In a recent judgment, ITAT Amritsar has endorsed that Premium of Keyman Insurance Policy (KIP) is an allowable business expenditure.
I.T.A No. 20(Asr)/2013 Assessment Year: 2007-08
Freewill Sports Pvt. Ltd vs. ACIT
Date of Order/Judgment: 22/03/2016
Brief Facts of the Case:
The only issue involved in this appeal was regarding the allowability of Premium of Keyman Insurance Policy (KIP) against the order of CIT(A) who had upheld the addition of Rs.3,00,000/- on account of payment of of KIP.
The ITAT noted that this case was earlier decided by Tribunal vide its order dated 13.05.2014 in favour of Revenue which was however recalled vide order dated 29.02.2016. It was also observed by the ITAT that CIT(A) had dismissed the appeal of assessee by following his own order in the case of Suri Sons which itself had been decided by the Tribunal in ITA 37(Asr)/2010 vide its order dated 31.08.2015 in favour of assessee.
While deciding the issue under the current appeal, The ITAT completely relied on its previous judgment delievered in the Suri Sons case.
The broad observations that emerged from the judgment in Suri Sons case are as under:
- All that is required for an insurance policy to meet the requirements of Section 10(10D),is (a) it should be a life insurance policy; (b) it should be taken by the assessee on the life of another person who is, or was, an employee of the assessee or is related to the business of the assessee is any manner.
- 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.
- Once the assessee purchases a policy under a life insurance scheme, then whether the insurance company makes investment in mutual funds for capital appreciation or under any other investment scheme, will not make any material difference.
- 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.
- Guidelines/Circular issued by the IRDA are not relevant to interpret the provisions of the Income tax Act, 1961.
- CBDT’s Circular dated 18.2.1998 is binding on the Income Tax Department, which categorically stipulates that premium on keyman policy should be allowed as business expenses.
- The words “is or was connected in any manner whatsoever with the business of the subscriber” are wider than what would be subsumed under a contract of employment.
- The object and purpose of a Keyman insurance policy is to protect the business against a financial set back which may occur, as a result of a premature death, to the business or professional organization. There is no rational basis to confine the allowability of the expenditure incurred on the premium paid towards such a policy only to a situation where the policy is in respect of the life of an employee. A Keyman insurance policy is obtained on the life of a partner to safeguard the firm against a disruption of the business that may result due to the premature death of a partner. Therefore, the expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of business.
- When KIP premium is treated ‘business expenditure’ per se by the Department itself, there cannot be any question of raising the issue of want of business expediency.
- Merely because the policy was assigned after sometime would not mean that the expenditure incurred in the first instance would lose the flavour of it being ^business expenditure’.
- Once the legal provisions and the outlook of Department itself based on such legal provisions permit the assessee to have the tax planning of this nature, and the course of action taken by the assessee is permissible under law, the argument of colourable device cannot be advanced by the Revenue.