TaxTMI 
TaxTMI 
2026 (9) TMI 1796
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.... of the case and in law the LD AO has erred in assessing the total income at Rs. 1,07,38,877 as against the returned income of Rs. 86,38,877. Disallowance of Insurance Premium on Employer Long Term Reward Policy for following: 2. On the facts and in the circumstances of the case and in law the Ld. Commissioner of Income Tax (Appeals) - NFAC, Delhi has erred in upholding the disallowance made by the LD Assessing Officer of the expenditure of Rs. 21 lakhs claimed by the assessee towards Employer Long Term Reward Policy 3. On the facts and in the circumstances of the case and in law the Ld. Commissioner of Income Tax (Appeals) - NFAC, Delhi has not considered the fact that the expenditure incurred was towards employee benefits and within the ambit of Employer Long Term Reward Program for Employee which is incurred for furtherance of business. 4. On the facts and in the circumstances of the case and in law the Ld. Commissioner of Income Tax (Appeals) -NFAC, Delhi is not justified in opining that the assessee has not included no other employees of the assessee in the scheme, hence, it is exclusively for Directors and therefore, not an admissible expen....
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....s and circumstances of the case and in law the proceeding U/s 147 is bad in law vis-à-vis the disallowance of claim of insurance premium of Rs. 21,00,000 on "Employee Long-Term Reward Policy". The claim was allowed in the first year ie. AY 2012-13 in scrutiny assessment after examining the claim. There being no change in the facts and law the Ld. AO erred in disallowing the claim which amounts to change of opinion. The reopening may kindly be held as bad in law following the judicial precedents." 4. Facts of the case in brief are that the assessee is a company engaged in the business of Manufacturing Electronic components. Income of Rs. 86,38,877/- declared in the return of income for A.Y. 2013-14 filed on 29.09.2013. Return has been processed u/s. 143(1) of the Act. Subsequently, case of the assessee reopened u/s. 148 of the Act based on the scrutiny assessment taken up for A.Y. 2016-17 on the issue of disallowability of expenses to the tune of Rs. 21,00,000/- under the head 'Employee benefit expenses', Ld. Assessing Officer had reason to believe that income escaped assessment. Notice u/s. 148 of the Act issued recording the reasons and in response to which the ....
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.... reopening of the assessments under section 147 for A.Y. 2013-14, 2014-15 and 2015-16 is a result of "change of opinion" which is not permissible in law based on the fact that no such issue was raised in the assessment proceedings for the AY 2012-13. However, it is well settled that the principle of res judicata or estoppel by record, which applies to decisions of Civil Courts, has no application to decisions of IT Authorities. As a general rule, the principle of res judicata is not applicable to decisions of IT Authorities and it is for this reason that an assessment for a particular year is final and conclusive between the parties only in relation to that year. Decisions given in assessment for an earlier year are not binding either on the assessee or the Department in a subsequent year. 7.2. Further, the judicial pronouncements cited by the assessee are not applicable to the extant case since the facts of the cases are different. In CIT v. Associated Electrical Industries (India) (Pvt) Ltd. (1986) 157 ITR 72 (SC), the assessee had treated the payment as part of the salary and had also deducted TDS. However, in the present case, the assessee has stated that the payment o....
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.... is observed: i. On the face of proposal form, the policy is mentioned as "UNIT LINKED PROPOSAL FORM" at page 23 of 32 pages policy document, which proved that the policy is not a Life Insurance policy. ii. In the column (appears on page 26 of 32 policy document pages proposal form), the nominee is Prasad Mahadeo Bhagwat (Husband of Life assured Smt Pratibha Prasad Bhagwat). Further, on page 27 of 32 pages policy document, the signature is done by Smt Pratibha Prasad Bhagwat in the column of "signature/Thumb impression of the life to be assured and the column "signature/Thumb Impression of proposed policyholder (only if different from the life to be assured)" is kept blank. Hence, keeping this fact under consideration, it is proved that neither the proposer nor the ultimate beneficiary of the insurance policy is the assessee company. Hence, the policy has certainly not bears the character of a "Keyman Insurance Policy". iii. As per point 3, page 24 of 32 pages policy document of proposal form, in the details of "Nature of Age Proof attached", is mentioned as "Passport". Since, a company cannot have a passport, it is evident that the proposer is an individ....
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....at it is clearly mentioned that "During the minimum lock in period in case of claim arising due to critical illness, the same would become payable to me". This clause clearly established that the policy claim arising due to critical illness of life assured will not going to benefit the company as all the claim proceeds will be paid to Pratibha Prasad Bhagwat. viii. From the perusal of "Endorsement on the Policy document" page 18 of 32 pages clause 'e' of policy document, it is seen that it is clearly mentioned that "During the minimum lock in period the policy cannot be surrendered, pledged or withdrawn for any other reason other than the one mentioned in point (b)" This clause clearly established that the policy cannot be surrendered, pledged or withdrawn by the company for any other reason other than as mentioned in point (b) i.e. the company has no right/ownership on the policy in the case of termination of employment of Pratibha Prasad Bhagwat. Hence, the conditions/explanation as per points (i) to (viii) are designed/framed in such a manner that the policy benefits will not going to benefit the assessee company under any circumstances. 5. ....
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....t of AY 2012-13, the issue of deductibility of said expenses was raised by Ld. AO. The appellant has submitted reply to the question raised by Ld. AO which can be referred at page no. 244 of the factual paper book. Vide this submission dated 29.10.2014, the appellant has submitted justification for allowability of the said claim. The Ld. AO has accepted the claim and passed assessment order u/s 143(3) dated 13.02.2015 which is enclosed in the factual paper book at page no. 235-243. From the assessment order it can be seen that the Ld. AO has made the disallowance only u/s 14A and has not made any disallowance on the impugned claim which is disputed in the present appeal. 7. It is submitted that if in the preceding year in the same set of facts the claim was allowed in the scrutiny assessment then in AY 2013-14 to AY 2015-16 disallowance by resorting to section 147 amounts to change of opinion and the reassessment is unjustified. If this ground is adjudicated in favor of the assessee then all other issues in the impugned appeals will be academic. 8. The Ld. AO in the assessment order for AY 2013-14 to AY 2015-16 while recording the reasons for reopening is only ref....
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....anations and the manner in which the policy is framed will not going to benefit to the assessee company under any circumstances and therefore, the Ld. AO has disallowed the claim. In view of the above first the following submission may kindly be considered for why it should not treated as perquisites u/s 17(2) or profit in lieu of salary in the present assessment years. 11.Interplay of Section 15 and Section 17(2): The learned Assessing Officer's (Ld. AO) contention that the insurance premium paid by the company should be treated as a perquisite under Section 17(2), and thereby subject to TDS, is unsustainable in law. For an amount to be taxed as a perquisite under Section 17(2), it must first satisfy the criteria of Section 15, which is the charging section for 'Salary'. Under Section 15, salary is chargeable to tax only when it is due, paid, or allowed to the employee. 12. Absence of Accrual or Vested Right: In the present context, the benefit of the policy becomes 'due' or 'allowed to the employee only upon the successful completion of a five-year lock-in period of employment. Prior to this event, no benefit accrues to the emplo....
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.... 17.It is submitted that the department is wrongly saying that the claim was made in AY 2013-14 and assessment was done u/s 143(1). While the record indicates that the first year in which the claim was made and allowed was AY 2012-13 and it was scrutiny assessment. Therefore, the basic foundation for recording reasons for reopening and for subsequent reassessment has no legs to stand. 18. Without prejudice it is submitted that in certain circumstances the company is the beneficiary especially if the lock in period is not served by the employee director. Only in case of serving minimum period, death of employee director or in case of terminal benefits at the discretion of the company, the employee director will be beneficiary. 19.In view of this it is submitted that the claim is deductible u/s 37. Rejoinder to note submitted by Ld. DR on 11.12.2025 for the hearing which was scheduled on 08.01.2026. 20. The Ld. DR after discussing the facts and features of the policy has relied upon following two decisions: 20.1. Allu Arvind Babu vs ACIT Circle 20(1) Chennai 122 Taxmann.com 66 (Madras High Court). This decision is not relevant in the ....
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....any personal benefits. (vii) The type of policy is not a bar to treat it as Keyman Insurance Policy for the purpose of section 37(1). The purpose and structure of policy is important. (viii) The substance over form approach should be adopted. If the company is the proposer, the beneficiary and the policies on the life of person whose services integral to the business the expenditure qualifies for deduction u/s 37(1). (ix) The Ld. AO's objection that the assessee company is 100% owned by directors and their family members and therefore, the insurance premium is for personal purpose and not for business is rejected. It was held that the company is a distinct legal entity separate from shareholders and directors and therefore, the claim cannot be disallowed. (x) The nomenclature in proposal forms are formalistic and technical and cannot override the commercial realities. (xi) The commercial expediency a premium paid hinge upon beneficiary ownership and benefit remaining with the company unless there is a assignment. (xii) When the policy is assigned to the director the benefit ceases to accrue to the company and the policy beco....
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.... insurance premium 'hereinafter referred as premium' against Employees Long Forms Reward by the AO concerned as well as Ld. CIT(A) NFAC. All the three cases were reopened on the basis of findings arrived at in AY 2016-17 that the assessee company has paid the premiums for the policies taken in the names of Mrs Pratibha Prasad Bhagwat and Mrs Manjiri Shirish Puntambekar. Subsequently, the said premiums were claimed by the assessee company as business expenditure u/s 37(1) of the Act. Upon perusal of the findings of the AO, it is observed that the insurance premiums for the two directors were paid by the assessee company but the ultimate beneficiary of the maturity benefits / premature claims will be the legal heirs/family members appointed at the option of two directors. The conditions / explanations to the policy are designed in such a manner that policy benefits will not be going to benefit the assessee company under any circumstances. The AO has concluded that the Policy document and Endorsement are in the name of director individuals. Further, the Ld. CIT(A) has given his findings that the assessee company has taken policies in the nam....
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.... Rs. 21,00,000/-claimed to be paid by the company taken in the names of Mrs Pratibha Prasad Bhagwat (taken during AY 2013-14) and Mrs Manjiri Shirish Puntambekar (taken during AY 2013-14), which resulted into reduction of its business income due to the claim of this insurance premium against Employees Lo. forms Reward (Insurance) at Rs. 21,00,000/- in the profit & loss account for the assessment year 2016-17, which the AO disallowed. Further, as per audit report & ITR filed for the A.Y 2013-14, it is seen that, similar facts exists and the assessee has claimed expenses of Rs. 21,00,000/- towards employee long term reward insurance for the entire assessment year also. 6.1 Based on the above findings, the AO formed reason to believe and after recording satisfaction and after obtaining necessary sanction from the competent authority i.e. the Pr.CIT, notice u/s 148 of the Act was issued to the appellant. The appellant filed its objection against the reopening proceedings and placing reliance on judicial precedents. The AO rejected the objection and placing rebuttal to the judicial decisions relied upon by the appellant. The appellant did not furnish its return of income in res....
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.... the appellant company to provide undue benefits to its directors and no other employees. Further the premium paid is not a business expenditure of the appellant company particularly when the appellant does not consider it as a perquisite in the hands of the concerned director. The AO had thoroughly examined the policy documents and the infirmities noticed/observed by him are discussed in para 7, page 7 to 10 of the assessment order. In my considered view, the AO is justified in disallowing the claim of the appellant of Rs. 21,00,000/-. Hence, the grounds of appeal No.1 & 2 are dismissed. 9. Ground No.3 & 4 relate to initiation of proceedings u/s 147 r.w.s. 148 of the Act. During the appellate proceedings, the appellant has argued that all material facts where fully and truly disclosed by the appellant and hence the initiation of proceedings u/s 147/148 of the Act is without jurisdiction. In the instance case, no scrutiny assessment was completed u/s 143(3) of the Act prior to initiating the proceedings u/s 147 of the Act. The return filed by the appellant was processed u/s 143(1) of the Act. Therefore, the contention of the appellant that all material facts where fully an....
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....site to be taxed in the hands of respective Directors because there was no benefit to the company from taking these policies and they are clearly not Keyman insurance policies under which the assessee company could claim the insurance premium as an expenditure because the benefit only accrues/receivable to the company taking the Keyman Insurance for its employees. It is note worthy that after detailed examination of facts for A.Y. 2016-17 ld. Assessing Officer proceeded to reopen the assessments for the impugned assessment years. 10. So far as the contention of the assessee that for A.Y. 2012-13 ld. Assessing Officer has accepted the contention of the assessee for the very same issue and allowed the expenditure, we find that principles of res judicata does not apply strictly to the income tax proceedings because each assessment year is an independent and distinct unit. The decision or finding for one assessment year does not legally bind the income tax authorities or the taxpayer in subsequent year. Tax rates, facts and circumstances are changed from year to year. It is also well settled that Income tax proceedings are quasi-judicial in nature rather than traditional court proce....
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....ut for A.Y. 2012-13 then certainly it would have tantamounted to 'change of opinion'. The instant A.Ys. 2013-14 and 2014-15 under appeal have not come up for any scrutiny proceedings u/s. 143(3) in the past therefore there was no occasion for the Assessing Officer to examine this issue. So far as A.Y. 2015-16 is concerned, assessee has passed through scrutiny proceedings u/s. 143(3) of the Act and in the assessment only reference is regarding the disallowance u/s. 14A of the Act. Further, the assessee has not filed any records demonstrating that very same issue has been examined by the ld. Assessing Officer and that whether any information was specifically asked for and whether any reply was given regarding the alleged issue of claim of expenditure for premium paid for Long Term Reward Insurance policy. Had the assessee given any such reply then certainly the same should have formed part of the paper book similar to the submissions made for A.Y. 2012-13. Therefore, considering the given facts and circumstances of the case, we are of the considered view that accepting of the claim for A.Y. 2012-13 would not by itself tantamount to 'change of opinion' for carrying out re-assessment p....
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.... policy would be received by the assessee company. Based on these submissions also, it is claimed that the impugned assessment years fall in the category of first five years and since the benefits are accruing to the assessee company, the same should be allowed as an expenditure. 14. We observe that during the course of hearing when it was asked whether the policy taken is Keyman Insurance policy, ld. Counsel for the assessee fairly accepted that it is not Keyman Insurance policy. We note that Keyman Insurance policies is purchased by the employer company on the life of its vital and essential employees, founder or leader to protect against financial loss, if that person passes away or becomes disabled and the company pays the premium of the policy and receives the cash payouts if the essential employee dies or suffers major disability. Such Keyman Insurance contributes to the continuation of successful business operations and cover up other inconsistencies during stressful scenario. Under the Keyman Insurance policy the benefit if any arising are only received by the Employer, i.e. Company. Since it is accepted that the present policy is taken by the assessee company in the nam....
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....ult of this Assignment except for policies covered under Employer-Employee-Long Term reward program for employees". Hence, In view of this condition incorporated by HDFC Life in its confirmation of assignment letter that "Any existing nomination for employees", even after assignment in favour of assessee company, the ultimate & undisputable beneficiary remains unchanged i.e. either the LIFE ASSURED Mrs Manjiri Shishir Puntambekar or NOMINEE in the case claim arises due to any mis-happening to the Life assured as the policy is taken under "Employer- Employee-Long Term reward program for employees". 2. The policy is the Unit Linked Insurance plan and not a Term Insurance plan. Hence, the conditions/explanation as per points (i) to (viii) are designed/framed in such a manner that the policy benefits will not going to benefit the assessee company under any circumstances. 7.5. As per Insurance policy terms and conditions as detailed above, the legal nominee/ultimate beneficiary is Mrs Manjiri Shishir Puntambekar & Mrs Pratibha Prasad Bhagwat with all maturity benefits legally vested to the nominees and not to the assessee company in all the conditions. Further, in case....
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.... the head 'Employee benefit expenses' are disallowed and added back to the income of the assessee. Penalty proceedings u/s 271(1)(c) for furnishing inaccurate particulars of income are also initiated separately. 7.8. A show cause notice with the proposed additions was sent to the assessee on 02.09.2021 and in reply, the assessee has again reiterated his earlier submissions regarding his objections to the reopening of assessment proceedings u/s 147 as reproduced in para 6.1 above. As already sated above, the FAO, vide annexure to notice u/s 142(1) dated 08.02.2021, informed the assessee that polices under section 148 has been issued within the stipulated time as per section 151 of the Income-tax Act, 1961 and laid out the relevant facts to dispose of the objections filed by the assessee. The rebuttal to the assessee's contentions is already discussed in the Para 6.2, 6.3, 7, 7.1 and 7.2 above. Thus, the assessee has failed to file any acceptable reply and has not produced any fresh evidence in support of his contentions." 16. We further take note of the finding of ld.CIT(A) who has rightly observed that the policy is not Keyman Insurance policy and no other e....