The ACIT, Central Circle-3, Surat V. M/s. Gem Art, Surat

ITA 2725/AHD/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8696 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 9 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 17-03-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 15-06-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: NEETA SHAH SRDR
• Keywords: Business expenditure; Revenue expenditure
• Section: 10(10D)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD BBENCH BEFORE SHRI G.D. AGARWAL, VICE-PRESIDENT (AZ) AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER ITA NO.2725/AHD/2007 [ASSTT.YEAR 2004-05] ASSTT. COMMISSIONER OF INCOME-TAX VS M/S. GEM ART, CIRCLE-6, SURAT, ROOM NO.218, 6/1247, BHUT SHERI, AAYAKAR BHAVAN, MAJURA GATE, MAHIDHARPURA, SURAT SURAT PAN NO.AADFG3339B (APPELLANT) (RESPONDENT) C.O. NO.224/AHD/2007 (ARISING OUT ITA NO.2725/AHD/2007) (ASSESSMENT YEAR: 2004-05) M/S. GEM ART, 6/1247, BHUT SHERI VS ASTT. COMMISSI ONER OF MAHIDHARPURA, SURAT INCOME-TAX, CIRCLE-6, SURAT (APPELLANT) (RESPONDENT) REVENUE BY :SMT.NEETA SHAH, SR-DR ASSESSEE BY: SHRI BANDISH SOPARKAR,AR O R D E R PER MAHAVIR SINGH, JUDICIAL MEMBER:- THIS APPEAL BY REVENUE AND CROSS OBJECTION (CO) BY ASSESSEE ARE ARISING OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX (APP EALS)-IV, SURAT IN APPEAL NO.CAS-IV/288/06-07 DATED 10-04-2007. THE ASSESSMEN T WAS FRAMED BY ACIT, CIRCLE-6, SURAT U/S.143(3) OF THE INCOME-TAX ACT, 1 961 (HEREINAFTER REFERRED TO AS THE ACT) VIDE HIS ORDER DATED 26-12-2006. ITA NO.2725/AHD./2007 & CO 224/AHD/2007 A.Y.2004-05 ACIT, CIR-6 SURAT V. M/S.GEM ART PAGE 2 2. THE ONLY ISSUE IN THIS APPEAL OF THE REVENUE IS AGAINST THE ORDER OF CIT(A) DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DISALLOWANCE OF PREMIUM PAID FOR KEYMAN INSURANCE POLICY. FOR THIS, REVENUE HAS RAISED THE FOLLOWING GROUND NO.1 ;- (1) ON THE FATS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A)- IV, SURAT HAS ERRED IN DIRECTING TO DELETE THE ADDI TION OF RS.15,00,000/- ON ACCOUNT OF DISALLOWANCE OF PREMIUM PAID FOR KEYMAN INSURANCE POLICY. 3. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE FILED A COPY OF TRIBUNALS ORDER IN ITA NO.1722/AHD/2008 DATED 06-03-2009 AND STATED THAT EXACTLY ON SAME F ACTS, AND THE ISSUE BEING EXACTLY IDENTICAL, THE ISSUE OF REVENUES APPEAL IS COVERED IN ASSESSEES OWN CASE IN ITA NO.1722/AHD/2008 (SUPRA) VIDE PARA-5, 5.1AND 5.2 , WHICH READS AS UNDER:- 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. THE AO DISALLOWED THE CLAIM FOR DEDUCTION MERELY ON THE GROUND THERE IS NO EMPLOYER EMPLOYEE RELATIONSHIP BETWEEN THE PARTNE RS AND RELIED UPON THE CIRCULAR NO.762 DATED 18-2-1998, WHICH READS AS UND ER:- TAXATION OF SUM RECEIVED UNDER THE KEYMAN INSURANCE POLICY 14.1 KEYMAN INSURANCE POLICY OF THE LIFE INSURANCE CORPORATION OF INDIA, ETC. PROVIDES FOR AN INSURANCE POLICY TAKEN BY A BUSINES S ORGANIZATION OR A PROFESSIONAL ORGANIZATION ON THE LIFE OF AN EMPLOYE E, IN ORDER TO PROTECT THE BUSINESS AGAINST THE FINANCIAL LOSS, WHICH MAY OCCU R FROM THE EMPLOYEES PREMATURE DEATH. THE KEYMAN IS AN EMPLOYEE OR A D IRECTOR, WHOSE SERVICES ARE PERCEIVED TO HAVE A SIGNIFICANT EFFECT ON THE P ROFITABILITY OF THE BUSINESS. THE PREMIUM IS PAID BY THE EMPLOYER. 14.2 THERE WERE SOME DOUBTS ON THE TAXABILITY OF TH E INCOME INCLUDING BONUS, ETC. FROM SUCH POLICY AND ALSO REGARDING THE TREATM ENT OF THE PREMIUM PAID WHETHER IT SHOULD BE ALLOWED AS A CAPITAL EXPENDITU RE OR AS REVENUE EXPENDITURE. THE FINANCE (NO.2) ACT, 1996, THEREFOR E, LAYS DOWN THE TAX TREATMENT OF THE KEYMAN INSURANCE POLICY. 14.3 CLAUSE (10D OF S.10 OF THE IT ACT EXEMPTS CERTAIN INCOME FROM TAX. THE FINANCE (NO.2) ACT, 1996, AMENDS CL.(10D) OF S.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 FINANCE (NO.2) ACT, 1996, ALSO LAYS DOWN T HAT THE SUMS RECEIVED BY THE SAID ORGANIZATION ON SUCH POLICIES, BE TAXED AS BUSINESS PROFITS; THE SURRENDER VALUE OF TH9E POLICY, ENDORSED IN FAVOUR OF THE EMPLOYEE (KEYMAN), OR THE SUM RECEIVED BY HIM AT THE TIME OF RETIREMEN T BE TAKEN AS PROFITS IN LIEU ITA NO.2725/AHD./2007 & CO 224/AHD/2007 A.Y.2004-05 ACIT, CIR-6 SURAT V. M/S.GEM ART PAGE 3 OF SALARY FOR TAX PURPOSES AND IN CASE OF OTHER P ERSONS HAVING NO EMPLOYER- EMPLOYEE RELATIONSHIP, THE SURRENDER VALUE OF THE P OLICY OR THE SUM RECEIVED UNDER THE POLICY BE TAKEN AS INCOME FROM OTHER SOUR CES AND TAXED ACCORDINGLY. THE PREMIUM PAID ON THE KEYMAN INSURAN CE POLICY IS ALLOWED AS BUSINESS EXPENDITURE. 14.5 THE AMENDMENTS TAKE EFFECT FROM THE 1 ST DAY OF OCTOBER 1996. A BARE PERUSAL OF THE AFORESAID CIRCULAR REVEALS TH AT THERE IS NOTHING IN THE CIRCULAR WHICH DEBARS THE ALLOWANCE OF DEDUCTION OF PREMIUM PAID ON THE LIFE OF THE PARTNERS BY THE FIRM. IN PARA 14.4 OF THE AFORESAID CIRCULAR IT IS ONLY MENTIONED THAT IN CASE OF OTHER PERSONS HAVING NO E MPLOYER-EMPLOYEE RELATIONSHIP, THE SURRENDER VALUE OF THE POLICY OR THE SUM RECEIVED UNDER THE POLICY BE TAKEN AS INCOME FROM OTHER SOURCES AND TA XED ACCORDINGLY. APPARENTLY, ONLY EMPLOYER AND EMPLOYEE RELATIONSHIP IS NOT ENVISAGED TO ALLOW THE PREMIUM PAID ON KEYMAN INSURANCE POLICY A S BUSINESS EXPENDITURE AND THERE CAN EXIST OTHER TYPES RELATIONSHIP. IT IS ALSO PERTINENT TO NOTE THE TERM PERSON OR PERSONS HAVE BEEN USED IN THE EX PLANATION TO SECTION 10(10D) WHICH MAY REFER TO NATURAL PERSON OR ARTIFI CIAL I.E. LEGAL PERSONS OR ENTITIES TREATED AS HAVING LEGAL ENTITY UNDER THE P ROVISIONS OF INCOME TAX ACT, 1961 AND IN THIS VIEW OF THE MATTER, THE AO'S CONCL USION IN DISALLOWING THE CLAIM IS NEITHER IN ACCORDANCE WITH THE AFORESAID C IRCULAR NOR IN ACCORDANCE WITH LAW. 5.1 NOW ADVERTING TO THE DECISION IN THE CASE OF P.G. ELECTRONICS (SUPRA) RELIEF UPON BY THE LD. AR, WHEREIN IT WAS HELD AS UNDER: IT MAY BE SEEN FROM PARA 14.2 OF THE CIRCULAR THAT THE BOARD WAS AWARE OF THE DOUBTS RELATING TO THE TREATMENT OF THE PREM IUM PAID IN RESPECT OF A KEYMAN INSURANCE POLICY ISSUED BY THE LIC OF INDI A AND HAS ACCORDINGLY CLARIFIED, TO PUT THE DOUBTS AT REST, I N THE LAST SENTENCE OF PARA 14.4 THAT THE PREMIUM PAID ON THE KEYMAN INSURANCE POLICY IS ALLOWED AS BUSINESS EXPENDITURE. IN THE LIGHT OF THE ABOVE AMENDMENTS AND THE CIRCUL AR CLARIFYING THE POSITION RELATING TO THE ALLOWABILITY OF THE PREMIU M PAID ON KEYMAN INSURANCE POLICY, THE CIT, IN MY VIEW, WAS NOT JUST IFIED IN DIRECTING THE AO TO DISALLOW THE PREMIUM PAID BY THE ASSESSEE-FIR M IN RESPECT OF THE LIFE OF PARTNER ANURAG GUPTA, ASSURED UNDER THE KEY MAN INSURANCE POLICY, AS CAN BE SEEN FROM PARA 2 OF THE ORDER OF THE CIT. THEREFORE, THE ORDER OF THE CIT CANNOT BE SUSTAINED AS IT RUNS COUNTER TO THE AMENDMENTS MADE TO THE ACT AS CLARIFIED BY THE CIRC ULAR ISSUED BY THE CBDT. IT IS WELL-SETTLED THAT CIRCULAR ISSUED BY TH E CBDT REGARDING THE EXECUTION OF THE ACT ARE BINDING ON THE IT AUTHORIT IES. THE AMENDED LAW IS APPLICABLE TO THE YEAR UNDER CONSIDERATION. THE CIT WAS, THEREFORE, NOT JUSTIFIED IN ASSUMING JURISDICTION T O REVISE THE ASSESSMENT UNDER S.263. CONTRARY TO THE LAW AND CIRCULAR ISSUED BY THE BOA RD. HE COULD NOT HAVE CONSIDERED THE ASSESSMENT ERRONEOUS SINCE THE ALLOWANCE OF THE PREMIUM AS A DEDUCTION AS BUSINESS EXPENDITURE WAS IN CONFORMITY WITH THE CIRCULAR OF THE BOARD WHICH WAS BINDING ON THE ITA NO.2725/AHD./2007 & CO 224/AHD/2007 A.Y.2004-05 ACIT, CIR-6 SURAT V. M/S.GEM ART PAGE 4 AO. EVEN ON MERITS, HIS VIEW THAT THE PREMIUM PAID ON KEYMAN INSURANCE POLICY SHOULD BE DISALLOWED IS NOT TENABL E, ALSO BECAUSE OF THE CIRCULAR CITED ABOVE, I THEREFORE CANCEL THE OR DER UNDER S.263 ON BOTH COUNTS AND ALLOW THE APPEAL. 5.2 IN THE LIGHT OF THE AFORESAID DECISION, CIRCULA R DATED 18-2/1998 AND EXPLANATION TO SECTION 10(10D) OF THE ACT, WE ARE O F THE OPINION THAT THE PREMIUM PAID UNDER THE KEYMAN INSURANCE POLICY ON T HE LIFE OF PARTNERS CAN NOT BE DISALLOWED. THEREFORE, THERE IS NO GROUND FO R INTERFERENCE WITH THE FINDINGS OF THE LEARNED CIT(A). ACCORDINGLY, GROUND NO.1 IS DISMISSED. 4. EXACTLY THE FACTS AND ISSUE BEING SAME IN THE PR ESENT CASE, RESPECTFULLY FOLLOWING THE TRIBUNALS DECISION IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2005- 06, WE DISMISS THE ISSUE OF REVENUES APPEAL. NOW COMING TO ASSESSEES CO NO.224/AHD/2007. 5. THE ONLY ISSUE IN THIS CO OF THE ASSESSEE IS AGA INST THE CONFIRMATION OF DISALLOWANCE OF RS.30,000/- FROM STAFF WELFARE EXPE NSES, RS.25,000/- ON FOREIGN TRAVELING AND RS.44,400/- ON TELEPHONE EXPENSES. 6. AFTER HEARING THE RIVAL CONTENTIONS AND GOING TH ROUGH THE CASE RECORDS INCLUDING ASSESSMENT ORDER, ORDER OF CIT(A) AND ASS ESSEES PAPER BOOK, WE FIND THAT FOREIGN TRAVEL EXPENSE DEBITED BY THE ASSESSEE TO T HE PROFIT & LOSS ACCOUNT AT RS.16,61,740/-. THE ASSESSING OFFICER DISALLOWED 10 % OF FOREIGN TRAVEL EXPENSES ON THE GROUND OF POSSIBLE PERSONAL USE AND THE CIT(A) RESTRICTED THE DISALLOWANCE AT A TOKEN OF RS.25,000/-. BEFORE US ALSO LD. COUNSEL F OR THE ASSESSEE HAS NOT DENIED THE POSSIBLE PERSONAL EXPENDITURE INCURRED ON ACCOU NT OF FOREIGN TRAVEL AND IN VIEW OF THIS FACT, WE FIND NO INFIRMITY IN THE ORDER OF CIT (A) AND THIS DISALLOWANCE CONFIRMED BY CIT(A) IS UPHELD. 6.1 AS REGARDS TO STAFF WELFARE EXPENSES, THE ASSES SEE HAS CLAIMED STAFF WELFARE EXPENSES AT RS.1,38,826/- AND ALSO OFFICE EXPENSES AT RS.1,61,345/-. THESE EXPENSES WERE INCURRED IN CASH AND THE ASSESSEE COU LD NOT ADDUCE THE VOUCHERS BEFORE THE ASSESSING OFFICER EXCEPT THE SELF-GENERA TED VOUCHERS AND IN THE ABSENCE OF THE SAME, THE AO DISALLOWED 25% AND MADE ADDITIO N AT RS.75,043/-. THE CIT(A) MADE AD HOC DISALLOWANCE AT RS.30,000/- AS THE ASSE SSEE IS NOT ABLE TO MAINTAIN COMPLETE RECORDS AND NO BILLS & VOUCHERS WERE PREPA RED BY THE ASSESSEE. BEFORE US ALSO THE ASSESSEE COULD NOT ADDUCE ANYTHING NEW, THE POSITION BEING THE SAME, ITA NO.2725/AHD./2007 & CO 224/AHD/2007 A.Y.2004-05 ACIT, CIR-6 SURAT V. M/S.GEM ART PAGE 5 WE CONFIRMED THE DISALLOWANCE RESTRICTED BY THE CIT (A). THIS ISSUE OF ASSESSEES CO IS DISMISSED. 6.2 AS REGARDS TO THE TELEPHONE DISALLOWANCE MADE B Y AO AT RS.66,631/- BEING 25% OF THE TOTAL EXPENDITURE ON THE GROUND OF POSSI BLE PERSONAL USE, THE CIT(A) RESTRICTED THE DISALLOWANCE AT 1/6 TH AND DIRECTED THE AO TO MAKE DISALLOWANCE AT RS.44,400/-. WE FIND THAT, EVEN NOW BEFORE US, THE ASSESSEE COULD NOT SUBSTANTIATE HIS CLAIM THAT THERE IS NO PERSONAL USER OF TELEPHO NE AND ACCORDINGLY WE CONFIRM THE DISALLOWANCE RESTRICTED BY CIT(A). THIS ISSUE OF A SSESSEES CO IS DISMISSED. 7. IN THE RESULT, REVENUES APPEAL AS WELL AS THE CO O F THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON THIS DAY OF 26 TH MARCH,2010 SD/- SD/- ( G.D.AGARWAL ) ( MAHAVIR SINGH ) (VICE PRESIDENT) (JUDICIAL MEMBER) AHMEDABAD, DATED : 26/03/2010 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- IV, SURAT 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD