AI Insights
The case revolves around the tax implications of keyman insurance policies taken by a company on the lives of its directors, Rajan Nanda and Naresh Trehan. The company paid the premiums and later assigned the policies to the directors, who continued paying the premiums. The core issues were whether the premiums paid by the company were allowable as business expenditures and whether the maturity amounts received by the directors were taxable. The Income Tax Appellate Tribunal had earlier ruled in favor of the assessees, a decision which was upheld by the High Court. The court's decision was influenced by the interpretation of relevant sections of the Income Tax Act and the provisions of the keyman insurance policies as clarified by the Life Insurance Corporation of India (LIC).
Appeal Details
Counselvise Citation
[2011] 140 COUNSELVISE.COM (IT) 743450 (HC-DELHI)
Assessee PAN
Bench
Appeal Number
CRN Number
Appellant
Respondent
Appeal Type
Others
Pronouncement Date
16-12-2011
Assessment Year
misc
Judgement Text
"./ /- t * o/o (1) (2) (4) I (3)l I I (s) (6) IN T'I-IE HIGH COURT OF DELHI AT NIEW DELHI AN NANDA Decision Delivered On: 16th December. 2011 . Appellant . Respondent . Appellant . . .Respondent -II ...Appellant . . .Respondent . Appellant .Respondent . . . Appellant . Respondent Pagg 1 of 4 I I -II rrA 1428 1,2o0A ttl RAJAN NANDA COMMISSIONER O Iii .l ivrnsus I NCOME TAX il ,, I MISSIONER OF INCOME TAX CE NANDA 1 Digitally Signed By:AMULYA Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified (7) (p) (10) t; I l I COMMISSI I ONER OF INCOME TAX VERSUS i,lr RA]AN NANPA ttl rr42o7t5/P,01o1 :ll I .TTiI vrr ' I ..,'l \";i 'l i RAJAN NANDA ll : trsq\"/iEl I RA]AN hIANDA VERSUS VERSUS VERSUS TREHAN '-I TREHAN (a . . .APPellanY . .Respondent . ApPellant .Respondent . Appellant . .ResPondent . . APPellant I i ,.1 . .ResPonoenq 'l . .ResPondent . .ResP . . ApPell I ant I I tl il ii ent: I I r\"1 I ond I I I I I Page I I I' F I I I .l I I I (L2) rTA 2-q73 1',2O1O. il ruNN SH TFI.EHAN Vrnsus ,. VERSUS VERSUS I INCOME TAX VERSUS MISSIPNER O RTS HEART INSTITUTE AND qRCFt CrrurnF lrp. ' tl NTSSi.OTTR OF INCOME TAX , 1 vrnsus 'll ORTS IHEART INSTITUTE AND EARCI'.I CENTRE LTD. I l\"' - --'- '-'*1--1--'' ,'\"'-. '-l' ( . . . ApPellant . . .ResPondent . . . APPellant . . .ResPondent . . . APPellant . . .ResPondent . . . APPellant . . .ResPondent . . ApPellant . . .ResPondent I . . , APPellant I I RagL a of a ))_ ESCORTS itEART IrySTITUTE I (18) rrA 1e1e4291o I i ltltl ^r.T i tl I ll urr I :l I ll r..llll I iii ll 'vrnsus rt i.;!ll'' ,llll:_.._. ESCORTS .H EART INSTITUTE 'llll,i VERSUS Ii rt No.400 of 2008' I I .Respondent . Appellant .Respondent . . Appellant . ' .ResPondent pra, Sr. Standing Counsel, i Aggarwal, Sr. Standing Advocate with Mr. V.N' itu ll;l (1?) rrA +7s:' illlllli I clr :I ll,i I r ;lllivrnsus ' | ;ii:ivtrK)ur :llil ESCORTS :HEART INSTITUTE AND RESEARCH CENTRE LTP. lounr\"t for tllre Revenue'i i wts' Rastrmi Ch< Mr. N.p,. Sahnii Sr. Stalding,Counsel, Ms' Sur E;;;';:i.rs \",\" - -'-i- 'i f.ri\"f , ror tlne n\"\"\"fr\"\"-' tut'' o's' Bajpai pou4sil for the Assessee- rvlr' u'5' DaJIJ Jha, Adivocate., I rtri.'V.pl. Gupta]with Mr] Basant Kumar, Adv tulr. ti.M. Meht$, Advocqte. llr rnnivr [- I L__ irdN'eLE THE AFTTNG cHrEF lu! Sr. tes. 'BLE| MR. JqSTrcE M.L' MEHT ii DECEM I , see I[A ZOLL/ pmc Q.<--E -ugr .E 3 > g(g < z (J = -c I -ic, I vvl -ccl I =\" ! ol -.-l i.e I 19. on merits, it was argued that the scheme of the Act wirs quite clear in this behalf, which was amply clarified vide CBDT,s Circular dated l8th FebrVarY, 1998 that the premium paid to the keyman insurance policy is allowable as business expenditure. This circular was binding on the Department. Mr.GuptaalsoreferredtothejudgmentoftheBombayHigh Court in the case of Commis;sioner of Income Ta.x V,s\" B,N, Exports t(2010) 323 I-fR I78 (Bom')' wherein the insurancepremiumonkeymaninsurancepo|icyhadbeen considered to be allowable' 2t. Mr, Gupta also argued that the allowability of the deducLion isbeingdisputedon|yforthereasonthattheconcerned individuals have raised claim in their cases regarding non- taxabilityofthematurityva|uereceivedbythempursuantto assignment of policies in their favour. claim made regarding exemption of amount in the hands of individuals cannot .determineorimpactal|owabilityoftheexpenditureinthe case of the respondent company. In this regard, he placed reliance on the decision of the'supreme court in the case of ' , EmpireluteCompanyLinnitedVs'Commissionerof Income Tax l!24 ITR 1 (SC)l' wherein it has been obs€rvedthatacertainpaymentconstitutes-incomeor, iTA No,400 of 2008, etc' Page 17 of 49 20. )e capital receipt in the hands of recipient is not material in determining whether the payment is revenue or capital disbursement qua the PaYer. I ,22. His further submission was that no such case of colourable I device could be projected by the Department when I i assignment of such policies was envisaged in the CBDT's Circular dated lBth February, 1998 itself. It was furtlrer argued that the ingredients under Section 37 were duly nret ' and satisfied as the expenditure incurred by the company was only on business considerations and the assignment of policy was also in the larger interest of business. It was, inter alia, submitted in this behalf that the assessee company was able to earn substarrtial profit by availing services of these individuals .(keyrnan) by incurring Lhe expenditure under reference and it is a fact duly recorded by the Tribunal in the. impugned order that these persons were very important in the aSSeSSee organization and when they left their assignments, its profit were drastically reduced' Accordingly, the expenditure was incurred only with business , consideration and is, therefore, an allowable deduction 23. Another dimension, which was given by the learned counsel for the assessee company was that the Department could ITA No.400 of 2008, etc' Page 18 of 49 ; A, not sit on the armchair of the assessee and decide as to ) | whether it was appropriate, as a business expediency, for the assessee to incur certain e>ted surrender value of the assignment and therefore, such an ' argument could not be raised. 21. After giving our due and thoughtful consideration to Ehe submissions of the parties of both sides, we feel that the aSSeSSee has been able to malce out a case in its favour and order of the Tribunal does not call for any interference' We ITA No.400 of 2008, etc. Page 20 of 49 33 are persuaded bY the following view of ours: ITA No.400 of 2008, etc. reasons in suPPort of this i (i) The Department 'has itself allowed the expenditure incurred on the premium paid for keyman insurance policies in previous years as i I business expenditure under Section 37 of l\"he I Act. Right from t99L-92 upto L993-94 ernd . thereafter even. in relspect of Assessment Yr:ar IggT-g8, the expenditure was allowed' Thor-rgh thereafter, the expenditure was disallowed, but again the claim was accepted for the Assessment Years 2OOI-02 and 2002-03. Principle of consistency would, therefore, bY applicable in such a case. (ii) The Tribunal has rightly referred to and reliecl upon the CBDT's Circular dated IB'2'1998' l'his Circular is bincling on the Income -fax Department, which categorically stipulates that premium on keyman policy should be allowed as business expenses. The assessee wot'tld,; naturally, take into . consideration such clarifications issued by the CBDT and would act Page 21 of 49 on the basis thereof. When the assessee was given the impression, 'by means of the aforesaid circular, that if expenditure is incurred on tlre keyman policy, it would be treated as business expenditure. There is no reason for tlre Departmenttodeviatetherefromwhenitcomes to the assessment, (iii) The nature of expenditure incurred on keyman iniurance policy has even been judicially consideredandBombayHighCourthashe|din B,l{, Exports (sup'ra)' that this expenditure is to be allowed as business expenditure, in the following words: \"The effect of Sdction 10(10D) is'that monies which are received under a life insurance policy are not included in the computation of the total incorne of a person for a previous year. However, any sum received under a Keyman insurance policy is to be reckoned while computing the total intome' For that purpose, a Keyman insurance 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 on who is or was connectr:d in a nY ma n ner whatsoever with the business of the subscriber' The words \"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. The latter part makes it clear that a Keyman insurance policy for tlre Page 22 of 49 a ITA N0.400 of 2008, etc' purposes of Clause (10D) is not confined to a situation where there is a contract of employment. Clause (10D) relates to the treatment for the purpose of taxation of ' moneys received under an insurance policy' In this appeal, the court has to determine the question of expenditure incurred towards the payment of insurance premium on a Keyman insurance policy. The circular which has been issued by the Central Board of Direct Taxes clarifies the position by stipulating that the premium paid for a Keyman insurance policy is allowable as business expenditure' In the present case, on the question whether the premium which was paid bY the firm could have been allowed as business expenditure, there is a finding of fact by the Tribunal that the firm had not taken insurance for the personal benefit of the partner, but for the benefit of the firm, in order to protect itself against the set back that rnay be caused on account of the death of a partner' The object and purpose of a Keyman insurance policy is to protect the business against a 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 confi:re the allowability of the expenditure incurred 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 Keyman insurance policy is obtained on the life of a partner to safeguard the firm against a disruption of the business that may result due to the premature death of a partner. Therefore, the expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of business\"' 3s- ITA No.400 of 2008, etc' (iv) The argument of Mr' N.P. Sahni, learned counsel for the Revenue', that taking such keyman insurancepoIicyeveryyearandthereal=ter Page 23 of 49 assigning the same to the beneficiaries may be treated as colourable device, may not be correct' , Though this argument appears to be attractive l when we look into the fact that the assessee had beentakingthepo|iciesairdthereafterassigning the same year after year !n favour of the beneficiaries, what cannot be ignored that this course of action is permitt-ed by the Departmernt itself as stated in CBDT's Circular datecl l.8.2.1998. (v) The expenditure incurred has to be tested on the touchstone of Section 37 of the Act and to see as to whether such expenditure is permissible or not. No doubt, the object of a keyman insurance policy is 'to enable business organizations to insure the life of a keyman in order to protect the business against the finAncial loss whlch may occur in the likely eventuality of premature death. Such arl expenditure is treated as business expenditure by' the Department it:;e|f r and recognized as such in Circular dated L8.2.1998. The expenditure is to be seen at [hei Page 24 of 49 7L iTA No.400 of 2008, etc. time it is incurred, was assigned after that the exPenditure Merely because the PolicY sometime wou.ld not rnean , incurred in the first instance would lose the flavour of it being'business expenditure'. (vi) once the legal provisions and the outlook or= ' Departmentitse|fbasedonsuch|ega|provisions permit the assessee to have the tax planning of thisnature,andthecourseofactiontakenbyt|re assesseeispermisr;ible'underlaw,theargument of colourable device cannot be advanced by the Revenue, When expendrture of this nature is treated 'business expenditure' per se by the Department itself, there cannot be any question . of raising the issue of want of business expediency. The learned counsel for the respondent is right in his submission that the Departmentcou|dnotsitonthearmchairofthe assessee and decide as to whether it was appropriate on business expediency for the assesseetoincursuchanexpenditureornot'If - the transaction is otherwise valid in law and is a Page 25 o{ 49 j ITA No,4Q0 of 2008, etc. 33 26. 27. part of tax planning, merely because it has resulted in reductioh of tax, such expenditure cannotbeignoredraisingtheissueofunder|ying motive of entering into this type of transacti.n. I Variousjudgmentscitedbythelearnedcounsel for the respondents clearly get attracted to tlris : C:ourt' The question of law is, thus, decided against the Revenue. As a result, appeals filed by the, Revenue against the assessee. companY are dismissed. Appeals trua Directons A6sL:ssee: These appeals were admitted on the following questions of law: (i) whether on the fercts and circumstances of the .case,therewasanyjustificationtotaxthe difference between the premium paid by the employer and the surrender value pald by the employee to the employer at the time of assignmentofthepo|icyandwhetheritcouIdbe taxed in the Year of assignment? (ii) whether on the facts and circumstances of the case,thelncomeTaxAppe|lateTribunaIvva5 ITA No.400 of 2008, etc. Page 26 of 49 justified in restoring back ihe matter to the AO to ' ascertain whether the keyman insurance policy on assignment by the employer to the etnployee wa's converted into an ordinary policy so as to , determine the question of taxability of the amount received by the employee on the maturity of such a policy; and if answer to the preceding part to this question is in the ' affirmatiVe, then, whether the insurance money received on maturity by the employee is exempt in full under Section 10(10D) of the Income l-ax Act? (iii) Whether the Tribunal in spite of being of the view that the keyman insurance policy after its assignment to the keyman assumed the character of an orclinary iltsurance policy erred in law in holding that.out of the sum received on maturity of the said policy, a sum equivalent to the surrender value of the policy at the time of assignment in favour of the assessee Uu i subjected to tax? Page27 of 49 s iTA No.400 of 2008, etc. I' 1o (iv) whether the Tribunal erred in directing the ' surrendervalueofRs.35,28,Bl5/-tobetaxedin spiteofthefactt|.ratatthetimeofassignment i theassesse.ehadmadeapaymentofthesaid amount to- the assignor, i.€., the employer company? (v)WhethertheTribunalWaSjustifiedin|awin rejecting the alternative the alternative claim of the assessee that in the eventuality that the amount received on maturity becomes liable to taxthendeductionbea||'owedinrespectofthe premiums paid by the assessee after assignment to him of the policies in question as also the surrender value perid by him to the employer at the time of assignrnent and which was embedcled in the figure of Rs'2,85,00,0OO/-? 28' Ms. Rashmi Chpora, Iearnec| counse| appeared for the Department in these appeals. she reiterated and highlighted the modus adopted by the company in talcing Keyman Insurance Policy year after year in the name of Lhe two Directors and then assigning the same in favour of thr=se Director assessees at a value much less than the amount ITA No.400 of 2008, etc. Page 28 of 49 paid by the companies in the. very next year of taking the policy. Her submission was that in this manner, by assigning the policy and receiving only surrender value as against the actual premia paid, which was much higher, the difference between two amounts was'the benefit received by the Director assessees, which would. be treated as incorne assessable to tax. Taxability was sought to be covered by the provisions of section L7 of the Act treating the same as profits in lieu of salary, i.e., perquisite in the hands of emploYee. 29. Shi further submitted that the maturity amount received by the assessee on the export of premium of policies, which is generally five years, was also taxable income as per section 2(24) of the Act. Her submission was that the letter from LIC on surrender the Keyman Insurance Policy turns into an ordinary policy is of no consequence as the treatment by the LIC under the Rules and Regulations therein and for such purpose cannot govern the taxabilitl; sf income is governeci ' by the provisions of Act, wlrich is self-contained stature' Original terms and conditiotts of the Keyman Insurance Policy ca.nnot change on surrender as the quantum of premium and maturity amount remains as per the original ITA No.400 of 2008, etc. Page 29 of 49 r terms and conditions. The. Legislature has specifically brought in provisions to tax the maturity value alongwith bonus, etc. aS income under salary, business and profession I and income from other Sources, etc. by incorporating various provisions such as 2(24)(xi), 17(3)(ii), 28(vi) and 56(iv) of the Act, which govern the taxability of amouqt received towards Keyman Insurance . Policies including the sum allocated bY waY of bonus, etc. 30. she also hammered the issue of colourable device adopted by the company and echoed the same sentiments as expressed by Mr. N.P. Sahni while arguing the appeals of the - Department qua the assessee company and submitted that bythisdevice,.companyWaSbenefittedbytreatingthe expenditure as business experrditure uhder Section 37(1) of the Act and Director assess;ees were benefitted on the ground that the same was exempt under section 10(10D) of the,Act. According to her,,Such a device was impermissib|e. she concluded her arguments by submitting that the LIC is a commerciaIorganisation,whichformuIatesitsownterms andpoliciesand/oral|owsconversionofonepolicy.o, another, but the Same cannot govern the taxabiIity oti income, but the same cannot cover the taxability of income ITA No.400 of 2008' etc. Page 30 of 49 u which has to be determined * on the basis of specific provisions of the Act. 31. The aforesaid submissions were refuted by Mr. R.M. Mehta and Mr. Bajpai who appeared for the assessee. Mr. Mehta argued that the case had to be examined having regard to the specific provision incorporated under the Act relating to . the Keyman Insurance Policy with effect from 01.10.L996' on that basis, it was to be found as to whether the difference between the premium paid by the company prlor to the date of assignment and the surrender value of the policy as computed by the LIC could be treated as income at the hands of the assessee, viz.., whether such a difference was 'perquisite' within the meaning of section 17(3)(ii) of the Act as done by the Ao. His submission, in this behalf, was that the Tribunal rightly came to the conclusion that section 10(10D) of the Act ers well'.as other consequenl-ial Amendments read with CBDT,s Circular No.762 da|.ed L8.2,1998 would clearly demonstrate that it is only \"sum received\" under the Keyman Insurance Policy, that would be treated as \"profits in lieu of sarlaiy\" in terms of Section 17(3) ' of Act. CBDT Circular datecl 18.2,1998 clearly postulates thaton|ythesurrenderVa|ueofthepolicyatthetimeofl I I Page 31 of 49 '' iTA No.4O0 of 2008' etc. \"13 I assignment or the sum received by ain individual at the time f retirement was taxable, on the second issue, viz., taxability of the amount at the time of inaturity of the insurance policy was untenable inasmuch as after the assignment of the policy, at the hands of the assessee, it became an ordinary policy and flo ol-l€ I assignment Keyman Policy for the balanced terms of the ' policy insurance premium was paid by the assessee as payable in an ordinary policy. Therefore, as per CE'DT Circular itself, which was rightly relied upon by the Tribunal, such an amount received.on maturity could not be added as income of the assessee. Mr. O.S. Bajpai specifically rel=uted the arguments of learned counsel for the Revenue by giving his own analysis to the various provisions of the Act. His submission, in this behalf, was that the concept of assignment is embedded in the very scheme of Keyman Insurance Rolicy. He submitted tlrat tlre .provisions of section 10(1OD) of the Act were to be rr:ad conjointly with Section 17(3)(ii) of the Act' 34. ', He first sought to highlight distinction between the Keynran ' Insurance Policy and ordiriary policy by submitting that in case of keyman po|icy there have to be two p|ayers, ViZ., (i) ITA No.400 of 2008, etc' Page 32 of49 ; Y1 32. 33. Ys one who pays premium to secure the life of the other and (ii) the other whose life is Secures, In contrast, there is only a ' single player in an ordinary policy, who gets his life ,u.rr\"d ' and pays the premium himseif. In the present case, \"this person happens to be an employee after policy is assigned to ' him. In this scenario, learned senior counsel argued that section 17(3)(ii) comes into picture when the recipient is to be taxed for the amount of insurance received by him on maturity or he is taxed on surrender value as profit in lieu of salary. In other words, if there is no assignment of Keyman Insurance Policy, there is no question of invoking section 17(3)(ii) as an employer cannot be taxed under this Section, but only an employee can be taxed. when there is no assignment, section 37 and section 28 or section 56 of the Act will operate. The tdmployer wilt seek deduction under section 37 and pay tax under section 28 or 56 of the Act' Section 17(3)(ii) of the Act comes into play only if an employee is to be taxed and an employee does not come into picture if there is no assignment' If employer does not continue the policy and surrenders it midway, he too would get only surrender value, But when there is assignment, the emp|oyeecomesintopictureandSectionlT(3)(ii)oftheAct ITA No.40O of 2008, Pagc 33 of 49 etc. I rVt i l'o becomes operative. T-hus, in the case of an employee, section 17(3)(ii) of the Act can co-exist only utith assignment to the employee. This niakes assignment a part of the scheme of the Act itself. H€, thus, argued that the assignment leads to conversion and changes the character of keyman insurance policy into an ordinary policy. Further, assignment is a followed transaction between the LIC's employer and employee. witlr this assignment, LIC not only agrees to convert the policy from keyman insurance policy to general . insurance policy, it also agrees to receive the premium from the employeg. when such a course is legally permissible, there is no question of adoption of colourable device, was the submission of Mr. Bajpai for which lre referred to the judgment of the Supreme Court in the case of llnion of India vs. Azadi tsacha.o Andolan, (2oo3) ?-63 ITR 706 (SC) followed in waffart share & sfoc/< Brokers P. Ltd. v\" CIT [2010] 326 ITR. 1 (SC). 35. On the aforesaid premise, his submission was that when the amount received by the employee on maturity of the policy I is the amount received in respect of ordinary policy; it was exempt from taxation by the statutes itself and, therefore,i such an amount could not be Laxed at all I ITA No.400 of 2008, etc. Page 34 of 49 I 36. Insofar as taxability of difference between the premium paid by the employer and the surrender value paid by the employee (assessee) is concerned, the same was to be examined only if it was (perquisites within the meaning of section L7(3)(ii) of the Act. His submission, in this behalf, Was that the 'keyman insurance'is taxable under Section t1 17(3)(ii) of the Act as a 'profit in lieu of salary' only when it is actually received. If it is not actually received, the condition of taxability is not satisfied and it cannot be ta><. I Once there is no assignment of company/employer in favour of the individual, the character of the insurance policy changes and it gets converted into an ordinary policy. Contracting parties also change inasmuch as after 'the assignment which is accepted by the insurance, the contract is now between the insurance company and the indiviclual and not. the company/employer which initially tool< the policy. such company/employer no .more remains the contracting parties. We have to \"bear in mind that law permits such an absignment even LIC accepted the assignment and the same is permissible. There is no prohibition aS to the assignment or conversion under the Act. Once there is an assignment, it leads to conversion and the character of policy changes. The insurance company has itself clarified that on assignment, it does not remaln a keyman policy and gets converted into an ordinary poiicy. ITA No.400 of 2008, etc. Page 47
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