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

ITA 862/CHANDI/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8510 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-02-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Next Hearing Date: 28-01-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 30-11-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Question of law
• Section: 143(3); 10(10D); 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI H.L.KARWA, VICE PRESIDENT AND MS. RANO JAIN, ACCOUNTANT MEMBER ITA NO.862 /CHD/2015 (ASSESSMENT YEAR : 2005-06) M/S PARAMOUNT IMPEX, VS. THE A.C.I.T. , D 202-203, PHASE VII, CIRCLE-1, FOCAL POINT, LUDHIANA. LUDHIANA. PAN: AAEFP3160G (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUDHIR SEHGAL RESPONDENT BY : SHRI JITENDER KUMAR DATE OF HEARING : 28.01.2016 DATE OF PRONOUNCEMENT : 02.02.2016 O R D E R PER RANO JAIN, A.M . : THE APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LEARNED COMMISSIONER OF INCO ME TAX (APPEALS)-1, LUDHIANA DATED 24.9.2015 FOR ASSESSMEN T YEAR 2005-06. . THE APPEAL BEFORE THE CIT (APPEAL S) WAS AGAINST THE ORDER OF THE ASSESSING OFFICER MADE UND ER SECTION 143(3) R.W.S. 147 OF THE INCOME TAX ACT, 19 61 (IN SHORT THE ACT). 2. THE ONLY ISSUE IS WITH REGARD TO DISALLOWANCE O F AN AMOUNT OF RS.11,80,685/- CLAIMED BY THE ASSESSEE ON 2 ACCOUNT OF KEYMAN INSURANCE ON THE LIFE OF SHRI RAK ESH KAPOOR, ONE OF THE PARTNERS OF THE ASSESSEE FIRM. FOR MAKING THE DISALLOWANCE, THE CONTENTIONS OF THE ASS ESSING OFFICER WERE TWO FOLD. THE FIRST REASON FOR DISALL OWANCE WAS THAT THERE IS NO EVIDENCE TO SHOW THAT THE POLI CY IS A KEYMAN INSURANCE AND THE SECOND WAS THAT THE PARTNE RS ARE NOT INDEPENDENT AND DISTINCT FROM THE FIRM AND THEY CANNOT BE TERMED AS ANOTHER PERSONS WITHIN SECTION 10(10D) OF THE ACT. 3. BEFORE THE LEARNED CIT (APPEALS), BESIDES MAKIN G ELABORATE SUBMISSIONS AS TO HOW THE FIRM AND PARTNE RS ARE TWO DISTINCT ENTITIES IT WAS ALSO SUBMITTED THAT TH E I.T.A.T., CHANDIGARH BENCH IN ASSESSEES OWN CASE F OR ASSESSMENT YEAR 2008-09, IN ITA NO.371/CHD/2012 DAT ED 5.6.2012, HAD DECIDED HE ISSUE IN FAVOUR OF THE ASS ESSEE. THE LEARNED CIT (APPEALS), DISMISSED THE APPEAL OF THE ASSESSEE STATING THAT THE I.T.A.T. HAD DECIDED THE APPEAL IN FAVOUR OF THE ASSESSEE ONLY ON THE ISSUE THAT TH E FIRM AND PARTNERS ARE TWO DISTINCT ENTITIES FOR THE PURP OSES OF SECTION 10(10D) OF THE ACT, WHILE THE ISSUE WHETHER THE POLICY IS KEYMAN INSURANCE POLICY OR NOT WAS NOT DE CIDED BY THE I.T.A.T. 4. AGGRIEVED, THE ASSESSEE HAS COME IN APPEAL BEFORE US, RAISING THE FOLLOWING GROUNDS OF APPEAL : 1. THAT THE WORTHY COMMISSIONER OF INCOME TAX (APP EALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFF ICER IN REOPENING THE CASE BY ISSUING NOTICE U/S 148 OF THE INCOME TAX ACT, 1961. 3 2. WITHOUT PREJUDICE TO THE ABOVE GROUND NO.1, THE WORTHY CIT (A) HAS ERRED IN UPHOLDING THAT THE POLICY TAKE N BY THE ASSESSEE FIRM IS NOT A KEYMAN INSURANCE POLICY AND IS A PERSONAL LIFE INSURANCE POLICY. 3. THAT THE WORTHY CIT (A) HAS ERRED IN UPHOLDING T HE ADDITION OF RS. 11,80,685/- MADE BY THE ASSESSING OFFICER IN RESPECT OF KEYMAN INSURANCE POLICY PREMI UM ON THE LIFE OF THE PARTNER, SH. RAKESH KAPOOR AS CL AIMED IN THE PROFIT AND LOSS ACCOUNT. 4. THAT THE ADDITION AS ABOVE HAS BEEN UPHELD BY TH E WORTHY CIT (A) AGAINST THE FACTS AND CIRCUMSTANCES OF THE CASE AND DETAILED SUBMISSIONS FILED BEFORE HER DURI NG THE COURSE OF HEARING HAS NOT BEEN CONSIDERED PROPERLY. 5. THAT THE APPELLANT CRAVES LEAVE TO ADD OR AMEND ANY GROUNDS OF APPEAL BEFORE THE APPEAL IS FINALLY HEAR D OR DISPOSED OFF. 5. THE LEARNED COUNSEL FOR THE ASSESSEE BESIDES RELYING ON THE ORDER OF THE I.T.A.T. IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09, ALSO SHOWED US A COPY OF THE POLICY DOCUMENT, WHEREBY IT WAS CERTIFIED BY THE INSURANCE OFFICE THAT THE POLICY IS IN RELATION TO A KEYMAN. 6. THE LEARNED D.R. RELIED ON THE ORDER OF THE LEARNED CIT (APPEALS). 7. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHO RITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECO RD. ON THE ISSUE WHETHER THE POLICY IS IN FACT A KEYMAN INSURANCE POLICY, FROM THE POLICY DOCUMENT, NO DOUB T REMAIN THAT THIS IS A KEYMAN INSURANCE POLICY. FUR THER, THE PERUSAL OF THE ORDER OF THE I.T.A.T., CHANDIGAR H BENCH IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09, WE 4 SEE THAT THE ISSUE HAS BEEN DEALT AT PAGE 3, PARAS 6 AND 7 AS UNDER : 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 O F EXPENDITURE OF KEYMAN INSURANCE PREMIUM PAID BY THE ASSESSEE FIRM ON THE LIVES OF ITS PARTNERS. THE AS SESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE IN VIE W OF THE PROVISIONS OF SECTION 10(10D) OF THE ACT AND TH E RATIO LAID DOWN BY THE APEX COURT IN MALABAR FISHER IES COMPANY (SUPRA). THE CIT (APPEALS) ALLOWED THE CLA IM OF THE ASSESSEE IN VIEW OF THE RATIO LAID DOWN BY T HE HON'BLE BOMBAY HIGH COURT IN CIT VS. B.N. EXPORTS [323 ITR 178 (BOM)] OBSERVING 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 COURT IN THE CASE OF MALABAR FISHERIES COMPANY VS. CIT 120 ITR 4 9. THE AR ON THE OTHER HAND HAS ARGUED THAT PARTNERSHIP FROM AND THE PARTNERS ARE TWO SEPARATE LEGAL PERSONS UNDER THE I.T.ACT 19 61 AND SEPARATE ASSESSMENT OF INCOME IS DONE IN THE CASE O F BOTH THE PERSONS. IT WAS FURTHER SUBMITTED IT IS ONLY UNDER THE GENERAL LAW THAT PARTNERSHIP FIRM AND THE PARTNERS ARE CONSIDER ED AS SAME AND THEREFORE THE SPECIFIC LEGAL IDENTITY OF THE PARTNE RSHIP 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 TRIBUNAL IN THE CASE OF ITO MODI MOTORS 27 S OT 476 WHEREIN IT HAS BEEN HELD THAT PARTNERS ARE MIND, HE ART AND BODY OF FIRM DUE TO WHICH THE FIRM IS ABLE TO CONDUCT ITS B USINESS AND THEREFORE THE KEYMAN INSURANCE POLICY ON THE LIFE O F PARTNERS WAS ALLOWABLE EXPENDITURE. THE AR ALSO PLACED RELIANCE ON THE JUDGEMENT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. B.N. EXPORTS 232 ITR 178 WHEREIN THE HON'BLE HIGH COURT HAS DISA GREED WITH 5 THE STAND OF THE REVENUE THAT THE PARTNERSHIP FIRM AND THE PARTNERS CAN NOT BE CONSIDERED AS SEPARATE ENTITIES. THE AO' S RELIANCE UPON THE DECISION OF HON'BLE APEX COURT IN THE CASE OF M ALABAR FISHERIES (SUPRA) IS MISPLACED AS THE JUDGEMENT OF HON'BLE CO URT IS ON THE ISSUE OF ALLOWANCE DEVELOPMENT REBATE AND THE OBSERVATION S THAT PARTNERSHIP FIRM AND ITS PARTNER ARE THE SAME IS IN CONTEXT OF THE DISTRIBUTION OF ASSETS OF THE FIRM. THE OBSERVA TIONS OF THE HON'BLE COURT GIVEN IN AN ENTIRELY DIFFERENT CONTEXT CAN NO T BE APPLIED TO THE FACTS OF THE CASE UNDER CONSIDERATION AS THE ISSUE IS TOTALLY DIFFERENT IN THE SENSE THAT THE SURVIVAL OF PARTNER S IS CRITICAL TO THE EFFICIENT WORKING OF THE FIRM AND IN THE CASE OF SU DDEN 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 PARTNER UNDER THE I.T.ACT 1961. THE OBSERVATIONS OF HON'BLE BOMBA Y HIGH 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 PER SON 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 WI TH THE BUSINESS OF THE SUBSCRIBER. THE WORD 'IS OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINESS' OF THE SUBSCRIBER ARE WIDER THAN WHAT WOULD BE SUBSUMED UNDER A CONTRACT OF EMPLOYMENT. T HE LATTER PART MAKES IT CLEAR THAT A KEYMAN INSURANCE POLICY FOR T HE PURPOSES OF CL. (10D) IS NOT CONFINED TO A SITUATION WHERE THER E IS A CONTRACT OF EMPLOYMENT. CIRCULAR NO. 762, DT. 18 TH FEB., 1998 ISSUED BY THE CBDT CLARIFIES THE POSITION BY STIPULATING THAT THE PREM IUM PAID FOR A KEYMAN INSURANCE POLICY IS ALLOWABLE AS BUSINESS EX PENDITURE. THERE IS A FINDING OF FACT BY THE TRIBUNAL THAT THE FIRM HAD NOT TAKE INSURANCE FOR THE PERSONAL BENEFIT OF THE PARTNER, BUT FOR THE BENEFIT OF THE FIRM, IN ORDER TO PROTECT ITSELF AGA INST 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 6 FINANCIAL SET BACK WHICH MAY OCCUR, AS A RESULT OF A PREMATURE DEATH, TO THE BUSINESS OR PROFESSIONAL ORGANIZATION. THERE IS NO RATIONAL BASIS TO CONFINE THE ALLOWABILITY OF THE EXPENDITUR E INCURRED ON THE PREMIUM PAID TOWARDS SUCH A POLICY ONLY TO A SITUAT ION WHERE THE POLICY IS IN RESPECT OF THE LIFE OF AN EMPLOYEE. A KEYMAN INSURANCE POLICY IS OBTAINED ON THE LIFE OF A PARTN ER TO SAFEGUARD THE FIRM AGAINST A DISRUPTION OF THE BUSINESS THAT MAY RESULT DUE TO THE PREMATURE DEATH OF A PARTNER. THEREFORE, THE EX PENDITURE WHICH IS LAID OUT FOR THE PAYMENT OF PREMIUM ON SUCH A P OLICY IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS . HENCE, THE APPEAL BY THE REVENUE DOES NOT RAISE ANY SUBSTANTIA L 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 BOMBAY HIGH COURT IN CIT VS. B.N. EXPORTS (SUPRA) WE ARE IN AGREEMENT WITH THE ORDER OF CIT (APPEALS) IN ALLOWING THE CLAIM OF EXPENDITURE OF KEYMAN INSURAN CE PREMIUM PAID BY THE ASSESSEE FIRM ON THE LIVES OF I TS PARTNERS. GROUND NOS.1 AND 2 RAISED BY THE REVENUE ARE THUS DISMISSED. 8. RESPECTFULLY FOLLOWING THE ORDER OF THE I.T.A.T ., WE HEREBY DIRECT THE ASSESSING OFFICER TO DELETE TH E ADDITION MADE BY HIM. 9. IN IT IS GROUNDS OF APPEAL, THE ASSESSEE HAS AL SO CHALLENGED THE VALIDITY OF REOPENING BY ISSUING NOT ICE UNDER SECTION 148 OF THE ACT. SINCE WE HAVE ALLOWE D RELIEF TO THE ASSESSEE WHILE ADJUDICATING OTHER GROUNDS OF APPEAL, THIS GROUND BECOMES ACADEMIC AND WE DO NOT FIND 7 ANY NEED TO ADJUDICATE THE SAME. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 2 ND DAY OF FEBRUARY, 2016. SD/- SD/- (H.L. KARWA) (RANO JAIN) VICE PRESIDENT ACCOUNTANT MEMBER DATED : 2 ND FEBRUARY, 2016 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/THE CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH