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TMI Blog2010 (8) TMI 1022X X X X Extracts X X X X X X X X Extracts X X X X ..... representatives of both the parties and perused the materials on record. 3. On ground No.1, the assessee has contested the disallowance of ₹ 11,00,000/- being premium paid towards Keyman Insurance Policy (KIP). Briefly, the facts of the case are that the assessee had debited a sum of ₹ 11,00,000/- as KIP premium paid for a partner of his firm by treating him as keyman. The A. O. took the view that such premium was not allowable as revenue expenditure and therefore, issued a show cause notice to the assessee asking to explain why the said sum should not be disallowed. The assessee explained that the policy was taken as insurance against financial loss which could arise from premature death of the keyman. Even though there might have been doubts regarding treatment of premium paid, the Finance Bill of 1996 introduced five amendments to settle the issue. According to the assessee, the Explanatory Notes at Para 14.4 clearly mentioned that the premium paid on the KIP was allowable as business expenditure and that the amount received back on maturity of such policy was made taxable u/s 28 (vi) with effect from 01-10-2996. Therefore, there was no question of not allowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and added ₹ 11,00,000/- to the total income of the assessee. 4. The addition was challenged before the learned CIT(A) and in the written submission submitted during the course of appellate proceedings the learned Counsel for the assessee contended that the AO was not justified in disallowing the expenditure incurred on the premium of ₹ 11,00,000/- under KIP and that as per section 10 (10D) of the IT Act, KIP is a life insurance policy taken by a person on the life of another person, who is or was the employee for the first mentioned person or he is or was connected in any manner whatsoever with the business of the first mentioned person. Therefore, according to the learned Counsel for the assessee, existence of employer- employee relationship is not at all essential and that the AO was not justified in disallowing the expenditure on the ground that there was no employer-employee relationship between the assessee firm and its partners. It has been further argued by the learned Counsel for the assessee that the insurance company issues the policy if all its conditions are met and since in this case, the insurance company had issued the policy to the partner of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced as under: 6. I have carefully considered both the positions. I do not accept the alternative view taken by the A. O. that the amount received on maturity of an insurance policy is a capital receipt and consequently, the sum expended towards the premia of such policy is to be treated as capital expenditure. As argued by the A. R., Circular No.762 dated 18-02-1998 issued by the CBDT clearly laid down that the premium paid towards the KIP is to be allowed as a business expenditure and that, as per the provisions of sec. 28 (vi) of the Act, the amount received on maturity of the KIP is to be brought to tax. In fact, the A. O. himself has reproduced the relevant portion of the said Circular at Para (9) of the assessment order. Therefore, the view taken by the A. O. that the premia paid towards KIP was to be treated as a capital expenditure and disallowed, was absolutely erroneous. 6.1 The Explanation below sec. 10(10D) defines the KIP. The same is reproduced hereunder: Explanation For the purpose of this clause, Keyman insurance policy means a life insurance policy taken by a person on the life of an other person who is or was the employee of the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmissions made before the authorities below and relied upon the decision of the Hon ble Bombay High Court in the case of CIT Vs B. N. Exports 231 CTR 227 and the order of the ITAT Ahmedabad Bench in the case of M/s. Gem Art dated 26-03-2010 in ITA No. 2725/Ahd/2007. He has also filed copy of the Keyman Insurance Policy through which the amount in question was paid for insurance. It was paid in a sum of ₹ 10,00,000/- in case of Mr. Ashishbhai M. Amin and Smt. Tejasben M. Amin in a sum of ₹ 1,00,000/- as a sleeping partner. On the other hand, the learned DR relied upon the orders of the authorities below. 7. We have considered the rival submissions and the material available on record. The assessee has relied upon the circular No.762 dated 18-02-1998 Para 14.4 of which are reproduced as under: 14.4 The Act also lays down that the sums received by the said organisation 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ife of an employee. A keuman 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 payment of premium on such a policy is incurred wholly and exclusively for the purpose of business. Hence, the appeal by the Revenue does not raise any substantial question of law . 8. The learned Counsel for the assessee also filed copy of the Keyman Insurance Policy in the matter in respect of two of the partners in which payment of ₹ 10,00,000/- and ₹ 1,00,000/- have been paid. In this KIP, the assessee firm is a proposer firm and the name of the life insured is the partner of the assessee firm. The periodical premium payment is prescribed yearly and that the benefits out of the policy was payable to the proposer i.e. the assessee firm. In the case of dissolution of partnership firm for any reason other than death of any of the partners insured under the policy, than the mentioned policy shall be either surrendered to the company for its cash value if any or may paid up for value if any as acquired under the polic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had not been connected with day to day business activity of the assessee. 9. Considering the above discussions, we are of the view that KIP obtained by the assessee firm in the names of the partners Mr. Ashishbhai M. Amin on payment of ₹ 10,00,000/- is allowable as revenue expenditure. We accordingly, set side the orders of the authorities below and delete the addition of ₹ 10,00,000/-. The addition of ₹ 1,00,000/- is however, confirmed in respect of the sleeping partner. In the result, ground No.1 of the appeal of the assessee is partly allowed. 10. On ground No.2, the AO disallowed one fifth of expenditure being personal in nature. The learned CIT(A) confirmed the addition. Considering the above finding of the authorities below, we do not find it to be a fit case for interference because the expenditure mentioned on these heads like vehicle and telephone expenses, the same could be used by the partners and their family members for personal purpose. No record is produced before us to show that the same were exclusively used for the purpose of business. Therefore, no interference is called for in this matter. As a result, ground No.2 of the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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