April 2009
S. 10(10D) read with S. 37(1) of the Income-tax Act, 1961 — Keyman Insurance Policy premium paid by firm in respect of policy on lives of partners is an allowable deduction.
By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Chartered Accountants
Reading Time 3 mins
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New Page 23 (2009) 27 SOT 476 (Mum.)
ITO v. Modi Motors
ITA No. 6900 (Mum.) of 2006
- A.Y. : 2003-04. Dated : 12-12-2008
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- S. 10(10D) read with S. 37(1) of the Income-tax Act, 1961
— Keyman Insurance Policy premium paid by firm in respect of policy on
lives of partners is an allowable deduction.
For the relevant assessment year, the assessee’s
claim for deduction of premium paid by it on the Keyman Insurance Policy in
respect of the lives of two working partners u/s.37(1) was disallowed by the
Assessing Officer on the grounds that :
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Keyman Insurance Policy
premium was allowable only in case an assessee who was an employer, paid the
amount in respect of the life of an employee.
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the partnership firm could
not be termed as ‘Another person’ within the meaning of S. 10(10D), as a
firm is not independent and distinct from its partners.
The CIT(A) held that the Assessing Officer was
not justified in presuming that there was no distinction between the partners
and the firm, and the conditions of S. 37 were also satisfied because that
expenditure had been incurred for the purpose of business and, accordingly, he
deleted the disallowance made by the Assessing Officer.
The Tribunal allowed the claim of the assessee.
The Tribunal noted as under :
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In view of
the various judicial opinions and also the legislative change in the Act, it
was to be held that under the Income-tax Act, a partnership firm is an
entity separate from its partners and if there exists any specific provision
in the Income Tax law modifying the partnership law, then such specific
provision shall be applied.
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The
wordings of Explanation to S. 10(10D) are also relevant, wherein it has been
mentioned that “Keyman Insurance Policy life insurance taken by the person
on the life of another person who is or was the employee of a
first-mentioned person or is or was connected in any manner whatsoever with
the business of the first-mentioned person”. Hence, the Legislature has also
envisaged various kinds of relationships (in addition to employer-employee
relationship) which may exist between the person paying the premium and the
person on whose life such
Keyman Insurance Policy is taken.
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The CBDT
vide its Circular No. 762, dated 182-1998 has explained the provisions of S.
10(10D) wherefrom it is abundantly clear that in order to allow the premium
paid on Keyman Insurance Policy as business expenditure, there can exist
relationships other than that of an employer and employee.
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The amount
received on maturity or surrender of Keyman Insurance Policy is taxable
under the head ‘Income from salary’ u/s.17(3)(ii) or ‘Income from profits
and gains of business or profession’ u/s.28(1)(vii) or ‘Income from other
sources u/s.56(2)(iv)’. Hence, if the Legislature would have intended that
such premium was allowable as deduction only in cases where employer and
employee relationship existed, then the amount received on
maturity/surrender would have been made taxable only under the head `Income
from salary’.
In view of
the above, Keyman Insurance Premium paid by the firm on the life of its
partners is allowable as business expenditure.
