Case Law Details
Brief of the case
In the case of Suri Sons vs. ACIT – ITAT Amritsar has held that that once life insurance policy has been sold as a life insurance policy on the keyman to the business, as long as it is in the nature of life insurance policy, whether pure life cover or term cover or a growth or guaranteed return policy, it is eligible for coverage of Section 10(10D).
Facts of the case
1. The assesse has claimed a deduction of Rs 1,49,99,222 towards keyman insurance policy on its partner Shri Sanjeev Suri. The Assessing Officer noted that the assesse had taken “united linked endowment assurance plan” and that out of total premium paid by the assesse, only Rs 3,26,293 is towards “risk premium on life” and the balance premium is invested by the insurance company in buying units. The main objective of the insurance policy, thus, was guaranteed returns on the insurance premium amounts, rather than life insurance, and this main objective was to be achieved by investing in units.
2. The Assessing Officer was of the view that a unit linked endowment plan, under Kotak Safe Investment Plan, “cannot be keyman insurance policy as per definition of keyman insurance given in the Income Tax Act”. The AO was of the view that keyman insurance policy can include only a ‘life insurance policy’ and “the scope of cover should not be wider than the term assurance”. The AO concluded that “the policy that has been taken as united linked endowment assurance plan is investment plan, premium of which has been put into growth fund and it is not a pure life insurance policy on the life of another person (emphasis, by underlining, supplied by the Assessing Officer)”.
3. The Assessing Officer also referred to the circular issued in April 2005 by the Insurance Regulatory and Development Authority (IRDA) referring to misuse of keyman insurance policies and warning the insurance companies and their agents of such malpractices. The AO observed that “Even as per the IRDA, only term insurance policies can be issued as keyman insurance cover”. The AO further examined an employee of the Kotak Mahindra Life Insurance Ltd who stated that the policy in question was “in no way keyman insurance policy” nor could it be converted into a keyman insurance policy. The AO also examined an employee of the Kotak Mahindra Old Mutual Life Insurance Ltd who stated on oath that the policy was issued as “keyman insurance cover under the United Linked Endowment Assurance Plan in accordance with the application made” by the policyholder.
4. the Assessing Officer also noted that the turnover of the assesse firm has gone down from 19 crores in the 2003-04 to Rs 12 crores in the assessment year 2004-05 and it has further come down to Rs 9 crore in the present year. This fall in turnover, apparently according to the Assessing Officer, shows that there was no commercial benefit from taking the keyman insurance cover. The insurance policy was taken for the benefit of the partner rather than the firm. No necessity or expediency of the person being keyman and the policy being taken for the benefit of the firm was established. When benefit of policy was assigned to the insured, the policy cannot be said to be for the benefit of the assesse firm.
5. After taking all the all aforesaid point AO hold that the assesse had failed to prove “that the policy taken is keyman as per definition given in the Income Tax Act, i.e. policy taken by a person on the life of another person and also fulfilling the terms and conditions laid down by IRDA in this regard, necessity and expediency of the person being keyman and the policy taken for the benefit of the assesse firm (emphasis, by underling, supplied by the AO)”, the Assessing Officer disallowed Rs 1,49,99,922.
6. Aggrieved by the decision of AO, assessee preferred an appeal before CIT(A) but could not get success . Hence assessee has preferred an appeal before ITAT against the order of the CIT(A)
Issue
Whether on the facts and circumstances of this case, learned CIT(A) erred in upholding the disallowance of Rs 1,49,99,922 towards premium of keyman insurance policies.
Contention of Assessee
1. The decisions in the case of Shri Nidhi Corporation (supra) and Emdee Apparel (supra) are directly on the issue that the insurance policy premium even on the policy which are not pure life insurance policies or term policies, are to be allowed as deduction as premium on keyman insurance policies. That precisely is the issue in this appeal, and, therefore, these decisions must be followed. As for the reference being made for special bench, learned counsel submits that the decision in the case of F C Sondhi & Co Vs DCIT [(2014) 49 taxmann.com 180 (Amritsar – Trib.)], is per incurium inasmuch as it does not follow earlier decisions on the same issue in the cases of Shri Nidhi Corporation (supra) and Emdee Apparel (supra), and, following decisions of this Tribunal in the case of JKT Fabrics Vs DCIT (4 SOT 84), it is not a binding judicial precedent.
2. That a rectification petition has already been filed against the said decision and this rectification is already heard, and order is reserved thereon, by the Tribunal on 2nd June 2015. In these circumstances, there being no conflict in the binding judicial precedents, there is no occasion for reference to the special bench. We are thus urged to follow the Shri Nidhi Corp decision and uphold the grievance of the assesse.
Contention of Revenue
1. The decision in the case of Shri Nidhi Coorporation Vs ACIT (151 ITD 470) is not applicable on the facts of this case as, in the policy submitted by the assesse, the assesse was given the liberty to choose the investment plan, whereas no such option was available to the assesse in the case of Shri Nidhi Corporation (supra). The assesse being allowed an option to choose its investment divests the very policy of its being nature of keyman insurance policy as such the same, being not the keyman insurance policy, is no eligible for exemption. It is further submitted that the issue involved in the case of Emdee Apparel & Another Vs ACIT, reported in 19 ITR Trib 623, is on different issue and I believe the same has no relevance to the subject matter of these appeals.
2. It is submitted that the Hon’ble bench has already decided the issue in favour of the department in the case of F C Sondhi & Co, and it is, therefore, prayed that the said order be followed. Without prejudice to this submission, it is submitted that if the Hon’ble bench is of the opinion that the said order is not to be followed, then it is an ideal situation where the issue should be referred to the President for constituting a special bench to decide the issue.
Tribunal decision / observations
1. As regards the F C Sondhi decision, relied upon by the learned Departmental Representative, we may point out that, while delivering this decision, an earlier decision on the same issue in the case of Shri Nidhi Corporation (supra), which decides the issue in favour of the assesse inasmuch as it holds that even non- pure life insurance policies are eligible for being treated as keyman insurance policies and that the IRDA circulars cannot, in any case, have a retrospective effect, was not taken note of by the Tribunal. Such a mistake may have been inadvertent but as to what is the consequence of such a mistake is, we find guidance from a coordinate bench decision in the case of J K T Fabrics (supra). Hence, in view of reasoning given in case of J K T Fabrics (supra) the coordinate bench decision in the case of F C Sondhi & Co (supra), does not constitute a binding judicial precedent.
2. What constitutes ‘keyman insurance policy’, we find guidance from the Explanation below Section 10(10D), as it stood at the relevant point of time, which defined the keyman insurance policy as follows:
For the purposes of this clause, “Keyman insurance policy” means a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first mentioned person.
3. All that is required for an insurance policy to meet the requirements of Section 10(10D), therefore, has to be – (a) it should be a life insurance policy; (b) it should be taken by the assesse on the life of another person who is, or was, an employee of the assesse or is related to the business of the assesse is any manner. Dealing with both the limbs of the above requirements, a coordinate bench of this Tribunal, in the case of Shri Nidhi Corporation (supra), has observed as follows:
It appears that after the assessee has purchased these policies, IRDA came up with circular dated 27th April 2005 that partnership insurance in the name of partner will not be covered under Keyman insurance but as a term insurance cover. Thus, such IRDA circular cannot be adversely viewed in case of the assessee as when the assessee has taken the policy under Keyman Insurance Scheme from two reputed insurance companies there was no such regulation. The other objections of the Revenue are that the deduction of the premium under Keyman insurance cannot be allowed in the case of partnership firm, is not tenable in view of the decision of the Hon’ble Jurisdictional High Court in B.N. Exports (supra), wherein, it has been held that if the Keyman Insurance Policy is obtained on a life of a partner, to safeguard the firm against a disruption of business, then the payment for premium on such policy is liable for deduction as business expenditure. Thus, even if a Keyman insurance has been taken in the name of a partner by the partnership firm, then also the deduction has to be allowed on the payment of premium. The other main objections of the learned Commissioner (Appeals) has been that firstly, these are not insurance policy as such but are mainly for capital appreciation under the investment scheme and secondly, the assessee has not received the maturity sum but it has been assigned to the partners, therefore, the assessee cannot be given deduction for any premium paid. Insofar as the first objection of the learned commissioner (Appeals) is concerned, we declined to agree with this conclusion, because once the assessee has bought a policy under a life insurance scheme, then whether the insurance company is making investment in mutual funds for capital appreciation or under any other investment scheme, will not make any material difference.
4. We are in considered agreement with the views so expressed by our distinguished colleagues. As long as a policy is an insurance policy, whether it involves a capital appreciation or is under any other investment scheme, it meets the tests laid down under section 10(10D).The requirement of pure insurance policy is something which is not laid down by the statute. Yet, it is this which has been inferred by the authorities below. Even if such an inference is desirable, as long as it does not emerge from the plain words of the statute, it cannot be open to supply the same. The concepts of term policy, pure life policy and the IRDA guidelines find no mention in the statutory provisions. But even if these concepts ought to be incorporated in this statutory provision of the Income Tax Act to make it more meaningful and workable, it cannot be open to any judicial forum to supply these omissions. Relying upon Hon’ble Supreme Court’s judgment in the case of Tarulata Shyam Vs CIT [(1977) 108 ITR 245 (SC)], a coordinate bench of this Tribunal, in the case of Tata Tea Limited Vs JCIT [(2003) 87 ITD 351 (Cal)]
5. It is also important to bear in mind the fact that the IRDA guidelines, no matter how relevant as these guidelines may be, have no role to play in the interpretation of the statutory provisions. IRDA is a body controlling the insurance companies and its guidance is relevant on how the insurance companies should conduct their business. Beyond this limited role, these guidelines donot affect how the provisions of the Income Tax Act are to be construed.
6. In this view of the matter, learned Assessing Officer’s observations to the effect that, “that the policy taken is keyman as per definition given in the Income Tax Act, i.e. policy taken by a person on the life of another person and also fulfilling the terms and conditions laid down by IRDA in this regard, necessity and expediency of the person being keyman and the policy taken for the benefit of the assesse firm (emphasis, by underling, supplied by the AO)” are devoid of any legally sustainable merits. The fulfilment of IRDA terms and conditions is wholly alien to the present context. As for the policy being taken for the benefit of the assesse firm, as long as it is for the purpose of taking an insurance policy on the life of a person who is related to the firm, the same cannot be called into question either.
7. IRDA regulates is issuance of life insurance policies by the insurance companies to the policyholders on the lives of its employees, former employees and key personnel but once such a policy is issued it cannot but be treated as a ‘keyman insurance cover’ as it essentially meets the requirement of Section 10(10D) because it is a “a life insurance policy taken by a person on the life of another person who is or was the employee of the first-mentioned person or is or was connected in any manner whatsoever with the business of the first -mentioned person”. The mandate of Section 10(10D) does not put any further tests, nor can we infer the same.
8. The Assessing Officer has questioned commercial expediency of taking the keyman insurance policies on the short grounds that (a) the fall in turnover, apparently according to the Assessing Officer, shows that there was no commercial benefit from taking the keyman insurance cover; (b) the insurance policy was taken for the benefit of the partner rather than the firm; and (c) no necessity or expediency of the person being keyman and the policy being taken for the benefit of the firm was established. When benefit of policy was assigned to the insured, the policy cannot be said to be for the benefit of the assesse firm. We see no merits in these objections to the commercial expediency. As for the fall in turnover, the benefit of an expenditure cannot be, by any stretch of logic, relevant to determine its commercial expediency, and, in any case.
9. Therefore, What constitutes a keyman insurance policy under section 10(10D) is not dependent on what is it treated even by the insurer; as long as the assesse is allowed to take life insurance policy on its keymen, as have been undisputedly taken in this case, the same satisfies the requirement of Section 10(10D). In view of these detailed discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assesse and delete the impugned disallowance of Rs 1,49,99,922. The assesse gets the relief accordingly.
