Business expenditure : A.Y. 2004-05 : Premium paid by assessee-firm on keyman insurance policy of partner is business expenditure allowable as deduction.

[CIT v. M/s. B. N. Exports (Bom.); ITA No. 2714 of
2009, dated 31-3-2010]

The assessee is a partnership firm. For the A.Y. 2004-05,
the assessee’s claim for deduction of the premium paid by the assessee-firm on
the keyman insurance policy of the partners was disallowed by the Assessing
Officer. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Bombay High Court upheld the
decision of the Tribunal and held as under :

“(i) The Circular No. 762, dated 18-2-1998 issued by the
CBDT clarifies the position by stipulating that the premium paid for a keyman
insurance policy is allowable as business expenditure.

(ii) 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 setback that may be caused
on account of the death of the partner.

(iii) The object and purpose of a keyman insurance policy
is to protect the business against the financial setback which may occur, as a
result of a premature death, to the business or professional organisation.
There is no rational basis to confine 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.

(iv) 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 the partner. Therefore, the expenditure
which is laid out for the payment of premium on such a policy is incurred
wholly and exclusively for the purpose of business.”