CBDT releases FORM ITR-3, ITR-4, ITR-5, ITR-6, ITR-7 for A.Y. 2014-15
Income-tax Notification No. 28/2014, Dated- 30th day of May, 2014
S.O. 1418(E).─In exercise of the powers conferred by section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-
- (1) These rules may be called the Income-tax (6th Amendment) Rules, 2014.
(2) They shall be deemed to have come into force with effect from the 1st day of April, 2014.
2. In the Income-tax Rules, 1962 (hereinafter referred to as the said rules), in rule 12, insub-rule(2), in the proviso,-
(a) after the expression "section 10A", the expression "section 10AA"shall be inserted;
(b) after the expression "section 44AB", the expression "section 44DA, section 50B"shall be inserted;
(c) for the expression "or section 115JB", the expression "section 115JB or section 115VW"shall be substituted.
3. In the said rules, in Appendix-II, for FORM ITR-3, FORM ITR-4, FORM ITR-5, FORM ITR-6 and FORM ITR-7, the following FORMS shall respectively be substituted, namely:-
[Notification No. 28/2014, F. No.142/2/201 4-TPL]
(Gaurav Kanaujia) Director to the Government of India
Note.- The principal rules were published in the Gazette of India, Extraordinary, Part-II, Section 3, Sub-section (ii) vide notification number S.O.969(E), dated the 26th March, 1962 and last amended by Income-tax (5th Amendment) Rules, 2014 vide notification S.O. No.1297 (E) dated 16 May, 2014.
Services provided to Foreign Principals for marketing their products in India qualify as an export of service
We are sharing with you an important judgement of the Hon'ble CESTAT, Delhi, in the case of Commissioner of Service Tax, Delhi Vs. Menon Associates [2014-TIOL-885-CESTAT-DEL] on following issue:
Issue:
Whether the Business Auxiliary Services ("BAS") provided to Foreign Principals for marketing their products in India qualify as an export of services under the erstwhile Export of Service Rules, 2005 ("the Export Rules")?
Facts & Background:
Menon Associates ("the assessee" or "the Respondent") was engaged in providing marketing services to its Foreign Principals based in UK, Italy and Australia during the period April, 2008 to January, 2009 ("the period"), which involved marketing of Principal's products in India. In consideration for the said activity, the assessee was getting commission from its Foreign Principals on which they paid Service tax amounting to Rs.15,49,103/- under BAS taxable under Section 65(105)(zzb) of the Finance Act, 1994. Subsequently, realizing that the services provided by them amounted to export of services in terms of Rule 3(1)(iii) of the Export Rules, they have applied for refund of the Service tax so paid by them.
The refund claim was rejected by the Adjudicating Authority but was allowed by the Learned Commissioner (Appeals), holding that the service of marketing of goods provided to Principals located abroad is export of service in terms of Rule 3(1)(iii) of Export Rules in as much as this service has been used by the persons located abroad for their business and the Respondent have also received the payment in foreign exchange, as is evident from the remittance certificates which showed all the transactions during the period along with the credit advices.
Being aggrieved by the said order, the Revenue preferred an appeal before the Hon'ble CESTAT, Delhi, contending that the Agreements between the Respondent and its Foreign Principals stipulate that the Respondent are to act as their representatives in India and supply information about their products and sell the same within the territory of India. Thus, whatever services had been rendered by the Respondent were meant to be used in India and had, in fact, been used in India and hence, the condition regarding use of the service and the delivery of the service being outside India was not satisfied. The Revenue also pleaded that the remittance advices produced do not mention the invoice no and hence, it cannot be said that the value of the services provided had been received by the Respondent in convertible foreign exchange.
Held:
It was held by the Hon'ble CESTAT, Delhi that BAS rendered by the assessee to its Foreign Principals for marketing their product in India qualify as an export of service under the provisions of the Export Rules.
The Hon'ble CESTAT, Delhi further held that since the clients to whom BAS has been provided are located outside India and the same has been used by them for their business, the following conditions of Rule 3(1) of the Export Rules read with Rule 3(2) thereof are satisfied:
(a) Service has been provided to a recipient located outside India for use in relation to commerce or industry,
(b) Service has been used outside India.
Regarding the other condition prescribed in Rule 3(2) of the Export Rules, requiring the payment to be made in convertible foreign exchange, the Hon'ble CESTAT, Delhi upheld the finding of Learned Commissioner (Appeals) in this regard.
Therefore, the Hon'ble CESTAT, Delhi rejected the contention of the Department and decided the case in favour of the assessee/ Respondent.
Point to note:
Effective form July 1, 2012, the Export Rules are rescinded and replaced by Rule 6A of the Service Tax Rules, 1994 ("the Service Tax Rules") read with the Place of Provision of Services Rules, 2012 ("the POP Rules"). Post July 1, 2012, for a service to be treated as an export of service, all the conditions as specified under Rule 6A of Service Tax Rules read with Rule 6(8) of the Cenvat Credit Rules, 2004 needs to be fulfilled. Otherwise, the service will not be treated as an export of service.
(Bimal Jain, FCA, FCS, LLB, B.Com (Hons), Mobile: +91 9810604563, Email: bimaljain@hotmail.com)
Requirement of Form 15CA and Form 15CB when remittance is not taxable
CA Pankaj G. Shah
Form 15CA is a Declaration of Remitter and is used as a tool for collecting information in respect of payments which are chargeable to tax in the hands of recipient non-resident. This is starting of an effective Information Processing System which may be utilized by the Income tax Department to independently track the foreign remittances and their nature to determine tax liability. In the modern times, the system for selection of cases into scrutiny have reduced drastically and without scrutiny there was no check to ensure that taxable foreign remittances have been made after deduction of tax or not. Therefore, the remittance channel i.e. Banks have been directed to obtain Form 15CA and 15CB before making any remittance. Authorised Dealers/ Banks are now becoming more vigilant in ensuring that such Forms are received by them before remittance is effected since now as per revised Rule 37BB a duty is casted on them to furnish Form 15CA received from remitter, to an income-tax authority for the purposes of any proceedings under the Income-tax Act.The issue which has arisen here is that whether Form 15CA has to be submitted in all cases since the Bankers demand it invariably?
In this regards the attention is invited to the Headings of the Form which provides as under:
"Information to be furnished for payments, chargeable to tax, to a non-resident not being a company, or to a foreign company"
"(To be filled up if the remittance is chargeable to tax and does not exceed fifty thousand rupees and the aggregate of such remittances made during the financial year does not exceed two lakh fifty thousand rupees)"
(Underlined for emphasis)
As can be seen from above the Form clearly states that it needs to be filled only if the remittance is chargeable to tax in India. Therefore on the first blush it appears crystal clear that Form 15CA is not required to be filled if the remittance/ payment to non-resident are not chargeable to tax. However the confusion has been created to Banks since a list has been provided in Rule 37BB where no information in Form 15CA is required and therefore except for the items provided in the list, Banks are insisting for Form 15CA even though the payment is not chargeable to tax. In such cases, the possible recourse is to submit a declaration in form of a note to Bank stating the nature of remittance and reason as to why it is not chargeable to tax and consequently exempted from the submission of Form 15CA.
How would one come to know that the remittance is chargeable to tax or not?
The answer is Form 15CB. Chargeability can be ascertained and certified by obtaining the Certificate from a Chartered Accountant in Form no. 15CB. This certificate has been prescribed under Section 195(6) of the Income tax Act and is an alternate channel of obtaining Tax clearance apart from Certificate from Assessing Officer.
Perusal of Form 15CB makes it clear that there is no condition or exemption to obtain such certificate when the remittance is not chargeable to tax. In fact this Form 15CB is the Tax Determination Certificate where the Issuer CA examines the remittance having regard to chargeability provisions under Section 5 and 9 of Income tax Act along with provisions of Double tax Avoidance Agreements with the Recipient's Residence Country. Therefore in my opinion, it is advisable to obtain 15CB even in cases where 15CA is not mandated. Though there is no penal provision prescribed in the Act if such Certificates in Form 15CB and Declaration in Form 15CA are not obtained, but it is in the interest of Assessee to have a tax determination in Form 15CB from a CA, since Non-resident taxation involves various complex issues and the consequences of Non deduction are severe.
(The author can be reached at pankajgshah@gmail.com or on +91 96918 93040 for any queries)
Points to Remember While Submitting Form No. 15G & 15H
CA Naresh Jakhotia
Very often, readers keep enquiring about the submission of forms No. 15G/15H to the banks or others payer so that interest could be received without deduction of tax at source (TDS). In this column, I am covering all about Form No. 15G & 15H and hopefully the detailed elaboration hereunder would provide a comprehensive picture about the submission of Form No. 15G & 15H.
What is Form 15G/ H and its relevance:
Basically, as you may be knowing, Tax at source is deductible (TDS) on some interest paid or payable, above Rs. 5,000/- (Rs. 10, 000/- if the payer is a bank). If yearly interest payment doesn't exceed Rs. 5,000/- or Rs. 10, 000/-, as mentioned above, then there is no liability to deduct tax at source.
TDS is nothing but tax paid in advance on behalf of the payee and credit for the same can be claimed by the payee at the time of filing the income tax return. However, TDS can be avoided by the payee by submitting declaration form No. 15G/15H. These forms have to be filed in duplicate and once the payer (bank, post office, company etc) takes them on record, the entire interest is to be paid to the depositor / lender without TDS. There are certain precautions one should take while submitting these forms. Filing a wrong form without being eligible to do so would be illegal and could involve payment of interest on the tax payable and also attracts penal consequences. The conditions under which Form 15G and 15H may be filed are almost similar yet there is a significant difference which needs to be noted carefully. In routine course, lot of taxpayers end up filing one of these forms when they are not eligible to do so and vice versa.
The main difference between Forms 15G and 15H is that Form 15G is meant for non-senior citizens whereas Form 15H is meant for senior citizens only.
Who can submit form No. 15G?
First and foremost only, a person who is resident in India can submit form No. 15G. NRI cannot submit this form. To be eligible to furnish Form 15G, the non-senior citizen needs to fulfill the following two conditions:
- The final tax on his estimated total income computed as per the provisions of the Income Tax Act should be nil; and
- The aggregate amount of interest income etc. received during the financial year should not exceed the basic exemption limit for that relevant year.
If both these conditions are satisfied, Form 15G may be furnished to the payer & entire interest income could be received without any TDS.
Who can submit form No. 15H?
Any resident individual, who is above the age of 60 years or has completed the age of 60 years at any time during the financial year, can submit form No. 15H provided his tax liability on the basis of his estimated income is nil. Unlike form No. 15G, this form can be submitted by the senior citizen even though the total interest amount from the payer may exceed Rs. 2.50 Lacs (i.e., the limit of basic exemption limit).
Difference between form 15G and 15H:
- Form 15G can be submitted by individual below the Age of 60 Years while form 15H can be submitted by senior citizens (60 years & above).
- Form 15G can be submitted by Hindu undivided families also but form 15H can be submitted only by Individual above the age of 60 years.
- 15G cannot be filed by any person whose income from interest on securities/interest other than "interest on securities" exceeds the applicable basic exemption limit.
Certain points to remember while submitting Form 15G & 15H:
- Please ensure to mention Permanent Account Number (PAN) on the forms while submitting form No. 15G or 15H. In case, taxpayer fails to provide PAN to the deductor, the tax would be deductible @ 20%. As a precautionary measure, taxpayer should keep hard copy of an acknowledgement of 15G/15H filed with the deductor (with PAN mentioned over it) to ensure that tax is not deducted at all.
- These Forms are to be submitted in duplicate, one of which is forwarded to the IT department. Income Tax Authorities can make further inquiries regarding the declaration filed by the depositor.
- The form should be submitted at the beginning of each financial year or at the time of deposit itself so as to avoid a situation where payer has already deducted the tax before its receipt.
- If a person is making FD in different branches of same bank then these forms should be deposited at each and every branch where the deposit has been made. For example, if Mr. Ashish has made deposits at three different branches of SBI, then he has to submit the Forms at each branch separately.
- These Forms can only be used for payments like dividends, interest on securities, interest other than interest on securities, national saving schemes, interest on units. For other types of payments (like brokerage, rent etc), these forms cannot be used.
- It may be noted that new set of forms are required to be filed every year and the eligibility criteria as stated above needs to be examined every year before furnishing the forms. Form 15G / Form 15H, once submitted, is valid for the financial year in which it is furnished. For subsequent years, the form would be required to be submitted again if assessee wants to receive the interest without deduction of tax at source.
- No TDS is deductible by banks on interest payable in saving bank accounts and recurring deposit accounts
- In case of bank FDR made for longer duration, even if interest will be paid on maturity only, the bank is required to deduct tax at source on the interest accrued for that year even though no interest in fact has been paid. So, ensure to submit form No. 15G/H on yearly basis even if FD doesn't mature in that year.
- Any false or wrong declaration attracts penalty under section 277 & so it should not be signed blindly. Such false declaration is liable for prosecution which may range from 3 months to 7 years depending upon the quantum of default. Taxpayer can be penalized with rigorous imprisonment irrespective of fact that such wrong details were furnished intentionally or unintentionally as "Ignorance of Law is no excuse."
- Further, the taxpayer may please note that Part A1 in form 26AS shows the interest on FD's against which tax is not deducted due to submission of Form No. 15G/ 15H. The information is readily with the IT department.
- Irrespective of the fact that Form15G & 15H has been filed or not, such income has to be mentioned under proper head while filing the return.
I hope that from the above discussion, it may be clear that you need to comply with certain conditions to be eligible to file form No. 15G or 15H. Moreover, you need to take certain precautions while filing these forms with the payer.
(Author is a CA in Practice from Nagpur and is Partner in M/s. SSRPN & Co.)
IT : A firm assigned a Keyman Insurance Policy to its partner just two days before completion of lock-in period and on that it had nil surrender value - The ITAT held that such assignment was made with a malafide intention so that the surrendered value could escape taxability in the hands of the employee - Therefore, the amount received under Keyman Insurance Policy would be taxable in the hands of partner
Facts:
| (a) | A partnership firm had taken a Keyman Insurance Policy in the name of the partner-assessee on March 31, 2005 and paid the first premium on the same day. | |
| (b) | Second and third premiums were paid on March 31, 2006 and March 31, 2007 respectively. | |
| (c) | After payment of premium for 3 years, firm had an option to surrender the policy at any time. However, if policy was surrendered before the completion of three years from the date of policy, i.e., 31st March, 2008, its value would be nil. | |
| (d) | The partnership firm assigned the policy to the partner-assessee on March 29, 2008 who, in turn, without paying the premium due on March 31, 2008 surrendered the policy and transferred the funds to the firm. | |
| (e) | Assessee contended that assignment of policy in his favour had converted Keyman Insurance Policy into an ordinary life policy and, therefore, any amount received on its maturity would be exempt under Section 10(10D). | |
| (f) | Assessee contended that since the surrender value of the policy was 'zero' at the time of assignment, same could not be taxable in his hands as was held by the tribunal in the case of Dr. Naresh Trehan v. Dy. CIT [I.T.A No. 1964/Del of 2010] |
ITAT held in favour of revenue as under:
| (1) | In view of section 28(vi) of the IT Act any amount received by an organization under a Keyman Insurance Policy would be taxable in the hands of such an organization as business profit. If such policy is endorsed in favour of employee (Keyman) than it would be taxable as 'profits in lieu of salary' under section 17(3)(ii). If such policy is endorsed in favour of any other person then sum received under the policy would be taxed as income from other sources under section 56(2)(iv). CBDT vide Circular No.762, dated February 18, 1998 had also clarified the same. | |
| (2) | Dr. Naresh Trehan case (Supra) was misinterpreted by assessee as in that case it was held that the surrender value of the policy was taxable in the hands of the transferee. The contention of assessee, that there was no surrender value on the date of assignment, was baseless because for all practical purposes the policy had completed 3 years and it was only due to malafide intention of the assessee to evade tax that it was transferred to the partner-assessee just two days before the completion of three years. | |
| (3) | Considering all the facts, it was crystal clear that the firm and assessee had arranged the affairs so as to kill two birds with one stone. It had got the required funds and simultaneously it did not pay any taxes thereon. | |
| (4) | In these circumstances, the findings of the Hon'ble Supreme Court in the case ofMcDowell & Co. [1985] 22 Taxman 11 were squarely applicable. Therefore, the whole affairs was rendered sham and the assessee was held liable to pay tax on surrender value received from Keyman Insurance Policy. |
■■■
[2014] 45 taxmann.com 573 (Amritsar - Trib.)
IN THE ITAT AMRITSAR BENCH
Deputy Commissioner of Income-tax
v.
Manjit Kumar
H.S. SIDHU, JUDICIAL MEMBER
AND B.P. JAIN, ACCOUNTANT MEMBER
AND B.P. JAIN, ACCOUNTANT MEMBER
IT APPEAL NO. 175 (ASR.) OF 2013
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
MAY 21, 2014
Tarsem Lal for the Appellant. Sudhir Sehgal for the Respondent.
ORDER
Per Bench ; This appeal of the assessee arises from the order of the CIT(A), Jalandhar, dated 04.01.2013 for the assessment year 2009-10.The assessee has raised following grounds of appeal:
| "1. | Whether on the facts & circumstances of the case, the CIT(A) is right in deleting the addition of Rs.59,14,720/- made by the AP treating the maturity proceeds of insurance policy as taxable by ignoring the fact that assignment of policy just two days before the completion of three years i.e. on 29th March, 2009 was done not for any financial or commercial consideration but just to avoid tax. | |
| 2. | Whether on the facts & circumstances of the case, the CIT(A) has ignored the clause 4 (iv) and 4(v) of the policy which reproduced as under: | |
| "(iv) A proportion of each premium the investment content, will be used to buy units in the Fund(s) of your choice. The current investment content rate for all premiums is specified in the policy schedule. | ||
| (v) If you have chosen more than one Fund, we will split the investment content in accordance with your instructions before we allocate units in each fund." | ||
| It is evident from the above clauses that the policy was not mere an insurance policy but was an investment tool for the firm. | ||
| 3. | Whether on the facts & circumstances of the case, the CIT(A) is justified in restricting the disallowance of expenses like petrol, car, business promotion expenses etc. incurred in by the assessee to Rs.40,000/- and not to 50% of the balance expenditure of Rs.1,76,408/- after allowing telephone expenses amounting to Rs. 2,16,216/- whereas the ld. CIT(A) himself observed that the assessee was engaged in the business commodity trading which is mainly done by sitting in the office on telephone. | |
| 4. | That the appellant craves leave to add or amend any ground of appeal before it is finally disposed off." |
2. The brief facts of the case as arising from the order of the AO at pages 2 to 7 are reproduced for the sake of convenience as under:
"2. From the capital account of the assessee, it was noticed that an amount of Rs.59,14,702/- was credited to this account on 26.04.2008. There was no reference to this amount in the return of income or other details. Accordingly, vide letter dated 31.10.2011 the assessee was asked to intimate the nature and source of this amount. It was intimated vide letter filed on 14.11.2011 that M/s. J.V. Steel Traders , a firm in which the assessee was a partner, had taken a Keyman's Insurance Policy from HDFC Life Insurance Co. in the name of the assessee. The same was assigned to him by the firm on 29th of March, 2008. The reason for the same has been stated to be inability of the firm to pay the premium due to losses. That policy was surrendered by the assessee, in April 2008 and the amount of Rs.59,14,702/- is the proceeds of that policy. The matter was discussed at length with Sh. Janak Raj, father of the assessee and Sh. Yogesh Thakur, CA counsel for the assessee on 01.12.2011. During discussion the following salient facts regarding the policy emerged:
| (i) | The policy was purchased by the firm on 31st March, 2005 and the first premium was paid on that date. | |
| (ii) | The second and third premiums were paid on 31st March, 2006 and 31st March, 2007 respectively. | |
| (iii) | The firm claimed and was allowed deduction of these amounts for the respective assessment years u/s 37(1) of the Income Tax Act, 1961. | |
| (iv) | As per the terms of the policy, the firm was required to pay premium for at least 3 years, which had been paid by it as above. | |
| (v) | After payment of the premium for 3 years, the firm could surrender the policy at any time and would get the unutilized value of the units at the credit of the policy. However, before the completion of three years from the date of the policy i.e. 31st March, 2008, this value would be ZERO. | |
| (vi) | The policy was assigned by the firm to the assessee on 29th of March, 2008. | |
| (vii) | The next premium due on 31.03.2008 was not paid by the assessee. | |
| (viii) | The assessee surrendered this policy to the company in April, 2008 and got the proceeds in his account on 26th April, 2008 i.e. within one month from the date of assignment. | |
| (ix) | Out of the above sale proceeds, an amount of Rs.59,14,000/-was transferred to the same firm i.e. M/s. J.V. Steel Traders by the assessee on Ist May, 2008. |
2.1 In this manner, the whole process of assignment of the policy by the firm to the assessee, its surrender and encashment by him and transfer of the funds to the firm was completed in a period of about a month. Had the policy not been assigned and been surrendered and encashed by the firm itsesf, the proceeds would have been taxable in its hands. However, the assessee has not included this sum in his taxable income. Accordingly, vide note sheet entry dated 01.12.2011, the assessee was asked to explain as to why the amount of Rs.59,14,702/- may not be treated as his taxable income and added to his income. The case was adjourned to 15.12.2011. On 15.12.2011, the case was attended by Sh. Janak Raj, father of the assessee, alongwith Sh.Yogesh Thakur, CA, Counsel and written reply was filed. The gist of the same is reproduced as below:
"As already submitted in our last reply that the assessee has received a sum of Rs.59,14,702/- on account of surrender value of unit link endowment policy no. 10197551 of HDFC, M/s. J.V. Steel Traders, Ludhiana where he was a key partner as on 29.03.2008. This policy was purchased by the firm in the name of the assessee under keyman insurance policy in the year 2005. The premium for the year ending 2005, 2006 and 2007 were paid by the firm amounting to Rs.15 lac each and deduction has been claimed by the firm u/s 37(i) of the Act on the premium so paid. In March, 2008, the keyman insurance policy was assigned by the firm in the favour of keyman. At the time of assignment of this policy, the surrender value of the policy was Nil. It is further submitted that assignment of the policy no longer answers description of keyman insurance policy because on assignment the keyman becomes policy holder and since the policy is on his life, the policy gets converted into ordinary life policy and loses the characteristics of keyman insurance policy and hence amount received on maturity by keyman in whose favour policy is assigned is exempt u/s 10(10D). Therefore, the amount of Rs.59,14,702/- received by the assessee, on account of surrender value of policy no.l10197551 is exempt u/s 10(10D) of the Act. The photo copies of policy documents and surrender value certificates issued by the HDFC Life Insurance Co. were also submitted before your goodself at the time of last hearing of the case.
In support of this plea, it is submitted that at the time of assignment, the surrender value is taxable as profits in lieu of salary u/s 17(2)(iii) in the assessment of the employee as stated by board in para 14.4 of circular 762 dt. 18th Feb., 1998 and if amount received on maturity is taxed again there would be double taxation of the same income which could not have been intended. The second submission that the assessee could make is to the effect that assignment which is irrevocable and unalterable of the policy, effects an absolute transfer of interest or benefit under the policy to the assignee and on assignment the assignee, becomes the only person entitled to the benefit under the policy and is subject to all liabilities and equities to which assignor was subject on the date of assignment and this means that assignee is not merely entitled to received the sum but has a right to policy money itself [see CED v. Kewelran [1989] 77 CTR (MP) 223: [1989] 179 ITR 254 (MP)]. Originally it was policy taken by one person on life of another person. After assignment it is a policy on the life of the policy holder himself and it does not come within the ambit of definition of 'Keyman insurance policy". The original policy may not have been cancelled and new policy may not have been issued but the assignment has totally altered the characteristic of original policy. Since after assignment assessee is policyholder and since policy is on his life, the sum received on maturity would be regarded as sum received under a life insurance policy and not sum received under keyman insurance policy and hence it would be exempt.
Your goodself kind attention is further invited to the recent decision of "The Delhi Tribunal" in the case of "DR. Naresh Trehan v. Deputy CIT [2010-TIOL-418-ITAT-Del] in which it has been held that "on assignment of Keyman insurance policy - total sum received on maturity (after reducing surrender value of the policy at the time of assignment) is exempt from tax."
In a recent ruling of the above said case, the Delhi Tribunal held that upon assignment of the keyman insurance policy by the company to the individual assessee, the total amount of the maturity value, as reduced by the amount equivalent to the surrender value of the policy at the time of assignment is not to be taxed.
2.2 The case was discussed at length. The policy is claimed to have been assigned by the firm to the assessee as the former was not in a position to pay the premium due to losses. Another contention of the assessee is that, after the policy was assigned by the firm to the assessee, it was no more Keyman's Insurance Policy and it became the normal Life Insurance Policy. It has also been stated that, as per the terms of the policy, it could be assigned at any time. Hence, the action of the firm was legal. In support of these contentions, decisions of the Hon'ble ITAT, Delhi Bench in the case of Dr. Naresh Trehan and Sh. Rajan Nand have been cited.
3. The above reply and various contentions raised by the assessee have been considered and are being dealt with as under:
3.1. The first contentions of the firm being in loss and not affording to pay the premium does not hold any ground. In fact, it contains its rebuttal in itself. The policy is not merely a policy on the life of the assessee. This is in fact an investment policy. This is amply clear from clauses 4(iv) and 4(v) of the policy, which is reproduced as under:
"(iv) A proportion of each premium, the investment content, will be used to buy units in the Fund(s) of your choice. The current Investment Content Rate for all premiums is specified in the policy schedule.
(v) If you have chosen more than one Fund, we will split the Investment content in accordance with your instructions before we allocate units in each fund."
The above clauses show it beyond any doubt that the policy was an investment tool for the firm. It had the option to invest in a particular fund or even to split the investment in more than one funds of its choice. No one gives away ones right just for the sake of it. The firm had already paid three installments of the premium and could have continued to hold the policy without making any further payment. It very well knew that a substantial part of premiums paid by it have gone into investment in fund(s) of its choice. Just two days after the policy was assigned, it would have completed 3 years and would be able to encash that investment. Rather, it chose to transfer the policy, because if it had been retained and encashed, the proceeds would have been subject to tax. The policy was assigned on 29th March, 2009 not for any financial or commercial consideration but just to avoid tax.
3.2. The second contention of the assessee is that after assignment, the policy is no more Keyman's Insurance Policy, but a normal Life Insurance Policy. Before dealing with this contention, it will be worthwhile to go into the legal position relating to this issue. Section 17(3) of the Income-tax Act, 1961 deals with 'Profits in lieu of salary'. Clause (ii) of this section reads as under:
"(ii) any payment (other than any payment referred to in clause (10) [, clause (10A)] [, clause (10B)], clause (11), [clause (12) [, clause (13)] or clause (13A)] of section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund [* * *], to the extent to which it does not consist of contributions by the assessee or [interest on such contributions or any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy."
The underlined portion of the above clause was inserted vide finance (No.2) Act, 1996 w.e.f. 01.10.1996. The provision was explained by the CBDT through circular No.762 dated 18.02.1998. Para 14.4 of this circular, which had been referred to by the counsel for the assessee also in the reply filed on 15.12.2011, is reproduced below:
"The act also lays down that the sums received by the said organization on such policies, be taxed as business profit' the surrender value of the policy endorsed in favour of the employee (Keyman), or the sum received by him at the time of retirement be taken as "profits in lieu of salary" for tax purpose; and in case of other persons having no employer-employee relationship, the surrender value of the policy or sum received under the policy be taken as income from other sources and taxed accordingly. The premium paid on the Keyman Insurance Policy is allowed as business expenditure."
From the above, it is clear that the law envisages taxation of any sum received under Keyman's Insurance Policy. Even bonus on the same is also taxable. The position has been reiterated by the CBDT also in the above referred circular.
Accordingly the contention of the assessee is not valid. The assessee is trying to misinterpret the decisions of the Hon'ble ITAT, Delhi. The Hon'ble ITAT has held that the surrender value of the policy is taxable in the hands of the transferee, in this case the assessee. It is being claimed that on the date of transfer, the policy had no surrender value. This claim is based on the technical ground that the policy had not completed 3 years. However, for all practical purposes, the policy had completed 3 years. It is only due to malafide intention of the assessee to evade tax, that it was got transferred just two days before completion of three years. This intention of the assessee is further strengthened by the fact that the assessee did not pay the premium due on 31.03.2008. This shows that he intended to encash the policy immediately after it completed three years. Thus, in the instant case, the question is a little bit different. This involves assignment of a policy for a mala fide purpose. It involves lifting of veil between the firm and the partner and looking at the whole affair as one. As such this contention of the assessee is not valid in the given circumstances.
3.4. After over-ruling the contentions given by the assessee, it is time to go into the real purport of the whole game. Considering all the facts, it is crystal clear that the only purpose of all this is to evade the payment of tax, that would have been otherwise payable. As mentioned above, the firm could surrender the policy at any time after retaining it for at least three years. It had done so, for almost this period. It was in need of funds, as stated by the assessee that it was in loss. To overcome the shortage of funds, surrender and encashment of the policy would have been a handy tool. The firm, in fact, resorted to the same. This is clear form the fact that after assignment, the assessee did not pay the next premium due on 31.03.2008. This shows that at the very outset, they intended to encash the policy immediately after completion of three years. However, if it was encashed in its own hands the procee3ds would have been liable to income tax. To avoid the same, it chose this circuitous route. By doing so, it intended to kill two birds with one stone. One the one hand, it got the required funds and on the other hand, it would go away without paying the due tax. In these circumstances, the action of the assessee is a clear case of manipulation and adoption of colourful method to avoid the payment of due taxes. In these circumstances, the findings of the Hon'ble Supreme Court of India in the case of McDowell & Co. 154 ITR 148 are squarely applicable. The gist of the same is that any action, which is otherwise legal, becomes illegal and sham, if done with malafide. By the same ratio, the whole affair is rendered sham and the assessee is liable to pay tax on the amount of Rs.59,14,702/-. Moreover, in view of the legal position discussed in para 3.1 above, the sum received under the policy is taxable in the hands of the assessee as he is the receiver of the sum.
4. Keeping in view the above discussion, the amount of Rs.59,14,702/- is treated as taxable receipt in the case of the assessee and added to his income."
3. The Ld. CIT(A) vide para 6 to 7 of his order deleted the addition so made and the relevant decision of the ld. CIT(A) for the sake of convenience is reproduced hereunder:
"6. I have considered the basis of additions made by the AO and the arguments of the AR on the issue. It is seen that the various steps taken by the firm in which the assessee is a partner in first purchasing the keyman Insurance policy, then paying the stipulated premium in three installments, assignment of the policy in favour of the assessee and finally maturity receipts in respect of the policy received by the assessee make it clear that in terms of legality there is nothing irregular about the transaction except for the fact that the entire arrangement has led to non taxability of impugned receipts of Rs.59,14,702/-. On the one hand, the firm whiel paying the insurance premium has lowered its tax liability and on the other hand the amount received on maturity of keyman insurance policy has also been claimed as tax free u/s 10(10D). This particular sequence of arrangement had been subject matter of litigation before the Hon'ble Delhi Bench of ITAT in number o cases pertaiing to Dr. Naresh Trehan, Mr. Rajan Nanda etc. and it was held that the maturity proceeds as reduced by the surrender value would not be liable to tax as per the provisions of section 10(10D)s as the same could be said to have been received under an ordinary insurance policy i.e. not Keyman Insurance Policy subsequent to the assignment of keyman Insurance Policy. The cases thereafter went up to the Hon'ble Delhi High Court which has delivered a judgment in favour of the assessee. It has been held that on assignment of the Keykman Insurance Policy to the employee, it ceases to be a keyman insurance policy with reference to the employee but becomes an ordinary Life Insurance Policy with reference to the employee but becomes an ordinary Life Insurance Policy eligible for exemption u/s 10(10D). The Hon'ble Court has relied upon the certificate given by Life Insurance Corpn. of India Ltd. to the fact that the kayman insurance policy after assignment assumes status of ordinary insurance policy. The specific observations of the Hon'ble Court on this crucial issue are as under:
"(1) The Tribunal while giving requisite relief brought to tax the amount of surrender value at the time of assignment subject to verification by the A.O. It also rejected the alternative argument of the assessee that in case the sum received on maturity was held to be taxable then deduction be allowed for the premium paid by the assessee after the assignment of the policy, which were embedded in the maturity amount and not claimed as a deduction in the tax assessments.
(ii) Thus, the issue depends on the question as to whether on assignment of insurance policy to assessee, it changes its character from Keyman Insurance also to an ordinary policy. It is because of the reason that if it remains keyman insurance policy, then the maturity value received is subject to tax as per section 10(10D) of the Act. On the other hand, if it had become ordinary policy, the premium received under this policy, in view of the aforesaid section 10(10D) itself, the same would not be subjected to tax.
(iii) Once there is no assignment of company/employer in favour of the individual, the character of the changes and it gets converted into an ordinary policy. Contracting parties also change in as much as after the assignment which is accepted by the insurance, the contract in now between the insurance company and the individual and not the company/employer which initially took the policy. Such company/employer no more remains the contracting parties. We have to bear in mind that law permits such an assignment even LIC accepted the assignment and the same is permissible. There is no prohibition as to the assignment or conversion under the Act. Once there is an assignment, it leads to conversion and the character of policy changes. The insurance company has itself clarified that on assignment, it does not remain a keyman policy and gets converted into an ordinary policy. In these circumstances, it is not open to the Revenue to still allege that the policy in question in keyman policy and when it matures, the advantage drawn there from is taxable. One has to keep in mind on maturity, it does not the company but who is an individual getting the matured value of the insurance.
(iv) No doubt, the parties here viz; the company as well as the individual taken huge benefit of these provisions, but it cannot be treated as the case of tax evasion. It is a case of arranging the affairs in such a manner as to avail the state exemption as provided in section 10(10D) of the Act. Law is clear. Every assessee has right to plan its affairs in such a manner which may result in payment of lease tax possible, albeit, in conformity with the provisions of the Act. It is also permissible to assessee to take advantage of the gaping holes in the provisions of the Act. The job of the Court is to simply look at the provisions of the Act and to see whether these provisions allow the assessee to arrange their affairs to ensure lesser payment of tax. If that is permissible, no further scrutiny is required and this would not amount to tax evasion. Benefit insured owing to the combined effect of a prudent investment and statutory exemption provided u/s 10(10D) of the Act, the section does not envisage of any bifurcation in the amount received on maturity on any basis whatsoever. Nothing can be read in section 10(10D) of the Act, which is not specifically provided because any attempt in that behalf as contended by Revenue would be tantamount to legislation and not interpretation."
7. Since the issue has been categorically decided in favour of the assessee by the Hon'ble Delhi High Court as detailed above and there is no contrary decision on the issue, the addition made by the A.O. is directed to be deleted."
4. We have heard the rival contentions and perused the facts of the case. As regards the nature of the Policy whether it is Keyman Insurance Policy or is an investment policy , the issue is squarely covered by our decision in the case of M/s. F.C. Sondhi & Co. (India) Pvt. Ltd. v. DCIT, Range-1, Jalandhar, in ITA No.117(Asr)/2010, dated 21.04.2014, the relevant portion of which is reproduced for the sake of convenience and better clarification as under:
"2. The brief facts of the case are that the assessee has claimed deduction on account of Keyman Insurance in the profit & loss account on the following policies :
| (a) | Lifetime from ICICI Prudential - a regular premium - Unit Linked Insurance Plan of premium of Rs.20,00,000/- on the life of Mr. Rajeev Anurag Sondhi. | |
| (b) | Premium Life from ICICI Prudential - a limited premium payment Unit Linked Insurance Plan of premium of Rs.20,00,000/- on the life of Mr. Rajeev Anurag Sondhi. | |
| (c) | Jeevan Shree-I of Life Insurance Corporation of premium of Rs.19,96,355/- on the life of Mr. Rajeev Anurag Sondhi. The policy is with Guaranteed Additions for 5 years and with profits thereafter. |
2.1 The AO further observed that that on perusal of the terms and conditions of the policies taken by the assessee, it is found that the assessee company has taken the investment, plans floated by the Insurance Company. In the case of the two policies of ICICI Prudential, the assessee company was even given the option of choosing the investment plan out of the four investment plans tailored made by the Insurance Company. In the case of the policy taken from LIC of India, the policy Jeevan Shree-I is policy with Guaranteed Additions for 5 years and with profits thereafter. Thus, all the policies taken by the assessee company are Investment Plan & Guaranteed Return/Addition Plan and the premium paid by the assessee company after deducting for mortality cover & other administrative charges are to be put into investment Plan as selected by the assessee company in the case of ICICI - Prudential Insurance Company and the LIC has undertaken guaranteed addition for five years and later on with profits. Out of total premium amount, mortality charges is nominal and depends upon the death benefits. Mortality charges, in the case of ICICI Prudential policies are being recovered on the date of commencement of the policy and on each monthly due date while the policy remains in force and shall be recovered by cancellation of Units, as per the policy document of the Insurance Company. In the case of the policy of guaranteed additions of LIC Policy, document is not legible and the assessee did not furnish the legible copy. However, on the perusal of first page which is somewhat legible, it could be made out that premium for main plan is Rs.19,91,265/- and sum assured is Rs.56,00,000/-, whereas Accident Benefit Premium is Rs.4250/- for Accident Benefit Sum Assured at Rs.25,00,000/-. Thus, the main purpose of the three policies taken by the assessee was investment of the premium accounts in Units after deducting mortality charges and other administrative expenses.
2.2. Further, on perusal of the contents of the policy issued by the Insurance Company, it was found that the policy taken is Unit Linked Insurance Plan. In view of the fact that the assessee has taken "Unit Linked Insurance Plan", the assessee was asked to explain & justify the claim of deduction under the head Keyman Insurance Policy in its profit and loss account vide order sheet noting dated 31.10.2008 & letter dated 03.11.2009. The assessee has stated vide letter dated 12.11.2008 that it is eligible for deduction of claim of Keyman Insurance and in this regard submitted that:
"As the Keyman Insurance Policies are concerned, these are on the life of a person and this is clearly mentioned on the face of the policies which have already been filed earlier. The mode in which the amount is to be invest the funds available wit them in debt/stock etc. and this cannot be the deciding factory in determining the allowability of the premium paid."
The AO further by explaining the meaning of Keyman Insurance Policy vide para 4 of his order and after considering the Polices of Life Insurance revealed the following facts in para 6.1, 6.2 & 6.3 of his order, which for the sake of convenience are reproduced as under:
"6.1. Life Time:
The policy is a regular premium a unit linked life insurance policy.
| (a) | The Plan: Life time is a regular premium unit linked insurance plan. The premiums net of all the charges are invested in a fund of the assessee's choice. | |
| (b) | Being a unit linked life insurance policy, the Policy holder has the option to allocate the Premiums and any Top-up Single Premium paid by him among one or more of the Plan(s) for purchase of units thereof. | |
| (c) | The Policy enables the policyholder to participate only in the investment performance of the Plan, to the extent of allocated units. | |
| (d) | Mortality charges; these charges are calculated on a yearly basis, but deducted every month from the units allocated. Mortality charges are put for the risk calculated (for Life Cover) depending upon the age and the mortality rating, as applicable. | |
| (e) | The assessee has option to increase/decrease in the premium and thus can invest in Units accordingly. Any increase or decrease in the premium shall not lead to any increase or decrease in the Death. | |
| (f) | There are four plans and the investment objectives of all the tour plans alongwith indicate portfolio Allocation are given in the policy document. | |
| (g) | The policy document states that investment in the units is subject to market risk. | |
| (h) | The Insurance charge that includes the amount of insurance cover shall be recovered out of premium amount and on each monthly due date by cancellation of units. | |
| (i) | Tax benefits would be available as per the prevailing Tax Laws and subject to conditions u/s 80C, 80D and 10(10D) of the I.T. Act. | |
| (j) | Copy of first premium receipt shows Type of Policy as Keyman but there is no mention of "Keyman Insurance Policy' in the Policy document. |
6.2. Premium Life. It is a limited premium payment unit linked insurance plan:
| (a) | The Plan: Premium Life is a limited premium payment unit linked insurance plan. The premiums net of all the charges are invested in a fund of the assessee's choice. | |
| (b) | Being a unit linked life insurance policy, the Policy holder has the option to allocate the Premiums and any Top-up Single Premium paid by him among one or more of the Plan(s) for purchase of units thereof. | |
| (c) | The Policy enables the policyholder to participate only in the investment performance of the Plan, to the extent of allocated units. | |
| (d) | Mortality charges; These charges are calculated on a yearly basis, but deducted every month from the units allocated. Mortality charges are put for the risk calculated (for Life Cover) depending upon the age and the mortality rating, as applicable). Mortality charges for annual premium of Rs.2,00,000/- has been calculated at Rs.2,510/- in the policy document. | |
| (e) | The assessee has option to increase/decrease in the premium and thus can invest in Units accordingly. Any increase or decrease in the premium shall not lead to any increase or decrease in the Death Benefits respectively | |
| (f) | There are four plans and the investment objectives of all the tour plans alongwith indicate portfolio Allocation are given. | |
| (g) | The policy document states that investment in the Units is subject to market risk. | |
| (h) | The Insurance charge that includes the amount of Insurance Cover shall be (recovered out of premium amount and on each monthly due date by cancellation of Units. | |
| (i) | Tax benefits would be available as per the prevailing Tax Laws. | |
| (j) | Copy of first premium receipts shows Type of Policy as Keyman but there is no mention of Keyman Insurance Policy in the Policy document. |
6.3. Jeevan Shree-I Life Insurance Premium:
| (a) | This plan of Life Insurance Corporation is a plan with guaranteed additions for 5 years and with profits thereafter. | |
| (b) | The premium of main plan is 19,91,265/- and sum assured for main plan is Rs.56 lacs. | |
| (c) | The accident benefit premium is of Rs.4,250/- separately calculated for accident benefit sum assured of Rs. 25 lacs and charges. | |
| (d) | As per the guaranteed additions undertaken by the Insurance Company, it is mentioned that a guaranteed addition of Rs.50 per thousand. Sum assured will be made to the sum assured at the end of the each policy year for each year's premium paid for first five years. | |
| (e) | After the completion of five years the policy shall participate in profits of "with profits assurance policy". | |
| (f) | Policy is not the term assurance policy and not on the life of another person. It is a investment plan with guaranteed additions and with profits. | |
| (g) | Thus, the LIC will invest the premium amount for guaranteed additions/guaranteed returns. | |
| (h) | There is no mention of "Keyman Insurance Policy" in the policy document. This is not a term assurance plan and as such does not fit into the definition of Keyman Insurance Plan as per explanation to the clause (c) of section 10(10D) of the Income Tax Act." |
2.3 In the light of the above facts, the AO was of the view that the assessee has invested in Unit Linked Insurance Plan under Keyman Insurance Plan and it is not Keyman Insurance Policy as per the meaning given in the Income Tax Act. The AO by referring to the Circulars dated 27.04.2005 and 30.01.2006 of IRDA which are reproduced at page 7 & 8 of his order in para 8.2 & 8.3 observed vide para 8.4, which for the sake of convenience is reproduced as under:
"8.4. Thus, the insurance regulator has categorically barred selling the keyman policy through endowment or unit-linked plans. It has said the keyman insurance cover can be sold only through term assurance, which combines life, accident and disability insurance policies to protect business of a company from the death or disablement of a key employee.
"All the insurers are advised strictly to ensure that where the premium for the insurance on the life of an employee is paid by the employer, or where the premium on the life of a partner is paid by another partner or by the partnership firm, the scope of cover is not wider than term assurance. Insurance Regulatory and Development Authority (RDA) said in its circular.
The rough stance of IRDA came after it found that some insurers had flouted its circular issued in April, 2005 and continued to sell partnership insurance through endowment or unit linked plans.
Insurers should not lose sight of the basic principle that person purchasing life insurance can only do so to the extent of his insurable interest in the life assured, the circular said. An employer buying keyman insurance for his own benefit cannot prove insurable interest beyond a certain cover protecting against death of the key employee and similar is the position of a partner buying against death of the key employee and similar is the position of a partner buying insurance on the life of another partner, IRDA said."
2.4. The assessee was given show cause notice, which is reproduced at pages 9 & 10 of AO's order and the assessee submitted the reply vide letter dated 12.11.2008, which is available at pages 10 & 11 of AO's order, which is reproduced as under:
"10. The assessee has submitted reply vide letter dated 12.11.2008:-
| (a) | "Regarding the Keyman Insurance Premium paid, it is submitted that the premium works out to Rs.59,96,365/- and not Rs.60,00,000/-. It has been suggested by you that since our keyman policies are unit linked insurance plans, these are not keyman insurance policies in view of the circular of IRDA. In view of the above, it has been stated that the policy taken is unit linked insurance and consequently the premium paid is proposed to be disallowed. | |
| (b) | It is further submitted that as far as the keyman insurance policies are concerned, these are on the life of a person and this is clearly mentioned on the face of the policies which have already been filed earlier. | |
| (c) | The mode in which the amount is to be invested by the insurance company. The insurance companies even otherwise invest the funds available with them in debt/stock etc. and this cannot be the deciding factor in determining the allowability of the premium paid. | |
| (d) | We have paid premium for the life cover as per the policies issued by the insurance companies and the purpose of the policy is to cover life risk. | |
| (e) | Even if the policies are unit linked, these are on the life of the person referred to by you and this will not affect the real nature of the policy as being a keyman insurance policy. The premium thus paid by us is fully allowable as revenue expenditure. | |
| (f) | Since the policies are not exactly in the nature of life insurance policies, the amount to be received back is to put to tax in the hands of the company in contradistinction to pure life policies whose maturity proceeds are exempt. The fact that the Keyman Insurance policies are unit linked does not adversely affect the position as far as the allowability of premium of these policies is concerned. | |
| (g) | As far as the circular of IRDA, a copy of which has been provided to us, it will not override the provision of Income Tax Act. Though the guidelines of IRDA will not affect the provisions of the Income Tax Act. It has been clarified by the insurance company that the date as mentioned in the circular of IRDA will apply after 10.05.2005. | |
| (h) | We are, however, of the view that as per the Income Tax Act, once a policy has been issued as a Keyman policy, the benefits of the same shall be available to the assessee and the circular of IRDA which does not override the Income Tax Act shall have not affect. | |
| (i) | As far as the choice of investment in the case of policies of ICICI Prudential are concerned, the appropriate form which provided by the insurance company was signed and handed over to them." |
2.5. Further the AO observed that the assessee admits that policies are Unit Linked and since these are on the life of the person and it will not affect the real nature of the policy. But the assessee did not respond to the violation of the basic principle that a person purchasing life insurance can only do so to the extent of his insurable interest in the assured, the meaning of "Keyman Insurance Policy" as per explanation to clause (c) to section 10(10D) of the I.T.Act i.e. policy on life as asked and pointed out vide order sheet noting dated 31.10.2008. The scope of cover should not be wider than term assurance. Status of the policy, contents, terms & conditions mentioned therein established that the plan is Unit Linked Insurance Plan and not Term Assurance Plan i.e. Policy on life as per definition of the I.T. Act as well as Circular issued by the IRDA.
2.6 The assessee further claims that policy has been issued prior to issue of Circular by the IRDA. The policy of Unit Linked Insurance Plan is not "Keyman Insurance Policy" as per the provisions of the I.T. Act as discussed above and these provisions of the I.T.Act are in place when the policy has been taken by the assessee. In the brochure also, the Insurance Company does not claim of any such benefit except tax benefit u/s 80C of the I.T.Act. The Circular issued by the IRDA warning insurers confirm that the fact that "Term Assurance Plan under Keyman Insurance Policy and not Unit Linked Endowment Assurance Plan would be eligible for deduction." The assessee further admits that policies are not exactly in the nature of life insurance policies [10(f) above]. Once the assessee itself admits this, it is evident that the policy does not fulfill the condition of "Keyman Insurance Policy" as per explanation to clause (c) to section 10(10D0 of the I.T.Act and it is not Keyman Policy as per Income Tax Act. Only Term Insurance Plan under Keyman Insurance Cover i.e. Policy of life not beyond it is eligible for deduction as per provisions of the I.T.Act provided the assessee firm proves that necessity and expediency of the person being Keyman and the policy taken for the benefit of the assessee so that premium paid could be justified as expenditure has been laid out on expended wholly and exclusively for the purposes of the business as per provisions of section 37 of the I.T.Act. Since, the assessee has taken the Unit Linked Insurance Plan, an Investment Plan, it is not eligible for deduction. 2.7. Ultimately, the AO disallowed deduction of premium paid amounting to Rs.59,96,355/- and the necessary observations in para 11 are being reproduced hereinbelow for the sake of convenience :
"11. Gist of the case & discussion:
The gist of the queries, enquiries, information, investigation, carried out & submission of the assessee is summarized here:-
| (i) | The assessee firm has taken policy, the type of which is Unit Linked Insurance Plan an Investment Plan. The purpose of Guaranteed Returns on the premium amount through investment in Units. It was claimed as Keyman Policy and amount of premium of Rs.59,96,355/- per annum has been claimed as deduction. | |
| (ii) | The policy taken as Unit Linked Insurance Plan " an investment Plan" of ICICI Prudential & Jeevan Shree-I of LIC of Guaranteed returns and profits and not Keyman Insurance Policy as per definition of Keyman Insurance Policy, explanation to clause (c) to section 10(10D) of the I.T. Act. It is not Term Assurance Plan policy as per IRDA Guidelines, for the policy to be qualified as Keyman Insurance Policy. | |
| (iii) | A nominal amount is being charged for mortality charges for life cover and the balance amount has been deployed to purchase Units as per clients choice. Status of the policy, contents, terms & conditions mentioned therein established that the plan is Unit Linked Insurance Plan & Plan with Guaranteed Return and not Term Assurance Plan i.e. Policy on life as per definition of the I.T.Act as well as Circular issued by the IRDA. Only a fraction of the total premium is meant for risk premium, the balance is for the deployment of purchase of units i.e. Investment in Units which cannot be taken for business expenditure. The assessee did not reply to this vital specific issue of nominal mortality charges for life cover and balance huge amount in the investment in units. | |
| The assessee firm has been asked to prove that the policy taken is Keyman as per definition given in I.T.Act i.e. policy taken by a person on the life of another person & also fulfilling the terms and conditions laid down by the IRDA in this regard, necessity and expediency of the person being Keyman and the policy taken for the benefit of the assessee company but the assessee failed to prove that. | ||
| (iv) | It does not fulfill the condition of policy taken by a person on the life of another person as per definition of Keyman in the I.T. Act, i.e. pure life insurance as also admitted by the assessee in its submission. The IRDA was aware of manipulation by the Insurance Agencies of selling "Unit Linked Insurance Plan" under Keyman Insurance Policy instead of Term Assurance Plan under Keyman as per Income Tax Act and the assesses thereby wrongly depriving the revenue of its rightful taxes by naming the policy as Keyman and claiming huge amount of premium as deduction. | |
| (v) | The assessee claims that the Insurance company has said that it has issued under 'Keyman Policy'. The policy may be termed as "Keyman" by the Insurance Company for its own purpose and guidelines might have been issued by IRDA subsequently, these guidelines and term as "Keyman" by Insurance Company cannot override the provision of "Keyman Insurance Policy" as per I.T. Act which are applicable and in place at the time of policy being taken by the assessee. Even the brochure of the Insurance Company says regarding tax benefits under section 80C only and section 10(10D) of the I.T.Act for receipts to be exempted if conditions fulfilled. |
Thus, the claim of deduction of such expenditure on account of payment of this premium of Rs.59,96,365/- which has been invested in "Units" as per assessee's option in ICICI Prudential Fund and Jeevan Shree-I Policy of guaranteed addition could not be said to have incurred for the purpose of the business and is thus not allowable as business expenditure of the assessee firm."
3. Before the ld. CIT(A), the assessee adduced certain additional evidences which were admitted and forwarded to the A.O. and comments taken and thereafter the ld. CIT(A) confirmed the action of the A.O. The order of the ld. CIT(A) in paras 2.5 to 2.14 for the sake of convenience is reproduced as under:
"2.5. I have considered the rival submissions carefully. Sub-section (10D) of section 10 of the I.T.Act exempts any sum received under a life insurance policy from the ambit of the total income of a person. Certain exceptions to this general exemption are, however, provided in the sub-section. The sub-section is extracted below:
"10. Incomes not included in total income.
In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included.
| ** | ** | ** |
(10D) any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy, other than—
| (a) | any sum received under sub-section (3) of section 80DD or subsection (3) of section 80DDA; or | |
| (b) | any sum received under a Keyman insurance policy; or | |
| (c) | any sum received under an insurance policy issued on or after the 1st day of April, 2003 [but on or before the 31st day of March, 2012] in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured |
Provided that the provisions of [sub-clauses (c) and (d)] shall not apply to any sum received on the death of a person:
Provided further that for the purpose of calculating the actual capital sum assured under [sub-clause (c)], effect shall be given to the Explanation to sub-section (3) of section 80C or the Explanation to sub-section (2A) of section 88, as the case may be.
Explanation .- 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 [and includes such policy which has been assigned to a person,"
2.6. Amounts received under the Keyman Insurance Policy have been included in the definition of income in section 2(24) of the I.T. Act, as under:
"2. Definitions.
In this Act, unless the context otherwise requires;
(24) "Income" includes-(xi) any sum received under a keyman insurance policy including the sum allocated by way of bonus on such policy.
Explanation- For the purposes of this clause, the expression "Keyman insurance policy" shall have the meaning assigned to it in the Explanation to clause (10D) of section 10;
2.6.1. The Act further provides for taxing of the receipts from a Keyman Insurance Policy as salary income, business income or under the head "income from other sources" in section 17(3)(ii), section 28(vi) and section 56(2)(iv) respectively. The scope of the taxability of receipt on Keyman Insurance Policy and deduction of premium paid for Keyman Insurance Policy were explained in CBDT Circular No.762 dated 18.2.1998 as under:
"Taxation of a sum received under the Keyman Insurance Policy
14.1 Keyman Insurance Policy of the Life Insurance Corporation of India, etc. provides for an insurance policy taken by a business organization or a professional organization on the life of an employee, in order to protect the business against the financial loss, which may occur from the employees' premature death. The 'Keyman' is an employee or a director, whose services are perceived to have a significant effect on the profitability of the business. The premium is paid by the employer.
14.2. There were some doubts on the taxability of the income including bonus etc. from such policy and also regarding the treatment of the premium paid - whether it should be allowed as a capital expenditure or as a revenue expenditure. The Act, therefore, lays down the tax treatment of the Keyman Insurance Policy.
14.3. Clause (10D) of section 10 of the Income-tax Act, exempts certain income from tax. The Act, amends clause (10DD) of section 10 to exclude any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy for this purpose.
14.4. The Act also lays down that the sums received by the said organization on such policies, be taxed as business profit; the surrender value of the policy, endorsed in favour of the employee (keyman), 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. The premium paid on the Keyman Insurance Policy is allowed as business expenditure.
14.5 The amendments take effect from the Ist day of October, 1996."
2.7. As is obvious from the definition given in the Explanation below section 10(10D), Keyman Insurance Policy is a life insurance policy taken by a person on the life of another person where the other person is or was the employee of the first person or is or was connected in any manner with the business of the first person. To be eligible to the classified as a Keyman Insurance Policy the essential ingredients are that the life insurance policy must be taken by one person for coverage of the risk on the life of another person who is either an employee or is connected is with the business of the first person. It should also be a 'life insurance' policy.
2.8. The AO has held that the Life Insurance Policy for the purpose of Keyman Insurance can only be a "Term Assurance Policy". A term insurance policy is normally one in which there is no accumulation of income, as has been contended by the appellant. A term policy is given by the insurance company for a specified period of time and assures payment of the sum assured on the death of the person insured before the expiry of the term or period of the policy. The AO has derived support for his proposition from the two Circulars issued by the Insurance Regulatory and Development Authority (IRDA) in respect of Keyman Policies. On 27.4.2005 the IRDA issued a Circular stating that certain aberrataions had taken placed in the matter of sale of Keyman Insurance. It was further stated that detailed guidelines would be issued in this regard, and, in the meanwhile, only Term Insurance Policies should henceforth be issued as Keyman Insurance Cover. On 30.1.2006 the IRDA issued another Circular in it was noted that despite the Circular dated 27.4.2005, certain insurers were still selling partnership insurances through endowment or Unit Linked Plans disregarding the spirit behind the earlier Circular. It was informed that a persons purchasing Life Insurance could only do so to the extent of his insurable interest in the person insured and that an employer buying Keyman Insurance for his own benefit or a partner of a firm buying insurance on the life of another partner for own benefit could not provide insurable interest beyond a certain cover protecting against death of the person insured. The Circular advised all insurers to ensure that the scope of cover purchased by an employer or a firm was not wider than a Term Assurance.
2.9. In my opinion, the AO's contention that a Keyman Insurance Policy is one which is of the nature of a 'term insurance' policy has force. The IRDA Circular dated 27.4.2005, after noting that certain aberrations had taken place in the issue of policies as Keyman Policies, issued a directive that henceforth only Term Insurance Policies should be issued as Keyman Insurance Cover. In the IRDA Circular dated 30.1.2006 the IRDA noted that aberrations in the form of issue of unit linked or endowment policies to firms on the life of partners had taken place. The IRDA noted that the employer or the firm could not provide insurable interest beyond "a certain cover" protecting against the death of the key employee or partner. It was stated that the scope of cover in Keyman Policies should not wider that that under "Term Assurance".
2.9.1 The IRDA has been established through the Insurance Regulatory and Development Authority Act, 1999. Under section 14(1) of this Act, the IRDA has the duty to regulate, promote and ensure orderly growth of the insurance business. Circulars issued by the IRDA are, thus, in exercise of its statutory functions. The AO's observations, therefore, that the cover under Keyman Policies could not be wider than that under "Term Assurance" has the backing of interpretation by the concerned statutory body entrusted with regulating the insurance business in India. The Authority noted that certain insurers had issued or were issuing Keyman insurance policies which were "aberrations", as noted above. They clarified that the cover under Keyman Policies could not be wider than that in 'term insurance' and directed insurers to follow their directive. The IRDA Circular dated 30.1.2006 is, thus, clarificatory in nature and states that a Keyman Insurance Policy should not have cover more than a term assurance policy because that was the essence of a keyman insurance policy.
2.9.2 It is the contention of the appellant that based on the principle of literal interpretation, a Keyman Insurance Policy was a policy taken by a person on the life of another person and nothing more can be read into the provision of I.T.Act. In the case of United Airlines v. CIT(supra) relied upon the appellant, the Hon'ble High Court have held that in a taxing statute the principle of literal interpretation was very strictly applied and while interpreting a taxing statute one could not go by the notion as to what was just and expedient.. It was held that there was no equity in a tax and considerations of equity were wholly out of place in the taxing statute. In this case, the Hon'ble High Court held that any payment for use of the land of airport, whether it was on landing or parking of the aircraft in the airport, would amount to payment of "rent". The Hon'ble High Court based their decision on the definition of the word "rent" in section 194I of the Act where any payment for use of land etc., by whatever name called, is included in the definition of "rent". The issue in the present case is somewhat different. Though the term "Keyman Insurance Policy" has been defined in section 10(10D) of the Act, the term "Life Insurance" has not been so defined in the Act. Under the circumstances, the interpretation of the term "Life Insurance" in the context of Keyman Insurance Policy by Insurance Regulatory Authority assumes much greater importance and would prevail in a situation where the Insurance Companies try to give another interpretation which is not in consonance with the interpretation by the Regulatory Authority.
2.9.3. The appellant has also contested the reliance on the Circular issued by IRDA on the ground that compliance to other Acts could not be examined for the purpose of claiming benefits under the Act. The decisions relied upon by the appellant do support the proposition put forth by the appellant. However, here the question is not whether there is compliance to the Circular of IRDA or not. As noted above, the issue is whether the Keyman Policy issued by the Insurance Company is a Life Insurance Policy. If a term is defined in the Act and deduction thereof is prescribed, as in the case of bad debts, non performing assets, or depreciation, there would be no need to look to other Acts for deciding the allowance of an expenditure or of taxing a receipt as income. However, in my humble opinion, if allowance has been provided in the Act for certain payments and the nature of the payment is not clearly defined in the Act but it is so defined in the other Act or explained by the Statutory Regulatory Authority for that Act, the interpretation in the other Act should be followed, especially when IRDA specifically noted that there had been misused of the Keyman Insurance Policy. There is nothing on record to show that any of the insurance companies has challenged the interpretation of the term Keyman Insurance Policy given by IRDA in any Court of Law. They have on the other hand, decided to abide by the interpretation given by IRDA. Once this is so, and it is taken that the Keyman Insurance Policies were being misused and a Keyman Insurance Policy, as explained by the IRDA, was only a term insurance policy, in my opinion, cognizance needs to be taken of such interpretation by the Regulatory Authority and affect should be given to such explanation while implementing the provisions of I.T.Act. The appellant's contention in this regard is, therefore, rejected.
2.10 Moreover, the AO has examined the nature and terms of the policies and pointed out various factors to show that the policies purchased were not an insurance cover on life per se' rather they were investment plans with accompanying insurance benefits. As per the terms of the policies issued by ICICI Prudential, the investment risk in the investment portfolio was to be borne by the "Policy Holder". These are unit linked plans that combine the benefits of insurance and capital market returns into one. They give a guarantee maturity value of with varying degrees of equity exposure depending upon the risk appetite of the policy holder. It is apparent from the terms of the policies purchased that the policies are basically investment vehicles in which money can be paid at regular intervals by the policy holder and the policy holder can ask the insurance company to invest the money in different Funds depending upon the risk appetite of the policy holder. This is like the insurance company acting as Mutual Fund which invests money in the stock markets and gives units to the investor to represent his investment. The company is levying charges (which are deducted from the premium) which are similar to those levied by Mutual Fund Companies as entry and exist loads. The company alongwith the investment, provides insurance cover to the investor and the premium for providing the life cover is deducted from the funds invested by the investor on a regular basis. The returns on such policies are subject to market risks. These are schemes where the decision of investment is made first and the insurance cover comes as an additional benefit. The policies are predominantly investment policies with a small portion of the premium paid for actual life cover. Under the cover of such a small proportion of the premium for life cover, the appellant has claimed that this is a life insurance policy. This is the kind of aberration which has apparently been referred to in the IRDA Circulars dated 27.4.2005 and 30.1.2006. By linking a small portion of the premium to the life cover, a substantial deduction on account of Keyman Insurance Policy has been sought to be claimed as deduction u/s 37(1) of the Act. The intent and purpose of the Keyman Insurance Policies envisaged in the IT. Act and clarified by the IRDA cannot be lost sight of while determining whether the payment made as premium was actually for a keyman insurance policy. Circular No.762 (supra) clarifies that a Keyman Insurance Policy is that which is taken for the benefit of the employer or of the Company which is likely to occur on the death of the person insured. Thus, it is the benefit to a business on the death of the person insured which is one of the paramount features or the key ingredients to determine whether a policy is of the nature covered under the Explanation to section 10(10D). Insurance policies which carry inherent risk of return cannot provide such benefit to the business.
2.11 As regards the policy taken from the Life Insurance Corporation of India (LIC), it is seen that the policy is for a period of five years, though the premium paying term is three yeas only. As per the policy document, the sum assured for main plan is Rs.56 lacs, whereas the "Term Assurance" sum assured is Nil. The premium for the main plan is Rs.19,91,265/-which is 35.5% of the sum assured. Thus, the appellant gets approximately all the amount invested as an assured return, after including the guaranteed additions, with mortality charges built into the policy. In addition, the assessee has an accident benefit sum assured of Rs. 25 lacs with the premium of Rs.4,250/-. This shows that the premium amount for the sum assured is not only for the mortality cover, but is for the return on the investment made also. The policy provides for a payment of Rs.50/- per thousand of sum assured for which indicates return of Rs.2,80,000/- every year in addition to the sum assured. The terms of the policy show that this policy did not have any term insurance benefits but was mainly an investment policy with death benefits built into the policy and accident benefit added to the policy. Hence, this policy also does not fall within the definition of Keyman Insurance Policy as explained by the IRDA. The appellant's reliance on the certificate issued by LIC to the effect that the policy issued was Keyman Insurance Policy does not take away the affect of the IRDA Circulars. Hence, even though the documents sought to be admitted - since the AO did not provide sufficient opportunity to the assessee during asstt. Proceedings. They do not help the case of the appellant. Merely, terming a policy as "Keyman" Insurance Policy will not make the policy a keyman policy as explained by the IRDA.
2.12 The appellant has contended that the IRDA Circular had prohibited the issue of Keyman insurance policies unless they were term insurance policies only after 10.5.2005 and that all its policies were issued on or before 10.5.2005. While the policies may have been issued prior to 10.5.2005, the issues mentioned in the IRDA Circulars showing misused of the Keyman Insurance Policy Scheme issued earlier and explaining what a Keyman Insurance Policy means will also affect the policies issued prior to 10.5.2005. In fact, the IRDA specifically mentioned that there had been aberrations in the matter of sale of Keyman Insurance in the Circular dated 27.4.2005, which indicates that all was not well in the policies issued prior to the date of Circular.
2.13 The appellant has contended that manner of investment of life insurance policy would not affect the allowability of premium. In my opinion, this has a significant effect of the issue at hand. A Keyman Insurance Policy is for the benefit of the employer. If there is risk involved in the investment, it is obviously not going to benefit the employer and the manner of investment by the Insurance Company, therefore, does determine whether the Keyman Insurance Policy is a proper life Insurance Policy or not. An Insurance Policy, which is designed to insure against the risk of death should not normally be subject to the vagaries of the stock market or investment decisions.
2.14 For the reasons discussed above, I uphold the action of the AO in denying deduction of the premium paid as Keyman Insurance Policies. Ground No.2 of appeal is rejected."
4. The Ld. counsel for the assessee, Mr. Sandeep Vijh, CA, at the outset, argued that the definition of Keyman Insurance Policy has been given in Explanation to Section 10(10D), which has been read as under:
"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."
He argued that the AO has derived support from two circulars issued by IRDA dated 27.04.2005 & 30.01.2006. He argued that the artificial restriction placed by the A.O. and Ld. CIT(A) with reference to Keyman Insurance as being term insurance only is thus not justified and a keyman insurance policy may be a non-term insurance policy also. He argued that the said Circular is basically in the context of partnership of Insurance Policies. He argued that the circular does not state that the policies are not in compliance and will be illegal and will not be treated as keyman insurance policies. The Ld. CIT(A) has not appreciated the decision of Hon'ble Delhi High Court in the case of United Airlines v. CIT reported at 287 ITR 281 wherein it has been referred that in taxing statute the principal of literal interpretation is very strictly applied while interpreting taxing statute one cannot go by the notion as to what is just and expedient. Similar view has been expressed by the Hon'ble Madras High Court in the case of CIT v. Mircormax Systems P. Ltd.reported at 277 ITR 409. The Ld. counsel further went ahead to explain the functioning of IRDA which was explained with certain objectives to regulate, promote and ensure orderly growth of the insurance business and the IRDA has no relevance as far as the allowability or premium under the Income Tax Act or taxation of policy proceeds is concerned. The Income Tax Act specifically mentions where another Acts have to be referred for our interpretation purposes like section 2(25A), 2(29D), 2(38), 2(42A) and Sec. 2(47)(V) and since IRDA has not referred to for defining Keyman Policy or Life Insurance, its circulars cannot be relied upon for Income Tax purposes. The words "Life Insurance" should be understood as in common parlance. He further relied upon the decisions in the case of CIT v. Lake Palace Hotels 226 ITR 561 (Raj), Swedish East India Co. v. CIT 133 ITR 407 and Indian Hotels v. ITO 245 ITR 538 (SC).
4.1. He argued that the Ld. CIT(A) has failed to appreciate that despite the fact that RBI has the power to regulate Non-Banking Finance Companies and the authority to regulate maintenance of accounts in terms of provision for Non Performing Assets, the same is not an allowable expense for computing income under the Income Tax Act. He relied upon the decisions in the case of TVS Finance & Services v. JCIT reported at 23 DTR 33 ( Madras) and in the case of Southern Technologies Ltd. v. JCIT reported at 320 ITR 577, which are available in the written submissions placed on record. He further relied upon the decisions of various courts of law with regard to the meaning of "Life Insurance" and with regard to referring to circulars of IRDA as under:
Smt. Tarulata Shyam & Ors. v. CIT 108 ITR 345 (SC)
Orissa State Warehousing Corpn. v. CIT 237 ITR 589 (SC)
Dilharshankar C. Bhachech v. CED 158 ITR 238 (SC)
Elel Hotels & Investment Ltd. v. UOI 178 ITR 140 (SC)
Mittal Cold Storage v. CIT 159 ITR 18 (MP)
4.2. He further argued that the Ld. CIT(A) has observed that the policies were investment plans with insurance cover thus accepted the concept of life insurance. He has also stated that the policies are unit linked plans that combine benefits of insurance and capital market into one. He has further observed that it is apparent from the policies that these are investment vehicles in which money is paid in regular intervals by the policy holder and the policy holder can ask the insurance company to invest in different funds depending upon the risk appetite of the policy holder. This is like insurance company acting as Mutual Fund. He has also stated that the company is levying charges ( which are deducted from premium) which are similar to those levied by Mutual Fund. The CIT(A) has concluded that the policies are predominantly investment policies and the intent and purpose of Keyman Insurance Policies envisaged in the I.T. Act and clarified by IRDA cannot be lost sight of the CIT(A) has also referred to circular No.762 dated 18/02/1998 wherein Keyman Insurance Policy has been defined and reiterated that this is for the benefit of business on the death of the person concerned. The Ld. CIT(A) has also referred to the circular No.762 which contemplates money being received in circumstances other than death also and this is in contrast to the definition of term insurance which according to the CIT(A) is the essence of Keyman Insurance Policy. The view thus taken by CIT(A) is not correct. The CIT(A) as also observed that policies which carry inherent risk of return cannot provide such benefit to business. In the policies of the assessee, it is an undisputed fact that money i.e. assured value is receivable on death and as such the view of CIT(A) is not correct. Also the insurance companies do not sit cover money. Even where no option is given to the policy holder, the amount of premium (after expenses including commission) is invested so that some return is given to policy holder on maturity. The observation regarding money being invested as per the directions is thus irrelevant. The Keyman Insurance Policies, in this case are life insurance policies as the policy value is receivable on the death of the persons and this is an undisputed fact (submission before the CIT(A) - last five lines at page No.6 of the paper book). No further test of using IRDA circulars to interpret the policy has been provided in the Income Tax Act. The life insurance policies issued as Keyman Insurance policies by insurance companies have to be accepted as such. To take an anology, if loan is sanctioned by bank in violation of lending norms, the amount borrowed will still be treated as a loan and its character will not change. No restriction has been placed in Section 10(10D) that policies where funds are invested as per direction of the company are not be treated as Keyman Insurance Policies and these conditions cannot be inferred. The Ld. CIT(A) has has in para 2.11 stated that there is an accident benefit of Rs.25 lakhs with a premium of Rs.4,250/- relating to the policy issued by LIC and that being so the premium amount for sum assured is not only for mortality cover but the investment also. The Ld. CIT(A) has failed to appreciate the difference between accident insurance and life insurance and wrongly concluded that the policy does not fall within the definition of Keyman as explained by IRDA. The premium of Rs.4,250/- relates to accidental insurance. The Ld. CIT(A) has in para No.2.12 accepted that the IRDA circular had prohibited the issue of Keyman Insurance Policies unless they were term insurance policies only after 10.05.2005 and that all the policies in this case were issued on or before 10.05.2005. This date is even prior to the circular dated 30.01.2006 which was to give guidelines. The Ld. CIT(A) then proceeds to go beyond the circular of IRDA and in view of the circular intimating misuse of Keyman Policies issued earlier has held that it will affect the policies issued prior to 10.05.2005. This clearly shows that the CIT(A) was bent upon taking a view against assessee and does not even accept the views of IRDA. At worst, the CIT(A) could have taken an adverse view for the policies issued after 31.01.2006. In para 2.13, the ld. CIT(A) has observed that the manner of investment of life insurance policy significantly effects the issue at hand. He is of the view that if risk is involved in investment, it is not going to benefit the employer and the manner of investment therefore does determine whether the Keyman Insurance Policy is a proper Life Insurance Policy. The Ld. CIT(A) is confusing the life insurance policy with the possible return on the maturity of the policy. The two are entirely different concepts and should not be confused. Even without the direction of the client, the insurance companies invest in debt and equity. Money is recoverable on the death of the Keyman and thus is a sufficient test. The Ld. CIT(A) has thus formed a wrong view and the addition in respect of Keyman Insurance Policies deserves to be deleted in view of the above submissions. It may also be submitted that an assessee is permitted to plan his affairs and if the transaction is genuine, merely because it results in saving of tax cannot be a reason for any disqualification . Also where two views possible one favouring the assessee is to prevail. CED v. R. Kanakasabai reported at 89 ITR 251 (SC).
5. The Ld. DCIT(DR), Mr. Tarsem Lal, on the other hand, strongly relied upon the orders of both the authorities below, which are well reasoned and perfect orders. The Ld. DR argued that if a company floats some policies and advertises as a Keyman Insurance Policy which later on came to the knowledge of IRDA being statutory authority who finds such policies in facts are investment policy and not Keyman Policies then circular so issued to regulate insurance company does not lend a claim to the assessee that such policies touted or advertised as Keyman Policies and premium so paid cannot be allowed as deduction. Accordingly, cases relied upon by the Ld. counsel for the assessee before the authorities bellow and before this Bench, are not applicable. It is purely a case of investment and there is nothing brought on record by the assessee before any of the authorities below or during arguments before this Bench that Insurance so taken is strictly on the Life Insurance where the assessee has opted for investment options. Moreover, as confirmed in para 10(f) of AO's order that the policies taken are not exactly in the nature of Life Insurance Payments. In the facts and circumstances, the Ld. DR prayed to confirm the order of the ld. CIT(A).
6. We have heard the rival contentions and perused the facts of the case. The assessee has taken three policies - one from ICICI Prudential (Life time), second from ICICI Prudential (Premium Life ) and third from Jeevan Shree-I. As stated in para 2 of AO's order reproduced hereinabove, there is no dispute to the fact that the assessee-company has given option of choosing the investment plan out of four investment plans offered by the Insurance Company. In the case of Jeevan Shree-I issued by L.I.C. of India, which is the policy with guaranteed additions for 5 years and with profits thereafter. Therefore, it cannot be denied that such policies are for the investment plan and are having guaranteed return and the premium paid by the assessee company to such Insurance Company after deducting for mortality cover and other administrative charges are to be put into investment plan as selected by the assessee company as far as the policies taken from ICICI Prudential are concerned. Whereas LIC has undertaken guaranteed addition for 5 years and later on with profits. These findings of the AO have been found to be correct and no cogent explanation to rebut or reverse such findings of the A.O.has been given before any of the authorities below or even before us. The findings of the AO are also found to be correct and has not been rebutted with cogent explanation before any of the authorities below or even before us that mortality charges in the case of ICICI Prudential policies are being recovered on the date of commencement of the policy and on each monthly due date while the policy remains in force and is to be recovered by cancellation of Units, as per the policy document of the Insurance Company. The accident benefit premium is Rs.4,250/- for accident benefit or sum assured of Rs. 25 lacs. Show cause notice was given to the assessee to explain whether the said polices are Unit Linked Investment Plan or not and to justify the claim of deduction in the Profit & Loss Account, the reply of the assessee was that the Insurance Companies even otherwise invest the funds available with them in debt/stock etc. and this cannot be the deciding factor in determining the allowability of the premium paid. This explanation of the assessee cannot convert investment plan into Pure Life Insurance Plan.
6.1. There is no dispute as argued by the Ld. counsel for the assessee that meaning to Keyman Insurance Policy is taken from the Explanation to the clause (c) of section 10(10D) of the Act, which has been reproduced hereinabove. As per definition of "Keyman Insurance Policy", a person purchasing life insurance can only do so to the extent of his insurable interest in the assured. With the background of the policies and terms and conditions and from the arguments putforth by the ld. counsel for the assessee and the Ld. DR and the relevant material on record, we are of the views that the policies have been taken from Unit Linked Investment 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. Therefore, the policy itself does not fall under the definition of Keyman Insurance Police as defined under explanation to clause (c) of section 10(10D) of the Act. The findings of the ld. CIT(A) and that of the A.O. in this regard are reasoned one and we find no infirmity in the orders of both the authorities below, in particular, the findings of the A.O. which have been confirmed by the ld. CIT(A) i.e. the findings of the AO in paras 6.1, 6.2 & 6.3. with reference to the Circular of IRDA and the order of the A.O. in para 11, which are well reasoned one and we concur with the views of the ld. CIT(A) and that of the A.O. We find no infirmity in the order of the ld. CIT(A) in this regard, who has rightly confirmed the action of the A.O. The arguments of ld. counsel for the assessee before the authorities below were mainly that the Insurance Policies are Keyman Insurance Policies taken on the life of a person and even otherwise also invest the funds available with them in debt/stock etc, which cannot be the deciding factor in determining the allowability of the premium paid. But at the same time, the assessee has admitted vide letter dated 12.11.2008 and on perusal of record, it is found that these policies are not in the nature of Life Insurance Policies exactly. 6.1 On perusal of facts on record and arguments of both the parties and legal position and interpretation of the Act, we are of the view that the arguments made by the Ld. DR are found to be convincing and findings of the Ld. CIT(A), who has rightly confirmed the action of the A.O. that the assessee-firm has taken policy, which is, in fact, Unit Linked Insurance Plan, an Investment Plan, the purpose of which is guaranteed returns on the premium amount through investment in Units and Unit Linked Insurance Plan for which the premium is paid though wrongly claimed as an expenditure, which is not allowable as an expenditure. The Circular of IRDA has clarified the position and the arguments made by the ld. counsel that it is prospective in nature, cannot be accepted since the circular is clarificatory in nature. In the facts and circumstances of the case, it is not a 'term Assurance Policy Plan" as per IRDA guidelines. A nominal amount is being charged for mortality charges for life cover and balance amount has been deployed to purchase Units as per assessee's choice. Only a fraction of the total premium is meant for risk premium, the balance is for the deployment of purchase of units i.e. Investment in Units which in fact, cannot be claimed as business expenditure, which query, in fact, has never been explained by the assessee before any of the authorities below or even before us. It does not fulfill the condition of policy taken by a person on the life of another person as per definition of explanation to clause (c) of section 10(10D) of the Act. Accordingly, the cases of various courts of law, which have been carefully perused by us are not at all applicable. In the facts and circumstances, the arguments made by the ld. counsel for the assessee, cannot help the assessee for the reasons mentioned hereinabove. Accordingly, we find no infirmity in the order of the Ld. CIT(A) who has rightly upheld the order of AO. Thus, the solitary ground raised by the assessee is dismissed.
4. Therefore, the contention of the assessee that it is a Life Insurance Policy cannot be held good because of our decision in the case of M/s. F.C. Sondhi & Co. (India) Pvt. Ltd. v. DCIT, R-1, Jalandhar (supra) and this being an investment policy and therefore, all the contentions raised by the assessee have rightly been rejected by the A.O. and the ld. CIT(A) has not taken the same in the right spirit.
5. As regards the contention of the assessee that after assignment, the policy is not a Keyman's Insurance Policy but a normal insurance policy, as held in the case of M/s. F.C. Sondhi & Co. (India ) Pvt. Ltd. v. DCIT R-1, Jalandhar (supra). It is not at all a Life Insurance Policy but an Investment Policy. In this regard, the ld. CIT(A) has misinterpreted the decision of ITAT Delhi Bench where it has been held that the surrender value of the policy was taxable in the hands of the transferee and it has been claimed that on the date of transfer that policy has no surrender value. The said claim shows that policy has not completed three years but in the present case the Policy has completed three years and the AO has rightly held that due to malafide intention of the assessee to evade payment of tax which has transferred two day before completion of three years. This contention of the assessee is further strengthened by the fact that the assessee did not pay premium due on 31.03.2008 which shows that he intended to encash policy after completion of three years. In the present case, there is assignment of policy for malafide purpose as observed by the A.O. Accordingly, the contention of the assessee is not valid in the given circumstances. The action of the firm in assignment of policy was not legal which was there to evade payment of tax due. Moreover, in view of the legal position, the sum received under the policy is taxable in the hands of receiver of the sum. Since the firm could surrender policy at any time after retaining it atleast for three years. It was stated by the assessee that to overcome shortage of funds, it surrendered and encashment of policy was made a handy tool. In fact, after assignment, the assessee did not pay next premium due on 31.03.2008. This shows that they intended to encash the policy immediately after completion of three years, which was encashed in its own hands and accordingly a circuitous route was adopted for fulfilling the requirement of the funds on one hand and not paying tax due on the other and. It is a colourful method adopted to evade tax in view of the decision of the Hon'ble Supreme Court in the case of McDowell & Co. 154 ITR 148, which in fact is applicable in the facts and circumstances of the present case. The whole affair is rendered sham and the assessee is liable to pay tax on the amount of Rs.59,14,702/-. The Ld. CIT(A) has ignored all these facts and accordingly the order of the Ld. CIT(A) is reversed and that of the A.O. is restored. This ground No. 1 & 2 of the Revenue are allowed.
6. As regards ground No.3, the brief facts of the case are that the assessee has claimed following expenses out of his income from business and profession in the computation chart.
| Petrol Expenses | Rs. 19,800/- |
| Car Expenses | Rs. 59,480/- |
| Business Promotion Expenses | Rs. 26,814/- |
| Travelling Expenses | Rs. 70,314/- |
| Telephone Expenses | Rs. 2,16,216/- |
| Total: | Rs. 3,92,624/- |
In the name of business income, the assessee has income from commodity trading and commission from M/s. Hi-Tech Pipe. The above expenses are the total expenses under these heads. The income from commodity trading has been earned through M/s. Shri Ganesh Commodity Traders. This is more or less only speculative income and has been earned without taking delivery of goods. No worthwhile expenses, except a few telephone calls, are involved in earning this income. Similarly commission income has been earned from M/s. Hi-Tech Pipe Ltd. New Delhi on sales of Rs.4,06,16,340/- sold through the assessee to M/s. Rakesh Engg. Works, Ghaziabad. The sale is to a single party and this activity also does not involve any worthwhile effort. In the light of these facts, the expenses claimed by the assessee are too much on the higher side and are not at all justified. However, incurring of some expenses on telephone and traveling etc. Cannot be totally ruled out. Keeping in view all the facts and circumstances, it is held that 50% of the expenses claimed are over stated and are that personal expenses of the assessee. It may not be out of place to mention here that in addition to these expenses, no further expenses under these heads have been shown for personal purposes. It cannot be accepted that the assessee has no expenses on these heads for his personal purposes. Accordingly, the claim of the assessee is restricted to the 50% of the amount of Rs.3,92,624/- which comes to Rs.1,96,312/-. The balance amount of Rs.1,96,312/- is disallowed and added back to the income of the assessee. Penalty proceeding for filing inaccurate particulars of this income are being initiated.
7. The Ld. CIT(A) restricted the disallowance at 10% i.e. at Rs. 40,000/- approximately.
8. We have heard the rival contentions and perused the facts of the case. We concur with the views of the ld. CIT(A) that the assessee was engaged in the business of commodity trading which is mainly done by sitting in the office on telephone and directly linked to earning of income and accordingly in view of all other expenses mentioned hereinabove, we find no infirmity in the order of the ld. CIT(A), who has rightly restricted the disallowance at 10%. Thus, ground No.3 of the Revenue is dismissed.
9. Ground No.4 is general in nature and therefore, did not require any adjudication.
10. In the result, the appeal filed by the Revenue in ITA No.175(Asr)/2013 is partly allowed.
__._,_.___
No comments:
Post a Comment