MAHENDRA PATEL BUILDERS PVT. LTD.,VADODARA V. THE DY.CIT, CENTRAL CIRCLE-2, VADODARA

ITSSA 61/AHD/2025

AI Insights

The case involves Mahendra Patel Builders P Ltd, which faced assessments under sections 153A and 143(3) of the Income-tax Act for the assessment years 2015-16 to 2020-21 following a search and seizure operation. The Assessing Officer added amounts to the income of the assessee as unexplained cash receipts and disallowed certain expenditures including life insurance premiums and delayed provident fund contributions. The CIT(A) upheld these additions and disallowances, leading to the appeals before the Income Tax Appellate Tribunal. The Tribunal examined issues such as the validity of the assessment orders without digital signatures, the nature of the insurance policies as Keyman Insurance, and the treatment of delayed EPF contributions.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 714288 (ITAT-AHMEDABAD)
• Appeal Type: Income Tax (Search & Seizure) Appeal
• Pronouncement Date: 07-08-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Assessment Year: 2015-2016
• Other Referred Cases: CIT v. Gujarat State Road Transport Corporation (GSRTC), CIT Vs. Gem Art
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Department Lawyers: RIGNESH DAS
• Assessee Lawyers: JIGAR ADHYARU
• Keywords: Revenue expenditure; Business expenditure; Document seized; Documents seized; Commercial expediency; Capital expenditure; Search and seizure; Validity of assessment
• Section: 143(3); 132; 153A; 139; 37(1); 10(10D)

Judgement Text

"आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण,अहमदाबाद \bयायपीठ अहमदाबाद \bयायपीठ अहमदाबाद \bयायपीठ अहमदाबाद \bयायपीठ ‘C’ अहमदाबाद। अहमदाबाद। अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, AHMEDABAD ]BEFORE S/SHRI SANJAY GARG, JUDICIAL MEMBER AND MAKARAND V.MAHADEOKAR, ACCOUNTANT MEMBER IT(SS)A No.61 to 65/Ahd/2025 Asstt.Year : 2015-16 to 2019-20 AND ITA No.1217/Ahd/2025 Asstt.Year : 2020-21 Mahendra Patel Builders P Ltd 1, Krishnadham Apartment Gotri Road Opp: Matru Mandir Society Vadodara 390 021. PAN : AABCM 8532 D Vs. The DCIT, Cent.Cir.2 Vadodara. (Applicant) (Responent) Assessee by : Shri Jigar Adhyaru, AR Revenue by : Shri Rignesh Das, CIT-DR सुनवाई क तारीख/Date of Hearing : 05/08/2025 घोषणा क तारीख /Date of Pronouncement: 07/08/2025 आदेश आदेश आदेश आदेश/O R D E R PER MAKARAND V.MAHADEOKAR, AM: These six appeals filed by the assessee for the Assessment Years 2015–16 to 2020–21 are directed against the respective appellate orders passed by the Learned Commissioner of Income Tax (Appeals)–12, Ahmedabad [hereinafter referred to as “Ld. CIT(A)”], all dated 18.03.2025, arising from assessment orders passed by the Assessing Officer (ACIT, Central Circle–1(4), Ahmedabad) under section 153A r.w.s. 143(3) of the Income-tax Act, 1961 (“the Act”) for A.Ys. 2015–16 to 2019–20, and under section 143(3) for A.Y. 2020–21, all dated 30.09.2021. Since common issues are involved in all the captioned appeals, differing only in the quantum of additions made by the Assessing Officer, the same were heard together and Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 2 are being disposed of by way of this consolidated and common order for the sake of convenience and judicial consistency. 2. Facts of the Case 2.1 The assessee is a private limited company engaged in the business of real estate and construction. A search and seizure action under section 132 of the Act was carried out on 06.05.2019 in the case of the Mahendra Patel group, including the assessee. In consequence of such search, notices under section 153A were issued by the Assessing Officer on 20.11.2020 for A.Ys. 2014–15 to 2019–20. In compliance, the assessee filed returns of income under section 153A on 18.01.2021, in each year declaring income in accordance with the earlier filed returns under section 139(1). For A.Y. 2020–21, no notice under section 153A was issued; the assessment was completed under section 143(3), based on return filed on 31.10.2020 declaring total income of Rs.46,16,990/-. The Assessing Officer completed assessments for all six years under scrutiny on 30.09.2021. 2.2 Pursuant to the search, statements of Shri Vishnu P. Patel, an employee of the assessee group, were recorded on oath on 06.05.2019. In his statement, he admitted that the entries in the seized diaries were made at the instruction of the directors of the assessee company and that they represented cash components over and above the registered sale consideration, which was received by the assessee. He further confirmed that the cash was utilised for government liaisoning, miscellaneous project expenses, and personal usage of the management. The key person and director of the assessee company, late Shri Mahendra Patel, also accepted during his statement that the project-wise diary entries pertained to cash receipts not recorded in the books of account. On post-search verification and inquiry, the Assessing Officer identified and quantified the cash component involved in three specific transactions involving flats sold in the Gangotri Green and Gangotri Exotica projects. The assessee submitted supporting sale deeds and explained that any excess cash was towards Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 3 extra work carried out at the request of flat purchasers, including tiling, flooring, interior civil works, and other customer-specific customisations. Affidavits from the purchasers were also submitted to support the explanation. However, the Assessing Officer held that these affidavits were not notarised, lacked specific descriptions of the extra work done, and appeared to be an afterthought to justify unaccounted cash receipts. Accordingly, respective amounts were added to the income of the assessee under section 69A of the Act as unexplained cash receipts. The Assessing Officer held that the assessee failed to furnish contemporaneous documentary evidence to prove that the cash receipts were towards specific additional work and also failed to correlate any entries with the registered sale agreements. The explanation offered was rejected on the ground that there was no corroboration of the nature and source of the alleged on- money. 2.3 It was further noted that in each of the relevant years, the assessee had incurred certain expenses on life insurance policies taken in the names of the directors and their relatives, the premium for which was debited to the profit and loss account under the head “Miscellaneous Expenses”. The assessee explained that such policies were for the purposes of keyman risk protection and were integral to business operations. However, the AO observed that the policies in question were endowment plans, issued in the personal names of directors, and the beneficiaries were individuals rather than the company. The AO therefore held that the insurance premium was not allowable under section 37(1) of the Act and disallowed the same as personal expenditure. 2.4 Further, the AO also noted from the tax audit report and Form 3CD that in A.Ys. 2015–16 to 2017–18, there were delays in the deposit of employees’ contributions to the provident fund beyond the due date prescribed under the respective welfare statutes. Relying on the judgment of the Hon’ble Gujarat High Court in the case of CIT v. Gujarat State Road Transport Corporation (GSRTC) [(2014) 366 ITR 170 (Guj)], the AO Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 4 disallowed the employees' contribution under section 36(1)(va) r.w.s. 2(24)(x) in each relevant year, to the extent it was deposited after the due date under the EPF Act. 2.4 The summary of all the assessments is tabulate as below: Particulars A.Y.2015– 16 A.Y. 2016– 17 A.Y.2017– 18 A.Y. 2018– 19 A.Y.2019– 20 A.Y.2020–21 ROI filed u/s 139 (Date) 01.10.2015 16.10.2016 18.10.2017 28.09.2018 27.09.2019 31.10.2020 ROI filed u/s 153A (Date) 18.01.2021 18.01.2021 18.01.2021 18.01.2021 18.01.2021 Not applicable Declared Income (Rs.) 1,83,67,460 2,39,02,040 61,23,340 33,19,090 Nil (Loss + Dep. set- off) 46,16,990 Notice u/s 153A (Date) 20.11.2020 20.11.2020 20.11.2020 20.11.2020 20.11.2020 Not applicable Assessment Order passed u/s 153A 153A 153A 153A 153A 143(3) Assessment Order passed on 30.09.2021 30.09.2021 30.09.2021 30.09.2021 30.09.2021 30.09.2021 Additions: Disallowance u/s 37(1) (Rs.) 10,30,900 10,15,450 9,20,502 15,18,750 12,91,690 12,49,397 On Money u/s 69A (Rs.) 0 20,90,000 30,59,000 26,30,000 6,30,000 8,80,000 Delayed Payment of EPF (Rs.) 26,488 44,746 22,904 0 0 0 Assessed Income (Rs.) 1,94,24,850 2,70,52,210 1,01,25,750 7467840 630000 6746390 2.5 Aggrieved by the above orders, the assessee preferred appeals before the Ld. CIT(A), raising multiple grounds including a legal ground that the assessment orders were invalid and void ab initio for not being digitally signed by the Assessing Officer. It was contended that absence of authentication by way of Digital Signature Certificate (DSC) rendered the orders unenforceable in law, in violation of section 282A of the Act read with Rule 127A of the Income-tax Rules. The Ld. CIT(A), however, rejected the assessee’s legal ground. He held that even in the absence of DSC, the order was validly authenticated, as the name and designation of the Assessing Officer was printed on the face of the order, and the same was served via email from the designated ITBA portal and also uploaded on the assessee's Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 5 e-filing account. Referring to section 282A(2) and Rule 127A(1), the Ld. CIT(A) held that absence of a digital signature is a curable defect protected under section 292B of the Act and cannot render the assessment order invalid. 2.6 On the merits, the Ld. CIT(A) confirmed the disallowances made by the AO under section 37(1) for life insurance premium, holding that the assessee failed to prove the policies were in the nature of “keyman insurance”. He concurred with the AO’s findings that the policies were personal in nature, and the company was not a beneficiary under the terms of the policies. 2.7 The learned CIT(A) also upheld the additions in respective years made by the Assessing Officer under section 69A of the Act, holding that the seized documents in the form of hand-written diaries (Annexures AS-2 and AS-3), the sworn statement of the employee recorded during search, and the subsequent confirmation by the director, collectively established that the assessee had received unaccounted cash (commonly referred to as “on- money”) from certain flat purchasers in respect of specific units in the projects. 2.8 As regards the disallowance under section 36(1)(va), the Ld. CIT(A) upheld the AO’s action by placing reliance on binding judgment of the Hon’ble jurisdictional High Court in the case of GSRTC (supra), holding that any delay beyond the statutory due date under the relevant labour laws disentitles deduction. 3. Aggrieved by the orders of the CIT(A) the assessee is in appeal before us raising following common grounds of appeal: 1. On the facts and in the circumstances of the case and in law, the ld.CIT(A) has grossly erred in holding that manually signing or affixing DSC for passing the assessment order is not mandatory and the Ld. CIT(A)has also grossly erred in holding that an order will be considered authenticated if the name and office of the designated income-tax authority is printed, stamped or otherwise written. Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 6 2. On the facts and in the circumstances of the case and in law, the Id. CIT(A) has grossly erred in holding that lack of affixing DSC or signing of order is merely a defect that would fall u/s 292B of the Act. 3. The Ld. CIT(A) on the facts and in the circumstances of the case and in law has grossly failed to consider the fact that the assessment order u/s.153A of the Act dated 30.09.2021 in the case of appellant for the year under consideration is illegal, invalid, and bad in law ab initio as such order is not signed by the Ld. A.O. It is pleaded to quash such illegal assessment order u/s 153A of the Act dated 30.09.2021. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has grossly erred in confirming disallowance of Rs. 10,30,900/- as made by Ld. A.O u/s 37(1) of the Act, being investment for keyman insurance policy. It is humbly requested your honour to delete this addition of Rs.10,30,900/- as made by the Ld. AO u/s 37(1) of the Act being the same illegal and devoid of any merit. 5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has grossly erred in confirming addition of Rs. 26,488/- as made by the Ld. AO u/s 2(24) r.w.s. 36(1)(va) of the Act on account of delay in payment of employee contribution to provident fund. It is humbly requested your honour to delete this addition of Rs. 26,488/- as made u/s 2(24) r.w.s. 36(1)(va) of the Act being the same illegal and devoid of any merit. 6. Kindly stay the demand. 7. The appellant craves leave to add, alter or delete any of the aforesaid ground or grounds if necessary. 3.1 The above grounds raised by the assessee in IT(SS)A No. [61/Ahd/2025 for A.Y. 2015–16 are detailed and specific. However, it is noted that the issues raised therein are common across all the captioned appeals for A.Ys. 2015–16 to 2020–21, differing only in respect of the quantum of disallowance or addition made in each year. For the sake of clarity and judicial brevity, the following substantive and summarised grounds, which are common to all years under appeal, are taken up for adjudication: 1. Challenge to validity of assessment order for want of digital signature – Whether the assessment order dated 30.09.2021 passed under section 153A/143(3) without a digital signature or manual signature of the Assessing Officer is legally valid or void ab initio. 2. Disallowance under section 36(1)(va) – Whether the addition made on account of delayed deposit of employees’ contribution to the provident fund, beyond the due date under relevant welfare legislation, is sustainable in law. Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 7 3. Disallowance under section 37(1) – Whether the disallowance of insurance premium paid towards life policies in the names of directors and family members is justified, or whether the same qualifies as allowable business expenditure in the nature of keyman insurance. 4. Challenge to validity of assessment order for want of digital signature: 4.1 During the course of hearing, the learned Authorised Representative reiterated the submissions made before the learned CIT(A) that the assessment order passed under section 153A of the Act was not digitally signed by the Assessing Officer and hence was not valid in the eyes of law. It was argued that such omission renders the order void ab initio, being in violation of section 282A of the Act read with Rule 127A of the Income-tax Rules, 1962. The learned AR placed reliance on CBDT Instruction No. 6/2017 and certain judicial precedents to submit that affixing of Digital Signature Certificate (DSC) is mandatory for validity of an electronically communicated order. 4.2 We have carefully considered the submissions of the learned AR and also perused the findings recorded by the learned CIT(A) on this issue. We find no infirmity in the view taken by the learned CIT(A) in holding that the assessment order, though not digitally signed, was validly authenticated within the meaning of section 282A(2) of the Act. The learned CIT(A) has rightly noted that the order was issued through the ITBA system from the official e-mail domain of the Department and contained the name and designation of the Assessing Officer. The communication was also made available to the assessee on its e-filing account. As per Rule 127A(1) of the Income-tax Rules, 1962, any electronic record shall be deemed to be authenticated if it bears the name and office of the income-tax authority and is sent from the designated system or address. The provisions of section 282A(2) do not prescribe affixation of digital signature as the sole mode of authentication in such cases. In our considered view, the absence of DSC, Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 8 at best, constitutes an irregularity curable under section 292B of the Act, and does not vitiate the assessment order per se. 4.3 Accordingly, we uphold the findings of the learned CIT(A) on this issue and hold that the assessment order cannot be treated as invalid merely for want of DSC. The grounds raised by the assessee in this regard are devoid of merit and are accordingly dismissed in case of all the appeals. 5. Disallowance under section 36(1)(va) : 5.1 During the course of hearing before us, the learned Authorised Representative (AR) for the assessee fairly submitted that in view of the binding judicial precedents of the Hon’ble Apex Court and jurisdictional High Court, the assessee does not wish to press the ground relating to the disallowance made under section 36(1)(va) of the Act on account of delayed deposit of employees’ contribution to the provident fund. The said ground is accordingly treated as not pressed and is dismissed as such in case of all the appeals. 6. Disallowance under section 37(1) : 6.1 In the course of assessment proceedings, the Assessing Officer noted from the profit and loss account and the supporting ledger that the assessee had claimed insurance premium expenditure under the head “Miscellaneous Expenses”, for various endowment life insurance policies taken in the names of its directors and their family members. The total premium paid (quantum varying year-wise) was claimed as a revenue expenditure deductible under section 37(1) of the Act. Following are the assessment year-wise details of such expenditure: Policy No. Insured Person AY 2015–16 AY 2016–17 AY 2017–18 AY 2018–19 AY 2019–20 AY 2020-1 400718466 Harendra Mahendrabhai Patel - - - 2,50,000 2,50,000 2,50,000 209071695 Harendra Mahendrabhai Patel 5,15,450 5,07,725 4,60,251 5,09,375 4,63,496 4,63,496 Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 9 400718474 Hemanthbhai Mahendrabhai Patel - - - 2,50,000 2,50,000 2,50,000 250362837 Hemanthbhai Mahendrabhai Patel 5,15,450 5,07,725 4,60,251 5,09,375 4,63,496 4,63,496 Total 10,30,900 10,15,450 9,20,502 15,18,750 12,91,690 12,49,397 6.2 In response to queries raised during the assessment, the assessee submitted that the insurance policies were taken as a measure of business risk mitigation, and the expenditure was in the nature of keyman insurance for the directors who were actively involved in the company’s operations. However, the AO rejected the assessee’s claim observing that insurance policies were endowment-type policies taken in the individual names of directors. The AO also noted that the assessee company is having 100% shareholding of the family therefore the expenditure on payment of such insurance policies cannot be termed as Keyman Insurance as the beneficiaries are directors. 6.3 In appellate proceedings before CIT(A), the assessee reiterated its submissions and contended that the insurance policies were taken as a measure of business risk mitigation. It was submitted that the policies were purchased for the benefit of the company as a safeguard against financial losses arising from the loss of key personnel. The assessee placed reliance on CBDT Circular No. 762 dated 18-02-1998 and the judgement of Hon’ble Gujarat High Court in case of CIT Vs. Gem Art [22 taxmann.com 243] which held that premium paid under Keyman Insurance Policies for partners qualify as revenue expenditure u/s 37(1) of the Act. 6.4 The Ld. CIT(A), on thorough consideration of the submissions made by the assessee and the assessment order, has recorded a detailed finding rejecting the claim of the assessee under section 37(1) of the Act. The key conclusions recorded by the CIT(A) are summarised as under: - Although the assessee contended that the insurance policies procured in the names of the directors were in the nature of Keyman Insurance Policies exclusively used for the business purposes of the company, the Ld. CIT(A) found that the policies in question were Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 10 endowment policies issued by Max Life Insurance Ltd. and were not explicitly designated as Keyman Insurance Policies. - On examination of the proposal forms submitted by the assessee during the appellate proceedings, it was noted that the appellant company had selected “saving” and “tax benefit” as the purpose of insurance. The forms also indicated that the objective of the policy was marked as ‘E/E’ (Endowment/Endowment) rather than “Keyman,” despite the availability of such an option. - The absence of “Keyman” as the stated objective in the proposal form was taken by the CIT(A) as a strong indicator that the policy in question was never intended to be a Keyman Insurance Policy. - The CIT(A) further observed that the assessee failed to furnish any cogent or substantive evidence to demonstrate that the policy was procured to cover the financial risk arising from the loss of a key employee or that such policy qualified as a Keyman Insurance Policy as understood under law. - Additionally, there was no documentary evidence placed on record to establish that the company was the sole beneficiary under the policies or that the same were exclusively used for business purposes. On the contrary, the policies appeared to be of personal nature taken in the names of the directors and lacked the essential features of a Keyman Insurance Policy. 6.5 Thus, the CIT(A) held that the assessee had failed to prove the business expediency of the said expenditure, and therefore, the premium paid on such policies could not be allowed as business expenditure under section 37(1) of the Act. Accordingly, the disallowance made by the Assessing Officer was confirmed by the CIT(A). 7. We have carefully considered the rival contentions and perused the assessment order, the appellate order passed by the Ld. CIT(A), and the material placed on record. 7.1 The Assessing Officer disallowed the insurance premium expenditure claimed under the head “Miscellaneous Expenses” by the assessee, on the ground that the insurance policies were endowment policies in the names of directors and their family members. The AO concluded that such expenditure was not incurred wholly and exclusively for the purpose of Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 11 business and therefore did not qualify for deduction under section 37(1). The AO also observed that since the company was family-owned with 100% shareholding held by the directors and their relatives, any insurance premium paid on policies in their names is essentially a personal expense and not a business expenditure. He concluded that the policies do not fall within the scope of “Keyman Insurance” and accordingly made the disallowance. 7.2 The Ld. CIT(A) confirmed the disallowance primarily on the basis of the nature of the policies being endowment in character and the absence of the word “Keyman” in the proposal forms. The CIT(A) noted that the assessee had opted for \"saving\" and \"tax benefit\" as the objectives in the insurance proposal forms rather than “Keyman,” which, according to the CIT(A), indicates that the policies were not intended to be Keyman Insurance Policies. The CIT(A) further held that no cogent documentary evidence was produced to demonstrate that the company was the sole beneficiary or that the policies were taken to protect the company against financial risk arising from loss of key managerial personnel. On this basis, the CIT(A) held that the assessee failed to prove business expediency and upheld the disallowance. 7.3 We find that both the Assessing Officer and the Ld. CIT(A) have rejected the claim solely on the basis of the form and terminology used in the insurance documentation, without giving due weightage to the substance of the transaction and the underlying commercial rationale. It is well settled in law that the allowability of a business expenditure under section 37(1) depends not on the nomenclature used but on whether the expense was incurred wholly and exclusively for the purposes of business and whether there is commercial expediency justifying the same. The mere use of the words \"saving\" or \"E/E\" in the proposal forms cannot ipso facto negate the business purpose of the policies, especially when the assessee has consistently asserted that the policies were taken to protect the Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 12 company from the financial consequences of the loss of key managerial persons. 7.4 It is pertinent to refer to CBDT Circular No. 762 dated 18.02.1998, which clarifies that premium paid on a Keyman Insurance Policy is allowable as a business expenditure under section 37(1) of the Act. The said Circular also clarifies that the definition of a Keyman includes a director or any person who has a substantial interest in the company. 7.5 In the present case, it is not disputed that the insured persons were active directors engaged in the core management and affairs of the assessee- company. The assessee has consistently contended that the insurance policies were taken to safeguard the company against potential financial loss arising from the untimely demise of such key managerial personnel. Significantly, the policy documents placed on record clearly show that the assessee-company itself is the proposer and policyholder, and the policies were issued on the lives of the directors purely in their capacity as key persons. In such circumstances, the mere fact that the life insured is a director does not render the expenditure personal in nature. 7.6 The company, as employer and policyholder, is entitled in law to insure the lives of its key functionaries for business protection, and there exists no statutory bar in treating the premium paid on such policies, structured with the company as the sole beneficiary as a deductible business expenditure under section 37(1) of the Act. It is a settled position in company law and tax jurisprudence that there is employer-employee relationship between company and directors of the company. This employer–employee nexus is particularly relevant in the context of Keyman Insurance. Explanation to section 10(10D) also clarifies that a Keyman Insurance Policy includes a policy taken by a company on the life of a person who is or was an employee of the company. The CBDT Circular No. 762, issued in the context of the Finance (No. 2) Act, 1996, provides a clear legislative intent and authoritative guidance regarding the nature, purpose, Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 13 and tax treatment of Keyman Insurance Policies. For the Sake of clarity, the relevant paras are reproduced below: Finance (No. 2), Act, 1996 Taxation of a sum received under the keyman insurance policy 14.1 A Keyman insurance Policy, of the Life Insurance Corporation of India, etc. provides for an insurance policy taken by a business organisation or a professional organisation on the life of an employee, in order to protect the business against the financial loss, which may occur from the employee’s premature death. The \"Keyman\" is an employee or a director, whose services are perceived to have a significant effect on the profitability of the business. The premium is paid by the employer. Finance (No. 2), Act, 1996 14.2 There were some doubts on the taxability of the income including bonus, etc. from such policy and also regarding the treatment of the premium paid - whether it should be allowed as a capital expenditure or as a revenue expenditure. The Act, therefore, lays down the tax treatment of the Keyman Insurance Policy. Finance (No. 2), Act, 1996 14.3 Clause (IOD) of section 10 of the Income-tax Act, exempts certain income from tax. The Act amends the clause (10D) of section 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. Finance (No. 2), Act, 1996 14.4 The Act also lays down that the sums received by the said organisation on such policies, be taxed as business profit; the surrender 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 relationship, the surrender value of the policy or the sum received under the policy be taken as income from other sources and taxed accordingly. The premium paid on the Keyman Insurance Policy is allowed as business expenditure. Finance (No. 2), Act, 1996 14.5 The amendments take effect from the 1st day of October, 1996. [Sections 3, 4, 8, 10 & 21] Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 14 7.7 This establishes that a director qualifies as a keyman, even without a strict employer–employee relationship, provided his services materially impact the profitability of the business, the policy must be taken by the employer (company) and on the life of the key person, and the premium must be paid by the employer with the objective to mitigate business risk, not to provide personal benefit. 7.8 It is not disputed that the policies in question are endowment-type life insurance policies issued by Max Life Insurance Ltd. and not term insurance policies. However, the type of the policy per se is not a bar to it being treated as a Keyman Insurance Policy for the purposes of section 37(1) of the Income-tax Act. The CBDT Circular No. 762 dated 18.02.1998 does not stipulate that only term insurance policies qualify as Keyman Insurance Policies. What is material is the purpose and structure of the policy. As clarified in paragraph 14.1 of the Circular: “A Keyman insurance policy... provides for an insurance policy taken by a business organisation... on the life of an employee, in order to protect the business against the financial loss, which may occur from the employee’s premature death.” 7.9 The substance-over-form approach must be adopted to ascertain whether the policy serves the commercial function envisaged for a Keyman Insurance Policy. If the company is the proposer, the beneficiary, and the policy is on the life of a person whose services are integral to the business, the expenditure qualifies for deduction under section 37(1), irrespective of whether the policy is term-based or endowment-based. In the present case the assessee company is the proposer and nominee under the policy, the directors insured are actively managing the affairs of the company and the policy documentation, including email confirmation from the insurer, indicates that the benefit is payable to the company, not to the individuals. Hence, the fact that the policy is an endowment policy does not take away its essential character as a Keyman Insurance Policy, as long as it satisfies the commercial criteria. Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 15 7.10 The Assessing Officer has laid significant emphasis on the fact that the assessee company is 100% owned by the directors and their family members and thus contended that the insurance premiums are incurred for personal benefit and not for business purposes. However, this line of reasoning does not withstand scrutiny. A company is a distinct legal entity, separate from its shareholders or directors. The corporate veil cannot be lifted merely because the shareholders are related or form a closely held group. The commercial decisions of the company, including risk mitigation through insurance, must be evaluated from the standpoint of the company as a juridical person. Further, it is well-settled that even in a closely held company, the insurance of key managerial personnel is a legitimate business decision if it protects the business from adverse financial impact. The motive or identity of shareholders does not alter the allowability of expenditure which is otherwise incurred for business considerations. Thus, the mere fact that the company is owned by the same family does not negate the business purpose behind obtaining life insurance policies on the lives of its directors, who are responsible for driving the business. 7.11 The Revenue has not doubted the genuineness of the payment or the identity of the insurance provider. The sole basis for rejection is the nomenclature in proposal forms and absence of explicit mention of the word \"Keyman\". In our view, these are technical and hyper-formalistic grounds and cannot override the commercial realities and established principles of law. Further, the onus on the assessee to prove business purpose has been adequately discharged through submission of policy copies, payment proofs, and explanation of the business rationale. The Revenue has not brought any material to demonstrate that the expenditure was not incurred for the purposes of business. 7.12 We have also noted the judgement relied upon by the assessee before CIT(A), where the Hon’ble Gujarat High Court in the case of CIT v. Gem Art [22 taxmann.com 243], [TS-5182-HC-2012(Gujarat)-O], held that Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 16 premium paid on Keyman Insurance Policies taken even in the names of partners is an allowable deduction under section 37(1). 7.13 While we find merit in the assessee’s contention that the insurance policies in question were procured in the capacity of employer to mitigate the business risk associated with the untimely demise of key managerial personnel, and that the assessee company was the original proposer and nominee of the policies, a critical aspect requiring further verification pertains to the assignment of policy during its currency. 7.14 It is a settled position that the commercial expediency of premium paid on a Keyman Insurance Policy hinge, on the continuing beneficial ownership and entitlement to policy benefits remaining with the employer company. As clarified in clause 4(4.1)(i) of the policy document and also evident from the insurer's communication, benefits under the policy are payable to the policyholder, which in the present case is the assessee company, unless there is a recorded assignment. 7.15 However, it is equally trite that any assignment of the policy during its term, whereby the rights under the policy are irrevocably transferred to the insured person (i.e., the director), alters the very character and purpose of the insurance contract. Once such an assignment is effected, the benefit ceases to accrue to the employer, and the policy becomes personal in nature, disentitling the employer from claiming deduction of premium under section 37(1) of the Act. 7.16 In the present case, while the assessee has placed on record the policy documents and correspondence indicating the original structure of the policy, there is no conclusive evidence before us to ascertain whether the policy remained unassigned throughout its term or whether it was subsequently assigned to the insured director, thereby rendering the employer-company a mere premium payer without corresponding business benefit. Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 17 7.17 Given the commercial and legal significance of such assignment, we are of the considered view that this aspect needs to be verified at the level of the Assessing Officer. The assessee shall produce the necessary documentation including policy status reports from the insurer, assignment endorsements if any, and confirmation that the policy continues to remain in the name of the company without assignment to the director or any third party. 7.18 It is a settled principle that the allowability of premium paid under a Keyman Insurance Policy as a deductible business expenditure under section 37(1) of the Act depends significantly on the commercial intent and continuity of the employer’s beneficial interest in the policy. If, upon verification, it is found that the insurance policies have been assigned by the assessee company to the respective directors during the term of the policy, then such assignment effectively transfers the beneficial interest and entitlements under the policy to the directors personally. In such circumstances, the policy ceases to serve its intended commercial purpose of protecting the business interest of the employer-company, and the expenditure loses its nexus with business exigency. Consequently, the deduction of the premium paid on such policies under section 37(1) of the Act would not be admissible, as the payment would partake the nature of a personal benefit conferred upon the director. 7.19 However, an exception to the above consequence may arise where the assignment of the policy to the director is accompanied by due treatment of the benefit arising therefrom as a taxable perquisite in the hands of the director under the head “profits in lieu of salary”. This position finds statutory recognition in para 14.4 of the Finance (No. 2) Act, 1996, which lays down that where a Keyman Insurance Policy is endorsed or assigned in favour of the employee (i.e., the keyman), the surrender value or the maturity amount so received is taxable as “profits in lieu of salary” under the Act. In such cases, where the premium payment by the employer is Printed from counselvise.com IT(SS)A No.61 to 65 /Ahd/2025 ITA No.1217/Ahd/2025 18 intended to compensate the employee and the resultant benefit is subjected to tax in the employee’s hands, the commercial character of the payment can be established, and the employer would be entitled to deduction of the premium as a legitimate business expenditure under section 37(1). 7.20 Therefore, if during the course of remand proceedings, it is verified that the policy was assigned to the director and the benefit arising therefrom is declared and taxed as perquisite in the hands of the employee, then the commercial nexus remains intact and the assessee’s claim for deduction of premium under section 37(1) may be adjudicated accordingly in its favour. The Assessing Officer shall examine the factual matrix on these lines and pass a speaking order. 7.21 Accordingly, we deem it fit and proper to restore this limited issue to the file of the Assessing Officer for the purpose of verifying whether the insurance policy was assigned during the term of the policy, and if so, to determine its effect on the allowability of the premium under section 37(1). The Assessing Officer shall afford due opportunity to the assessee and pass a speaking order on this aspect. This ground in case of each appeal is allowed for statistical purposes. 8. In the combined result, the appeals of the assessee are partly allowed for statistical purposes. Order pronounced in the Court on 7th August, 2025 at Ahmedabad. Sd/- Sd/- (SANJAY GARG) JUDICIAL MEMBER (MAKARAND V. MAHADEOKAR) ACCOUNTANT MEMBER Ahmedabad, dated 07/08/2025 vk* Printed from counselvise.com "