Director insurance premiums are not deductible where benefits flow to directors and reassessment rests on later-year tangible material.
Insurance premiums paid for director-focused long-term reward policies were not deductible as business expenditure where the policies were not Keyman Insurance Policies, benefits accrued to directors, nominees or heirs rather than the employer, and the premiums were not taxed as director perquisites. The expenditure therefore failed the wholly and exclusively business-purpose test. Reassessment was sustained because acceptance of a similar claim in another assessment year did not create res judicata, and later-year scrutiny information on policy terms constituted tangible material indicating escaped income. The sanction challenge lacked supporting approval records or other material.
Issues: (i) Validity of reassessment under Sections 147 and 148 of the Income-tax Act, 1961 based on information from assessment proceedings for a later year, including the alleged change of opinion and sanction under Section 151 of the Income-tax Act, 1961; (ii) Allowability under Section 37(1) of the Income-tax Act, 1961 of insurance premiums paid under employee long-term reward policies issued on the lives of directors.
Issue (i): Validity of reassessment under Sections 147 and 148 of the Income-tax Act, 1961 based on information from assessment proceedings for a later year, including the alleged change of opinion and sanction under Section 151 of the Income-tax Act, 1961.
Analysis: The acceptance of a similar insurance-premium claim in an earlier assessment year did not create res judicata for subsequent years, each assessment year being a separate unit. The claim had not been examined in scrutiny assessments for the relevant years, except that the earlier scrutiny order addressed a different disallowance. Information obtained from scrutiny proceedings for the later year, after examination of the policy terms, furnished tangible material for the belief of escaped income. Reasons were supplied and objections were disposed of by a speaking order. The challenge concerning sanction under Section 151 lacked the notice, approval record, or other supporting material.
Conclusion: The reassessment proceedings were valid, against the assessee.
Issue (ii): Allowability under Section 37(1) of the Income-tax Act, 1961 of insurance premiums paid under employee long-term reward policies issued on the lives of directors.
Analysis: The policies were not Keyman Insurance Policies. Their terms provided for reassignment to the directors after the lock-in period, while death and critical-illness benefits accrued to the directors, their nominees, or legal heirs rather than to the company. The policies covered only directors and did not secure an ultimate benefit for the company. The premium was therefore in the nature of a perquisite for the directors; however, it had not been treated or taxed as such in their hands. The expenditure was not shown to have been incurred wholly and exclusively for business purposes.
Conclusion: The insurance-premium expenditure was not allowable as a business deduction, against the assessee.
Final Conclusion: The reassessment jurisdiction stood sustained and the insurance-premium additions were maintained for all the assessment years concerned.
Ratio Decidendi: Premium paid by an employer for a director's insurance policy is not deductible as business expenditure where the policy is not a Keyman Insurance Policy, its benefits ultimately accrue to the director or nominee rather than the employer, and it is not treated as a taxable perquisite.