M/s. Parshwa Lam & Core Industries, Baroda V. The Income tax Officer,Ward-2(4), Baroda

ITA 1415/AHD/2012

• Counselvise Citation: 141520514 RSA 2012
• Duration Of Justice: 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 26-10-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 27-06-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D G PANSARI
• Assessee Lawyers: VIPUL K SHAH
• Keywords: Business income; Depreciation; Business expenditure
• Section: 10(10D); 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD B BENCH BEFORE: SHRI D.K. TYAGI, JUDICIAL MEMBER AND SHRI T.R. MEENA, ACCOUNTANT MEMBER I.T.A. NO.1415/AHD/2012 A.Y. 2005-06 M/S PARSHWA LAM & CORE INDUSTRIES, 104, FATEHSAGAR COMPLEX, FATEHGUNJ, VADODARA-390002 APPELLANT VS. THE INCOME TAX OFFICER, WARD-2(4) VADODARA RESPONDENT DEPARTMENT BY : SHRI D.G. PANSARI, SR. D.R. ASSESSEE BY : SHRI VIPUL K. SHAH, A.R. DATE OF HEARING : 26.10.2012 DATE OF PRONOUNCEMENT : 30.11.2012 / ORDER PER : D.K. TYAGI, JUDICIAL MEMBER THIS IS ASSESSEES APPEAL AGAINST THE ORDER OF LD. CIT(A)-III, BARODA DATED 26.03.2012. 2. ASSESSEE HAS TAKEN FOLLOWING EFFECTIVE GROUNDS O F APPEAL:- 1. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FAC T IN CONFIRMING THE ORDER PASSED BY THE A.O. IN DISALLOWING 20% OF EXPE NSES ON DEPRECIATION ON CAR, CAR REPAIRING & MAINTENANCE AN D PETROL AND CAR EXPENSE AMOUNTING TO RS.9,900/-, 11,740/- AND RS.17 ,600/- TREATING NON BUSINESS PURPOSE. 2. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FACT IN CONFIRMING THE ORDER PASSED BY THE A.O. IN DISALLOWING PREMIUM PAI D OF RS.3,59,600/- TOWARDS KEYMAN INSURANCE POLICY. 3. GROUND NO.1 RELATES TO DISALLOWANCE OF 20% OF EX PENSES ON DEPRECIATION ON CAR, CAR REPAIRING AND MAINTENANCE AND PETROL AMOUNTING TO RS.9900/-, RS.11,740/- AND 11,600/- RESPECTIVELY. I.T.A. NO.1415/AHD/2012 A.Y. 2005-06 2 4. THE A.O., DURING THE ASSESSMENT PROCEEDINGS OBSE RVED THAT THE ASSESSEE HAD CLAIMED DEPRECIATION OF RS.49,567/- ON CAR, CAR REPAIR AND MAINTENANCE CHARGES OF RS.58,683/- AND PETROL AND C AR EXPENSES OF RS.20,028/-. THE ASSESSEE DID NOT MAINTAIN ANY LOG BOOK/TRIP REGISTER IN THIS REGARD. THEREFORE, THE A.O. ASKED THE ASSESSEE TO EXPLAIN AS TO WHY 20% OF THESE EXPENSES SHOULD NOT BE DISALLOWED. SINCE THE ASSESSEE DID NOT OBJECT TO THE PROPOSED DISALLOWANCE THE A.O. DISALLOWED 20 % OF THESE EXPENSES AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. LD. CIT (A) FOLLOWING THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF RAMESH CHANDRA & CO. 168 ITR 375 CONFIRMED THE DISALLOWANCE MADE BY THE A.O. AS THE ASSESSEE AGREED FOR THIS DISALLOWANCE BEFORE THE A.O. 5. AT THE TIME OF HEARING ALSO NOTHING SUBSTANTIAL WAS ARGUED TO DEVIATE US FROM THE FINDING OF LD. CIT(A) HENCE THE ORDER PASS ED BY HIM IS HEREBY UPHELD. THIS GROUND OF THE ASSESSEE IS DISMISSED. 6. GROUND NO.2 RELATES TO DISALLOWANCE OF THE PREMI UM OF RS.3,59,600/- PAID TOWARDS KEYMAN INSURANCE POLICY. 7. THE A.O., DURING THE ASSESSMENT PROCEEDINGS OBSE RVED THAT THOUGH THE ASSESSEE HAS PAID PREMIUM OF RS.3,59,600/- TOWARDS KEYMAN INSURANCE POLICY IN RESPECT OF SHRI VIPUL M MAGIA AND SHRI PI YUSH M MEHTA, THE PARTNERS OF THE FIRM, THE POLICIES WERE NOT NOMINATED IN FAV OUR OF THE ASSESSEE FIRM. THEREFORE, THE A.O. ASKED THE ASSESSEE TO EXPLAIN A S TO WHY THIS EXPENDITURE SHOULD NOT BE DISALLOWED AS THE SAME IS IN THE NATU RE OF PERSONAL EXPENSES. THE ASSESSEES CONTENTION WAS THAT THE PREMIUM WAS PAID TOWARDS THE LIFE OF THE KEYMAN OF THE FIRM AND CITED CBDT CIRCULAR NO.7 62 DATED 18.02.1998 AND STATED THAT SECTION 10(10D) HAD BEEN AMENDED AND TH E AMOUNT RECEIVED ON I.T.A. NO.1415/AHD/2012 A.Y. 2005-06 3 SURRENDERED VALUE OF THE POLICY WILL BE OUT OF BRAC KET OF THE EXEMPTION AND ACCORDINGLY BE TAXED AND THE PREMIUM PAID ON THE KE YMEN INSURANCE POLICY IS TO BE ALLOWED AS BUSINESS EXPENDITURE. THIS EXPLAN ATION WAS NOT ACCEPTABLE TO THE A.O. ON THE FOLLOWING GROUNDS:- (I) THE A.O. HELD THAT THE PROCEEDINGS OF THE SAID POLICY WERE TO BE RECEIVED BY OTHERS IN THE CASE OF POLICY OF SHRI VIPUL MAHASUKHBHAI MEHTA AND NOT BY THE FIRM. (II) LIC OF INDIA HAD SPECIFICALLY DEVISED THIS POL ICY FOR PUBLIC AND PRIVATE COMPANIES, WHO ARE HAVING TECHNICALLY QUALI FIED PERSONS AND WHO CONTRIBUTE SUBSTANTIALLY FOR THE BUILDING UP/GR OWTH OF THE COMPANY AS WELL AS INCREASING THE PROFIT RATIO OF T HE SAID ENTITIES. BUT, IN THE PRESENT CASE THE PARTNERS ARE ONLY GRAD UATES. (III) THE PARTNERS ARE NOT THE EMPLOYEES OF THE FIR M BUT THEY ARE THE OWNERS OF THE BUSINESS CARRIED ON BY THE FIRM AND T HEREFORE, THERE DOES NOT EMPLOYER EMPLOYEE RELATIONSHIP. HENCE, TH ERE IS NO PAYMENT BY THE EMPLOYER TO THE EMPLOYEES AS MENTION ED IN THE BOARDS CIRCULAR NO.762 DATED 18.02.1998. (IV)IN THIS CASE BOTH THE PARTNERS WHO WERE INSURED UNDER THE KEYMAN INSURANCE POLICY ARE ONLY GRADUATES I.E., HA VING DEGREE OF B. COM. THEY ARE NEITHER TECHNICALLY SOUND NOR POSSESS ING ANY TECHNICAL OR EXTRA-ORDINARY DEGREE. FURTHER THE ACTIVITY OF THE BUSINESS ALSO DOES NOT REQUIRE THE SERVICES OF THE SKILLED PERSON S. THE ASSESSEE HAS EMPLOYED 15 PERSONS AND HAS PAID SALARY AMOUNTI NG TO RS.1,40,600/-. THE OBJECT OF THE KEYMEN INSURANCE IS TO INDEMNIFY THE BUSINESS ENTITIES FROM THE LOSS OF EARNING LIKE LY TO RESULT FROM THE DEATH OF AN IMPORTANT EMPLOYEE. THE IMMEDIATE REPL ACEMENT OF THE KEYMENT UPON SUCH EVENTUALITY OF THE DEMISE OF IMPO RTANT EMPLOYEE MAY NOT BE POSSIBLE. IT MIGHT TAKE SOME TIME FOR S UCH ENTITY TO FILL IN THE VOID CREATED BY THE DEMISE OF SUCH KEYMEN. IT MIGHT ALSO INCUR A HEAVY COST FOR FILLING OF SUCH VACUUM. THE AMOUNT OF KEYMEN INSURANCE IS ESTIMATED TO BE THE MONETARY VALUE OF THE LIKELY SETBACK TO THE PROFIT OF THE ORGANIZATION DUE TO THE DEMISE OF THE KEYMEN. AS FAR AS THE RESTRICTIVE COVENANTS PROPAGATED BY L IC IN THIS REGARD ARE CONCERNED, THEY MAINLY RELATE TO EXCLUSION OF T HOSE COMPANIES WHO ARE ENGAGED IN TRADING FROM THE SCOPE OF KEYMEN INSURANCE POLICY, NON AVAILABILITY OF SUPPLEMENTARY BENEFITS LIKE DAB/EPDB/TERM-RIDER ETC. PREMIA PAID UNDER THE SAI D KEYMEN INSURANCE POLICY ARE ORDINARILY ALLOWABLE UNDER THE PROVISION OF SECTION 37(1) OF THE I.T. ACT WITH THE RIDER THAT T HE PROCEEDS OF THE POLICY IN THE HANDS OF THE FIRM WILL BE TREATED AS BUSINESS INCOME AND WILL BE TAXED UNDER THE HEAD PROFITS AND GAINS OF B USINESS OR PROFESSION UNDER SECTION 28 OF THE I.T. ACT. MOREO VER, IN BOTH THE I.T.A. NO.1415/AHD/2012 A.Y. 2005-06 4 CASES THE NOMINATIONS HAS BEEN MADE IN FAVOUR OF OT HER PERSONS THEN THE FIRM WHICH FACTOR DOES NOT MAKE THE POLICY TAKEN BY THE FIRM TO FALL UNDER THE GENRE OF KEYMEN INSURANCE POLICY. IN VIEW OF THE ABOVE, THE A.O. DISALLOWED THE PAYME NT OF PREMIUM OF RS.3,59,660/- ON THE KEYMAN INSURANCE POLICY OF PAR TNERS TREATING THE SAME AS NON-BUSINESS EXPENDITURE AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 8. BEFORE LD. CIT(A) THE ASSESSEES SUBMISSION WAS THAT BOTH THE WORKING PARTNERS WERE HAVING B. COM. DEGREE AND HAVING SUBS TANTIAL ROLE IN THE BUSINESS OF THE FIRM AND WERE CONTRIBUTING SUBSTANT IALLY FOR THE BUILDING UP/ GROWTH OF THE FIRM AS WELL AS INCREASING PROFIT RAT IO OF THE FIRM. IT WAS FURTHER SUBMITTED THAT THE PREMIUM PAID BY FIRM IN RESPECT OF KEYMAN INSURANCE POLICIES ON THE LIFE OF THE WORKING PARTNERS WAS AL LOWABLE AS BUSINESS EXPENDITURE AS THE EMPLOYER-EMPLOYEE RELATIONSHIP I S NOT ESSENTIAL FOR ALLOWING DEDUCTION OF PREMIUM ON KEYMAN INSURANCE POLICY. FOR MAKING THIS SUBMISSION RELIANCE WAS PLACED ON THE DECISION OF H ONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. B.N. EXPORT [37 DTR 381. 231 CTR 227] AND IN THE DECISION OF ITAT, MUMBAI IN THE CASWE OF MODI MOTOR S [126 TTJ (MUM.) 495. LD. CIT(A) HOWEVER, CONFIRMED THE ACTION OF THE A.O . 9. AT THE TIME OF HEARING BOTH THE PARTIES AGREED T HAT THE ISSUE IS NOW COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE R EVENUE BY THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS . GEM ART IN TAX APPEAL NO.1739 OF 2009 DATED 13 TH MARCH, 2012 WHEREIN FOLLOWING WAS HELD:- IN COMPUTING THE TOTAL INCOME OF A PREVIOUS YEAR O F ANY PERSON AS PER SECTION 10(10)D ANY SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY IS NOT TO BE INCLUDED KEYMAN INSURANCE POLI CY MEANS A LIFE INSURANCE POLICY TAKEN BY A PERSON ON THE LIFE OF A NOTHER PERSON WHO IS OR WAS THE EMPLOYEE OF THE FIRST-MENTIONED PERSO N OR IS OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINES S OF THE FIRST- I.T.A. NO.1415/AHD/2012 A.Y. 2005-06 5 MENTIONED PERSON AND GOING THROUGH THE EXPLANATION GIVEN IN THE SAID SECTION THE PARTNER DEFINITELY COMES WITHIN TH E PURVIEW OF THE PERSON WHO IS CONNECTED WITH IN ANY MANNER WHATSOEV ER WITH THE BUSINESS OF THE FIRM THE PREMIUM PAID ON THE KEYM AN INSURANCE POLICY IS ALLOWED AS BUSINESS EXPENDITURE AS THE AM ENDMENT HAD TAKEN EFFECT FROM OCTOBER 1, 1996 IN FAVOUR OF AS SESSEE. 10. IN VIEW OF THE ABOVE, THE ADDITION MADE BY THE A.O. AND SUSTAINED BY LD. CIT(A) IS HEREBY DELETED. THIS GROUND OF THE A SSESSEE IS ALLOWED. 11. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCED IN OPEN COURT ON 30.11.2012 SD/- SD/- (T.R. MEENA) (D.K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER TRUE COPY N.K. CHAUDHARY, SR. P.S. COPY OF THE ORDER FORWARDED TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT (APPEALS) 5. THE DR, AHMEDABAD 6. THE GUARD FILE BY ORDER AR,ITAT,AHMEDABAD