Loesche India case: it is not necessary that all the payments/expenditure incurred by the assessee should have direct bearing on earning of income, but some payments are also made under certain business expediency
Recently, in Loesche India Pvt. Ltd. vs. Addl. CIT [ITA No. 295/Del/2016 AY: 2010-11, decided on 13.08.2018], appeal was filed by the assessee against the order of the CIT(A)-V, Delhi dated 27.11.2015 for the AY 2010-11 in which one of the ground raised was that the CIT (A) has erred on facts and in law in sustaining the disallowance of Rs. 1,205,531 made by the assessing officer in relation to medical insurance premium paid for the family members of the employees of the company on the ground that such expenditure, though incurred in terms of contractual obligations entered into with the employees, cannot be stated to have been incurred wholly and exclusively for the purposes of business of the assessee.
Facts & decision in brief:
The appellant-company being engaged in the 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 return declaring total income of Rs.19,12,54,863/- was e-filed on 30.09.2010. During the course of scrutiny, a perusal of the details placed on record revealed that during the above year, the assessee had claimed an amount of Rs. 15,48,654/- on account of medical insurance. Since an addition of Rs. 10,91 169/- during AY 2009-10 in the case of the assessee company was made in respect of payment of medical insurance premium covering the family members of the employees, vide further questionnaire dated, 13.11.2013, the assessee company was further required to furnish details of the relations in respect of whom premium has been paid and to show cause why premium paid for insurance of relatives of employees be not disallowed (being gratuitous, not on commercial lines,) since obligation of employee is being met by employer. As per the appellant the expenditure incurred towards health insurance premium of family of employees was claimed as allowable expenditure under section 37 of the Income tax Act, 1961(for short ‘the Act’) as the same had been incurred wholly and exclusively for the purposes of the business. A perusal of the list of persons with respect to whom the medical insurance premium had been incurred revealed that the amounts had been incurred, leave apart immediate family (though subject to allow ability as being discussed later on), towards the medical insurance of Mother in Law of the Managing Director, leave apart his independent children, and also towards the married sisters of the other directors of the company.
According to the AO, the appellant 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 of certain case laws such as the Madras High Court decision in India Express Newspapers (Madurai) Pvt. Ltd. (238 ITR 070) and Calcutta High Court decision in MD Jindial (164 ITR 28), the AO was of the view 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 Mahindra & Mahindra Ltd., on which reliance was placed by the appellant, since the instant benefit was not for achieving the purpose of corporate social responsibility but in the case in question, it was to benefit a few selected employees. Even otherwise since the employees had not offered what amounted to be perquisites n their hands under section 17(2)(iv) of the Act, he was of the view that these were not business expenses qualifying for deduction under section 37(1) of the Act.
The assessee carried the matter in appeal before the CIT(A), who after considering the detailed submissions of the assessee and the order of the AO, sustained the addition made by the AO. Against which the assessee filed appeal before the Tribunal.
The learned Members of the Delhi ITAT, after hearing, the submissions of both the parties and going through the material available on record, found considerable substance in the contention of the assessee. The record revealed that the assessee had paid the insurance premiums of the employees’ family members in terms of employment Rules framed by the assessee-company there for. The Authorities below could not bring 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 was not necessary that all the payments/expenditure incurred by the assessee should have direct bearing on earning of income, but some payments are also made under certain business expediency. The payments claimed to have been made by the assessee for the insurance premium of such members who had attained the age of 21 years or more or who are the remote relations of assessee had already been offered by the assessee to tax before the CIT(A) as also noted in the written submissions. The Authorities below appeared to have rejected the claim of the assessee that these payments were in the nature of perquisites to the employees as contemplated under sub-clause (iv) of section 17(2) of the Act, according to which any sum paid by the employer in respect of 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 prohibited the application of section 17(2) of the Act in certain eventualities as contained in these provisos. In view of attending facts and circumstances of the case and the provisions of law, the learned Members did not find any justification in the findings reached by the Authorities below for rejecting the deduction of expenditure claimed by the assessee. Therefore, in view of various decisions relied by the assessee and in the totality of facts and circumstances of the case, the learned Members did not found any justification to discard the claim of assessee made under section 37(1) of the Act. The appeal of the assessee was allowed.