ACIT, Ludhiana V. M/s Paramount Impex, Ludhiana

ITA 371/CHANDI/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60871 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-06-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 29-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K SAINI
• Keywords: Business expenditure; Question of law
• Section: 143(3); 10(10D)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.371/CHD/2012 (ASSESSMENT YEAR : 2008-09) THE A.C.I.T., VS. PARAMOUNT IMPEX, CIRCLE-1, D/202, PHASE VI, LUDHIANA. FOCAL POINT, LLUDHIANA. PAN: AAEFP3160G (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI N.K.SAINI, DR RESPONDENT BY : SHRI SUDHIR SEHGAL DATE OF HEARING : 16.05.2012 DATE OF PRONOUNCEMENT : 05.06.2012 O R D E R PER SUSHMA CHOWLA, J.M, : THE APPEAL FILED BY THE REVENUE AGAINST THE ORDER O F THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, LUDHIANA DA TED 12.01.2012 RELATING TO ASSESSMENT YEAR 2008-09 AGAINST THE ORD ER PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (IN SHOR T THE ACT). 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE AS UNDER: 1. THAT THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS. 11,80,6857- MADE BY ASSESSING OFFIC ER ON THE ISSUE OF KEYMAN INSURANCE PREMIUM PAID ON THE LIFE OF PARTNE R. 2. THAT THE LD.CIT(A) HAS ERRED IN IGNORING THE CORRECT MEANING OF EXPLANATION U/S 10(100), WHICH SAY THAT. ' FOR THE PURPOSES OF THIS CLAUSE, 'KEYMAN INSURANCE POLICY' 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 PERSON O R IS OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINES S OF THE FIRST MENTIONED PERSON. 2 3. THAT THE LD CIT(A) ERRED IN LAW AND ON FACTS IN DEL ETING THE ADDITION OF RS. 2,44,072/- MADE ON ACCOUNT OF DISA LLOWANCE OF FOREIGN TRAVEL EXPENSE AS NO DETAILS OF EXPENSES IN CURRED ON FOREIGN TRAVEL WERE PRODUCED BEFORE AO. 3. THE ISSUE RAISED IN GROUND NO.1 AND 2 RAISED BY THE REVENUE IS AGAINST THE DELETION OF ADDITION MADE ON ACCOUNT OF KEYMAN INSURANCE PREMIUM PAID BY THE ASSESSEE ON THE LIVES OF THE PA RTNERS. THE ASSESSING OFFICER HAD DISALLOWED EXPENDITURE OF RS. 11,80,685/- IN RESPECT OF EXPENSES CLAIMED TOWARDS KEYMAN INSURANC E POLICY IN VIEW OF THE RELATIONSHIP BETWEEN THE FIRM AND THE PARTNERS. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE INSURANCE POLICY H AD TO BE TAKEN BY A PERSON ON THE LIFE OF ANOTHER PERSON AND THE ASSESS ING OFFICER THUS INTERPRETED THAT THE ORGANIZATION AND THE PERSON WH OSE LIFE IS INSURED SHOULD BE TWO SEPARATE ENTITIES/PERSONS. THE ASSES SING OFFICER PLACED RELIANCE ON THE RATIO LAID DOWN IN MALABAR FISHERIE S COMPANY VS. CIT [120 ITR 49 (SC)] AND ALSO IN CIT VS. CHIDAMBRAM PI LLAI [106 ITR 292. 4. IN APPEAL BEFORE THE CIT (APPEALS) THE ASSESSEE PLACED RELIANCE ON THE VARIOUS DECISIONS OF THE TRIBUNAL AND ALSO THE CLARIFICATION ISSUED BY THE CBDT VIDE CIRCULAR NO.762 DATED 18.2.1998. THE LEARNED A.R. FOR THE ASSESSEE PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN CIT VS. B.N.EXPORTS [323 ITR 1 78 (BOM). THE CIT (APPEALS) ALLOWED THE CLAIM OF THE ASSESSEE IN VIEW OF THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN CIT VS. B. N. EXPORTS (SUPRA) AND ALSO CIRCULAR ISSUED BY CBDT, WHICH WAS CONSIDERED BY THE HON'BLE BOMBAY HIGH COURT. 5. SHRI SUDHIR SEHGAL APPEARED FOR THE ASSESSEE AND SHRI N.K.SAINI PUT IN APPEARANCE FOR THE REVENUE. 3 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE RAISED VIDE GROUND NOS.L AND 2 BY THE REVENUE ARE AGAINST THE ALLOWABILITY OF CLAIM OF EXPENDITURE OF KEYMAN INSU RANCE PREMIUM PAID BY THE ASSESSEE FIRM ON THE LIVES OF ITS PARTNERS. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE IN VIEW OF THE PROVISIONS OF SECTION 10(10D) OF THE ACT AND THE RATIO LAID DOWN BY THE A PEX COURT IN MALABAR FISHERIES COMPANY (SUPRA). THE CIT (APPEALS) ALLOW ED THE CLAIM OF THE ASSESSEE IN VIEW OF THE RATIO LAID DOWN BY THE HON' BLE BOMBAY HIGH COURT IN CIT VS. B.N. EXPORTS [323 ITR 178 (BOM)] O BSERVING AS UNDER: 4. I HAVE CONSIDERED THE FACTS OF THE CASE AND THE BASIS OF DISALLOWANCE MADE BY THE AO AND ALSO THE ARGUMENTS OF THE AR ON THE ISSUE. THE MAIN LOGIC BEHIND AO'S CONCLUSION IS THA T THE PARTNERSHIP FIRM AND THE PARTNERS DON'T CONSTITUTE TWO SEPARATE LEGAL PERSONS AND THEREFORE THE PROVISIONS OF SECTION 10(10D) WERE NO T APPLICABLE IN THE CASE OF PARTNERSHIP FIRM TAKING KEYMAN INSURANCE PO LICY. THE AO'S VIEW GAINS STRENGTH FROM THE JUDGEMENT OF APEX COUR T IN THE CASE OF MALABAR FISHERIES COMPANY VS. CIT 120 ITR 49. THE A R ON THE OTHER HAND HAS ARGUED THAT PARTNERSHIP FROM AND THE PARTN ERS ARE TWO SEPARATE LEGAL PERSONS UNDER THE I.T.ACT 1961 AND S EPARATE ASSESSMENT OF INCOME IS DONE IN THE CASE OF BOTH TH E PERSONS. IT WAS FURTHER SUBMITTED IT IS ONLY UNDER THE GENERAL LAW THAT PARTNERSHIP FIRM AND THE PARTNERS ARE CONSIDERED AS SAME AND TH EREFORE THE SPECIFIC LEGAL IDENTITY OF THE PARTNERSHIP FIRM AS DISTINCT FROM THE PARTNERS AS CREATED BY THE INCOME TAX ACT COULD NOT BE IGNORED. THE AR ALSO PLACED RELIANCE ON THE DECISION OF MUMBAI T RIBUNAL IN THE CASE OF ITO MODI MOTORS 27 SOT 476 WHEREIN IT HAS B EEN HELD THAT PARTNERS ARE MIND, HEART AND BODY OF FIRM DUE TO WH ICH THE FIRM IS ABLE TO CONDUCT ITS BUSINESS AND THEREFORE THE KEYMAN IN SURANCE POLICY ON THE LIFE OF PARTNERS WAS ALLOWABLE EXPENDITURE. THE AR ALSO PLACED RELIANCE ON THE JUDGEMENT OF HON'BLE BOMBAY HIGH CO URT IN THE CASE OF CIT VS. B.N. EXPORTS 232 ITR 178 WHEREIN THE HON 'BLE HIGH COURT HAS DISAGREED WITH THE STAND OF THE REVENUE T HAT THE PARTNERSHIP FIRM AND THE PARTNERS CAN NOT BE CONSID ERED AS SEPARATE 4 ENTITIES. THE AO'S RELIANCE UPON THE DECISION OF HO N'BLE APEX COURT IN THE CASE OF MALABAR FISHERIES (SUPRA) IS MISPLACED AS THE JUDGEMENT OF HON'BLE COURT IS ON THE ISSUE OF ALLOWANCE DEVELOPM ENT REBATE AND THE OBSERVATIONS THAT PARTNERSHIP FIRM AND ITS PARTNER ARE THE SAME IS IN CONTEXT OF THE DISTRIBUTION OF ASSETS OF THE FIR M. THE OBSERVATIONS OF THE HON'BLE COURT GIVEN IN AN ENTIRELY DIFFERENT CONTEXT CAN NOT BE APPLIED TO THE FACTS OF THE CASE UNDER CONSIDERATIO N AS THE ISSUE IS TOTALLY DIFFERENT IN THE SENSE THAT THE SURVIVAL OF PARTNERS IS CRITICAL TO THE EFFICIENT WORKING OF THE FIRM AND IN THE CASE O F SUDDEN DEMISE OF WORKING PARTNER. THE BUSINESS OF THE FIRM COULD SUF FER TREMENDOUSLY SO AS TO MAKE AN ATTEMPT TO ENSURE THE LOSSES BY TAKING KEYMAN INSURANCE POLICY. FURTHER THE HON'BLE BOMBAY HIGH COURT HAS REFERRED TO THE DECISION OF HON'BLE APEX COURT IN THE CASE BIST & SONS VS. CIT 116 ITR 131 WHEREIN IT HAS BEEN HELD THAT FIRM IS A SEPARATE ASSESSABLE ENTITY DISTINCT FROM ITS P ARTNER UNDER THE I.T.ACT 1961. THE OBSERVATIONS OF HON'BLE BOMBAY HI GH COURT ON THIS ISSUE ARE AS UNDER:- 'FOR THE PURPOSE OF SECTION 10(10D), A KEYMAN INSUR ANCE POLICY MEANS A LIFE INSURANCE POLICY TAKEN BY A PERSON ON THE LIFE OF ANOTHER PERSON WHO IS OR WAS IN EMPLOYMENT AS WELL AS ON A PERSON WHO IS OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUS INESS OF THE SUBSCRIBER. THE WORD 'IS OR WAS CONNECTED IN ANY MA NNER WHATSOEVER WITH THE BUSINESS' OF THE SUBSCRIBER ARE WIDER THAN WHAT WOULD BE SUBSUMED UNDER A CONTRACT OF EMPLOYMENT. THE LATTER PART MAKES IT CLEAR THAT A KEYMAN INSURANCE POLICY FOR THE PURPOS ES OF CL. (10D) IS NOT CONFINED TO A SITUATION WHERE THERE IS A CONTRA CT OF EMPLOYMENT. CIRCULAR NO. 762, DT. 18 TH FEB., 1998 ISSUED BY THE CBDT CLARIFIES THE POSITION BY STIPULATING THAT THE PREMIUM PAID FOR A KEYMAN INSURANCE POLICY IS ALLOWABLE AS BUSINESS EXPENDITURE. THERE IS A FINDING OF FACT BY THE TRIBUNAL THAT THE FIRM HAD NOT TAKE INSURANC E FOR THE PERSONAL BENEFIT OF THE PARTNER, BUT FOR THE BENEFIT OF THE FIRM, IN ORDER TO PROTECT ITSELF AGAINST THE SET BACK THAT MAY BE CAUSED ON ACCOUNT OF DEATH OF A PARTNER. THE OBJECT AND PURPOSE OF A KEYMAN INSURANCE ICY IS TO PROTECT THE BUSINESS AGAINST A FINANCIAL SET BACK WHICH MAY OCCUR, AS A RESULT OF A PREMATURE DEATH, TO THE BUS INESS OR PROFESSIONAL 5 ORGANIZATION. THERE IS NO RATIONAL BASIS TO CONFINE THE ALLOWABILITY OF THE EXPENDITURE INCURRED ON THE PREMIUM PAID TOW ARDS SUCH A POLICY ONLY TO A SITUATION WHERE THE POLICY IS IN R ESPECT OF THE LIFE OF AN EMPLOYEE. A KEYMAN INSURANCE POLICY IS OBTAINED ON THE LIFE OF A PARTNER TO SAFEGUARD THE FIRM AGAINST A DISRUPTIO N OF THE BUSINESS THAT MAY RESULT DUE TO THE PREMATURE DEATH OF A PAR TNER. THEREFORE, THE EXPENDITURE WHICH IS LAID OUT FOR THE PAYMENT O F PREMIUM ON SUCH A POLICY IS INCURRED WHOLLY AND EXCLUSIVELY F OR THE PURPOSES OF BUSINESS. HENCE, THE APPEAL BY THE REVENUE DOES NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW.' IN VIEW OF THE DETAILED ANALYSIS OF THE FACTS OF TH E CASE AND DIRECT JUDICIAL PRONOUNCEMENT ON THE ISSUE, THE DIS ALLOWANCE MADE BY THE AO IS DIRECTED TO BE DELETED. 7. FOLLOWING THE RATIO LAID DOWN BY THE HON'BLE BOM BAY HIGH COURT IN CIT VS. B.N. EXPORTS (SUPRA) WE ARE IN AGREEMEN T WITH THE ORDER OF CIT (APPEALS) IN ALLOWING THE CLAIM OF EXPENDITURE OF KEYMAN INSURANCE PREMIUM PAID BY THE ASSESSEE FIRM ON THE LIVES OF I TS PARTNERS. GROUND NOS.1 AND 2 RAISED BY THE REVENUE ARE THUS DISMISSE D. 8. GROUND NO.3 RAISED BY THE REVENUE IS AGAINST THE FOREIGN TRAVELING EXPENDITURE. THE ASSESSEE HAD CLAIMED TOTAL EXPEND ITURE OF RS.9,77,289/- ON ACCOUNT OF FOREIGN TRAVELING EXPEN DITURE. THE ASSESSING OFFICER HAD DISALLOWED 25% OF THE SAID EX PENDITURE FOR PERSONAL USE BY THE PARTNERS. THE CIT (APPEALS) AL LOWED THE ENTIRE CLAIM OF THE ASSESSEE OBSERVING AS UNDER: 7. I HAVE CONSIDERED THE BASIS OF DISALLOWANCE MAD E BY THE AO AND ARGUMENTS OF THE AO ON THE ISSUE. THE AR HAS MA DE OUT A CASE THAT THE ENTIRE EXPENDITURE ON FOREIGN TRAVELI NG WAS ON ACCOUNT OF BUSINESS EXIGENCIES AND THE COUNTRIES TR AVELED I.E. USA AND CANADA REPRESENT 80% OF THE TURNOVER OF THE ASSESSEE FIRM AND SAME COUNTRIES HAVE BEEN VISITED ON A CONT INUOUS 6 BASIS YEAR AFTER YEAR TO MAINTAIN THE BUSINESS RELA TION AND TO EXPAND THE SAME. IT WAS FURTHER SUBMITTED THAT THE FRINGE BENEFIT TAX (FBT) @ 5% ON ENTIRE EXPENDITURE ON FOR EIGN TRAVELING HAD BEEN PAID SEPARATELY TO TAKE CARE OF ANY POSSIBLE PERSONAL USE OF THE FUNDS OF THE FIRM WHILE ON FORE IGN TOUR. I AM AN AGREEMENT WITH THE AR ON THIS ISSUE AS THE TOUR TO SPECIFIED COUNTRIES SEEMS TO BE ENTIRELY ON ACCOUNT OF BUSINE SS CONSIDERATION AND THE PARTNERS HAVE TRAVELED INDIVI DUALLY AND NOT ALNGWITH THEIR FAMILIES SO AS TO SUGGEST PERSON AL USE OF FUNDS OF THE FIRMS. IT ALSO NEEDS TO BE APPRECIATED THAT THE PARTNERS HAVE NOT GONE ON BUSINESS TOUR FOR THE FIRST TIME S O AS TO TAKE THE OPPORTUNITY TO GO AROUND SIGHT SEEING. THE FOREIGN BUSINESS TOURS ARE A REGULAR FEATURE IN THE CASE OF THE ASSESSEE A ND THE PARTNERS ARE NOT EXPECTED TO WHILE AWAY THEIR TIME ON FRIVOL OUS ACTIVITIES ESPECIALLY WHEN THERE IS NO EVIDENCE TO SUGGEST THE SAME. THE AO'S APPREHENSION THAT THE FOREIGN CURRENCY PUR CHASED FOR THE PURPOSES OF BUSINESS TOURS MAY HAVE BEEN USED F OR SOME PERSONAL EXPENSES IS WELL FOUNDED BUT THE SAME GETS TAKEN CARE OF BY PAYMENT OF STIPULATED FRINGE BENEFIT TAX. ANY DI SALLOWANCE IN ADDITION TO FRINGE BENEFIT TAX HAS TO BE BASED ON C ONCRETE EVIDENCE AVAILABLE WITH THE AO AND IN CASE OF ESTIMATION SPE CIFIC REASONS NEED TO BE BROUGHT ON RECORD LIKE AN UNUSUAL INCREA SE IN FOREIGN TRAVELING EXPENSES ESPECIALLY THE UNVOUCHED EXPENSE S VIS-A- VIS LAST YEAR/YEARS. IN THE CIRCUMSTANCES, IT IS PU RE HUNCH OF THE AO AND THEREFORE, I AM OF THE OPINION THAT THE DISALLOWANCE MADE BY THE AO DESERVES TO BE DELETED. 9. IN VIEW OF THE FINDINGS OF THE CIT (APPEALS), WH ICH ARE NOT CONTROVERTED BY THE LEARNED D.R. FOR THE REVENUE, W E ARE IN AGREEMENT WITH THE ORDER OF THE CIT (APPEALS) IN ALLOW ING TOTAL EXPENDITURE ON 7 FOREIGN TRAVELING INCURRED BY THE ASSESSEE DURING T HE YEAR UNDER CONSIDERATION. THUS GROUND NO.3 RAISED BY THE REVE NUE IS DISMISSED. 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH DAY OF JUNE, 2012. SD/- SD/- (T.R.SOOD) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 5 TH JUNE, 2012 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH