TaxTMI 
TaxTMI 
2014 (6) TMI 318
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich reproduced as under: "(iv) A proportion of each premium the investment content, will be used to buy units in the Fund(s) of your choice. The current investment content rate for all premiums is specified in the policy schedule. (v) If you have chosen more than one Fund, we will split the investment content in accordance with your instructions before we allocate units in each fund." It is evident from the above clauses that the policy was not mere an insurance policy but was an investment tool for the firm. 3. Whether on the facts & circumstances of the case, the CIT(A) is justified in restricting the disallowance of expenses like petrol, car, business promotion expenses etc. incurred in by the assessee to Rs.40,000/- and not to 50% of the balance expenditure of Rs.1,76,408/- after allowing telephone expenses amounting to Rs. 2,16,216/- whereas the ld. CIT(A) himself observed that the assessee was engaged in the business commodity trading which is mainly done by sitting in the office on telephone. 4. That the appellant craves ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in his account on 26th April, 2008 i.e. within one month from the date of assignment. (ix) Out of the above sale proceeds, an amount of Rs.59,14,000/-was transferred to the same firm i.e. M/s. J.V. Steel Traders by the assessee on 1^st May, 2008. 2.1 In this manner, the whole process of assignment of the policy by the firm to the assessee, its surrender and encashment by him and transfer of the funds to the firm was completed in a period of about a month. Had the policy not been assigned and been surrendered and encashed by the firm itsesf, the proceeds would have been taxable in its hands. However, the assessee has not included this sum in his taxable income. Accordingly, vide note sheet entry dated 01.12.2011, the assessee was asked to explain as to why the amount of Rs.59,14,702/- may not be treated as his taxable income and added to his income. The case was adjourned to 15.12.2011. On 15.12.2011, the case was attended by Sh. Janak Raj, father of the assessee, alongwith Sh. Yogesh Thakur, CA, Counsel and written reply was filed. The gist of the same is reproduced as below: "As already submitted in our la....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Kewelran [1989] 77 CTR (MP) 223: [1989] 179 ITR 254 (MP)]. Originally it was policy taken by one person on life of another person. After assignment it is a policy on the life of the policy holder himself and it does not come within the ambit of definition of 'Keyman insurance policy". The original policy may not have been cancelled and new policy may not have been issued but the assignment has totally altered the characteristic of original policy. Since after assignment assessee is policyholder and since policy is on his life, the sum received on maturity would be regarded as sum received under a life insurance policy and not sum received under keyman insurance policy and hence it would be exempt. Your goodself kind attention is further invited to the recent decision of "The Delhi Tribunal" in the case of "DR. Naresh Trehan v. Deputy CIT [2010-TIOL-418-ITAT-Del] in which it has been held that "on assignment of Keyman insurance policy - total sum received on maturity (after reducing surrender value of the policy at the time of assignment) is exempt from tax." In a recent ruling of the above said case, the Delhi Tribunal held that upon assignment of the keyman insurance p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsfer the policy, because if it had been retained and encashed, the proceeds would have been subject to tax. The policy was assigned on 29th March, 2009 not for any financial or commercial consideration but just to avoid tax. 3.2. The second contention of the assessee is that after assignment, the policy is no more Keyman's Insurance Policy, but a normal Life Insurance Policy. Before dealing with this contention, it will be worthwhile to go into the legal position relating to this issue. Section 17(3) of the Income-tax Act, 1961 deals with 'Profits in lieu of salary'. Clause (ii) of this section reads as under: "(ii) any payment (other than any payment referred to in clause (10) [, clause (10A)] [, clause (10B)], clause (11), [clause (12) [, clause (13)] or clause (13A)] of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund [* * *], to the extent to which it does not consist of contributions by the assessee or [interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... contention of the assessee is not valid in the given circumstances. 3.4. After over-ruling the contentions given by the assessee, it is time to go into the real purport of the whole game. Considering all the facts, it is crystal clear that the only purpose of all this is to evade the payment of tax, that would have been otherwise payable. As mentioned above, the firm could surrender the policy at any time after retaining it for at least three years. It had done so, for almost this period. It was in need of funds, as stated by the assessee that it was in loss. To overcome the shortage of funds, surrender and encashment of the policy would have been a handy tool. The firm, in fact, resorted to the same. This is clear form the fact that after assignment, the assessee did not pay the next premium due on 31.03.2008. This shows that at the very outset, they intended to encash the policy immediately after completion of three years. However, if it was encashed in its own hands the procee3ds would have been liable to income tax. To avoid the same, it chose this circuitous route. By doing so, it intended to kill two birds with one stone. One the one hand, it got the required funds and on....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... been received under an ordinary insurance policy i.e. not Keyman Insurance Policy subsequent to the assignment of keyman Insurance Policy. The cases thereafter went up to the Hon'ble Delhi High Court which has delivered a judgment in favour of the assessee. It has been held that on assignment of the Keykman Insurance Policy to the employee, it ceases to be a keyman insurance policy with reference to the employee but becomes an ordinary Life Insurance Policy with reference to the employee but becomes an ordinary Life Insurance Policy eligible for exemption u/s 10(10D). The Hon'ble Court has relied upon the certificate given by Life Insurance Corpn. of India Ltd. to the fact that the kayman insurance policy after assignment assumes status of ordinary insurance policy. The specific observations of the Hon'ble Court on this crucial issue are as under: "(1) The Tribunal while giving requisite relief brought to tax the amount of surrender value at the time of assignment subject to verification by the A.O. It also rejected the alternative argument of the assessee that in case the sum received on maturity was held to be taxable then deduction be allowed for the premium paid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tage of the gaping holes in the provisions of the Act. The job of the Court is to simply look at the provisions of the Act and to see whether these provisions allow the assessee to arrange their affairs to ensure lesser payment of tax. If that is permissible, no further scrutiny is required and this would not amount to tax evasion. Benefit insured owing to the combined effect of a prudent investment and statutory exemption provided u/s 10(10D) of the Act, the section does not envisage of any bifurcation in the amount received on maturity on any basis whatsoever. Nothing can be read in section 10(10D) of the Act, which is not specifically provided because any attempt in that behalf as contended by Revenue would be tantamount to legislation and not interpretation." 7. Since the issue has been categorically decided in favour of the assessee by the Hon'ble Delhi High Court as detailed above and there is no contrary decision on the issue, the addition made by the A.O. is directed to be deleted." 4. We have heard the rival contentions and perused the facts of the case. As regards the nature of the Policy whether it is Keyman Insurance Policy or is an investment policy , the iss....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent of the Insurance Company. In the case of the policy of guaranteed additions of LIC Policy, document is not legible and the assessee did not furnish the legible copy. However, on the perusal of first page which is somewhat legible, it could be made out that premium for main plan is Rs.19,91,265/- and sum assured is Rs.56,00,000/-, whereas Accident Benefit Premium is Rs.4250/- for Accident Benefit Sum Assured at Rs.25,00,000/-. Thus, the main purpose of the three policies taken by the assessee was investment of the premium accounts in Units after deducting mortality charges and other administrative expenses. 2.2. Further, on perusal of the contents of the policy issued by the Insurance Company, it was found that the policy taken is Unit Linked Insurance Plan. In view of the fact that the assessee has taken "Unit Linked Insurance Plan", the assessee was asked to explain & justify the claim of deduction under the head Keyman Insurance Policy in its profit and loss account vide order sheet noting dated 31.10.2008 & letter dated 03.11.2009. The assessee has stated vide letter dated 12.11.2008 that it is eligible for deduction of claim of Keyman Insurance and in this regard submitt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....man but there is no mention of "Keyman Insurance Policy' in the Policy document. 6.2. Premium Life. It is a limited premium payment unit linked insurance plan: (a) The Plan: Premium Life is a limited premium payment unit linked insurance plan. The premiums net of all the charges are invested in a fund of the assessee's choice. (b) Being a unit linked life insurance policy, the Policy holder has the option to allocate the Premiums and any Top-up Single Premium paid by him among one or more of the Plan(s) for purchase of units thereof. (c) The Policy enables the policyholder to participate only in the investment performance of the Plan, to the extent of allocated units. (d) Mortality charges; These charges are calculated on a yearly basis, but deducted every month from the units allocated. Mortality charges are put for the risk calculated (for Life Cover) depending upon the age and the mortality rating, as applicable). Mortality charges for annual premium of Rs.2,00,000/- has been calculated at Rs.2,510/- in the policy document. (e) The assessee has option to increase/decrease in the premium and thus can invest in Units accordingly. Any increase or decrease ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... para 8.4, which for the sake of convenience is reproduced as under: "8.4. Thus, the insurance regulator has categorically barred selling the keyman policy through endowment or unit-linked plans. It has said the keyman insurance cover can be sold only through term assurance, which combines life, accident and disability insurance policies to protect business of a company from the death or disablement of a key employee. "All the insurers are advised strictly to ensure that where the premium for the insurance on the life of an employee is paid by the employer, or where the premium on the life of a partner is paid by another partner or by the partnership firm, the scope of cover is not wider than term assurance. Insurance Regulatory and Development Authority (RDA) said in its circular. The rough stance of IRDA came after it found that some insurers had flouted its circular issued in April, 2005 and continued to sell partnership insurance through endowment or unit linked plans. Insurers should not lose sight of the basic principle that person purchasing life insurance can only do so to the e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....act that the Keyman Insurance policies are unit linked does not adversely affect the position as far as the allowability of premium of these policies is concerned. (g) As far as the circular of IRDA, a copy of which has been provided to us, it will not override the provision of Income Tax Act. Though the guidelines of IRDA will not affect the provisions of the Income Tax Act. It has been clarified by the insurance company that the date as mentioned in the circular of IRDA will apply after 10.05.2005. (h) We are, however, of the view that as per the Income Tax Act, once a policy has been issued as a Keyman policy, the benefits of the same shall be available to the assessee and the circular of IRDA which does not override the Income Tax Act shall have not affect. (i) As far as the choice of investment in the case of policies of ICICI Prudential are concerned, the appropriate form which provided by the insurance company was signed and handed over to them." 2.5. Further the AO observed that the assessee admits that policies are Unit Linked and since these are on the life of the person and it will not affect the real nature of the policy. But the assessee did not respond to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....being reproduced hereinbelow for the sake of convenience : "11. Gist of the case & discussion: The gist of the queries, enquiries, information, investigation, carried out & submission of the assessee is summarized here:- (i) The assessee firm has taken policy, the type of which is Unit Linked Insurance Plan an Investment Plan. The purpose of Guaranteed Returns on the premium amount through investment in Units. It was claimed as Keyman Policy and amount of premium of Rs.59,96,355/- per annum has been claimed as deduction. (ii) The policy taken as Unit Linked Insurance Plan " an investment Plan" of ICICI Prudential & Jeevan Shree-I of LIC of Guaranteed returns and profits and not Keyman Insurance Policy as per definition of Keyman Insurance Policy, explanation to clause (c) to section 10(10D) of the I.T. Act. It is not Term Assurance Plan policy as per IRDA Guidelines, for the policy to be qualified as Keyman Insurance Policy. (iii) A nominal amount is being charged for mortality charges for life cover and the balance amount has been deployed to purchase Units as per clients choice. Status of the policy, contents, terms & conditions mentioned therein established that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of guaranteed addition could not be said to have incurred for the purpose of the business and is thus not allowable as business expenditure of the assessee firm." 3. Before the ld. CIT(A), the assessee adduced certain additional evidences which were admitted and forwarded to the A.O. and comments taken and thereafter the ld. CIT(A) confirmed the action of the A.O. The order of the ld. CIT(A) in paras 2.5 to 2.14 for the sake of convenience is reproduced as under: "2.5. I have considered the rival submissions carefully. Sub-section (10D) of section 10 of the I.T.Act exempts any sum received under a life insurance policy from the ambit of the total income of a person. Certain exceptions to this general exemption are, however, provided in the sub-section. The sub-section is extracted below: "10. Incomes not included in total income. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included. xxxxxxxxxxxxx (10D) any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, oth....
X X X X Extracts X X X X
X X X X Extracts X X X X
....zation or a professional organization on the life of an employee, in order to protect the business against the financial loss, which may occur from the employees' premature death. The 'Keyman' is an employee or a director, whose services are perceived to have a significant effect on the profitability of the business. The premium is paid by the employer. 14.2. There were some doubts on the taxability of the income including bonus etc. from such policy and also regarding the treatment of the premium paid - whether it should be allowed as a capital expenditure or as a revenue expenditure. The Act, therefore, lays down the tax treatment of the Keyman Insurance Policy. 14.3. Clause (10D) of section 10 of the Income-tax Act, exempts certain income from tax. The Act, amends clause (10DD) of section 10 to exclude any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy for this purpose. 14.4. The Act also lays down that the sums received by the said organization on such policies, be taxed as business profit; the surrender value of the policy, endorsed in favour of the employee (keyman), or the sum received by him at th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to the extent of his insurable interest in the person insured and that an employer buying Keyman Insurance for his own benefit or a partner of a firm buying insurance on the life of another partner for own benefit could not provide insurable interest beyond a certain cover protecting against death of the person insured. The Circular advised all insurers to ensure that the scope of cover purchased by an employer or a firm was not wider than a Term Assurance. 2.9. In my opinion, the AO's contention that a Keyman Insurance Policy is one which is of the nature of a 'term insurance' policy has force. The IRDA Circular dated 27.4.2005, after noting that certain aberrations had taken place in the issue of policies as Keyman Policies, issued a directive that henceforth only Term Insurance Policies should be issued as Keyman Insurance Cover. In the IRDA Circular dated 30.1.2006 the IRDA noted that aberrations in the form of issue of unit linked or endowment policies to firms on the life of partners had taken place. The IRDA noted that the employer or the firm could not provide insurable interest beyond "a certain cover" protecting against the death of the key employee or par....
X X X X Extracts X X X X
X X X X Extracts X X X X
....been defined in section 10(10D) of the Act, the term "Life Insurance" has not been so defined in the Act. Under the circumstances, the interpretation of the term "Life Insurance" in the context of Keyman Insurance Policy by Insurance Regulatory Authority assumes much greater importance and would prevail in a situation where the Insurance Companies try to give another interpretation which is not in consonance with the interpretation by the Regulatory Authority. 2.9.3. The appellant has also contested the reliance on the Circular issued by IRDA on the ground that compliance to other Acts could not be examined for the purpose of claiming benefits under the Act. The decisions relied upon by the appellant do support the proposition put forth by the appellant. However, here the question is not whether there is compliance to the Circular of IRDA or not. As noted above, the issue is whether the Keyman Policy issued by the Insurance Company is a Life Insurance Policy. If a term is defined in the Act and deduction thereof is prescribed, as in the case of bad debts, non performing assets, or depreciation, there would be no need to look to other Acts for deciding the allowance of an expendi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd Companies as entry and exist loads. The company alongwith the investment, provides insurance cover to the investor and the premium for providing the life cover is deducted from the funds invested by the investor on a regular basis. The returns on such policies are subject to market risks. These are schemes where the decision of investment is made first and the insurance cover comes as an additional benefit. The policies are predominantly investment policies with a small portion of the premium paid for actual life cover. Under the cover of such a small proportion of the premium for life cover, the appellant has claimed that this is a life insurance policy. This is the kind of aberration which has apparently been referred to in the IRDA Circulars dated 27.4.2005 and 30.1.2006. By linking a small portion of the premium to the life cover, a substantial deduction on account of Keyman Insurance Policy has been sought to be claimed as deduction u/s 37(1) of the Act. The intent and purpose of the Keyman Insurance Policies envisaged in the IT. Act and clarified by the IRDA cannot be lost sight of while determining whether the payment made as premium was actually for a keyman insurance po....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ad prohibited the issue of Keyman insurance policies unless they were term insurance policies only after 10.5.2005 and that all its policies were issued on or before 10.5.2005. While the policies may have been issued prior to 10.5.2005, the issues mentioned in the IRDA Circulars showing misused of the Keyman Insurance Policy Scheme issued earlier and explaining what a Keyman Insurance Policy means will also affect the policies issued prior to 10.5.2005. In fact, the IRDA specifically mentioned that there had been aberrations in the matter of sale of Keyman Insurance in the Circular dated 27.4.2005, which indicates that all was not well in the policies issued prior to the date of Circular. 2.13 The appellant has contended that manner of investment of life insurance policy would not affect the allowability of premium. In my opinion, this has a significant effect of the issue at hand. A Keyman Insurance Policy is for the benefit of the employer. If there is risk involved in the investment, it is obviously not going to benefit the employer and the manner of investment by the Insurance Company, therefore, does determine whether the Keyman Insurance Policy is a proper life Insurance P....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... where another Acts have to be referred for our interpretation purposes like section 2(25A), 2(29D), 2(38), 2(42A) and Sec. 2(47)(V) and since IRDA has not referred to for defining Keyman Policy or Life Insurance, its circulars cannot be relied upon for Income Tax purposes. The words "Life Insurance" should be understood as in common parlance. He further relied upon the decisions in the case of CIT v. Lake Palace Hotels 226 ITR 561 (Raj), Swedish East India Co. v. CIT 133 ITR 407 and Indian Hotels v. ITO 245 ITR 538 (SC). 4.1. He argued that the Ld. CIT(A) has failed to appreciate that despite the fact that RBI has the power to regulate Non-Banking Finance Companies and the authority to regulate maintenance of accounts in terms of provision for Non Performing Assets, the same is not an allowable expense for computing income under the Income Tax Act. He relied upon the decisions in the case of TVS Finance & Services v. JCIT reported at 23 DTR 33 ( Madras) and in the case of Southern Technologies Ltd. v. JCIT reported at 320 ITR 577, which are available in the written submissions placed on record. He further relied upon the decisions of various courts of law with regard to the mea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing money being invested as per the directions is thus irrelevant. The Keyman Insurance Policies, in this case are life insurance policies as the policy value is receivable on the death of the persons and this is an undisputed fact (submission before the CIT(A) - last five lines at page No.6 of the paper book). No further test of using IRDA circulars to interpret the policy has been provided in the Income Tax Act. The life insurance policies issued as Keyman Insurance policies by insurance companies have to be accepted as such. To take an anology, if loan is sanctioned by bank in violation of lending norms, the amount borrowed will still be treated as a loan and its character will not change. No restriction has been placed in Section 10(10D) that policies where funds are invested as per direction of the company are not be treated as Keyman Insurance Policies and these conditions cannot be inferred. The Ld. CIT(A) has has in para 2.11 stated that there is an accident benefit of Rs.25 lakhs with a premium of Rs.4,250/- relating to the policy issued by LIC and that being so the premium amount for sum assured is not only for mortality cover but the investment also. The Ld. CIT(A) has f....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that if a company floats some policies and advertises as a Keyman Insurance Policy which later on came to the knowledge of IRDA being statutory authority who finds such policies in facts are investment policy and not Keyman Policies then circular so issued to regulate insurance company does not lend a claim to the assessee that such policies touted or advertised as Keyman Policies and premium so paid cannot be allowed as deduction. Accordingly, cases relied upon by the Ld. counsel for the assessee before the authorities bellow and before this Bench, are not applicable. It is purely a case of investment and there is nothing brought on record by the assessee before any of the authorities below or during arguments before this Bench that Insurance so taken is strictly on the Life Insurance where the assessee has opted for investment options. Moreover, as confirmed in para 10(f) of AO's order that the policies taken are not exactly in the nature of Life Insurance Payments. In the facts and circumstances, the Ld. DR prayed to confirm the order of the ld. CIT(A). 6. We have heard the rival contentions and perused the facts of the case. The assessee has taken three policies - one f....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has been reproduced hereinabove. As per definition of "Keyman Insurance Policy", a person purchasing life insurance can only do so to the extent of his insurable interest in the assured. With the background of the policies and terms and conditions and from the arguments putforth by the ld. counsel for the assessee and the Ld. DR and the relevant material on record, we are of the views that the policies have been taken from Unit Linked Investment Plan is investment plan, premium of which has been put into growth fund and it is not a Pure Life Insurance Policy on the life of another person. Therefore, the policy itself does not fall under the definition of Keyman Insurance Police as defined under explanation to clause (c) of section 10(10D) of the Act. The findings of the ld. CIT(A) and that of the A.O. in this regard are reasoned one and we find no infirmity in the orders of both the authorities below, in particular, the findings of the A.O. which have been confirmed by the ld. CIT(A) i.e. the findings of the AO in paras 6.1, 6.2 & 6.3. with reference to the Circular of IRDA and the order of the A.O. in para 11, which are well reasoned one and we concur with the views of the ld. CI....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nces, the arguments made by the ld. counsel for the assessee, cannot help the assessee for the reasons mentioned hereinabove. Accordingly, we find no infirmity in the order of the Ld. CIT(A) who has rightly upheld the order of AO. Thus, the solitary ground raised by the assessee is dismissed. 4. Therefore, the contention of the assessee that it is a Life Insurance Policy cannot be held good because of our decision in the case of M/s. F.C. Sondhi & Co. (India) Pvt. Ltd. v. DCIT, R-1, Jalandhar (supra) and this being an investment policy and therefore, all the contentions raised by the assessee have rightly been rejected by the A.O. and the ld. CIT(A) has not taken the same in the right spirit. 5. As regards the contention of the assessee that after assignment, the policy is not a Keyman's Insurance Policy but a normal insurance policy, as held in the case of M/s. F.C. Sondhi & Co. (India ) Pvt. Ltd. v. DCIT R-1, Jalandhar (supra). It is not at all a Life Insurance Policy but an Investment Policy. In this regard, the ld. CIT(A) has misinterpreted the decision of ITAT Delhi Bench where it has been held that the surrender value of the policy was taxable in the hands of the tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income from business and profession in the computation chart. Petrol Expenses Rs. 19,800/- Car Expenses Rs. 59,480/- Business Promotion Expenses Rs. 26,814/- Travelling Expenses Rs. 70,314/- Telephone Expenses Rs. 2,16,216/- Total: Rs. 3,92,624/- In the name of business income, the assessee has income from commodity trading and commission from M/s. Hi-Tech Pipe. The above expenses are the total expenses under these heads. The income from commodity trading has been earned through M/s. Shri Ganesh Commodity Traders. This is more or less only speculative income and has been earned without taking delivery of goods. No worthwhile expenses, except a few telephone calls, are involved in earning this income. Similarly commission income has been earned from M/s. Hi-Tech Pipe Ltd. New Delhi on sales of Rs.4,06,16,340/- sold through the assessee to M/s. Rakesh Engg. Works, Ghaziabad. The sale is to a single party and this activity also does not involve any worthwhile effort. In the light of these facts, the expenses claimed by the assessee are too much on the higher side and are not at all justified. However, incurring of some expens....