2016 (5) TMI 1155 - HC - Income Tax

Keyman Insurance Premiums Deemed Business Expenditure by Bombay HC

Pr. Commissioner of Income Tax-I, Ludhiana Versus M/s Ramesh Steels, Ludhiana

The Bombay High Court held that premiums paid on Keyman Insurance Policies are allowable as business expenditure under Section 37(1) of the Income Tax ... Premium paid for securing “Keyman Insurance Policy” - Addition of premium paid on the life of partners and debited to the profit and loss account as Keyman Insurance Premium of the assessee firm - Held that:- The Bombay High Court delving into identical issue in Commissioner of Income Tax v. B.N. Exports [2010 (3) TMI 186 - BOMBAY HIGH COURT ] after noticing the relevant statutory provisions and the Board Circular No. 762 dated 18th February, 1998 issued by the Central Board of Direct Taxes on the issue had held that the premium paid for a 'Keyman Insurance Policy' is allowable as business expenditure under Section 37(1) of the Act. It was further noted that the object and purpose of the said policy is to protect the business against a financial set back which may occur as a result of a premature death, to the business or professional organization. There is no rational basis to confine the allowability of the expenditure incurred on the premium paid towards such a policy only to a situation where the policy is in respect of the life of an employee. The said policy when obtained to secure the life of a partner against a disruption of the business is equally for the benefit of the partnership business which may be affected as a result of premature death of a partner. Thus, the premium on the 'Keyman Insurance Policy' of partner of the firm is wholly and exclusively for the purposes of business and is allowable as business expenditure - Decided in favour of assessee Issues:1. Admissibility of premium paid on Keyman Insurance Policy as business expenditure under Section 37 of the Income Tax Act, 1961.Analysis:Issue 1: Admissibility of premium paid on Keyman Insurance Policy as business expenditure under Section 37 of the Income Tax Act, 1961The primary issue in this appeal was whether the premium paid for securing a 'Keyman Insurance Policy' to protect the business against financial loss due to the premature death of a partner is admissible as expenditure under Section 37 of the Act. The Bombay High Court, in Commissioner of Income Tax v. B.N. Exports, held that such premiums are allowable as business expenditure under Section 37(1) of the Act. The objective of a Keyman Insurance Policy is to safeguard the business against financial setbacks resulting from the premature death of a partner, making it a legitimate business expense. The Central Board of Direct Taxes' Circular 762 clarified that premiums paid on Keyman Insurance Policies are allowable as business expenditure.The Court referred to Section 10(10D) of the Act, which excludes sums received under a Keyman Insurance Policy from tax computation. The Circular further explained that a Keyman Insurance Policy is taken by a business organization on the life of an employee to protect against financial loss from the employee's premature death. The premium paid on such policies is deemed allowable as business expenditure. The Gujarat High Court and the Punjab & Haryana High Court have also supported this view in previous judgments.In conclusion, the Tribunal correctly accepted the claim of the assessee regarding the admissibility of the premium paid on the Keyman Insurance Policy as business expenditure. The Court found no error in the Tribunal's approach and dismissed the appeal, stating that no substantial question of law arises in this matter.This detailed analysis highlights the legal interpretation and precedent set by previous judgments, emphasizing the admissibility of Keyman Insurance Policy premiums as legitimate business expenses under the Income Tax Act, 1961.