6 Section 37(1) – In the absence of any evidence brought on record by the AO to substantiate that the payment of insurance premium of employees’ family members in terms of employment rules framed by the assessee company had no nexus with business of the assessee, it could hardly be said that the impugned expenditure was not incurred wholly and exclusively for the purposes of business, which is the real intent of section 37(1).

Loesche
India (P.) Ltd. vs. ACIT

ITA No. :
295/Delhi/2016

A. Y:
2010-11    
Dated: 13^th August, 2018

Section 37(1)
– In the absence of any evidence brought on record by the AO to substantiate
that the payment of insurance premium of employees’ family members in terms of
employment rules framed by the assessee company had no nexus with business of
the assessee, it could hardly be said that the impugned expenditure was not
incurred wholly and exclusively for the purposes of business, which is the real
intent of section 37(1).

FACTS

The assessee company engaged in business of
Design & Engineering, manufacturing and trading of vertical roller grinding
mill systems & components thereof for cement, steel, power plants and other
mineral based industries filed its return of income declaring total income of
Rs. 19,12,54,863.  In the course of
assessment proceedings, the Assessing Officer (AO) noticed that amount of Rs.
15,48,654 has been claimed on account of medical insurance.  He called upon the assessee to furnish
details of relations of employees in respect of whom insurance premium has been
paid and also to show cause why it should not be disallowed on the ground that
it is gratuitious and not on commercial lines since obligation of the employee
has been met by the employer.  Upon
perusal of the list of relatives who had been insured, the AO noticed that
medical insurance premium has been paid to insure health of mother-in-law of
the Managing Director apart from his independent children and also towards
married sisters of other directors of the assessee company. He held that the
assessee had adopted an inequitable and unreasonable system by bearing the
medical insurance expenses of only the relatives of key managerial persons and
their distant family members.  Relying on
the decisions of Madras High Court in the case of CIT vs. Indian Express
Newspapers (Madurai) (P.) Ltd. [1999] 104 Taxman 578 and Calcutta High
Court in M D Jindal vs. CIT [1986] 28 Taxman 509 (Delhi), he held that
he was entitled to lift the veil of corporate entity in order to ascertain the
actual intention. He distinguished the case law of Bombay High Court in the
case of Mahindra & Mahindra on which reliance was placed by the
assessee since the instant benefit was not for achieving the purpose of
corporate social responsibility but in the instant case it was to benefit a few
selected employees.  Even otherwise,
since the employees had not offered what amounted to be perquisites in their
hands u/s. 17(2)(iv), he was of the view that these were not business expenses
qualifying for deduction u/s. 37(1).

Aggrieved, the assessee preferred an appeal
to the CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that the record
reveals that the assessee had paid the insurance premiums of the employees’
family members in terms of employment rules framed by the assessee-company
therefor.  Therefore, it can hardly be
said that the impugned expenditure were not incurred wholly and exclusively for
the purpose of business, which is the real intent of section 37(1).  The Tribunal further observed that the
authorities below have not brought any evidence on record to substantiate that
the payments so made by the assessee-company had no nexus with the business of
the assessee.  Even otherwise, it is not
necessary that all the payments/expenditure incurred by the assessee should
have a direct bearing on earning of income, but some payments are also made
under certain business expediency.  It
noted that the payments claimed to have been made for insurance premium of such
members who have attained the age of 21 years or more or who are the remote
relations of the assesse have already been offered by the assessee to tax
before the CIT(A).  It observed that the
authorities below appear to have rejected the claim of the assessee that these
payments were in the nature of perquisites to the employees as contemplated
u/s. 17(2)(iv), according to which any obligation which, but for such payment,
would have been payable by the assessee, shall be included in perquisites.
However, in view of proviso (iii) & (iv) appended to this section clearly
prohibit application of section 17(2) in certain eventualities contained in
these provisos. The Tribunal held that in view of the attending facts and
circumstances of the case and the provisions of law, noted above, there is no
justification in the findings reached by the authorities below for rejecting
the deduction of impugned expenditure claimed by the assessee. Therefore, there
is no justification to discard the impugned claim of the assessee u/s.
37(1). 

The Tribunal allowed the appeal filed by
the assessee.