2013 (7) TMI 955 - AT - Income Tax

Tribunal allows appeal on Keyman Insurance Premium disallowance, deems premiums as business expenditure.

Mujeebur Raheman F. Ansari Versus The DCIT

The Tribunal allowed the appeal regarding the disallowance of Keyman Insurance Policy Premium for three assessment years. The Tribunal held that the ... - 1. ISSUES PRESENTED AND CONSIDERED Whether premium paid for a Keyman insurance policy on the life of a person who is not a formal employee but is connected with the business (here, a relative who manages sales, collection and production and holds a power of attorney to run the business) is an allowable business expenditure under section 37(1) of the Income Tax Act. Whether employer-employee relationship or formal employment contract is a prerequisite for allowability of Keyman insurance premium as a business expenditure. 2. ISSUE-WISE DETAILED ANALYSIS Issue: Allowability of Keyman insurance premium paid for a person connected with the business though not a formal employee. Legal framework: Section 37(1) permits deduction of business expenditure laid out or expended wholly and exclusively for the purpose of business. The meaning of 'Keyman insurance policy' for related tax provisions (section 10(10D) cited for interpretive guidance) includes policies on lives of persons 'connected in any manner whatsoever with the business of the subscriber', a phrase broader than contractual employment. Administrative clarification (CBDT circular) treats premium paid for Keyman insurance as allowable business expenditure where taken to protect the business against financial setback from premature death of a key person. Precedent treatment: The Court relied on the principle from the High Court decision interpreting clause equivalent to Keyman coverage: the words 'is or was connected in any manner whatsoever with the business' are wider than a contract of employment, and the object of Keyman insurance is to protect business interest against financial loss. That precedent was followed and applied to facts where the insured person is not an employee but is substantially engaged in business operations. Interpretation and reasoning: The Tribunal accepted that the statutory phraseology contemplates coverage beyond formal employment, extending to persons who are connected with the business in any manner. The object and purpose of Keyman insurance-protection of the business against financial setback on premature death of a person whose services are important to the business-supports treating the premium as wholly and exclusively for business purposes. Evidence that the insured person assisted in sales, collection and production and held a power of attorney to manage business in the proprietor's absence demonstrates a connection with the business sufficient to fall within the statutory phrase. The Assessing Officer's contention that Keyman policy norms limited eligibility to company/partnership or required employer-employee relationship was held to be inconsistent with the broader statutory and administrative position; absence of adverse material contradicting the assessee's factual assertions was noted. Ratio vs. Obiter: Ratio-where a premium is paid for a Keyman insurance policy on the life of a person who is 'connected in any manner whatsoever with the business' (even if not a formal employee), such premium can be an expenditure 'wholly and exclusively laid out' for business purposes and therefore allowable under section 37(1). Obiter-remarks distinguishing eligibility norms of insurers (e.g., LIC norms) and requirements applicable to companies/partnerships are treated as not determinative of tax allowability and operate as contextual observations rather than binding law on tax deduction principles. Conclusion: The disallowance of Keyman insurance premium was set aside. Premiums paid in respect of a person shown to be connected with the business (by active management roles and power of attorney) are deductible as business expenditure; absence of a formal employer-employee contract does not preclude allowance. Appeals partly allowed to delete the disallowance in all impugned years.