The DCIT, Circle-4,,, Baroda v. Prakash Chemicals Agencies Pvt.Ltd.,, Baroda

ITA 1771/AHD/2009 | 2006-2007
Pronouncement Date: 30-03-2012 | Result: Dismissed

Appeal Details

RSA Number 177120514 RSA 2009
Assessee PAN AACCP6646G
Bench Ahmedabad
Appeal Number ITA 1771/AHD/2009
Duration Of Justice 2 year(s) 10 month(s) 2 day(s)
Appellant The DCIT, Circle-4,,, Baroda
Respondent Prakash Chemicals Agencies Pvt.Ltd.,, Baroda
Appeal Type Income Tax Appeal
Pronouncement Date 30-03-2012
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 30-03-2012
Date Of Final Hearing 07-03-2012
Next Hearing Date 07-03-2012
Assessment Year 2006-2007
Appeal Filed On 28-05-2009
Judgment Text
-1- IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'B' BEFORE SHRI D K TYAGI JUDICIAL MEMBER AND SHRI T R MEENA ACCOUNTANT MEMBER ITA NO.1771/AHD/2009 (ASSESSMENT YEAR:-2006-07) THE DEPUTY COMMISSIONER OF INCOME- TAX CIRCLE-4 BARODA V/S M/S PRAKASH CHEMICAL AGENCIES PVT. LTD. INDUCHACHA HOUSE OPP. CHHANI OCTROI NAKA BARODA PAN: AACCP 6646 G [APPELLANT] [RESPONDENT] REVENUE BY :- SHRI SAMIR TEKRIWAL SR. DR ASSESSEE BY:- SHRI MEHUL K PATEL AR DATE OF HEARING:- 07-03-2012 DATE OF PRONOUNCEMENT:- 30-03-2012 O R D E R PER D K TYAGI (JM) :- THIS APPEAL FILED BY REVENUE IS DIRECTED AGAINST AN ORDER DATED 23-03-2009 PASSED B Y THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-III BARODA [H EREINAFTER REFERRED TO AS THE LEARNED CIT(A)] FOR ASSESSMENT YEAR 2006- 07. THE ONLY GROUND RAISED BY THE REVENUE READS AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN ALLOWING KEYMAN INSURANCE P REMIUM AMOUNTING TO RS.25 LAKHS OVERLOOKING THE FACT THAT THE EXPENDITURE WAS DISALLOWABLE U/S 37(1) OF THE INCOME TAX ACT 1 961 AS THE ASSESSEE COULD NOT ESTABLISH THAT THE PAYMENT WAS W HOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE ASSESSEES BUSIN ESS. 2 2 THE FACTS OF THE CASE ARE THAT IN ITS P&L ACCOUNT THE ASSESSEE HAS DEBITED KEYMAN INSURANCE AMOUNTING TO RS.25 00 000/-. THE ASSESSEE WAS REQUESTED TO STATE WHY THE SAME SHOULD BE ALLOWED AS BUSINESS EXPENDITURE. THE ASSE SSEE HAS GIVEN THE DETAILS OF PREMIUM PAID AS UNDER VIDE ITS LETTER DATED 10-11-2008:- [A] MANISH SHAH RS. 2 00 000 [B] PINAKIN SHAH RS. 2 00 000 [C] CHIRAG SHAH RS. 2 00 000 [D] ATUL SHAH M RS. 2 00 000 [E] HITESH SHAH RS. 2 00 000 [F] HARDIK SHAH RS. 2 00 000 [G] DILIP SHAH RS.13 00.000 ---------------- TOTAL RS.25 00.000 BEFORE THE AO IT WAS STATED BY THE ASSESSEE THAT K EYMAN INSURANCE PREMIUM IS ALLOWABLE U/S. 37(1) OF THE AC T. HOWEVER THE AO DID NOT ACCEPT THE SUBMISSION MADE BY THE AS SESSEE AND DISALLOWED THE CLAIM BY OBSERVING AS UNDER:- 6.2 I HAVE CONSIDERED THE CONTENTION OF THE ASSESS EE. THE SAME IS NOT TENABLE. TO DECIDE THAT A PERSON IS A KEY PERSO N OR NOT THE FOLLOWING ASPECTS SHOULD BE SEEN - [A] KEY PERSON IS AN EMPLOYEE AND OR AN EXECUT IVE I DIRECTOR [WORKING DIRECTOR] [B] ANY EMPLOYEE WITH SPECIALIST SKILLS AND DEFINED AND IDENTIFIABLE RESPONSIBILITIES MAY BE A KEY PERSON; [C] ANY EMPLOYEE WHO CONTRIBUTES SUBSTANTIALLY TO THE PROFITS OF THE COMPANY/FIRM AND WHOSE LOSS WOULD AF FECT THOSE PROFITS IS A KEY PERSON. 6.3 FURTHER BEFORE DECIDING WHETHER A PERSON IS A KEY PERSON FOR AN ORGANIZATION SOME OF THINGS THAT HAVE TO BE SEEN A RE THAT THE COMPANY'S STANDING ITS FINANCIALS ITS PROFITABILI TY KEY PERSON'S ROLE IN 3 THE ORGANIZATION KEY PERSON'S EXPERTISE IN THE FIE LD THE COMPANY IS CARRYING ON THE BUSINESS LOSS THE COMPANY WILL INC UR IN CASE OF DEATH OF SUCH A KEY PERSON AND HIS/HER REPLACEMENT COST. 6.4 UNDER THE INCOME-TAX ACT [SECTION 10(10D) 'KEY PERSON INSURANCE POLICY' MEANS A LIFE INSURANCE POLICY TAK EN BY A PERSON ON THE LIFE OF ANOTHER PERSON WHO IS OR WAS THE EMPLOY EE OF THE FIRST MENTIONED PERSON OR IS OR WAS CONNECTED IN ANY MANN ER WHATSOEVER WITH THE BUSINESS OF THE FIRST MENTIONED PERSON. 6.5 EXPLANATION TO THE CBDT CIRCULAR HAS DEFINED 'K EYMAN INSURANCE POLICY' 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 FI RST MENTIONED PERSON OR IS OR WAS CONNECTED IN ANY MANN ER WHATSOEVER WITH THE BUSINESS OF THE FIRST MENTIONED PERSON. 6.6 AS PER EXPLANATORY NOTES ON PROVISIONS RELATING TO DIRECT TAXES A KEYMAN INSURANCE POLICY OF THE LIFE INSURANCE CORP ORATION OF INDIA ETC. PROVIDES FOR AN INSURANCE POLICY TAKEN BY A BU SINESS ORGANIZATION OR1 A PROFESSIONAL ORGANIZATION ON THE LIFE OF AN E MPLOYEE IN ORDER TO PROTECT THE BUSINESS AGAINST THE FINANCIAL LOSS WH ICH MAY OCCUR FROM THE EMPLOYEE'S PREMATURE DEATH. THE 'KEYMAN' IS AN EMPLOYEE OR A DIRECTOR WHOSE SERVICES ARE PERCEIVED TO HAVE A SI GNIFICANT EFFECT ON THE PROFITABILITY OF THE BUSINESS. THE PREMIUM IS P AID BY THE EMPLOYER. 6.7 IN THE INSTANT CASE THE ASSESSEE HAS NOT BEEN ABLE TO EVEN FURNISH THE DETAILS OF THE PERSON ON WHOM THE KEYMA N INSURANCE POLICY HAS BEEN TAKEN AND WHAT TO TALK OF OTHER ASPECTS AS MENTIONED HEREIN ABOVE. IN THE CASE OF SWADESHI COTTON MILLS CO. [63 ITR 57 60] THE APEX COURT HAS HELD THAT MERELY BECAUSE OF THE EXIS TENCE OF AN AGREEMENT BETWEEN THE ASSESSEE AND HIS EMPLOYEE FOR PAYMENT OF CERTAIN REMUNERATION AND THE FACT OF ACTUAL PAYMENT THE ASSESSING OFFICER WAS NOT BOUND TO HOLD THAT THE PAYMENT WAS MADE WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS. IT WAS OP EN TO HIM TO CONSIDER ALL THE RELEVANT FACTORS. THE PAYMENT OF C OMMISSION TO THE DIRECTORS WAS HELD TO BE FOR EXTRA COMMERCIAL REASO N ON ACCOUNT OF THE FACT THAT (1) THE DIRECTORS DID NOT RENDER ANY SPEC IAL SERVICE IN THE RELEVANT YEAR; (2) THE MANAGEMENT OF THE COMPANY WA S DONE BY MANAGING AGENT AND VERY LITTLE WAS DONE BY THE DIRE CTORS; (3) MUCH 4 LESSER REMUNERATION PAID IN EARLIER YEARS WAS NOT C ONSIDERED AS INADEQUATE BY THE DIRECTORS AND (4) THE INCREASE IN THE COMPANY'S PROFITS WAS DUE TO THE CONTROL OF CLOTH HAVING BEEN LIFTED AND NOT ANY SPECIAL EXERTION BY THE DIRECTORS. ON THIS BASIS T HE DISALLOWANCE OF COMMISSION PAID AT THE RATE 1% OF NET PROFIT IN ADD ITION TO MONTHLY REMUNERATION WAS CONFIRMED BY THE SUPREME COURT. FU RTHER IN THIS CASE THE ASSESSEE HAS NOT PAID ANY REMUNERATION TO DIRECTORS. IT IS ALSO TO MENTION HERE THAT THE ASSESSEE IS AN AUTHORIZED DEALER AND INDENTING AGENT OF GUJARAT ALKALIES & CHEMICALS LTD. A PUBLIC SECTOR UNDERTAKING OF THE GOVERNMENT OF GUJARAT AND ALSO E NGAGED IN TRADING OF CHEMICALS AND RELATED PRODUCTS. THEREFORE THERE IS NO NEED OF EXPERTISE TO RUN THE BUSINESS OF THE ASSESSEE COMPA NY. IN THESE CIRCUMSTANCES AND IN ABSENCE OF ANY DETAILS FURNIS HED BY THE ASSESSEE THE KEYMAN INSURANCE PREMIUM PAID BY THE ASSESSEE A MOUNTING TO RS.25 00 000 IS DISALLOWED AND ADDED BACK TO THE TO TAL INCOME OF THE ASSESSEE. 3 ON APPEAL THE LEARNED CIT(A) DELETED THE ADDITIO N WITH THE FOLLOWING OBSERVATIONS:- ESTABLISHED AS TO HOW THESE PERSONS ARE KEYMAN ON WHOSE LIFE KEYMAN INSURANCE POLICY WERE TAKEN. HOWEVER THE A PPELLANT SUBMITTED THAT BY LETTER DATED 5-12-2008 GIVEN TO T HE ASSESSING OFFICER ENCLOSED AS ANNEXURE-D TO THE SUBMISSION GI VEN IN APPEAL THE DETAILS OF PERSONS DATE OF JOINING NATURE OF WORK DONE BY THEM WERE GIVEN TO PROVE THAT THE INSURANCE PREMIUM PAID IS F OR THE PERSONS WHO ARE EITHER EMPLOYEES OR DIRECTORS HANDLING KEY FUNC TIONS. THE TWO PERSONS NAMELY MANISH K. SHAH AND DILIP K. SHAH ARE EMPLOYEES ON WHOSE LIFE PREMIUM OF RS.15 LACS WERE PAID. OTHER F IVE PERSONS ARE DIRECTORS HANDLING VARIOUS ASPECTS OF BUSINESS ON W HOSE LIFE TOTAL RS.10 LACS PREMIUM WAS PAID. THE APPELLANT ALSO MEN TIONED THAT IT IS WRONG ON THE PART OF THE ASSESSING OFFICER THAT NO EXPERTISE IS NEEDED IN RUNNING THE BUSINESS OF THE COMPANY SINCE THE AP PELLANT IS AUTHORIZED DEALER OF GACL AND INVOLVED IN TRADING O F CHEMICALS. THE DAY TODAY BUSINESS IS CARRIED ON BY THE ASSESSEE AN D THE ASSESSEE ONLY KNOWS THE VAGARIES OF THE BUSINESS. THE APPELLANT A LSO STRONGLY RELIED UPON THE CIRCULAR OF CBDT REGARDING TAXATION OF KEY MAN INSURANCE POLICY. THE KEYMAN INSURANCE POLICY CAN BE TAKEN IN THE NAME OF ANOTHER PERSON WHO IS AN EMPLOYEE OR WAS CONNECTED IN ANY MANNER WITH THE BUSINESS OF THE APPELLANT. IT IS NOT IN DI SPUTE THAT TWO OF THE DIRECTORS NAMELY DILIP K. SHAH AND MANISH K. SHAH A RE EMPLOYEES OF 5 THE APPELLANT AND THEY ARE COVERED BY THE RELEVANT PROVISIONS GOVERNING KEYMAN INSURANCE POLICY. OTHER PERSONS AR E DIRECTORS HANDLING SOME OF THE BUSINESS ACTIVITY OF THE APPEL LANT COMPANY AND THEREFORE COVERED BY THE CLAUSE OTHER PERSONS CONN ECTED WITH BUSINESS. THE APPELLANT ALSO REFERRED CIRCULAR NO. 762 OF CBDT IN WHICH IT IS CLEARLY MENTIONED THAT THE KEYMAN IS AN EMPLOYEE OR A DIRECTOR. THE PREMIUM PAID ON THE KEYMAN INSURANCE POLICY IS SPECIFICALLY ALLOWED IN THE SAID CIRCULAR. THE APP ELLANT REFERRED THE DECISION IN THE CASE OF SUNITA FINLEASE LTD IN WHIC H ITAT HELD THAT KEYMAN INSURANCE PREMIUM IS AN ALLOWABLE BUSINESS E XPENSE AND THE SAME IS TO BE ALLOWED BY THE ASSESSING OFFICER SUBJ ECT TO THE VERIFICATION OF PREMIUM PAID. SIMILAR VIEW WAS EXPR ESSED BY THE DELHI ITAT IN THE CASE OF P.G ELECTRONICS. THE MUMBAI IT AT IN ITS LATEST DECISION IN THE CASE OF MODI MOTORS HELD THAT FOR A LLOWING KEYMAN INSURANCE PREMIUM THERE IS NO NECESSITY OF EMPLOYE R-EMPLOYEE RELATIONSHIP. CONSIDERING THESE DECISIONS AND FACTS OF THE CASE IT IS CLEAR THAT THE KEYMAN INSURANCE PREMIUM PAID BY THE APPELLANT IS ALLOWABLE AS BUSINESS EXPENSES. ACCORDINGLY THE ADD ITION MADE BY THE AO IS DELETED. 4 AGGRIEVED BY THE ORDER OF THE LEARNED CIT(A) THE REVENUE IS NOW IN APPEAL BEFORE US. THE LEARNED DR SUPPORTE D THE ORDER OF THE AO. 5 THE LEARNED COUNSEL OF THE ASSESSEE SUPPORTED THE ORDER OF THE LEARNED CIT(A) AND SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF ITAT IN T HE CASES OF SUNITA FINLEASE LTD. AS WELL AS THE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF P G ELECTRONICS (SUPRA). THE L EARNED COUNSEL OF THE ASSESSEE ALSO REFERRED TO CIRCULAR NO.762 [C OPY OF PLACED AT PAGE 22 OF THE PB]. THE LEARNED COUNSEL FURTHER RELIED UPON THE FOLLOWING DECISIONS OF ITAT:- [I] ACIT VS. PRAKASH CHEMICAL AGENCIES (P) LTD. [IT A NO.63/AHD/2011 ORDER DATED 09-12-2011 FOR AY 2007- 08] 6 [II] DCIT VS. M/S PRAKASH CHEMICAL PVT. LTD. [ITA NO.172/AHD/2-11 ORDER DATED 14-10-2011 FOR AY 2007 -08] 6 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RE CORD. WE HAVE ALSO GONE THROUGH VARIOUS DECISIONS REFERRED T O BY THE LEARNED CIT(A) IN HIS ORDER AS WELL AS THE DECISION S RELIED UPON BY THE LEARNED COUNSEL OF THE ASSESSEE BEFORE US. W E FIND THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF THE ITAT AHMEDABAD BENCH IN THE ASSESSEES OWN CASE FOR AY 2007- 08 IN ITA NO. 63/AHD/2011 ORDER DATED 09-12-2011 WHEREIN THE TRIBUNAL HAS HELD AS UNDER:- 5. IN THE PRESENT CASE A CLEAR FINDING IS GIVEN B Y THE LD. CIT(A) THAT TWO PERSONS NAMELY MR. SUDIP SHAH AND MR. DIL IP SHAH ARE EMPLOYED AND THE ASSESSEE PAID THE PREMIUM OF RS.25 LAKHS FOR THEM AND OTHER SIX PERSONS ARE DIRECTORS HANDLING VARIOU S ASPECTS OF BUSINESS ON WHOSE LIFE TOTAL RS.12 LAKH PREMIUM WAS PAID. IT IS ALSO NOTED BY LD. CIT(A) ON PAGE-34 OF HIS ORDER THAT IT WAS SUBMITTED BY ASSESSEE BEFORE HIM THAT BY LETTER DATED 05-12-2008 GIVEN TO THE AO COPY OF WHICH SUBMITTED BEFORE LD. CIT(A) ALSO THE DETAILS OF PERSONS DATE OF JOINING NATURE OF WORK DONE BY TH EM WERE GIVEN TO THE AO TO PROVE THAT KEYMAN INSURANCE PREMIUM WAS P AID FOR THOSE PERSONS WHO ARE EITHER EMPLOYEE OR DIRECTOR HANDLI NG KEY FUNCTIONS. LD. CIT(A) ALSO CONSIDERED THE BOARDS CIRCULAR NO. 762. IN THE LIGHT OF THESE FACTS THIS ISSUE IS SQUARELY COVERED IN F AVOUR OF THE ASSESSEE BY THE TRIBUNAL DECISION CITED BY LD. AR OF THE ASS ESSEE RELEVANT PORTION OF WHICH HAS BEEN ALREADY REPRODUCED ABOVE AND HENCE BY RESPECTFULLY FOLLOWING THE TRIBUNAL DECISION WE DE CIDE THE ISSUE IN FAVOUR OF THE ASSESSEE AND DECLINE TO INTERFERE IN THE ORDER OF LD. CIT(A). RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF TH E ITAT IN THE ASSESSEES OWN CASE FOR AY 2007-08 WE DECIDE THE I SSUE IN FAVOUR OF THE ASSESSEE. 7 7 IN THE RESULT THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT TODAY ON 30-03-2012 SD/- SD/- (T R MEENA) ACCOUNTANT MEMBER (D K TYAGI) JUDICIAL MEMBER DATE : 30-03-2012 COPY OF THE ORDER FORWARDED TO: 1. M/S PRAKASH CHEMICAL AGENCIES PVT. LTD. INDUCHA CHA HOUSE OPP. CHHANI OCTROI NAKA BARODA 2. THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-4 BARODA 3. CIT CONCERNED 4. CIT(A)-III BARODA 5. DR ITAT AHMEDABAD BENCH-B AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT AHMEDABAD