Keyman insurance premium on unit linked policies was disallowed after they were treated as investment products, not pure business cover.

Premium paid on unit linked insurance policies claimed as Keyman Insurance Policy was held not allowable as business expenditure. The policies were examined in substance and found to be investment-linked products with guaranteed returns, where only a small part provided mortality cover and the balance was deployed in investment funds. Applying the Explanation to section 10(10D) and the scheme of section 37, the analysis concluded that a Keyman Insurance Policy must reflect genuine life cover taken for business protection. IRDA circulars were treated as clarifying that keyman cover should not extend beyond term assurance. On those facts, the premium was disallowed and the disallowance sustained.

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Issues: Whether premium paid on unit linked insurance policies claimed as Keyman Insurance Policy was allowable as business expenditure under the Income-tax Act.

Analysis: The policies were examined in substance and found to be unit linked investment plans with guaranteed returns, where only a small component represented mortality cover and the balance was deployed in investment funds. The definition of Keyman Insurance Policy in the Explanation to section 10(10D) of the Income-tax Act, 1961 was applied, along with the statutory scheme under section 37. The Insurance Regulatory and Development Authority circulars were treated as clarificatory of the nature of keyman cover and as supporting the view that such cover should not extend beyond term assurance. On the facts, the policies did not answer the statutory description of a pure life insurance policy taken on the life of another person for business protection.

Conclusion: The premium was not deductible as business expenditure and the disallowance was sustained.

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