the certificate issued by LIC to the effect that the policy issued was Keyman Insurance Policy does not take away the affect of the IRDA Circulars. Hence, even though the documents sought to be admitted - since the AO did not provide sufficient opportunity to the assessee during asstt. Proceedings. They do not help the case of the appellant. Merely, terming a policy as "Keyman" Insurance Policy will not make the policy a keyman policy as explained by the IRDA. 2.12. The appellant has contended that the IRDA Circular had prohibited the issue of Keyman insurance policies unless they were term insurance policies only after 10.5.2005 and that all its policies were issued on or before 10.5.2005. While the policies may have been issued prior to 10.5.2005, the issues mentioned in the IRDA Circulars showing misused of the Keyman Insurance Policy Scheme issued earlier and explaining 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 Insuran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been referred that in taxing statute the principal of literal interpretation is very strictly applied while interpreting taxing statute one cannot go by the notion as to what is just and expedient. Similar view has been expressed by the Hon'ble Madras High Court in the case of CIT vs. Micromax Systems P. Ltd. reported at 277 ITR 409. The Ld. counsel further went ahead to explain the functioning of IRDA which was explained with certain objectives to regulate, promote and ensure orderly growth of the insurance business and the IRDA has no relevance as far as the allowability or premium under the Income Tax Act or taxation of policy proceeds is concerned. The Income Tax Act specifically mentions where another Acts have to be referred for our interpretation purposes like section 2(25A), 2(29D), 2(38), 2(42A) and Sec. 2(47)(V) and since IRDA has not referred to for defining Keyman Policy or Life Insurance, its circulars cannot be relied upon for Income Tax purposes. The words "Life Insurance" should be understood as in common parlance. He further relied upon the decisions in the case of CIT vs. Lake Palace Hotels 226 ITR 561 (Raj), Swedish East India Co. vs. CIT 133 ITR 407 and I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een defined and reiterated that this is for the benefit of business on the death of the person concerned. The Ld. CIT(A) has also referred to the circular No.762 which contemplates money being received in circumstances other than death also and this is in contrast to the definition of term insurance which according to the CIT(A) is the essence of Keyman Insurance Policy. The view thus taken by CIT(A) is not correct. The CIT(A) as also observed that policies which carry inherent risk of return cannot provide such benefit to business. In the policies of the assessee, it is an undisputed fact that money i.e. assured value is receivable on death and as such the view of CIT(A) is not correct. Also the insurance companies do not sit cover money. Even where no option is given to the policy holder, the amount of premium (after expenses including commission) is invested so that some return is given to policy holder on maturity. The observation regarding money being invested as per the directions is thus irrelevant. The Keyman Insurance Policies, in this case are life insurance policies as the policy value is receivable on the death of the persons and this is an undisputed fact (submission b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the possible return on the maturity of the policy. The two are entirely different concepts and should not be confused. Even without the direction of the client, the insurance companies invest in debt and equity. Money is recoverable on the death of the Keyman and thus is a sufficient test. The Ld. CIT(A) has thus formed a wrong view and the addition in respect of Keyman Insurance Policies deserves to be deleted in view of the above submissions. It may also be submitted that an assessee is permitted to plan his affairs and if the transaction is genuine, merely because it results in saving of tax cannot be a reason for any disqualification . Also where two views possible one favouring the assessee is to prevail. CED vs. R. Kanakasabai reported at 89 ITR 251 (SC). 5. The Ld. DCIT(DR), Mr. Tarsem Lal, on the other hand, strongly relied upon the orders of both the authorities below, which are well reasoned and perfect orders. The Ld. DR argued that if a company floats some policies and advertises as a Keyman Insurance Policy which later on came to the knowledge of IRDA being statutory authority who finds such policies in facts are investment policy and not Keyman ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncement of the policy and on each monthly due date while the policy remains in force and is to be recovered by cancellation of Units, as per the policy document of the Insurance Company. The accident benefit premium is Rs. 4,250/- for accident benefit or sum assured of Rs. 25 lacs. Show cause notice was given to the assessee to explain whether the said polices are Unit Linked Investment Plan or not and to justify the claim of deduction in the Profit & Loss Account, the reply of the assessee was that the Insurance Companies even otherwise invest the funds available with them in debt/stock etc. and this cannot be the deciding factor in determining the allowability of the premium paid. This explanation of the assessee cannot convert investment plan into Pure Life Insurance Plan. 6.1. There is no dispute as argued by the Ld. counsel for the assessee that meaning to Keyman Insurance Policy is taken from the Explanation to the clause (c) of section 10(10D) of the Act, which has been reproduced hereinabove. As per definition of "Keyman Insurance Policy", a person purchasing life insurance can only do so to the extent of his insurable interest in the assured. With the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it is prospective in nature, cannot be accepted since the circular is clarificatory in nature. In the facts and circumstances of the case, 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, in fact, has never been explained by the assessee before any of the authorities below or even before us. 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. Accordingly, the cases of various courts of law, which have been carefully perused by us are not at all applicable. In the facts and circumstances, the arguments made by the ld. counsel for the assessee, cannot help the assessee for the reasons mentioned hereinabove. Accordingly, we find no infirmity in the order of the Ld. CIT(A) who has rightly ..... X X X X Extracts X X X X X X X X Extracts X X X X
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