Loesche India Pvt. Ltd. Vs Add. CIT (ITAT Delhi)
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 there for. 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) of the IT Act. The ld. 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 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. In the instant case, The payments claimed to have been made by the assessee for the insurance premium of such members who have attained the age of 21 years or more or who are the remote relations of assessee have already been offered by the assessee to tax before the ld. CIT(A), as also noted in the written submissions above. The ld. 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 under sub-clause (iv) of section 17(2) of the IT 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 prohibit the application of section 17(2) in certain eventualities as contained in these provisos. We do not find any justification to discard the impugned claim of assessee made u/s. 37(1) of the IT Act.
FULL TEXT OF THE ITAT JUDGMENT
This is an appeal filed by the assessee against the order of the ld. CIT(A)-V, Delhi dated 27.11.2015 for the assessment year 2010-11 on the following grounds :
“1. That the order of the Learned Commissioner of Income Tax [Appeals V] New Delhi [hereinafter stated as CIT [All is bad in law and on facts.
2. That the learned 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.
3. That any consequential relief, to which the assessee may be entitled to under the foregoing grounds of appeal, may kindly be granted to the assessee.”
2. The brief facts of the case have been brought out by the ld. CIT(A) as under :
3. The appellant is 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. A return declaring total income of Rs.19,12,54,863/- was e-filed by the assessee 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 has 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 is claimed as allowable expenditure under section 37 of the Income tax Act, 1961 as the same has 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 has been incurred would reveal that the amounts have 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. Thus it could be well said that under the guise of medical premium with respect to family members, not even the direct but also the indirect and distant relatives of the key managerial persons are being benefited.
3.1. 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 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. 3 7(1).
3. The assessee carried the matter in appeal before the ld. CIT(A), who after considering the detailed submissions of the assessee and the order of the Assessing Officer, sustained the addition made by the Assessing Officer. Aggrieved, the assessee is in appeal before the Tribunal.
4. The ld. AR of the assessee reiterated the submissions made before the authorities below and has also submitted a written synopsis before us, stating as under :
6.1 Allowability of the expenditure disallowed
The allowability of this expense is governed by section 37(1). The main requisites laid down by the Supreme Court for allowability of expenditure u/s 37(1) are that the money paid out must be –
a) wholly and exclusively for the purpose of the business or profession; and further
b) must not be for:
(i) Capital expenditure;
(ii) Personal expense; or
(iii) Expense of the character described in section 30 to section 36.
In this connection we may also invite your attention to the decisions of Supreme Court in the following cases – CIT v. Indian Molasses Co. (P.) Ltd. [1970] 78 ITR 474 (SC) [for copy of this judgement pl refer pages 56 to 64 of the accompanying paper book
– sl no. 8]; J.K. Cotton Mfrs. Ltd. v. CIT [1975] 101 ITR 221 (SC); Sassoon J. David & Co. (P) Ltd. v. CIT [1979] 118 ITR ITR 261 (SC).
Section 3 7(1), generally provides for allowance of the residuary business expenditure. Therefore, business expenditure is allowable u/s 37, the sole condition precedent being the existence of nexus with the purpose of business carried on – Coates of India Ltd. v. CIT [1994] 205 ITR 373 (Cal).
The expense in question was incurred
exclusively for business purposes of the assessee was not personal in nature and
was revenue in nature.
Thus, an arbitrary disallowance on the basis adopted by the assessing officer while framing the assessment order for the AY 20 10-11 is grossly unreasonable and un-called for and is contrary to the
Provisions of section 37(1) and
The principles enunciated in the various case laws of Supreme Court referred above
6.2 Expenditure under consideration is on account of contractual obligation
The appellant respectfully submits that the insurance cover for the employees and their family members is being extended in line with the contractual obligations undertaken by the appellant in terms of the appointment letters issued to employees. The relevant extract of clause in the employment contract [for sample employment letters pl refer pages 65 to 74 of the accompanying paper book – sl no. 9] is as under:
“you shall be eligible for reimbursement of medical expenses and group medical insurance scheme for self and dependent family members as per rules of the company”
The above employment terms demonstrate that the payments made towards insurance premium for family members were purely towards the contractual obligations.
In the present age the benefits and facilities provided to the employees go a long way in keeping them happy and satisfied thus contributing to increase in productivity of employees. Therefore, the expense in question was incurred to further the business objectives of the assessee through having a more committed work force.
The coverage under the medical insurance policy is based on the declaration provided by the employees for the family members. [for sample declarations pl. refer pages 75 to 80 of the accompanying paper book – sl no. 10. The policy document is also enclosed at pages 81 to 96 of the accompanying paper book – sl no. 11]
6.3 Response to the observation of the Learned AO
In regard to the observation of the AO that “a further perusal of the list of the family members shows that this mechanism has been used by the assessee company, solely and exclusively to make payments on the medical insurance of the key management i.e. the directors and the Managing Director. A perusal of the list of persons with respect to whom the medical insurance premium has been incurred would reveal that the amount has been incurred for leave apart immediate family, towards the medical insurance of relatives like mother-in law of the managing director and sister of the other directors”.
The appellant respectfully submits that there were only 3 instances where insurance premium was paid for the distant family members of the employees and that the premium paid for such persons aggregated to Rs.32,274 details of which are as under:
