ADDL CIT 25(1), MUMBAI V. BAADER SCHULZ LABORATORIES, MUMBAI

ITA 6224/MUM/2011

• Counselvise Citation: 622419914 RSA 2011
• Duration Of Justice: 3 year(s) 9 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-06-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 22-06-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 08-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PRADEEP D SHAH
• Keywords: Business expenditure; Revenue expenditure
• Section: 37

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI RAJENDRA, ACCOUNTANT MEMBER ITA NO.6224/MUM/2011 ASSESSMENT YEAR: 2008-09 ASST. COMMISSION OF INCOME TAX-25(1), C-11, R.NO.202, PRATYAKSHAKAR BHAVAN, BANDRA KURLA COMPLEX, BANDRA(EAST), MUMBAI-400051 / VS. M/S BAADER SCHULZ LABORATORIES SHANTIVILLA, SHANTIVAN CO-OP. HSG. SOC. NEAR CLUB AQUARIA, DEVIDAS LANE, BORIVALI, MUMBAI-400103 ( / REVENUE) ( !' # /ASSESSEE) P.A. NO. AACFB8402B / REVENUE BY DR. YOGESH KAMAT-DR !' # / ASSESSEE BY SHRI PRADEEP D. SHAH $ % & # ' / DATE OF HEARING : 22/06/2015 & # ' / DATE OF ORDER: 01/07/2015 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE REVENUE IS AGGRIEVED BY THE IMPUGNED ORDER DAT ED 20/06/2011 OF THE LD. FIRST APPELLATE AUTHORITY, MU MBAI, ON THE GROUND, DELETING THE ADDITION OF RS.31,25,00 0/- M/S BAADER SCHULZ LABORATORIES SHANTIVILLA ITA NO.6224/MUM/2011 2 MADE ON ACCOUNT OF PAYMENT TOWARDS KEYMAN INSURANCE PREMIUM, TAKEN ON THE LIFE OF THE PARTNERS. 2. DURING HEARING OF THE APPEAL, DR. YOGESH KAMAT, LD. DR, CONTENDED THAT THE PARTNERS, IN RESPECT OF WHOM, THE INSURANCE PREMIUM WAS PAID, WERE NEITHER MANAGI NG PARTNERS NOR WORKING PARTNERS AS THEY DID NOT RECEI VE ANY PREMIUM FROM THE ASSESSEE FIRM, IGNORING THE FACT T HAT THE BENEFIT WOULD NOT ACCRUE TO THE ASSESSEE FIRM. ON T HE OTHER HAND, SHRI PRADEEP D. SHAH, LD. COUNSEL FOR THE ASS ESSEE, DEFENDED THE CONCLUSION ARRIVED AT IN THE IMPUGNED ORDER. 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS , IN BRIEF, ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF MANUFACTURING OF POULTRY AND CATTLE FEEDS, FILED ITS RETURN DATED 30/09/2008. THE ASSESSEE COM PANY TOOK INSURANCE POLICY ON THE LIFE OF THE PARTNERS A ND CLAIMED DEDUCTION ON THE PREMIUM PAID FOR SUCH POLI CY. IT WAS CLAIMED BEFORE THE ASSESSING OFFICER THAT THE P REMIUM PAID TOWARDS KEYMAN INSURANCE POLICY IS DEDUCTIBLE BY PLACING RELIANCE UPON CIRCULAR NO. 762 DATED 18/02/ 1998. THE LD. ASSESSING OFFICER DENIED THE CLAIM AGAINST WHICH THE ASSESSEE WENT IN APPEAL BEFORE THE LD. COMMISSI ONER OF INCOME TAX (APPEALS). THE LD. COMMISSIONER OF INCO ME TAX (APPEALS) EXAMINED THE CLAIM AND FOUND THAT THE AMO UNT OF RS.31,25,000/- WAS PAID IN RESPECT OF ICICI PRUDENT IAL KEYMAN INSURANCE POLICIES (POLICY NO.01615183, 0161 5296 AND 01051293). THE LD. COMMISSIONER OF INCOME TAX M/S BAADER SCHULZ LABORATORIES SHANTIVILLA ITA NO.6224/MUM/2011 3 (APPEALS) DECIDED IN FAVOUR OF THE ASSESSEE AGAINST WHICH THE REVENUE IS IN APPEAL BEFORE THIS TRIBUNAL. WE FIND THAT THE PERSONS FOR WHOM THE KEYMAN INSURANCE POLICY WA S TAKEN AND CONSEQUENT PREMIUM WAS PAID ARE CLOSELY CONNECTED WITH THE BUSINESS OF THE ASSESSEE FIRM. K EYMAN INSURANCE POLICY MEANS A LIFE INSURANCE POLICY TAKE N BY A PERSON FOR THE LIFE OF ANOTHER PERSON WHO IS OR WAS THE EMPLOY OF THE FIRST MENTIONED PERSON OR IS WAS CONN ECTED IN ANY MANNER WHATSOEVER WITH THE BUSINESS OF THE FIRS T MENTION PERSONS, WHO IS PAYING FOR SUCH PERSON, WHO IS CLOSELY CONNECTED WITH THE BUSINESS OF THE PAYER. THE RATIO LAID DOWN IN CIT VS B.N. EXPORTS (190 TAXMAN 325), THE HONBLE JURISDICTIONAL HIGH COURT HELD THAT THE KEY MAN INSURANCE PREMIUM PAID ONLY POLICIES OF THE LIVES O F THE PARTNERS IS AN ALLOWABLE DEDUCTION. IN THE PRESENT APPEAL, THE LD. ASSESSING OFFICER DID NOT ALLOW THE KEYMAN INSURANCE PREMIUM BROADLY ON TWO COUNTS (A) THE PAR TNERS IN RESPECT OF WHOM INSURANCE PREMIUM WAS PAID WERE NEITHER MANAGING PARTNERS NOR WORKING PARTNERS AS T HEY DID NOT RECEIVE ANY REMUNERATION FROM THE FIRM AND (B) THE POLICIES WERE ASSIGNED TO THE PARTNERS AND THE BENE FIT WOULD NOT ACCRUE TO THE ASSESSEE FIRM. HOWEVER, IF IT IS ANALYZE, THE KEYMAN INSURANCE PREMIUM PAID IN RESPE CT OF ANY PERSON, WHO IS CONNECTED WITH THE BUSINESS OF T HE ASSESSEE WOULD BE TREATED AS KEYMAN. THERE IS NO REQUIREMENT, THAT SUCH PERSON SHOULD BE A WORKING P ARTNER OR MANAGING PARTNER. THE HONBLE DELHI HIGH COURT IN CIT VS RAJAN NANDA (2012) 349 ITR 8 (DEL.) HELD THAT PR EMIUM M/S BAADER SCHULZ LABORATORIES SHANTIVILLA ITA NO.6224/MUM/2011 4 ON KEYMAN INSURANCE IS A DEDUCTIBLE BUSINESS EXPEND ITURE U/S 37 OF THE ACT. THE RELEVANT PORTION OF THE ORD ER IS REPRODUCED HEREUNDER FOR READY REFERENCE:- THE ASSESSEE TOOK KEYMAN INSURANCE POLICIES ON THE LIVES OF TWO EMPLOYEES/DIRECTORS IN DIFFERENT YEARS. AFTER PAYIN G PREMIA FOR A CERTAIN PERIOD, THEY WERE ASSIGNED TO THE TWO EMPLOYEES/DIRECTORS RECEIVING THE SURRENDER VALUE F ROM THEM. FOR THE REMAINING PERIOD OF THE POLICIES, THE INSUR ANCE PREMIA WERE PAID BY THE ASSIGNEES. THE ASSESSING OFFICER H ELD THAT SINCE THE EXPENDITURE INCURRED ON THE PREMIA PAID ON THE KEYMAN INSURANCE POLICIES WAS MUCH MORE THAN THE SURRENDER VALUE REALIZED BY THE ASSESSEE ON THE ASSIGNMENT OF THESE POLICIES TO THE EMPLOYEES/DIRECTORS, THE AMOUNT PAID BY THE ASS ESSEE AS PREMIA ON THE POLICIES COULD NOT BE TREATED AS EXPE NDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PU RPOSE OF THE ASSESSEE. THEREFORE, HE DISALLOWED THE PREMIA PAID IN DIFFERENT YEARS WHICH WAS CLAIMED AS BUSINESS EXPENDITURE. TH E COMMISSIONER (APPEALS) AND THE TRIBUNAL, HOWEVER, H ELD THAT THE AMOUNT WAS DEDUCTIBLE. IN SO FAR AS THE EMPLOYEES/DIRECTORS WERE CONCERNED , THE QUESTION WAS WHETHER THE DIFFERENCE BETWEEN THE ACT UAL PREMIUM PAID AND THE SURRENDER VALUE GIVEN BY THEM WAS TO BE TREATED AS SALARY IN THEIR HANDS AND WAS TO BE TA XED ACCORDINGLY AND WHETHER THE MATURITY VALUE RECEIVED BY THEM ON THE POLICY WAS TO BE TAXED OR NOT. THE ASSESSING OFFICER HELD THAT THE DIRECTORS HAD TAKEN A SUBSTANTIAL BENEFIT BY PAYING ONLY THE SURRENDER VALUE AS AGAINST THE MUCH HIGHER AMOU NT OF PREMIA PAID BY THE ASSESSEE. THE DIFFERENCE BETWEEN THE PREMIA PAID BY THE ASSESSEE AND THE SURRENDER VALUE PAID B Y THEM WAS TREATED AS BENEFIT TO BE TAXED IN THEIR HANDS. THE TRIBUNAL HELD THAT MERELY BY ASSIGNMENT IN A PARTICULAR YEAR WHEN THE POLICY WAS STILL CONTINUING, NO TAXABLE EVENT HAD TAKEN PL ACE AND, THEREFORE, NO TAX COULD BE CHARGED. IT HAD ALSO HEL D THAT THE AMOUNT IN QUESTION COULD NOT BE TAXED AS PERQUISITE SO AS TO FALL WITHIN THE SCOPE OF SECTION 17(3) . THE TRIBUNAL TO OK NOTE OF THE CERTIFICATE OBTAINED BY THE ASSESSEE FROM THE LIC W HEREBY IT HAD CERTIFIED THAT A KEYMAN INSURANCE POLICY AFTER ASSI GNMENT M/S BAADER SCHULZ LABORATORIES SHANTIVILLA ITA NO.6224/MUM/2011 5 ASSUMED THE STATUS OF AN ORDINARY INSURANCE POLICY. THE TRIBUNAL WHILE GIVING REQUISITE RELIEF BROUGHT TO T AX THE AMOUNT OF THE SURRENDER VALUE AT THE TIME OF ASSIGNMENT SU BJECT TO VERIFICATION BY THE ASSESSING OFFICER. ON APPEAL TO THE HIGH COURT : HELD, DISMISSING THE APPEALS, (I) THAT THE DEPARTME NT HAD ITSELF ALLOWED THE EXPENDITURE INCURRED ON THE PREMIUM PAI D FOR THE KEYMAN INSURANCE POLICIES IN PREVIOUS YEARS AS BUSI NESS EXPENDITURE UNDER SECTION 37 OF THE ACT. RIGHT FROM 1991-92 TO 1993-94 AND THEREAFTER EVEN IN RESPECT OF THE ASSES SMENT YEAR 1997-98, THE EXPENDITURE WAS ALLOWED. THEREAFTER, T HE EXPENDITURE WAS DISALLOWED, BUT AGAIN THE CLAIM WAS ACCEPTED FOR THE ASSESSMENT YEARS 2001-02 AND 2002-03. THE P RINCIPLE OF CONSISTENCY WOULD, THEREFORE, BE APPLICABLE IN SUCH A CASE. THE OBJECT OF A KEYMAN INSURANCE POLICY IS TO ENABLE BU SINESS ORGANIZATIONS TO INSURE THE LIFE OF A KEY MAN IN OR DER TO PROTECT THE BUSINESS AGAINST THE FINANCIAL LOSS WHICH MAY O CCUR IN THE LIKELY EVENTUALITY OF HIS PREMATURE DEATH. SUCH AN EXPENDITURE IS TREATED AS BUSINESS EXPENDITURE BY THE DEPARTMENT A ND RECOGNISED AS SUCH IN CIRCULAR DATED FEBRUARY 18, 1 998. THE CIRCULAR IS BINDING ON THE INCOME-TAX DEPARTMENT, W HICH CATEGORICALLY STIPULATES THAT PREMIUM ON KEYMAN POL ICY SHOULD BE ALLOWED AS BUSINESS EXPENSES. MERELY BECAUSE THE POLICY WAS ASSIGNED AFTER SOME TIME THAT WOULD NOT MEAN THAT T HE EXPENDITURE INCURRED IN THE FIRST INSTANCE WOULD LO SE THE FLAVOUR OF BUSINESS EXPENDITURE. THE PREMIA WERE DEDUCTIB LE AS BUSINESS EXPENDITURE. (II) THAT THE EXPLANATION TO SECTION10(10D)GIVES TH E MEANING TO KEYMAN INSURANCE POLICY AND ONLY THAT SUM RECEIVE D UNDER THIS POLICY WOULD BE TREATED AS INCOME. SUB-CLAUSE( II)OF CLAUSE(3)OF SECTION17TAXES ANY SUM RECEIVED IN A K EYMAN INSURANCE POLICY. THE WORD RECEIVED ASSUMES SIGN IFICANCE. THE LEGISLATURE IN ITS WISDOM THOUGHT TO TAX ONLY T HAT PAYMENT, WHICH IS RECEIVED BY THE EMPLOYEE-ASSESSEE UNDER TH E KEYMAN INSURANCE POLICY. THE PURPORT OF SUB-CLAUSE(II)IS A LTOGETHER DIFFERENT. SUCH AN AMOUNT DUE OR RECEIVED BY THE AS SESSEE HAS TO BE : (A) BEFORE JOINING ANY EMPLOYMENT ; OR (B) AFT ER CESSATION OF ITS EMPLOYMENT. NO SUCH CONTINGENCY OCCURRED WHEN T HE KEYMAN INSURANCE POLICY WAS ASSIGNED BY THE COMPANY IN FAVOUR M/S BAADER SCHULZ LABORATORIES SHANTIVILLA ITA NO.6224/MUM/2011 6 OF THE DIRECTOR-ASSESSEE. THE TAX EVENT DID NOT OCC UR, AS NO SUCH AMOUNT WAS RECEIVED AT THE TIME OF ASSIGNMENT OF TH E POLICY BY THE COMPANY AS EMPLOYER TO THE DIRECTOR-ASSESSEE, A S EMPLOYEE. THE AMOUNTS WERE NOT TAXABLE IN THE HANDS OF THE DI RECTORS. (III) THAT THERE IS NO PROHIBITION ON THE ASSIGNMEN T OR CONVERSION OF KEYMAN INSURANCE UNDER THE ACT. ONCE THERE IS AN ASSIGNMENT, IT LEADS TO CONVERSION AND THE CHARACTE R OF THE POLICY CHANGES. THE INSURANCE COMPANY HAD ITSELF CL ARIFIED THAT ON ASSIGNMENT, IT DOES NOT REMAIN A KEYMAN POLICY A ND GETS CONVERTED INTO AN ORDINARY POLICY. HENCE, THE POLIC Y IN QUESTION WAS NOT A KEYMAN INSURANCE POLICY AND WHEN IT MATUR ED, THE ADVANTAGE DRAWN THEREFROM WAS NOT TAXABLE. IN ANOTHER CASE OF CIT VS GEM ART (2012) 208 TAXMAN 47 (GUJ.), WHEREIN, PREMIUM WAS PAID BY THE FIRM FO R PARTNERS UNDER KEYMAN INSURANCE POLICY, THE HONBLE HIGH COURT TREATED IT AS REVENUE EXPENDITURE. RESPECTFUL LY FOLLOWING THE AFORESAID DECISIONS FROM HONBLE DELH I AND GUJARAT HIGH COURTS, WE AFFIRM THE STAND OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS), THUS, APPEAL OF THE REVENUE IS DISMISSED. FINALLY, THE APPEAL OF THE REVENUE IS DISMISSED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF LD. REPRESENTATIVES FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 22/06/2015. SD/ - (RAJENDRA) SD/ - (JOGINDER SINGH) ' # / ACCOUNTANT MEMBER $ # / JUDICIAL MEMBER MUMBAI; ( DATED : 01/07/2015 F{X~{T? P.S/. .. M/S BAADER SCHULZ LABORATORIES SHANTIVILLA ITA NO.6224/MUM/2011 7 !%$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. *+,- / THE APPELLANT 2. ./,- / THE RESPONDENT. 3. 0 0 1# ( *+ ) / THE CIT, MUMBAI. P4. 0 0 1# / CIT(A)- , MUMBAI 5. 34.# , 0 *+'* 5 , / DR, ITAT, MUMBAI 6. 6!7 / GUARD FILE. ! / BY ORDER, /3+#.# //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI