M/s. Ganga Automobiles, Surat V. The ACIT.,Circle-2, Surat

ITA 3921/AHD/2008

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1840 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-03-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 15-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 01-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: U S RAINA
• Keywords: Business expenditure; Question of law; Revenue expenditure; Capital expenditure
• Section: 10(10D); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'D' BEFORE SHRI D.K. TYAGI, JM & SH. A N PAHUJ A,AM ITA NO.3921/AHD/2008 (ASSESSMENT YEAR:-2005-06) M/S GANGA AUTOMOBILES, 21 ST CENTURY BUSINESS CENTRE,HOUSE-A,NEAR UDHANA DARWAJA,RING ROAD,SURAT [PAN: AADFG 2811L] V/S ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-2, AAYAKAR BHAVAN,MAJURA GATE, SURAT [APPELLANT] [RESPONDENT] REVENUE BY :- SHRI U S RAINA, DR ASSESSEE BY:- SHRI HARDIK VORA, AR O R D E R A N PAHUJA: THIS APPEAL BY THE ASSESSEE AGAINST AN ORDER DATE D 10-10-2008 OF THE LD. CIT(APPEALS)-II, SURAT, RAIS ES THE FOLLOWING GROUNDS:- [1] UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(A)-II, SURAT HAS ER RED IN CONFIRMING THE ADDITION OF RS.11,57,893/- ON ACCOUNT OF KE YMAN INSURANCE OF THE PARTNERS WITHOUT APPRECIATING THE FACTS OF T HE CASE AS WELL AS THE SUBMISSION TENDERED BY THE APPELLANT . [2] UNDER THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(A)-II, SURAT WRONGL Y REJECTED THE CLAIM WITHOUT APPRECIATING THE FACT SUCH DISALLOWAN CE RESULTED IN TO DOUBLE TAXATION IN AS MUCH AS THE APPELLANT FIRM HA D FULLY PAID TAX ON SURRENDER OF POLICY IN SUBSEQUENT YEAR AS PER PR OVISIONS OF LAW. [3] THE APPELLANT CRAVES LEAVE TO ADD TO, ALTER OR TO AMEND THE PRESENT GROUND OF APPEAL. 2 ADVERTING TO GROUND NO.1 IN THE APPEAL, FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT THE RETURN DECLARING INCO ME OF RS.34,79,430/-FILED ON 29.10.2005 BY THE ASSESSEE, A TWO WHEELER AUTOMOBILE DEALER, AFTER BEING PROCESSED U/S 143(1 ) OF THE INCOME- TAX ACT, 1961 [HEREINAFTER REFERRED TO AS THE ACT ], WAS SELECTED FOR ITA NO.3921/AHD/2008 2 SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE ACT ON 21-10- 2006. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER [AO IN SHORT] NOTICED THAT THE ASSESSEE C LAIMED AN AMOUNT OF RS.11,57,893/- ON ACCOUNT OF INSURANCE PREMIA PAID ON LIFE OF FOUR PARTNERS, TREATING THE PARTNERS AS KEYMEN . T O A QUERY BY THE AO, THE ASSESSEE EXPLAINED THAT THE INSURANCE PREM IUM WAS PAID ON THE LIFE OF PARTNERS BY TREATING THEM AS KEYMEN, WHO WERE LOOKI NG AFTER DIFFERENT AREAS OF BUSINESS OF THE FIRM. THE AO WAS OF THE OPINION THA T THE EXPENDITURE ON ACCOUNT OF PREMIA UNDER KEYMAN INSURANCE POLICY TAKEN ON TH E LIFE OF THE PARTNERS WAS NOT ALLOWABLE AS REVENUE EXPENDITURE.THE AO DID NOT ACC EPT THE CONTENTIONS OF THE ASSESSEE ON THE GROUND THAT PROPOSER AS WELL PREMIU M PAYER UNDER THE KEYMAN INSURANCE POLICY ,IS EMPLOYER WHILE THE LIFE TO BE INSURED IS THAT OF AN EMPLOYEE. THE BENEFIT, IN THE EVENT OF A CLAIM, GOES TO THE EMPLOYER. ACCORDING TO THE AO, THE EXISTENCE OF AN EMPLOYER EMPLOYEE RELATIONSHI P IS SINE-QUA-NON FOR THE DEDUCTIBILITY OF KEYMAN INSURANCE PREMIA. SINCE SUC H KIND OF RELATIONSHIP DID NOT EXIST BETWEEN THE FIRM AND THE PARTNERS, EXPENDITUR E ON ACCOUNT OF PREMIA UNDER A KEYMAN INSURANCE POLICY ON THE LIFE OF PARTNERS B ESTOWED PERSONAL BENEFITS TO THE PARTNERS, THE AO OPINED. SINCE PERSONAL EXPENDI TURE WAS NOT DEDUCTIBLE, THE AO DISALLOWED THE CLAIM FOR DEDUCTION, RELYING INTE R ALIA, UPON THE DECISION IN THE CASE OF CIT VS KHODIDAS MOTIRAM PANCHAL (1986) 161 ITR 99 (GUJ) . 3. ON APPEAL, THE LEARNED CIT(A) UPHELD THE DISALL OWANCE WITH THE FOLLOWING OBSERVATIONS:- 6.1 THE EXPLANATION BELOW SEC. 10(10D) DEFINES TH E KIP. THE SAME IS REPRODUCED HEREUNDER: EXPLANATION FOR THE PURPOSE OF THIS CLAUSE, KEY MAN INSURANCE POLICY MEANS A LIFE INSURANCE POLICY TAKEN BY A PERSON ON THE LI FE OF AN OTHER PERSON WHO IS OR WAS THE EMPLOYEE OF THE FIRST - MENTIONED PERSON OR IS OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINESS OF THE FIRST MENTIONED PERSON. AS PER THE EXPLANATION, THE KIP IS A POLICY TAKEN B Y A PERSON ON THE LIFE OF AN EMPLOYEE OR A PERSON WHO IS OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINESS OF THE PERSON TAKING THE POLICY. IN TH E CASE OF A PARTNERSHIP FIRM, A ITA NO.3921/AHD/2008 3 PARTNER CANNOT BE TREATED AS AN EMPLOYEE OF THE FIR M. AS OBSERVED BY THE AO, THE PARTNERS CONSTITUTE THE FIRM. THEREFORE, IF A K IP IS TAKEN BY THE FIRM, IT WOULD AMOUNT TO THE PARTNERS INSURING THEMSELVES. CONSEQU ENTLY, IT WOULD AMOUNT TO THE FIRM BESTOWING PERSONAL BENEFITS TO A PARTNER A ND WOULD REPRESENT A PERSONAL EXPENDITURE AND NOT A BUSINESS EXPENDITURE. THE A. R. HAS NOT COUNTERED THIS OBSERVATION OF THE A. O. THEY HAVE MERELY STATED T HAT THE A. O. GAVE A VERY NARROW MEANING TO THE WORD KEYMAN AND THAT, THE P ARTNER BEING DIRECTLY CONNECTED WITH THE BUSINESS OF THE FIRM, IS THEREFO RE, THE KEYMAN SINCE HIS DEATH WOULD ADVERSELY AFFECT THE FIRMS BUSINESS. THERE I S NO MERIT IN SUCH AN ARGUMENT. 6.1 AS PER THE EXPLANATION, IF IT IS NOT AN EMPLOY EE, THE PERSON IN WHOSE NAME THE KIP IS TAKEN HAS TO BE CONNECTED IN SOME MANNER WITH THE BUSINESS OF THE PERSON TAKING POLICY. THE PARTNERS ARE NOT MERELY CONNECTED TO THE FIRM. THEY ARE THE FIRM, AND THEY CONSTITUTE THE FIRM. THEREFO RE, ANY PARTNER CANNOT BE A KEYMAN FOR THE FIRM. TO THAT EXTENT, I WOULD RESPEC TFULLY REJECT THE VIEW TAKEN BY THE HONBLE DELHI BENCH OF THE ITAT IN THE CASE OF P. G. ELECTRONICS SUPRA). IN ANY CASE, THE ONLY ISSUE BEFORE THE ITAT WAS WHETHE R OR NOT THE PREMIUM PAID ON THE KIP IS ALLOWABLE AS A BUSINESS EXPENDITURE. THE ITAT HELD THAT IT WAS ALLOWABLE AS A BUSINESS EXPENDITURE SINCE IT WAS CL ARIFIED AS SUCH IN THE CIRCULAR NO.762 ISSUED BY THE CBDT. PARA 14.1A OF THE CIRCUL AR CLARIFIED THAT A KEYMAN IS AN EMPLOYEE OR A DIRECTOR WHOSE SERVICES ARE PERCEI VED TO HAVE A SIGNIFICANT EFFECT ON THE PROFITABILITY OF THE BUSINESS. THE PR EMIUM IS PAID BY THE EMPLOYER. THE A. O. THEREFORE, WAS FULLY JUSTIFIED IN TAKING THE VIEW THAT THE PARTNER OF A FIRM COULD NOT BE A KEYMAN AND CONSEQUENTLY, IN DISALLOW ING THE SUM OF RS.11,57,893 LACS PAID BY THE ASSESSEE FIRM AS PREMIUM FOR THE K IP. THE ADDITION OF THE SAID SUM IS CONFIRMED. 4. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LEARNED AR ON BEHAL F OF THE ASSESSEEE RELIED UPON DECISION DATED 20.8.2010 OF T HE ITAT IN THE CASE OF PARMESHWAR ENGINEERS VS. ACIT IN ITA NO.436 9/AHD./2007 AND ANOTHER DECISION DATED 30.7.2010 IN THE CASE OF ACIT VS. M/S J.B.EXPORTS IN ITA NO.1992/AHD/2008 FOR THE AY2005- 06. THE LD. DR DID NOT REFER US TO ANY CONTRARY DECISION AND SUPPO RTED THE FINDINGS OF THE LD. CIT(A). 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE AFORESAID TWO DECISIONS OF THE ITAT. WE FIND THAT THE ITAT AHMEDABAD BENCH-A( TO WHICH ONE OF US WAS A PARTY) WHILE ADJUDICATING A SIMILAR CLAIM IN THE CASE OF M/S J.B.EXPORTS ITA NO.3921/AHD/2008 4 (SUPRA) FOLLOWED DECISION DATED 6.3.2009 OF A CO -ORDINATE BENCH IN THE CASE OF M/S GEM ART IN ITA NO.1722/AHD./2008 FOR THE AY 2005-06 WHEREIN IT WAS HELD AS UNDER:- 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. THE AO DISALLOWED THE CLAIM FOR DEDUCTI ON MERELY ON THE GROUND THERE IS NO EMPLOYER EMPLOYEE RELATIONSHI P BETWEEN THE PARTNERS AND RELIED UPON THE CIRCULAR NO. 762 DATE D 18-2-1998 , WHICH READS AS UNDER: TAXATION OF A SUM RECEIVED UNDER TH E KEYMAN INSURANCE POLICY 14.1 KEYMAN INSURANCE POLICY OF THE LIFE INSURANCE CORPORATION OF INDIA, ETC. PROVIDES FOR AN INSURANCE POLICY TAKEN BY A BUSINESS ORGANIZATION OR A PROFESSIONAL ORGANIZATION ON THE LIFE OF AN EMPLOYEE, IN ORDER TO PROTECT THE BUSINESS AGAINST THE FINANC IAL LOSS, WHICH MAY OCCUR FROM THE EMPLOYEES PREMATURE DEATH. THE KEY MAN IS AN EMPLOYEE OR A DIRECTOR, WHOSE SERVICES ARE PERCEIVE D TO HAVE A SIGNIFICANT EFFECT ON THE PROFITABILITY OF THE BUSI NESS. 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 REG ARDING THE TREATMENT OF THE PREMIUM PAID WHETHER IT SHOULD B E ALLOWED AS A CAPITAL EXPENDITURE OR AS REVENUE EXPENDITURE. THE FINANCE (NO.2) ACT, 1996, THEREFORE, LAYS DOWN THE TAX TREATMENT O F 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 INSURANC E 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 THE POLIC Y , ENDORSED IN FAVOUR OF THE EMPLOYEE (KEYMAN), OR THE SUM RECEIVE D 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 EM PLOYER- EMPLOYEE RELATIONSHIP, THE SURRENDER VALUE OF THE P OLICY OR THE SUM RECEIVED UNDER THE POLICY BE TAKEN AS INCOME FROM O THER SOURCES AND TAXED ACCORDINGLY. THE PREMIUM PAID ON THE KEYM AN INSURANCE POLICY IS ALLOWED AS BUSINESS EXPENDITURE. ITA NO.3921/AHD/2008 5 14.5 THE AMENDMENTS TAKE EFFECT FROM THE 1 ST DAY OF OCTOBER 1996. A BARE PERUSAL OF THE AFORESAID CIRCULAR REVEALS T HAT THERE IS NOTHING IN THE CIRCULAR WHICH DEBARS THE ALLOWANCE OF DEDUCTION O F PREMIA PAID ON THE LIFE OF PARTNERS BY THE FIRM. IN PARA 14.4 OF THE AFORESAID CIRCULAR IT IS ONLY MENTIONED THAT IN CASE OF OTHER PERSONS HAVING NO EMPLOYER- EMPLOY EE RELATIONSHIP, THE SURRENDER VALUE OF THE POLICY OR THE SUM RECEIVED U NDER THE POLICY BE TAKEN AS INCOME FROM OTHER SOURCES AND TAXED ACCORDINGLY. A PPARENTLY, ONLY EMPLOYER AND EMPLOYEE RELATIONSHIP IS NOT ENVISAGED TO ALLOW THE PREMIUM PAID ON KEYMAN INSURANCE POLICY AS BUSINESS EXPENDITURE AND THERE CAN EXIST OTHER TYPES RELATIONSHIP. IT IS ALSO PERTINENT TO NOTE TH E TERM PERSON OR PERSONS HAVE BEEN USED IN THE EXPLANATION TO SECTION 10(10D) WHI CH MAY REFER TO NATURAL PERSON OR ARTIFICIAL I.E. LEGAL PERSONS OR ENTITIES TREATED AS HAVING LEGAL ENTITY UNDER THE PROVISIONS OF INCOME TAX ACT, 1961 AND IN THJS VIEW OF THE MATTER, THE A.O.S CONCLUSION IN DISALLOWING THE CLAIM IS NEIT HER IN ACCORDANCE WITH THE AFORESAID CIRCULAR NOR IN ACCORDANCE WITH LAW. 5.1 NOW ADVERTING TO THE DECISION IN THE CASE O F P. G. ELECTRONICS (SUPRA) RELIED UPON BY THE LD. AR, WHEREIN IT WAS HELD AS U NDER: IT MAY BE SEEN FROM PARA 14.2 OF THE CIRCULAR THAT THE BOARD WAS AWARE OF THE DOUBTS RELATING TO THE TREATMENT O F THE PREMIUM PAID IN RESPECT OF A KEYMAN INSURANCE POLICY ISSUED BY THE LIC OF INDIA AND HAS ACCORDINGLY CLARIFIED, TO PUT THE DOU BTS AT REST, IN THE LAST SENTENCE OF PARA 14.4 THAT THE PREMIUM PAID O N 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 FIRM IN RESPECT OF THE LIFE OF PARTNER ANURAG GUPTA, ASSURED UNDER THE KEYMAN INSURANCE POLICY, AS CAN BE SEEN FROM PARA 2 OF THE ORDER OF THE CIT. THEREFORE, THE ORDER OF THE CIT CANNOT BE SUST AINED AS IT RUNS COUNTER TO THE AMENDMENTS MADE TO THE ACT AS CLARIF IED BY THE CIRCULAR ISSUED BY THE CBDT. IT IS WELL-SETTLED THA T CIRCULAR ISSUED BY THE CBDT REGARDING THE EXECUTION OF THE ACT ARE BIN DING ON THE IT AUTHORITIES. THE AMENDED LAW IS APPLICABLE TO THE Y EAR UNDER CONSIDERATION. THE CIT WAS, THEREFORE, NOT JUSTIFIE D IN ASSUMING JURISDICTION TO REVISE THE ASSESSMENT UNDER S.263, CONTRARY TO THE LAW AND CIRCULAR ISSUED BY THE BOARD. 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 AO. EVEN ON MERITS, ITA NO.3921/AHD/2008 6 HIS VIEW THAT THE PREMIUM PAID ON KEYMAN INSURANCE POLICY SHOULD BE DISALLOWED IS NOT TENABLE, ALSO BECAUSE OF THE CIRCULAR CITED ABOVE. I THEREFORE CANCEL THE ORDER UNDER S.263 ON BOTH COUNTS AND ALLOW THE APPEAL. 5.2. IN THE LIGHT OF THE AFORESAID DECISION, CIRCUL AR DATED 18-2-1998 AND EXPLANATION TO SECTION 10(10D) OF THE ACT , WE ARE OF THE OPINION THAT THE PREMIUM PAID UNDER THE KEYMAN INSURANCE POLICY ON THE LIFE OF PARTNERS CAN NOT BE DISALLOWED. THEREFORE, THERE IS NO GROU ND FOR INTERFERENCE WITH THE FINDINGS OF THE LEARNED CIT(A). ACCORDINGLY, GR OUND NO.1 IS DISMISSED. 5.1 ACCORDINGLY, IN THE CASE OF M/S JB EXPORTS (SUPRA),CLAIM FOR DEDUCTION OF INSURANCE PREMIA UNDER THE KEYMAN INSURANCE POLICY ON THE LIFE OF PARTNERS WAS ALLOWED. 5.2 LIKE WISE , IN THE CASE OF M/S. PARMESHWAR ENGINEERS (SUPRA), THE BENCH FOLLOWED A DECISION OF THE HONBLE BOMBAY HIGH COUR T IN CIT VS. BN EXPORTS,231 CTR 227(BOMBAY) AND CONCLUDED AS UNDER: 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS A ND THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE HAS RELIED UPON THE CIRCULAR N O.762 DATED 18-02-1998 PARA 14.4 OF WHICH ARE REPRODUCED AS UNDER: 14.4 THE ACT ALSO LAYS DOWN THAT THE SUMS RECEIVED BY THE SAID ORGANISATION ON SUCH POLICIES, BE TAXED AS BUSINESS PROFIT; THE SUR RENDER 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 R ELATIONSHIP, THE SURRENDER VALUE OF THE POLICY OR SUM RECEIVED UNDER THE POLIC Y BE TAKEN AS INCOME FROM OTHER SOURCES AND TAXED ACCORDINGLY. THE PREMIUM PA ID ON THE KEYMAN INSURANCE POLICY IS ALLOWED AS BUSINESS EXPENDITURE . THE PREMIUM PAID ON KIP HAS BEEN ALLOWED AS BUSINES S EXPENDITURE. THE AMOUNT RECEIVED IN KIP HAS BEEN MADE TAXABLE AND AC CORDING TO SECTION 28 (VI) OF THE IT ACT WITH EFFECT FROM 01-10-1996 WHICH PRO VIDES THAT A SUM RECEIVED UNDER KIP INCLUDING THE SUM ALLOCATED BY WAY OF BON US ON SUCH POLICY WILL BE TREATED AS INCOME CHARGEABLE TO INCOME TAX UNDER TH E HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION. EXPLANATION TO SECTION 10(1 0D) IS REPRODUCED ABOVE IN THE FINDING OF THE LEARNED CIT(A) FIND MENTION THE WORD IS OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINESS WOULD HAVE WIDER MEANING. THE SAME IS CONSIDERED BY THE HONBLE BOMBAY HIGH COURT IN T HE CASE OF CIT VS. B. N. EXPORTS (SUPRA) AND IT WAS HELD AS UNDER: HELD, FOR THE PURPOSE OF S. 10(10D), A KEYMAN INSU RANCE POLICY MEANS A LIFE INSURANCE POLICY TAKEN BY A PERSON ON THE LIFE OF A NOTHER PERSON WHO IS OR WAS IN EMPLOYMENT AS WELL AS ON A PERSON WHO IS OR WAS CON NECTED IN ANY MANNER ITA NO.3921/AHD/2008 7 WHATSOEVER WITH THE BUSINESS OF THE SUBSCRIBER. THE WORD IS OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINESS OF THE SUB SCRIBER ARE WIDER THAN WHAT WOULD BE SUBSUMED UNDER A CONTRACT OF EMPLOYMENT. T HE LATER 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 CONTRACT OF EMPLOYM ENT. CIRCULAR NO.762, DATED 18TH FEB., 1998 ISSUED BY THE CBDT CLARIFIES THE PO SITION BY STIPULATING THAT THE PREMIUM PAID FOR A KEYMAN INSURANCE POLICY IS ALLOW ABLE AS BUSINESS XPENDITURE. THERE IS A FINDING OF FACT BY THE TRIBUNAL THAT THE FIRM HAD NOT TAKEN FOR THE PERSONAL BENEFIT OF THE PARTNER, BUT FOR THE BENEFI T OF THE FIRM, IN ORDER TO PROTECT ITSELF AGAINST THE SET BACK THAT MAY BE CAU SED ON ACCOUNT OF THE DEATH OF A PARTNER. THE OBJECT AND PURPOSE OF A KEYMAN INSUR ANCE POLICY IS TO PROTECT THE BUSINESS AGAINST A FINANCIAL SET BACK WHICH MAY OCC UR, AS A RESULT OF A PREMATURE DEATH, TO THE BUSINESS OR PROFESSIONAL ORGANIZATION . THERE IS NO RATIONAL BASIS TO CONFINE THE ALLOWABILITY OF THE EXPENDITURE INCURRE D ON THE PREMIUM PAID TOWARDS SUCH A POLICY ONLY TO A SITUATION WHERE THE POLICY IS IN RESPECT OF THE LIFE OF AN EMPLOYEE. A KEUMAN INSURANCE POLICY IS OBTAINED ON THE LIFE OF A PARTNER TO SAFEGUARD THE FIRM AGAINST A DISRUPTION OF THE BUSI NESS THAT MAY RESULT DUE TO THE PREMATURE DEATH OF A PARTNER. THEREFORE, THE EXPEND ITURE WHICH IS LAID OUT FOR THE PAYMENT OF PREMIUM ON SUCH A POLICY IS INCURRED WHO LLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. HENCE, THE APPEAL BY THE REVEN UE DOES NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW . 8. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO FILED COPY OF THE KEYMAN INSURANCE POLICY IN THE MATTER IN RESPECT OF TWO OF THE PARTN ERS IN WHICH PAYMENT OF RS.10,00,000/- AND RS.1,00,000/- HAVE BEEN PAID. IN THIS KIP, THE ASSESSEE FIRM IS A PROPOSER FIRM AND THE NAME OF THE LIFE INSURED IS THE PARTNER OF THE ASSESSEE FIRM. THE PERIODICAL PREMIUM PAYMENT IS PRESCRIBED YEARLY AND THAT THE BENEFITS OUT OF THE POLICY WAS PAYABLE TO THE PROPOSER I.E. THE ASSESSEE FIRM. IN THE CASE OF DISSOLUTION OF PARTNERSHIP FIRM FOR ANY REASON OTHER THAN DEATH OF ANY OF THE PARTNERS INSURED UNDER THE POLICY, THAN THE MENTIONED POLICY SHALL BE EITH ER SURRENDERED TO THE COMPANY FOR ITS CASH VALUE IF ANY OR MAY PAID UP FOR VALUE IF ANY AS ACQUIRED UNDER THE POLICY AS ON THE DATE OF THE DISSOLUTION OF THE PAR TNERSHIP AND SUCH PAID UP POLICY SHALL BE ABSOLUTELY ASSIGNED IN FAVOUR OF THE PARTN ERS INSURED UNDER THE POLICY. IT WOULD MEAN THAT THE ASSESSEE FIRM HAD NOT TAKEN INS URANCE FOR THE PERSONAL BENEFIT OF THE PARTNERS 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. THEREFORE, THE ASSESSEE FIRM BEING PROPOSER AND ULT IMATE BENEFICIARY OUT OF KIP HAS BEEN ABLE TO PROVE THAT POLICY WAS OBTAINED WIT H THE OBJECT TO PROTECT THE INTEREST OF THE ASSESSEE FIRM IN THE EVENT OF DEATH OF ANY OF THE PARTNERS. THEREFORE, THE KIP IS OBTAINED BY THE ASSESSEE FIRM FOR THE PURPOSE OF ITS BUSINESS. IN THE CASE OF DISSOLUTION, THE BENEFITS WOULD GO TO THE PARTNERS MEANING THEREBY THE PARTNERS OF THE ERSTWHILE FIRM. IN THAT EVENT, NO PERSONAL BENEFIT HAS BEEN ASSIGNED TO THE PARTNERS. THUS, TH E ASSESSEE FIRM PROVED THAT IT HAS TAKEN THE KIP FOR ITS PARTNERS WHO ARE CONNECTE D WITH THE BUSINESS OF THE ASSESSEE FIRM EXCEPT THE SLEEPING PARTNER. THE PART NERS ARE DIRECTLY CONNECTED WITH THE BUSINESS OF THE ASSESSEE FIRM AND ARE KEY PERSONS TO TAKE DECISION IN THE BUSINESS OF THE ASSESSEE. AS NOTED ABOVE, THE P OLICY WAS TAKEN FOR THE BENEFIT OF THE BUSINESS OF THE ASSESSEE, THEREFORE, THE AMOUNT INCURRED FOR ITA NO.3921/AHD/2008 8 OBTAINING KIP POLICY SHALL HAVE TO BE CONSIDERED AS REVENUE EXPENDITURE. THE KIP IS NOT CONFINED TO A SITUATION WHERE THERE IS A CONTRACT OF EMPLOYMENT, PREMIUM OF KIP OF PARTNERS OF THE FIRM IS WHOLLY AN D EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND IS ALLOWABLE AS BUSINESS EXPENDITURE. THE SAME VIEW IS TAKEN BY THE ITAT AHMEDABAD BENCH IN THE CASE OF M/S. GEM AR T (SUPRA) IN WHICH DEPARTMENTAL APPEAL HAS BEEN DISMISSED ON THE IDENT ICAL ISSUES. THE VIEW OF THE AO THAT IT IS CAPITAL EXPENDITURE IS NEGATED BY THE LEARNED CIT(A) AND THERE IS NO CHALLENGED TO THE FINDING OF THE LEARNED CIT(A) IN THIS REGARD. SINCE THE AMOUNT IS LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THAT ACCORDING TO SECTION 28(VI) OF THE IT ACT WITH EFFECT FROM 01-10 -1996 THE SUM RECEIVED UNDER KIP IS TAXABLE INCOME, THEREFORE, THE AUTHORITIES B ELOW SHOULD HAVE HELD THAT THE AMOUNT INCURRED BY THE ASSESSEE FOR OBTAINING KIP W AS A REVENUE EXPENDITURE EXCEPT IN THE CASE OF SLEEPING PARTNER WHO HAS NOT BEEN TAKING ANY ACTIVE PART IN THE BUSINESS OF THE ASSESSEE AND HAD NOT BEEN CONNE CTED WITH DAY TO DAY BUSINESS ACTIVITY OF THE ASSESSEE. 9. CONSIDERING THE ABOVE DISCUSSIONS, WE ARE OF THE VIEW THAT KIP OBTAINED BY THE ASSESSEE FIRM IN THE NAMES OF THE PARTNERS MR. ASHI SHBHAI M. AMIN ON PAYMENT OF RS.10,00,000/- IS ALLOWABLE AS REVENUE EXPENDITU RE. WE ACCORDINGLY, SET SIDE THE ORDERS OF THE AUTHORITIES BELOW AND DELETE THE ADDITION OF RS.10,00,000/-. THE ADDITION OF RS.1,00,000/- IS HOWEVER, CONFIRMED IN RESPECT OF THE SLEEPING PARTNER. IN THE RESULT, GROUND NO.1 OF THE APPEAL OF THE ASS ESSEE IS PARTLY ALLOWED. 5.3 IN THE LIGHT OF CONSISTENT VIEW TAKEN IN T HE AFORESAID DECISIONS , ESPECIALLY WHEN THE LD. DR DID NOT PO INT OUT THAT ANY OF THE PARTNER WAS A SLEEPING PARTNER, WE ARE OF THE O PINION THAT THE PREMIUM PAID UNDER THE KEYMAN INSURANCE POLICY ON THE LIF E OF PARTNERS CAN NOT BE DISALLOWED. WE, THEREFORE, SET SIDE THE ORDERS OF THE AUTHORITIES BELOW AND DELETE THE ADDITION OF RS.11,57,893/-. ACCORDINGLY, GROUND NO.1 IS ALLOWED. 6. AS REGARDS ISSUE RAISED IN GROUND NO.2 NO SUB MISSIONS HAVING BEEN MADE BEFORE US BY THE LD. AR ON BEHALF OF THE ASSESSEE NOR RELEVANT FACTS ARE EVIDENT FROM THE IMPUGNED ORDERS. ACCORDINGLY, GROUND NO.2 DOES NOT SURVIVE FOR OUR ADJUDICATION AND IS DISMISSED. 7. NO ADDITIONAL GROUND HAVING BEEN RAISED BEFORE US IN TERMS OF RESIDUARY GROUND NO.3 IN THE APPEAL, ACCORDINGLY, T HIS GROUND IS ALSO DISMISSED. 8. NO OTHER PLEA OR ARGUMENT WAS RAISED BEFORE US. ITA NO.3921/AHD/2008 9 9. IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT TODAY ON 15-03-2011 SD/- SD/- (D.K.TYAGI) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATED : 15-03-2011 COPY OF THE ORDER FORWARDED TO: 1. M/S GANGA AUTOMOBILES, 21 ST CENTURY BUSINESS CENTRE,HOUSE-A,NEAR UDHANA DARWAJA,RING ROAD,SURAT 2. THE ACIT, CIRCLE-2,, AAYAKAR BHAVAN, MAJURA GATE , SURAT 3. CIT CONCERNED 4. CIT(A)-II, SURAT 5. THE DR, BENCH-D, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD