P.G. ELECTRONICS v. INCOME TAX OFFICER
[Citation -2005-LL-1007-5]

Citation 2005-LL-1007-5
Appellant Name P.G. ELECTRONICS
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 07/10/2005
Assessment Year 1998-99
Judgment View Judgment
Keyword Tags business organisation • business expenditure • capital expenditure • insurance premium • insurance policy • keyman insurance • premia
Bot Summary: Sub-s. to s. 10 was inserted to exempt any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy other than sums received under a Keyman Insurance Policy. The Explanation inserted below the sub-section defined a Keyman Insurance Policy to mean 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. Clause of sub-s. of s. 17 was amended to include any sum received under the Keyman Insurance Policy, including the sum allocated by way of bonus on such policy, as profits in lieu of salary of the employee, taxable under the head salaries. 18th Feb., 1998, issued by the CBDT as follows: Taxation of a sum received under the Keyman Insurance Policy A Keyman Insurance Policy of the Life Insurance Corporation of India, etc. The Finance Act, 1996, also lays down that the sums received by t h e said organization on such policies, be taxed as business profits; the surrender value of the policy, endorsed in favour of the employee, or the sum received by him at the time of retirement be taken as profits in lieu of salary for tax purposes; and in case of other persons having no employer- employee relationship, the surrender value of the policy or the sum received under the policy be taken as income from other sources and taxed accordingly. In the light of the above amendments and the circular clarifying the position relating to the allowability of the premium paid on Keyman Insurance Policy, the CIT, in my view, was not justified in directing the AO to disallow the premium paid by the assessee-firm in respect of the life of partner Anurag Gupta, assured under the Keyman Insurance Policy. There is no doubt regarding the fact that the policy is a Keyman Insurance Policy, as can be seen from para 2 of the order of the CIT. Therefore, the order of the CIT cannot be sustained as it runs counter to the amendments made to the Act as clarified by the circular issued by the CBDT. It is well-settled that circulars issued by the CBDT regarding the execution of the Act are binding on the IT authorities.


This appeal by assessee is directed against order passed by CIT(A) on 13th March, 2002 under s. 263 of Act for asst. yr. 1998-99. Nobody appeared on behalf of assessee though notice has been served on assessee as per AD card placed on record. I, therefore, proceed to dispose of appeal on basis of record and after hearing learned Departmental Representative. assessee is partnership firm, engaged in business of manufacture and sale of electronic and electric goods. In assessment completed under s. 143(3), AO allowed deduction in respect of insurance premium of Rs. 87,840 paid in respect of Shri Anurag Gupta, one of partners, under "Keyman Insurance Scheme". CIT considered allowance of premium as business expenditure to be erroneous insofar as it is prejudicial to interest of Revenue. He, therefore, took proceedings for revising assessment under s. 263 and invited assessee s objections. assessee seems to have started (supported) allowance of expenditure with reference to order of Bombay Bench of Tribunal in ITA No. 1747/D/81 (sic). CIT, however, observed that decision would apply only to certain situation, that it cannot be held that all premia paid by firm in respect of insurance of lives of partners irrespective of other facts and circumstances are allowable as deduction and proceeded to distinguish facts of assessee s case form facts in case before Tribunal. He noted that in present case, there was no provision in partnership deed providing for payment of life insurance premium for life of partner and nothing was also brought on record to show that partner concerned had some special or technical qualification which would have enabled firm to execute its business efficiently. CIT further noted that it is not known as to whether there was any liability on part of partner to refund amount of premium in case he retired or resigned from firm. In these circumstances, he directed AO to withdraw deduction allowed and thus enhanced assessment by Rs. 87,840. It is against aforesaid order of CIT that assessee is in appeal before Tribunal. I have considered matter in light of order of IT authorities and arguments of learned Departmental Representative. In grounds of appeal it is stated by assessee that success of business organisation greatly depends on one or more keymen because of their leadership ability, long experience or technical skill, that such person may even be partner of firm, that absence of such partner will be significant loss to firm, and, therefore, premia paid under Keyman Insurance Scheme was allowable under s. 37(1). It was also pointed out that there was only two partners, of which Anurag Gupta was keyman and main tool for profitability of firm. In ground No. 6, it is stated that supplementary deed has been executed reflecting clause relating to keyman insurance. In ground No. 7, it is stated that supplementary deed shows that partners have agreed to pay commission on insurance premium on life of Anurag Gupta. I have carefully considered matter. Various amendments were made to IT Act, 1961, simultaneously by Finance (No. 2) Act, 1996, w.e.f. 1st Oct., 1996 relating to subject of Keyman Insurance Policy. Clause (xi) was inserted to s. 2(24), which defined "income", to include any sum received under Keyman Insurance Policy including sum allocated by way of bonus on such policy. Sub-s. (10D) to s. 10 was inserted to exempt any sum received under life insurance policy, including sum allocated by way of bonus on such policy other than sums received under Keyman Insurance Policy. Explanation inserted below sub-section defined "Keyman Insurance Policy" to mean life insurance policy taken by person on life of another person who is or was employee of first-mentioned person or is or was connected in any manner whatsoever with business of first-mentioned person. Clause (ii) of sub-s. (3) of s. 17 was amended to include any sum received under Keyman Insurance Policy, including sum allocated by way of bonus on such policy, as "profits in lieu of salary" of employee, taxable under head "salaries". Clause (vi) was inserted to s. 28 to provide that any sum received under Keyman Insurance Policy including sum allocated by way of bonus on such policy will be charged to tax under head "profits and gains of business or profession". However, cl. (iv) to sub-s. (2) to s. 56, also inserted by same amending Act, provided that if sum received under Keyman policy is not taxed under head "salaries" or "profits and gains of business or profession", then it will be taxed under head "income from other sources". above amendments, all w.e.f. 1st Oct., 1996, were explained by Circular No. 762, dt. 18th Feb., 1998, issued by CBDT as follows: "Taxation of sum received under Keyman Insurance Policy Keyman Insurance Policy of Life Insurance Corporation of India, etc., provides for insurance policy taken by business organization or professional organization on life of employee, in order to protect business against financial loss, which may occur from employee s premature death. "Keyman" is employee or director, whose services are perceived to have significant effect on profitability of business. premium is paid by employer. There were some doubts on taxability of income including bonus, e tc ., from such policy and also regarding treatment of premium paid whether it should be allowed as capital expenditure or as revenue expenditure. Finance (No. 2) Act, 1996, therefore, lays down tax treatment of Keyman Insurance Policy. Clause (10D) of s. 10 of IT Act exempts certain income from tax. Finance (No. 2) Act, 1996, amends cl. (10D) of s. 10 to exclude any sum received under Keyman Insurance Policy including sum allocated by way of bonus on such policy for this purpose. Finance (No. 2) Act, 1996, also lays down that sums received by t h e said organization on such policies, be taxed as business profits; surrender value of policy, endorsed in favour of employee (Keyman), or sum received by him at time of retirement be taken as "profits in lieu of salary" for tax purposes; and in case of other persons having no employer- employee relationship, surrender value of policy or sum received under policy be taken as income from other sources and taxed accordingly. premium paid on Keyman Insurance Policy is allowed as business expenditure. amendments take effect from 1st day of October, 1996." amendments take effect from 1st day of October, 1996." It may be seen from para 14.2 of circular that Board was aware of doubts relating to treatment of premium paid in respect of Keyman Insurance Policy issued by LIC of India and has accordingly clarified, to put doubts at rest, in last sentence of para 14.4 that "The premium paid on Keyman Insurance Policy is allowed as business expenditure". In light of above amendments and circular clarifying position relating to allowability of premium paid on Keyman Insurance Policy, CIT, in my view, was not justified in directing AO to disallow premium paid by assessee-firm in respect of life of partner Anurag Gupta, assured under Keyman Insurance Policy. There is no doubt regarding fact that policy is Keyman Insurance Policy, as can be seen from para 2 of order of CIT. Therefore, order of CIT cannot be sustained as it runs counter to amendments made to Act as clarified by circular issued by CBDT. It is well-settled that circulars issued by CBDT regarding execution of Act are binding on IT authorities. amended law is applicable to year under consideration. CIT was, therefore, not justified in assuming jurisdiction to revise assessment under s. 263, contrary to law and circular issued by Board. He could not have considered assessment erroneous since allowance of premium as deduction as business expenditure was in conformity with circular of Board which was binding on AO. Even on merits, his view that premium paid on Keyman Insurance Policy should be disallowed is not tenable, also because of circular cited above. I therefore cancel order under s. 263 on both counts and allow appeal. *** P.G. ELECTRONICS v. INCOME TAX OFFICER
Report Error