Andhra Pradesh Fibres Ltd. V. Assistant Commissioner of Income Tax, Circle-3(1), Visakhapatnam

ITTA/370/2011

AI Insights

The case revolves around Andhra Pradesh Fibres Ltd., which claimed an insurance premium of Rs.20,92,660 as a business expenditure for the assessment year 2007-08, arguing that Sri T. Sapthagiri, a director, was a 'Keyman' under the Income Tax Act. The Assessing Officer rejected this claim, leading to a series of appeals. The Commissioner of Income Tax (Appeals) initially allowed the claim, but the Income Tax Appellate Tribunal reversed this decision, leading to the current appeal. The High Court's decision focused on the lack of evidence to support the claim that Sri Sapthagiri was a Keyman, as he was not involved in day-to-day operations or decision-making, which are critical to being considered a Keyman under the relevant tax provisions.

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 678063 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 15-11-2011
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Keywords: Assessment Year 2007-08; Business expenditure; Income Tax Return; Keyman Insurance Policy
• Section: 260A; 10(10D)

Judgement Text

"THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE SANJAY KUMAR I.T.T.A. NO.370 OF 2011 DATED 15TH NOVEMBER, 2011 BETWEEN Andhra Pradesh Fibres Ltd., Jeegiram Village, Saluru-535 591, Vizianagaram District. … Appellant And Assistant Commissioner of Income Tax, Circle-3(1), Visakhapatnam. … Respondent THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE SANJAY KUMAR I.T.T.A. NO.370 OF 2011 JUDGMENT: (Per Hon’ble Sri Justice V.V.S.Rao) The appellant Company filed its Income Tax Return for the assessment year 2007-08 before the Assistant Commissioner of Income Tax, Circle-3(1), Visakhapatnam. In the return it claimed an amount of Rs.20,92,660/- as allowable expenditure being payment of premium for insuring Sri T.Sapthagiri, a Director of the Company. The expenditure was claimed on the ground that the said Director is a ‘Keyman’ in the Company. The Assessing Officer, on enquiry, found that Sri Sapthagiri was not a working Director, that salary was not paid to him and that the insurance premium paid cannot be allowed as expenditure. Accordingly, the same was added back and income was recomputed. Being aggrieved, the appellant filed an appeal before the Commissioner of Income Tax (Appeals), Visakhapatnam. By order dated 09.12.2009, the appeal was allowed. The Revenue then filed an appeal before the Income Tax Appellate Tribunal, Visakhapatnam Bench. The learned Tribunal by order dated 04.02.2011 allowed the appeal, aggrieved by which the present appeal is filed under Section 260A of the Income Tax Act, 1961 (for short, ‘the Act’). The learned counsel for the appellant would submit that Sri Sapthagiri is a Keyman as defined in Section 10(10D) of the Act. According to him, the learned Tribunal was in error in recording a finding that Sri Sapthagiri was not a Keyman; that the explanation filed by the appellant was not considered and therefore the finding is perverse. The learned counsel relies on Circular No.762 dated 18.02.1998 issued by the Central Board of Direct Taxes [(1998) 145 CTR Statutes Note Page 5]. The same reads as under: “CIRCULAR NO.762, DATED 18-2-1998 Taxation of a sum received under the Keyman Insurance Policy. 14.1 A Keyman Insurance Policy, of the Life Insurance Corporation of India, etc., provides for an insurance policy taken by a business organisation or a professional organisation 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 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, lay 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 (10D) of section 10 to exclude any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus 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 the time of retirement be taken as profits in lieu of salary for tax purposes; and in case of other persons having no employer-employee relationship, the surrender value of the policy or the sum received under the policy be taken as income from other sources and taxed accordingly. The premium paid on the Keyman Insurance Policy is allowed as business expenditure. 14.5 The amendments take effect from 1-10-1996.” The premium paid under Keyman insurance policy is allowed as a business expenditure for the reason that the sum received under the life insurance policy of the Keyman is now treated as business profit. To claim the benefit, the assessee is required to show that the Keyman is a full time employee and an insurance policy was taken out to protect the business against the financial loss which may occur from the premature death of such Keyman. When the matter was heard by the learned Tribunal, an opportunity was given to the appellant to produce evidence to justify its claim that the said Director was a Keyman. The minutes of Board Meetings were produced. On perusing the same, the learned Tribunal came to the conclusion that Sri Sapthagiri alone was not chairing the Board Meetings and that no evidence was produced to show that he was looking after the day-to-day transactions like planning, purchases, production, labour, etc. In that view of the matter, the submission that the finding of the learned Tribunal is perverse is misconceived. After giving adequate opportunity to the assessee, the learned Tribunal recorded a finding of fact that Sri Sapthagiri was not a Keyman. The matter must rest there. In this appeal, this question of fact cannot be allowed to be reagitated. The Appeal fails and is accordingly dismissed. No costs. ______________ V.V.S.RAO, J. ____________________ SANJAY KUMAR, J. 15TH NOVEMBER, 2011. VGSR "