Keyman insurance premiums deemed business expenditure, not taxable income on assignment or maturity.

The High Court held that the premium paid on keyman insurance policies is allowable as business expenditure under Section 37 of the Act. The court ruled that the difference between the premium paid by the employer and the surrender value paid by the employee is not taxable income as no taxable event occurred at the time of assignment. Additionally, the maturity value received by the employee on the insurance policy is exempt from tax under Section 10(10D) of the Act. The court dismissed the Revenue's appeals and allowed the assessees' appeals in this matter.

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Issues Involved:
1. Whether the premium paid by the company on keyman insurance policies is allowable as business expenditure.
2. Whether the difference between the premium paid by the employer and the surrender value paid by the employee at the time of assignment of the policy is taxable.
3. Whether the maturity value received by the employee on the insurance policy is taxable.

Issue 1: Allowability of Premium Paid on Keyman Insurance Policies as Business Expenditure

The Assessing Officer (AO) disallowed the premium paid by the company on keyman insurance policies, considering it a colorable device to claim business expenditure. The CIT (A) and the Tribunal, however, allowed it as business expenditure. The Revenue argued that the modus operandi adopted by the company was to benefit the keymen, not for business purposes, and contravened the LIC's scheme. The Tribunal relied on CBDT's Circular No.762 dated 18th February 1998, which allows such premium as business expenditure. The High Court upheld the Tribunal's decision, emphasizing the principle of consistency, the binding nature of the CBDT Circular, and judicial precedents. The court concluded that the expenditure incurred on keyman insurance policies is allowable as business expenditure under Section 37 of the Act.

Issue 2: Taxability of Difference Between Premium Paid by Employer and Surrender Value Paid by Employee

The AO treated the difference between the premium paid by the company and the surrender value paid by the employee at the time of assignment as taxable income. The CIT (A) held it as 'salary' under Section 17 of the Act, but the Tribunal reversed this decision, stating no taxable event occurred at the time of assignment. The High Court agreed with the Tribunal, noting that no sum was "received" under the Keyman insurance policy at the time of assignment. The court emphasized that taxability under Section 17(3)(ii) requires actual receipt of the amount, which did not occur in this case. Thus, the difference between the premium paid by the employer and the surrender value paid by the employee is not taxable.

Issue 3: Taxability of Maturity Value Received by Employee

The Tribunal held that the Keyman insurance policy, after assignment, assumed the character of an ordinary insurance policy. The Revenue argued that the maturity value received should be taxable. The High Court upheld the Tribunal's view, noting that the assignment led to the conversion of the policy into an ordinary policy, and the maturity value received by the employee is exempt under Section 10(10D) of the Act. The court emphasized that the law permits such assignment, and once the policy is assigned, it does not remain a Keyman policy. Therefore, the maturity value received by the employee is not taxable.

Conclusion:

The High Court dismissed the Revenue's appeals and allowed the assessees' appeals, holding that the premium paid on keyman insurance policies is allowable as business expenditure, the difference between the premium paid by the employer and the surrender value paid by the employee is not taxable, and the maturity value received by the employee on the insurance policy is exempt from tax.

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