2010 (3) TMI 186 - HC - Income Tax

Appeal dismissed: Keyman insurance premiums for partner's life held wholly and exclusively business expenditure, allowable

HC dismissed the Revenue's appeal, affirming the Tribunal's finding that premiums paid on a Keyman insurance policy were incurred wholly and exclusively ... Business Expenditure - Whether, the Tribunal was justified in confirming the order of the Commissioner of Income-tax (Appeals) by deleting the addition of insurance premium paid by the asses- see-firm on a Keyman insurance policy? - HELD THAT:- The circular 762, notes that there were certain doubts on the taxability of the income, including bonus, received from such policies and as regards whether the premium paid should be allowed as capital or as revenue expenditure. The circular clarifies that the Act lays down the tax treatment for a Keyman insurance policy. The circular clarifies that the premium paid on a Keyrnan insurance policy is allowable as business expenditure. In the present case, on the question whether the premium which was paid by the firm could have been allowed as business expenditure, there is a finding of fact by the Tribunal that the firm had not taken insurance for the personal benefit of the partner, but for the benefit of the firm, in order to protect itself against the set back that may be caused on account of the death of a partner. The object and purpose of a Keyman insurance 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 pre mium paid towards such a policy only to a situation where the policy is in respect of the life of an employee. A Keyman 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. There fore, the expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of business. Hence, for the reasons recorded earlier, the appeal by the Revenue does not raise any substantial question of law. The appeal is dismissed. There shall be no order as to costs. Issues:- Whether the Income-tax Appellate Tribunal was justified in confirming the deletion of an addition of Rs. 31,68,775 being insurance premium paid by the assessee-firm on a Keyman insurance policy.Analysis:The High Court of Bombay dealt with an appeal by the Revenue under section 260A of the Income-tax Act, 1961, concerning the assessment year 2004-05. The core issue revolved around the deletion of an addition of Rs. 31,68,775, which was the insurance premium paid by a partnership firm on a Keyman insurance policy. The Income-tax Appellate Tribunal upheld the deletion, stating that the expenditure on the insurance policy was wholly and exclusively for the business of the firm. The Tribunal relied on Circular 762 and a previous decision to support its stance.The Revenue contended that a partnership firm does not have a separate existence from its partners and argued against the relationship of employer and employee between a firm and its partners due to the absence of a contract of service. The court analyzed relevant provisions of the Income-tax Act, highlighting that a firm is considered a distinct assessable entity for taxation purposes. The court delved into the definition of a Keyman insurance policy and its tax treatment under section 10(10D).Moreover, the court referred to Circular 762, emphasizing that the premium paid on a Keyman insurance policy is allowable as business expenditure. The Revenue's argument, citing a Supreme Court judgment, was countered by the court's interpretation that a partnership firm is a distinct assessable entity for tax purposes, separate from its partners. The court concluded that the expenditure on the Keyman insurance policy was incurred for the business's benefit, aiming to protect the firm against financial setbacks due to the premature death of a partner.In the final judgment, the court dismissed the Revenue's appeal, stating that it did not raise any substantial question of law. The decision was made based on the finding that the expenditure on the Keyman insurance policy was wholly and exclusively for the business's purposes. No costs were awarded in this matter.Therefore, the High Court of Bombay upheld the Tribunal's decision, affirming the deletion of the addition of the insurance premium paid by the partnership firm on the Keyman insurance policy, as it was deemed a legitimate business expenditure safeguarding the firm's interests.