Appeal details
Counselvise Citation
[2009] 115 COUNSELVISE.COM (IT) 0438 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 month(s) 9 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
12-11-2009
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
C
Next Hearing Date
12-11-2009
Assessment Year
2006-2007
Appeal Filed On
03-09-2009
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C BEFORE SHRI T.K.SHARMA, JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER DATE OF HEARING: 12.11.2009 DRAFTED ON: 12.11 .2009 ITA NO.2538/AHD/2009 ASSESSMENT YEAR : 2006-2007 DEPUTY COMMISSIONER OF INCOME TAX, ANAND CIRCLE, ANAND. VS. N/S. PWS ENGINEERS PVT. LTD. PANCHAL ESTATE, ANAND-SOJITRA ROAD, ANAND. PAN/GIR NO. : AABCP 6507D (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI M.C.MEHTA SR. A.R. RESPONDENT BY: SHRI M.G.PATEL O R D E R PER N.S.SAINI , ACCOUNTANT MEMBER :- THIS IS AN APPEAL FILED BY THE REVENUE AGAINST TH E ORDER OF LD. CIT(A)-IV, BARODA DATED 5.06.2009 IN APPEAL NO.CAB/IV-A-235/08 -09. 2. GROUND NO.1 OF THE APPEAL READS AS UNDER: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS ERRED IN DE LETING RS.9,00,000/- BEING PREMIUM FOR KEYMAN INSURANCE POLICIES, BY ADM ITTING FRESH EVIDENCE IN CONTRAVENTION TO RULE 46A, WITHOUT AFFO RDING ANY OPPORTUNITY TO THE AO TO EXAMINE THE EVIDENCE PRODUCED BEFORE T HE CIT(A). 3. THE BRIEF FACTS OF THE CASE AS STATED BY THE ASS ESSEE IN THE STATEMENT OF FACTS FILED BEFORE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY CARRYING ON B USINESS OF MANUFACTURING AND SALE OF SOPHISTICATED AUTOMATIC FOOD PACKING MACHIN E FILED RETURN OF INCOME AT RS.9,99,295/- ON 20.09.2006. THE ACCOUNTS ARE AUDIT ED UNDER SECTION 44AB OF THE INCOME TAX ACT AND THE AUDIT REPORT WAS FILED. ITA NO. 2538/AHD/2009 M/S.M/S. PWS ENGINEERS PVT. LTD ASST.YEAR -2006-07 - 2 - KEYMAN INSURANCE PREMIUM EXPS.: RS.12,00,000/-: YOUR APPELLANT HAS FURNISHED DETAILS AND EXPLAINED DURING THE PROCEEDING AS UNDER. A) UPON MATURITY OF INSURANCE CLAIM OF KEYMAN INSURANC E POLICY OF RS.14,29,791/- IS TAKEN AS INCOME OF THE COMPANY DU RING THE YEAR AS PROVIDED UNDER SECTION 28(IV) OF THE INCOME TAX ACT . B) DURING THE YEAR, RS.12 LACS PAID TOWARDS SAID INSUR ANCE POLICY PREMIUM IS TAKEN AS EXPENSES. C) THE RECEIPT UPON MATURITY IS TAKEN AS INCOME UNDER SECTION 28(IV) AND PAYMENT OF INSURANCE PREMIUM ON SAID POLICY IS EXPE NDITURE ALLOWABLE UNDER SECTION 37(1) OF THE ACT ARE SELF EXPLANATORY . D) THE ASSTT. COMMISSIONER OF INCOME TAX DISALLOWED TH E PREMIUM EXPENSES OF RS.12 LACS ON THE GROUND OF ASSIGNMENT OF POLICY TO THE DIRECTORS WHICH IS DULY PERMITTED VIDE SECTION 17(3)(III) OF THE IN COME TAX ACT WHICH IS RECKLESSLY DISREGARDED AND MADE THE ADDITION. E) THE ASSTT. COMMISSIONER OF INCOME TAX HAS NOT APPRE CIATED THE FACT THAT NONE OF THE POLICY IS ASSIGNED TO ANY KEYMAN DIRECT OR DURING THE YEAR AND MADE UNLAWFUL ADDITION. 4. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAD DECIDED THE ISSUE BY OBSERVING AS UNDER: 2. THE FIRST GROUND OF APPEAL IS REGARDING ADDITIO N OF RS.12,00,000/-, BEING PREMIUM FOR KEYMAN INSURANCE POLICIES. APPELL ANT HAD CLAIMED PREMIUM OF RS.12 LAKH FOR FOUR KEYMAN LIFE INSURANC E POLICIES TAKEN FROM ICICI PRUDENTIAL LIFE INSURANCE AS AN EXPENSE. THE ASSESSING OFFICER NOTED THAT PREMIUM FOR POLICY TOWARDS SHRI YOGESH S . PANCHAL OF RS.3 LAKH WAS REFUNDED AND THE APPELLANT COMPANY HAD THEREFOR E, PAID RS.9 LAKH ONLY. THE LEARNED ASSESSING OFFICER FURTHER FOUND F ROM COPIES OF THE POLICIES THAT THE POLICIES WERE ASSIGNED BY THE APP ELLANT COMPANY IN FAVOUR OF THE KEYMAN DIRECTORS ON 17.06.2006. LEARNED ASSE SSING OFFICER WAS OF THE VIEW THAT AS PER THE KEYMAN POLICY, PREMIUM WAS BEING PAID BY THE APPELLANT COMPANY FOR COVERING LOSS IN THE EVENT OF DEATH OF ITS KEYMEN AND ON THE CONTRARY, APPELLANT HAD TRANSFERRED AND ASSIGNED THE RIGHTS AND BENEFITS IN FAVOUR OF RESPECTIVE DIRECTORS. THE LEA RNED ASSESSING OFFICER INFERRED THAT THE NATURE OF POLICIES OBTAINED BY TH E APPELLANT COMPANY WAS ITA NO. 2538/AHD/2009 M/S.M/S. PWS ENGINEERS PVT. LTD ASST.YEAR -2006-07 - 3 - NOTHING BUT POLICIES FOR DEATH BENEFIT TO LEGAL HEI RS OF THE DIRECTORS. LEARNED ASSESSING OFFICER DISALLOWED PREMIUM OF RS. 12 LAKH TOWARDS KEYMAN LIFE INSURANCE POLICIES. 2.1 BEFORE ME, DURING APPELLANT PROCEEDINGS, IT WAS SUBMITTED THAT THE LEARNED ASSESSING OFFICER HAD SUBSEQUENTLY RECTIFIE D THE ASSESSMENT TO RESTRICT THE DISALLOWANCE/ADDITION AT RS.9 LAKH THR OUGH ORDER DATED 21.01.2009 AND THE AMOUNT REMAINING IN DISPUTE IN T HE APPEAL WAS RS.9 LAKH ONLY. APPELLANT FURTHER SUBMITTED THAT DURING FINANCIAL YEAR 2005- 2006 RELEVANT TO A.Y. 2006-07, NONE OF THE THREE PO LICIES, FOR WHICH PREMIUM OF RS.9 LAKH WAS PAID, WERE ASSIGNED IN FAV OUR OF THE KEYMEN DIRECTORS. CERTIFICATE ISSUED BY ICICI PRUDENTIAL L IFE INSURANCE CO. LTD. THAT POLICIES WERE NOT ASSIGNED DURING F.Y. 2005-06 WAS ALSO FILED. IT WAS SUBMITTED THAT THE POLICIES WERE LAWFULLY ASSIGNED TO THE DIRECTORS IN THE YEAR ENDING ON 31.03.2007, I.E. THE NEXT FINANCIAL YEAR. UPON ASSIGNMENT, SURRENDER VALUE OF THE RESPECTIVE POLICIES CAME TO RS.85,597.50, WHICH WAS DULY TAKEN AS INCOME OF THE DIRECTORS IN A.Y. 2007- 08 IN EACH OF THE THREE CASES. THE PREMIUM FOR SUBSEQUENT YEARS WOULD BE PA ID BY THE DIRECTORS FOR REST OF THE YEARS UNTIL MATURITY OF THE POLICY AND THE APPELLANT COMPANY COULD NOT CLAIM ANY DEDUCTION THEREAFTER. THE DIREC TORS WOULD PAY THE PREMIUM IN THE SUBSEQUENT YEARS AND WOULD TAKE THE AMOUNT RECEIVED ON MATURITY AS THEIR INCOME AND PAY TAX ON IT. APPELLA NT RELIED ON DECISION OF ITAT, MUMBAI IN THE CASE OF MODI MOTORS (2009) 27 S OT 476 (MUMBAI) THAT THE AMOUNT RECEIVED ON MATURITY OR SURRENDER O F KEYMAN INSURANCE POLICY IS TAXABLE UNDER THE HEAD INCOME FROM SALARY UNDER SECTION 17(3)(II) OF THE ACT. 2.2. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS A ND FACTS OF THE CASE. PREMIUM PAID BY THE APPELLANT IN RESPECT OF KEYMAN INSURANCE POLICIES TO COVER RISK ON LIFE OF ITS KEYMEN IS AN ALLOWABLE BU SINESS EXPENDITURE, AS ALSO CLARIFIED IN CBDTS CIRCULAR NO.762 DATED 18.0 2.1998. PARA 14.4 OF CBDTS CIRCULAR NO.762 IS AS UNDER: THE ACT ALSO LAYS DOWN THAT THE SUMS RECEIVED BY T HE SAID ORGANIZATION ON SUCH POLICIES, BE TAXED AS BUSINESS PROFIT; THE SURRENDER VALUE OF THE POLICY, ENDORSE IN FAVOUR OF THE EMPLOYEE (KEYMAN), OR THE SUM RECEIVED BY HIM AT THE TIME OF RETIREMENT BE TAKEN AS PROFI T IN LIEU OF SALARY FOR TAX PURPOSES; AND IN CASE OF OTHER PERSONS HAVING N O EMPLOYER-EMPLOYEE RELATIONSHIP, THE SURRENDER VALUE OF THE POLICY OR THE SUM RECEIVED UNDER THE POLICY BE TAKEN AS INCOME FROM OTHER SOURCES AN D TAXED ACCORDINGLY. THE PREMIUM PAID ON THE KEYMAN INSURANCE POLICY IS ALLOWABLE AS BUSINESS EXPENDITURE. DURING F.Y. 2005-06, APPELLANT PAID PREMIUM TOTALLI NG TO RS.9 LAKH IN RESPECT OF THREE INSURANCE POLICIES TAKEN BY IT TO COVER THE RISK ON LIFE OF ITA NO. 2538/AHD/2009 M/S.M/S. PWS ENGINEERS PVT. LTD ASST.YEAR -2006-07 - 4 - THREE OF ITS DIRECTORS, I.E. THE KEYMAN. SO FAR AS FINANCIAL YEAR 2005-06 IS CONCERNED, THE AMOUNT OF PREMIUM WAS EXPENDED FOR THE PURPOSE OF APPELLANTS BUSINESS AND WAS AN ALLOWABLE BUSINESS EXPENDITURE. FROM THE NEXT FINANCIAL YEAR, I.E. AFTER ASSIGNMENT OF THE P OLICIES IN FAVOUR OF DIRECTORS, APPELLANT IS NOT ENTITLED TO CLAIM THE D EDUCTION FROM PROFITS ON ACCOUNT OF SUCH PREMIUM. IN F.Y. 2005-2006, THE POL ICIES COVERED APPELLANTS RISK ON LIFE OF ITS KEYMEN AND THE EXPE NDITURE ON PREMIUM WAS THEREFORE, INCURRED FOR APPELLANTS BUSINESS. THE P REMIUM PAID IN F.Y. 2005-2006 IS THEREFORE, AN ALLOWABLE BUSINESS EXPEN DITURE. IT IS ALSO SEEN THAT THE SURRENDER VALUE OF POLICIES ENDORSED/ASSIG NED IN FAVOUR OF THE KEYMEN DIRECTORS IN NEXT FINANCIAL YEAR WAS DULY IN CLUDED IN THEIR RESPECTIVE TAXABLE INCOME IN A.Y. 2007-08. IN VIEW OF THIS, DISALLOWANCE OF RS.9 LAKH (AS PER THE RECTIFIED ASSESSMENT ORDER) I S CANCELLED. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTE D THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS). 6. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASS ESSEE SUBMITTED THAT DURING THE FINANCIAL YEAR 2005-06 RELEVANT TO ASSES SMENT YEAR 2006-07, NONE OF THE THREE POLICES FOR WHICH PREMIUM OF RS.9 LACS WA S PAID WERE ASSIGNED IN FAVOUR OF THE KEYMAN DIRECTORS. THEREFORE, NO ADDIT ION TO THE INCOME OF THE ASSESSEE CAN BE MADE DURING THE YEAR UNDER CONSIDER ATION. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE, THE UNDISPUTED FACTS ARE THAT THE ASSESSEE COMPANY HAS TAKEN KEYMAN INSURANCE POLICY IN RESPECT OF LIFE OF ITS THREE DIRECTORS AN D PAID AGGREGATE PREMIUM OF RS.9 LACS DURING THE YEAR UNDER CONSIDERATION AND CLAIME D DEDUCTION FOR THE SAME. THE FURTHER UNDISPUTED FACTS ARE THAT IN THE IMMEDIATEL Y SUCCEEDING YEAR, THE ASSESSEE COMPANY HAS ASSIGNED THE SAID KEYMAN INSURANCE POLI CY TO THE RESPECTIVE DIRECTORS. ON THE ABOVE FACTS, THE LEARNED ASSESSIN G OFFICER DISALLOWED THE CLAIM FOR DEDUCTION FOR RS.9 LACS ON THE GROUND THAT THE POLICIES WERE TAKEN FOR THE BENEFITS OF THE DIRECTORS AND THEIR FAMILY MEMBERS. IN APPEAL, LEARNED COMMISSIONER OF INCOME TAX(APPEALS) OBSERVING THAT THE DIRECTORS IN THE ITA NO. 2538/AHD/2009 M/S.M/S. PWS ENGINEERS PVT. LTD ASST.YEAR -2006-07 - 5 - SUBSEQUENT YEAR HAS INCLUDED SURRENDER VALUE OF KEY MAN INSURANCE POLICY OF RS.85,597.50/- EACH IN THE RESPECTIVE INCOME TAX RE TURN AND PAID TAX THEREON. THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS ALS O OBSERVED THAT IN SUBSEQUENT YEAR AND SUBSEQUENT TO THAT YEAR, PREMIU M IN RESPECT OF THE POLICIES IN QUESTION WAS TO BE PAID BY THE DIRECTORS TO WHOM PO LICIES ARE ASSIGNED AND ON MATURITY OF THE POLICIES, THE DIRECTORS SHALL BE LI ABLE TO PAY TAX ON THE AMOUNT RECEIVED. THE LEARNED COMMISSIONER OF INCOME TAX(AP PEALS) AFTER TAKING INTO CONSIDERATION THE CBDT CIRCULAR NO.762 DATED 18.02. 1998 AS REPORTED IN 230 ITR (ST.) 12 HELD THAT PREMIUM OF RS.9 LACS PAID BY THE ASSESSEE UNDER THE KEYMANS INSURANCE POLICY WAS DEDUCTABLE IN THE HANDS OF THE ASSESSEE COMPANY AND THEREAFTER, HE DELETED THE DISALLOWANCE. WE FIND TH AT IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE COMPANY HAS NOT ACTUALLY PAID THE PREMIUM OF RS.9 LACS UNDER THE KEYMAN INSURANCE POLICY DURING THE YEAR U NDER CONSIDERATION AND IT IS ALSO NOT THE CASE OF THE REVENUE THAT THE PERSONS W HOSE LIFE WERE INSURED UNDER THOSE POLICIES WERE NOT KEYMAN OF THE ASSESSEE COMP ANY. IN VIEW OF THE ABOVE FACTS, MERELY BECAUSE THE POLICIES WERE ASSIGNED IN SUBSEQUENT YEAR TO THE RESPECTIVE DIRECTORS OR MERELY BECAUSE SOME BENEFIT WAS OBTAINED BY THE DIRECTORS OR THEIR FAMILY MEMBERS, THE GENUINE EXPE NSES OF THE ASSESSEE COMPANY CANNOT BE DISALLOWED UNLESS THERE IS A SPECIFIC PRO VISION IN THE ACT AUTHORISING SUCH DISALLOWANCE. IN THE DECISION IN THE CASE SAYA JI IRON & ENGINEERING CO. VS. COMMISSIONER OF INCOME TAX (2002) 253 ITR 749 (GUJ) IS AN AUTHORITY FOR THE PROPOSITION THAT THE COMPANY AND ITS DIRECTORS ARE DIFFERENT PERSONS IN THE EYES OF LAW AND MERELY BECAUSE AN EXPENSE INCURRED BY THE A SSESSEE COMPANY RESULTED IN ANY BENEFIT TO THE DIRECTORS, SUCH EXPENSES CANNOT BE DISALLOWED IN THE HANDS OF THE ASSESSEE COMPANY ON THE OTHER HAND, THE BENEFIT RECEIVED BY THE DIRECTORS MAY BE TAXED IN THEIR HANDS. IN VIEW OF THE ABOVE, SETT LED LEGAL POSITION, WE DO NOT FIND ANY ERROR IN THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS). IT IS AFFIRMED AND THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. ITA NO. 2538/AHD/2009 M/S.M/S. PWS ENGINEERS PVT. LTD ASST.YEAR -2006-07 - 6 - 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED AT THE CONCLUSION OF THE HEARING I N THE PRESENCE OF THE PARTIES IN THE COURT ON 12/11/2009. SD/- SD/- ( T.K. SHARMA ) ( N.S. SAINI ) JUDICIAL MEMBER A CCOUNTANT MEMBER AHMEDABAD; DATED 12/11/2009 PREPARED AND COMPARED BY : PARAS COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)- 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD
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