Parmeshwar Engineers, Surat v. The ACIT.,Circle-2,, Surat

ITA 4369/AHD/2007 | 2004-2005
Pronouncement Date: 20-08-2010 | Result: Partly Allowed

Appeal Details

RSA Number 436920514 RSA 2007
Assessee PAN AADFP1709J
Bench Ahmedabad
Appeal Number ITA 4369/AHD/2007
Duration Of Justice 2 year(s) 8 month(s) 10 day(s)
Appellant Parmeshwar Engineers, Surat
Respondent The ACIT.,Circle-2,, Surat
Appeal Type Income Tax Appeal
Pronouncement Date 20-08-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 20-08-2010
Date Of Final Hearing 17-08-2010
Next Hearing Date 17-08-2010
Assessment Year 2004-2005
Appeal Filed On 10-12-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH AHMEDABAD (BEFORE S/SHRI BHAVNESH SAINI JM AND D.C. AGRAWAL AM) ITA NO.4369/AHD/2007 A. Y.: 2004-05 M/S. PARMESHWAR ENGINEERS C-113 UDHNA UDHYOGNAGAR SANGH SHOPPING COMPLEX UDHNA SURAT. VS THE A. C. I. T. CIRCLE-2 AAYAKAR BHAVAN MAJURA GATE SURAT PA NO. AADFP 1709 J (APPELLANT) (RESPONDENT) APPELLANT BY SHRI RASESH SHAH AR RESPONDENT BY SHRI BHUVNESH KULSHRESTHA DR O R D E R PER BHAVNESH SAINI: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A)-II SURAT D ATED 28-09-2007 FOR THE ASSESSMENT YEAR 2004-05 ON THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE A S WELL AS LAW ON THE SUBJECT THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN CONFIRMING THE AC TION OF THE ASSESSING OFFICER IN MAKING DISALLOWANCE OF RS.11 00 000/- ON ACCOUNT OF PREMIUM PAID UNDER KEYMAN INSURANCE POLICY. 2. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN CONFIRMING THE AC TION OF THE ASSESSING OFFICER IN MAKING DISALLOWANCE OF RS.2 27 328/- BEING 1/5 TH OF EXPENSES RELATING TO VEHICLE AND TELEPHONE. 2. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOT H THE PARTIES AND PERUSED THE MATERIALS ON RECORD. 3. ON GROUND NO.1 THE ASSESSEE HAS CONTESTED THE D ISALLOWANCE OF RS.11 00 000/- BEING PREMIUM PAID TOWARDS KEYMAN I NSURANCE POLICY ITA NOS. 4369/AHD/2007 M/S. PARMESHWAR ENGINEERS VS ACIT CIR ((2) SURAT 2 (KIP). BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAD DEBITED A SUM OF RS.11 00 000/- AS KIP PREMIUM PAID FOR A PAR TNER OF HIS FIRM BY TREATING HIM AS KEYMAN. THE A. O. TOOK THE VIEW THA T SUCH PREMIUM WAS NOT ALLOWABLE AS REVENUE EXPENDITURE AND THEREFORE ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE ASKING TO EXPLAIN WHY THE SA ID SUM SHOULD NOT BE DISALLOWED. THE ASSESSEE EXPLAINED THAT THE POLICY WAS TAKEN AS INSURANCE AGAINST FINANCIAL LOSS WHICH COULD ARISE FROM PREMATURE DEATH OF THE KEYMAN. EVEN THOUGH THERE MIGHT HAVE BEEN DO UBTS REGARDING TREATMENT OF PREMIUM PAID THE FINANCE BILL OF 1996 INTRODUCED FIVE AMENDMENTS TO SETTLE THE ISSUE. ACCORDING TO THE AS SESSEE THE EXPLANATORY NOTES AT PARA 14.4 CLEARLY MENTIONED TH AT THE PREMIUM PAID ON THE KIP WAS ALLOWABLE AS BUSINESS EXPENDITURE AN D THAT THE AMOUNT RECEIVED BACK ON MATURITY OF SUCH POLICY WAS MADE T AXABLE U/S 28 (VI) WITH EFFECT FROM 01-10-2996. THEREFORE THERE WAS N O QUESTION OF NOT ALLOWING THE PREMIUM AS BUSINESS EXPENDITURE. THE A O REJECTED THE SUBMISSION OF THE ASSESSEE OBSERVING THAT THOUGH TH E ASSESSEE HAD PLACED RELIANCE ON CBDT CIRCULAR NO.762 DATED 18-02 -1998 BUT FAILED TO CONSIDER THE CIRCULAR IN ITS ENTIRETY. THE AO NO TED THAT THE CIRCULAR CLEARLY DEFINE KEYMAN AS AN EMPLOYEE OR A DIRECTOR WHOSE SERVICES IS PERCEIVED TO HAVE A SIGNIFICANT EFFECT ON THE PROFI TABILITY OF THE BUSINESS. THE PREMIUM WAS TO BE PAID BY THE EMPLOYER. THE AO HAS REPRODUCED THE RELEVANT PORTION OF THE CIRCULAR AT PARA 9 OF T HE ASSESSMENT ORDER AND DISCUSSED THE CONCEPT OF KEYMAN INSURANCE ITS PURP OSE AND WHO COULD BE A KEYMAN AS PER EXPLANATION TO SECTION 10 (10D) OF THE IT ACT AND TOOK THE VIEW THAT A KEYMAN IS EITHER AN EMPLOYEE O F THE ORGANIZATION OR ANY OTHER SALARIED PERSON WHO IS A KEY PERSON IN TH E ORGANIZATION. THE KIP IS A POLICY WHERE THE PROPOSER AS WELL AS THE P AYER OF THE PREMIUM IS THE EMPLOYER AND THE LIFE TO BE INSURED IS THAT OF AN EMPLOYEE AND THERE HAS TO EXIST EMPLOYER EMPLOYEE RELATIONSHIP FOR K IP TO BE ALLOWED AS A DEDUCTION. SUCH RELATION IS ABSENT BETWEEN THE PART NERSHIP FIRM AND THE PARTNERS. THE PARTNERS CONSTITUTE THE FIRM AND THE REFORE THERE CANNOT BE ITA NOS. 4369/AHD/2007 M/S. PARMESHWAR ENGINEERS VS ACIT CIR ((2) SURAT 3 ANY EMPLOYER EMPLOYEE RELATIONSHIP BETWEEN THE FI RM AND THE PARTNERS. THE AO FURTHER OBSERVED THAT THE AMOUNT RECEIVED ON MATURITY OF KIP IS NOT EXEMPT U/S 10 (10D) OF THE ACT SINCE THE MATURE D AMOUNT ACQUIRES THE NATURE OF CAPITAL RECEIPT AND THAT THE PREMIUM PAID TOWARDS KIP IS IN THE NATURE OF CAPITAL EXPENDITURE AND CANNOT BE ALL OWED AS DEDUCTION U/S 37(1) OF THE IT ACT. FURTHER RELYING ON THE DE CISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS KHODIDAS M OTIRAM PANCHAL 161 ITR 99 THE AO OBSERVED THAT THE PURPOSE OF TAKING O UT SUCH POLICY IS TO ENSURE THE AVAILABILITY OF LIQUID CASH AT THE REQUI SITE POINT OF TIME AND SINCE LIQUID CASH IS CAPITAL ASSET THE EXPENDITURE INCURRED TOWARDS KIP PREMIUM CAN ONLY BE SAID TO BE IN THE NATURE OF CAP ITAL EXPENDITURE. ACCORDINGLY THE AO CAME TO THE CONCLUSION THAT A P ARTNER OF A FIRM CANNOT BE A KEYMAN OF THE FIRM THERE BEING NO EMPL OYER EMPLOYEE RELATIONSHIP BETWEEN THE FIRM AND THE PARTNERS AND THE EXPENDITURE INCURRED TOWARDS THE KIP PREMIUM IS A CAPITAL EXPEN DITURE AND SUCH EXPENDITURE COULD ONLY BE TREATED AS PERSONAL EXPEN DITURE OF THE PARTNERS. THE AO THEREFORE DISALLOWED THE CLAIM O F THE ASSESSEE AND ADDED RS.11 00 000/- TO THE TOTAL INCOME OF THE ASS ESSEE. 4. THE ADDITION WAS CHALLENGED BEFORE THE LEARNED C IT(A) AND IN THE WRITTEN SUBMISSION SUBMITTED DURING THE COURSE OF A PPELLATE PROCEEDINGS THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THE AO WAS NOT JUSTIFIED IN DISALLOWING THE EXPENDITURE INCURRED O N THE PREMIUM OF RS.11 00 000/- UNDER KIP AND THAT AS PER SECTION 10 (10D) OF THE IT ACT KIP IS A LIFE INSURANCE POLICY TAKEN BY A PERSON ON THE LIFE OF ANOTHER PERSON WHO IS OR WAS THE EMPLOYEE FOR THE FIRST ME NTIONED PERSON OR HE IS OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH T HE BUSINESS OF THE FIRST MENTIONED PERSON. THEREFORE ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE EXISTENCE OF EMPLOYER- EMPLOYEE RELAT IONSHIP IS NOT AT ALL ESSENTIAL AND THAT THE AO WAS NOT JUSTIFIED IN DISA LLOWING THE EXPENDITURE ON THE GROUND THAT THERE WAS NO EMPLOYER-EMPLOYEE R ELATIONSHIP BETWEEN ITA NOS. 4369/AHD/2007 M/S. PARMESHWAR ENGINEERS VS ACIT CIR ((2) SURAT 4 THE ASSESSEE FIRM AND ITS PARTNERS. IT HAS BEEN FUR THER ARGUED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE INSURANCE COMPANY ISSUES THE POLICY IF ALL ITS CONDITIONS ARE MET AND SINCE IN T HIS CASE THE INSURANCE COMPANY HAD ISSUED THE POLICY TO THE PARTNER OF THE ASSESSEE THE AO WAS NOT JUSTIFIED IN GOING INTO THE ASPECTS WHICH A RE NOT ESSENTIAL TO THE ISSUE OF THE KIP. IN THE PARTNERSHIP FIRM THE PART NERS ARE DIRECTLY CONNECTED WITH THE BUSINESS OF THE FIRM AND THEY AR E THE KEY PERSON WHO TAKES DECISIONS FOR RUNNING THE BUSINESS OF THE FIR M. DEATH OF A PARTNER OR ANY DAMAGE CAUSED TO HIM WOULD HAVE DEFINITE ADV ERSE AFFECT IN THE BUSINESS OF THE FIRM. REFERRING TO CBDT CIRCULAR NO .762 DATED 18-2-1998 THE LEARNED COUNSEL FOR THE ASSESSEE SUB MITTED THAT SINCE THE SURRENDER VALUE OF THE KIP IS TO BE TREATED AS INCO ME FROM OTHER SOURCES AND TAXED THE PREMIUM PAID TOWARDS SUCH POLICY IS TO BE ALLOWED AS BUSINESS EXPENDITURE AND THAT THE AO FAILED TO CORR ECTLY INTERPRET THE SAID CIRCULAR OR TO APPLY IT IN A FAIR AND JUDICIOU S MANNER. REGARDING THE AOS VIEW THAT THE EXPENDITURE INCURRED TOWARDS THE PREMIUM WAS A CAPITAL EXPENDITURE IT HAS BEEN SUBMITTED BY THE L EARNED COUNSEL FOR THE ASSESSEE THAT SECTION 28(VI) CLEARLY LAYS DOWN THAT ANY SUM RECEIVED UNDER THE KIP WAS TAXABLE UNDER HEAD OF BUSINESS IN COME AND THEREFORE THE RECEIPT CANNOT BE TREATED AS CAPITAL EXPENDITUR E AND IF THAT BE SO THE PREMIUM PAID TOWARDS THE KIP COULD NOT BE TREATED A S CAPITAL EXPENDITURE. REGARDING AO RELIANCE IN THE CASE OF KHODIDAS MOTIRAM PANCHAL (SUPRA) THE LEARNED COUNSEL FOR THE ASSESS EE SUBMITTED THAT THE RATIO OF THE SAID CASE SUPPORT THE ASSESSEES CASE AND THAT THE HONBLE HIGH COURT HELD THAT IF THE AMOUNT RECEIVED FROM TH E INSURANCE COMPANY ON THE DEMISE OF A PARTNER IS A CAPITAL ASSET WHAT THE FIRM EXPENDS FOR ACQUIRING THAT CAPITAL ASSET CAN ONLY BE SAID TO BE CAPITAL IN NATURE WITHIN THE MEANING OF SEC. 37(1) OF THE IT ACT. IT WAS FURTHER SUBMITTED THAT AS A COROLLARY IT CAN BE SAID THAT IF THE AMO UNT RECEIVED IS NOT CAPITAL IN NATURE THE EXPENDITURE INCURRED FOR GET TING THE SAID AMOUNT CANNOT BE TREATED AS A CAPITAL EXPENDITURE AND SECT ION 28(VI) OF THE IT ACT ITA NOS. 4369/AHD/2007 M/S. PARMESHWAR ENGINEERS VS ACIT CIR ((2) SURAT 5 CLEARLY LAYS DOWN THAT THE MATURITY VALUE OF THE KI P WAS TO BE TAXED AS REVENUE RECEIPT. THE LEARNED COUNSEL FOR THE ASSESS EE RELIED ON THE DECISION OF ITAT DELHI BENCH IN THE CASE OF P. G. E LECTRONICS VS ITO 98 TTJ 896 IN SUPPORT OF THE CLAIM OF THE ASSESSEE. 5. THE LEARNED CIT(A) CONSIDERING THE SUBMISSIONS O F THE ASSESSEE AND THE MATERIAL ON RECORD DISMISSED THE APPEAL OF THE ASSESSEE AND CONFIRMED THE ADDITION. HIS FINDINGS ON PARA 6 6. 1 AND 6.2 ARE REPRODUCED AS UNDER: 6. I HAVE CAREFULLY CONSIDERED BOTH THE POSITIONS . I DO NOT ACCEPT THE ALTERNATIVE VIEW TAKEN BY THE A. O. THAT THE AMOUNT RECEIVED ON MATURITY OF AN INSURANCE POLICY IS A CAPITAL RECEIPT AND CONSEQUENTLY THE SUM EXPENDED TOWARDS THE PREMIA OF SUCH POLICY IS TO BE TREATED AS CAPIT AL EXPENDITURE. AS ARGUED BY THE A. R. CIRCULAR NO.76 2 DATED 18-02-1998 ISSUED BY THE CBDT CLEARLY LAID DOWN THA T THE PREMIUM PAID TOWARDS THE KIP IS TO BE ALLOWED AS A BUSINESS EXPENDITURE AND THAT AS PER THE PROVISIONS OF SEC. 28 (VI) OF THE ACT THE AMOUNT RECEIVED ON MATURITY OF THE KIP IS TO BE BROUGHT TO TAX. IN FACT THE A. O. HIMSELF HAS REPR ODUCED THE RELEVANT PORTION OF THE SAID CIRCULAR AT PARA (9) O F THE ASSESSMENT ORDER. THEREFORE THE VIEW TAKEN BY THE A. O. THAT THE PREMIA PAID TOWARDS KIP WAS TO BE TREATED AS A CAPITAL EXPENDITURE AND DISALLOWED WAS ABSOLUTELY ERRONEOU S. 6.1 THE EXPLANATION BELOW SEC. 10(10D) DEFINES THE KIP. THE SAME IS REPRODUCED HEREUNDER: EXPLANATION FOR THE PURPOSE OF THIS CLAUSE KEYMAN INSURANCE POLICY MEANS A LIFE INSURANCE POLICY TAKEN BY A PERSON ON THE LIFE OF AN OTHER 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. AS PER THE EXPLANATION THE KIP IS A POLICY TAKEN B Y A PERSON ON THE LIFE OF AN EMPLOYEE OR A PERSON WHO IS OR WA S CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINES S OF THE PERSON TAKING THE POLICY. IN THE CASE OF A PARTNERS HIP FIRM A PARTNER CANNOT BE TREATED AS AN EMPLOYEE OF THE FIR M. AS ITA NOS. 4369/AHD/2007 M/S. PARMESHWAR ENGINEERS VS ACIT CIR ((2) SURAT 6 OBSERVED BY THE A. O. AT PARA 16 OF THE ASSESSMENT ORDER THE PARTNERS CONSTITUTE THE FIRM. THEREFORE IF A KIP I S TAKEN BY THE FIRM IT WOULD AMOUNT TO THE PARTNERS INSURING THEM SELVES. CONSEQUENTLY IT WOULD AMOUNT TO THE FIRM BESTOWING PERSONAL BENEFITS TO A PARTNER AND WOULD REPRESENT A PERSONA L EXPENDITURE AND NOT A BUSINESS EXPENDITURE. THE A. R. HAS NOT COUNTERED THIS OBSERVATION OF THE A. O. HE HAS MERE LY STATED THAT THE A. O. GAVE A VERY NARROW MEANING TO THE WO RD KEYMAN AND THAT THE PARTNER BEING DIRECTLY CONNE CTED WITH THE BUSINESS OF THE FIRM IS THEREFORE THE KEYMAN SINCE HIS DEATH WOULD ADVERSELY AFFECT THE FIRMS BUSINESS. T HERE IS NO MERIT IN SUCH AN ARGUMENT. 6.2 AS PER THE EXPLANATION IF IT IS NOT AN EMPLOYE E THE PERSON IN WHOSE NAME THE KIP IS TAKEN HAS TO BE CON NECTED IN SOME MANNER WITH THE BUSINESS OF THE PERSON TAKING POLICY. THE PARTNERS ARE NOT MERELY CONNECTED TO THE FIRM . THEY ARE THE FIRM AND THEY CONSTITUTE THE FIRM. THEREFORE ANY PARTNER CANNOT BE A KEYMAN FOR THE FIRM. TO THAT EXTENT I WOULD RESPECTFULLY REJECT THE VIEW TAKEN BY THE HONBLE D ELHI BENCH OF THE ITAT IN THE CASE OF P. G. ELECTRONICS SUPRA) . IN ANY CASE THE ONLY ISSUE BEFORE THE ITAT WAS WHETHER OR NOT T HE PREMIUM PAID ON THE KIP IS ALLOWABLE AS A BUSINESS EXPENDITURE. THE ITAT HELD THAT IT WAS ALLOWABLE AS A BUSINESS EXPENDITURE SINCE IT WAS CLARIFIED AS SUCH IN THE CIRCULAR NO.762 ISSUED BY THE CBDT. PARA 14.1A OF T HE CIRCULAR CLARIFIED THAT A 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 P AID BY TH4E EMPLOYER. THE A. O. THEREFORE WAS FULLY JUSTIFIED IN TAKING THE VIEW THAT THE PARTNER OF A FIRM COULD NOT BE A KEYM AN AND CONSEQUENTLY IN DISALLOWING THE SUM OF RS.11 LACS PAID BY THE ASSESSEE FIRM AS PREMIUM FOR THE KIP. THE ADDITION OF THE SAID SUM IS CONFIRMED. 6. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND RELIED UPON T HE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS B. N. EXPORTS 231 CTR 227 AND THE ORDER OF THE ITAT AHMEDABAD BENCH IN TH E CASE OF M/S. GEM ART DATED 26-03-2010 IN ITA NO. 2725/AHD/2007. HE HAS ALSO FILED COPY OF THE KEYMAN INSURANCE POLICY THROUGH WHICH T HE AMOUNT IN QUESTION WAS PAID FOR INSURANCE. IT WAS PAID IN A S UM OF RS.10 00 000/- ITA NOS. 4369/AHD/2007 M/S. PARMESHWAR ENGINEERS VS ACIT CIR ((2) SURAT 7 IN CASE OF MR. ASHISHBHAI M. AMIN AND SMT. TEJASBEN M. AMIN IN A SUM OF RS.1 00 000/- AS A SLEEPING PARTNER. ON THE OTHE R HAND THE LEARNED DR RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE HAS RELIED UPON T HE CIRCULAR NO.762 DATED 18-02-1998 PARA 14.4 OF WHICH ARE REPRODUCED AS UNDER: 14.4 THE ACT ALSO LAYS DOWN THAT THE SUMS RECEIVE D BY THE SAID ORGANISATION 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 A T THE TIME OF RETIREMENT BE TAKEN AS PROFITS IN LIEU OF SALAR Y FOR TAX PURPOSES; AND IN CASE OF OTHER PERSONS HAVING NO EM PLOYER- EMPLOYEE RELATIONSHIP THE SURRENDER VALUE OF THE P OLICY OR SUM RECEIVED UNDER THE POLICY BE TAKEN AS INCOME FR OM OTHER SOURCES AND TAXED ACCORDINGLY. THE PREMIUM PAID ON THE KEYMAN INSURANCE POLICY IS ALLOWED AS BUSINESS EXPENDITURE. THE PREMIUM PAID ON KIP HAS BEEN ALLOWED AS BUSINES S EXPENDITURE. THE AMOUNT RECEIVED IN KIP HAS BEEN MADE TAXABLE AND AC CORDING TO SECTION 28 (VI) OF THE IT ACT WITH EFFECT FROM 01-10-1996 W HICH PROVIDES THAT A SUM RECEIVED UNDER KIP INCLUDING THE SUM ALLOCATED BY WAY OF BONUS ON SUCH POLICY WILL BE TREATED AS INCOME CHARGEABLE TO INCOME TAX UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSION. EX PLANATION TO SECTION 10(10D) IS REPRODUCED ABOVE IN THE FINDING OF THE L EARNED CIT(A) FIND MENTION THE WORD IS OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINESS WOULD HAVE WIDER MEANING. THE SAME IS CONSIDERED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. B. N. EXPORTS (SUPRA) AND IT WAS HELD AS UNDER: HELD FOR THE PURPOSE OF S. 10(10D) A KEYMAN INS URANCE POLICY MEANS A LIFE INSURANCE POLICY TAKEN BY A PER SON ON THE LIFE OF ANOTHER PERSON WHO IS OR WAS IN EMPLOYMENT AS WELL AS ON A PERSON WHO IS OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINESS OF THE SUBSCRIBER. THE WORD IS ITA NOS. 4369/AHD/2007 M/S. PARMESHWAR ENGINEERS VS ACIT CIR ((2) SURAT 8 OR WAS CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINESS OF THE SUBSCRIBER ARE WIDER THAN WHAT WOU LD BE SUBSUMED UNDER A CONTRACT OF EMPLOYMENT. THE LATER PART MAKES IT CLEAR THAT A KEYMAN INSURANCE POLICY FOR T HE PURPOSES OF CL. (10D) IS NOT CONFINED TO A SITUATIO N WHERE THERE IS A CONTRACT OF EMPLOYMENT. CIRCULAR NO.762 DATED 18 TH FEB. 1998 ISSUED BY THE CBDT CLARIFIES THE POSITION BY S TIPULATING THAT THE PREMIUM PAID FOR A KEYMAN INSURANCE POLICY IS ALLOWABLE AS BUSINESS EXPENDITURE. THERE IS A FINDI NG OF FACT BY THE TRIBUNAL THAT THE FIRM HAD NOT TAKEN FOR THE PERSONAL BENEFIT OF THE PARTNER BUT FOR THE BENEFIT OF THE FIRM IN ORDER TO PROTECT ITSELF AGAINST THE SET BACK THAT MAY BE CAU SED ON ACCOUNT OF THE DEATH OF A PARTNER. THE OBJECT AND P URPOSE OF A KEYMAN INSURANCE POLICY IS TO PROTECT THE BUSINESS AGAINST A FINANCIAL SET BACK WHICH MAY OCCUR AS A RESULT OF A PREMATURE DEATH TO THE BUSINESS OR PROFESSIONAL ORGANIZATION . THERE IS NO RATIONAL BASIS TO CONFINE THE ALLOWABILITY OF TH E EXPENDITURE INCURRED ON THE PREMIUM PAID TOWARDS SUCH A POLICY ONLY TO A SITUATION WHERE THE POLICY IS IN RESPECT OF THE LIF E OF AN EMPLOYEE. A KEUMAN INSURANCE POLICY IS OBTAINED ON THE LIFE OF A PARTNER TO SAFEGUARD THE FIRM AGAINST A DISRUPTIO N OF THE BUSINESS THAT MAY RESULT DUE TO THE PREMATURE DEATH OF A PARTNER. THEREFORE THE EXPENDITURE WHICH IS LAID O UT FOR THE PAYMENT OF PREMIUM ON SUCH A POLICY IS INCURRED WHO LLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. HENCE THE APPEAL BY THE REVENUE DOES NOT RAISE ANY SUBSTANTIAL QUESTION OF LAW. 8. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO FIL ED COPY OF THE KEYMAN INSURANCE POLICY IN THE MATTER IN RESPECT OF TWO OF THE PARTNERS IN WHICH PAYMENT OF RS.10 00 000/- AND RS.1 00 000/- HAVE BE EN PAID. IN THIS KIP THE ASSESSEE FIRM IS A PROPOSER FIRM AND THE N AME OF THE LIFE INSURED IS THE PARTNER OF THE ASSESSEE FIRM. THE PE RIODICAL PREMIUM PAYMENT IS PRESCRIBED YEARLY AND THAT THE BENEFITS OUT OF THE POLICY WAS PAYABLE TO THE PROPOSER I.E. THE ASSESSEE FIRM. IN THE CASE OF DISSOLUTION OF PARTNERSHIP FIRM FOR ANY REASON OTHER THAN DEATH OF ANY OF THE PARTNERS INSURED UNDER THE POLICY THAN THE MENTIONED POLICY SHALL BE EITH ER SURRENDERED TO THE COMPANY FOR ITS CASH VALUE IF ANY OR MAY PAID UP FO R VALUE IF ANY AS ACQUIRED UNDER THE POLICY AS ON THE DATE OF THE DIS SOLUTION OF THE PARTNERSHIP AND SUCH PAID UP POLICY SHALL BE ABSOLU TELY ASSIGNED IN ITA NOS. 4369/AHD/2007 M/S. PARMESHWAR ENGINEERS VS ACIT CIR ((2) SURAT 9 FAVOUR OF THE PARTNERS INSURED UNDER THE POLICY. IT WOULD MEAN THAT THE ASSESSEE FIRM HAD NOT TAKEN INSURANCE FOR THE PERSO NAL BENEFIT OF THE PARTNERS BUT FOR THE BENEFIT OF THE FIRM IN ORDER TO PROTECT ITSELF AGAINST THE SET BACK THAT MAY BE CAUSED ON ACCOUNT OF DEATH OF A PARTNER. THEREFORE THE ASSESSEE FIRM BEING PROPOSER AND ULT IMATE BENEFICIARY OUT OF KIP HAS BEEN ABLE TO PROVE THAT POLICY WAS OBTAI NED WITH THE OBJECT TO PROTECT THE INTEREST OF THE ASSESSEE FIRM IN THE EV ENT OF DEATH OF ANY OF THE PARTNERS. THEREFORE THE KIP IS OBTAINED BY THE ASSESSEE FIRM FOR THE PURPOSE OF ITS BUSINESS. IN THE CASE OF DISSOLUTION THE BENEFITS WOULD GO TO THE PARTNERS MEANING THEREBY THE PARTNERS OF THE ERSTWHILE FIRM. IN THAT EVENT NO PERSONAL BENEFIT HAS BEEN ASSIGNED T O THE PARTNERS. THUS THE ASSESSEE FIRM PROVED THAT IT HAS TAKEN THE KIP FOR ITS PARTNERS WHO ARE CONNECTED WITH THE BUSINESS OF THE ASSESSEE FIR M EXCEPT THE SLEEPING PARTNER. THE PARTNERS ARE DIRECTLY CONNECTED WITH T HE BUSINESS OF THE ASSESSEE FIRM AND ARE KEY PERSONS TO TAKE DECISION IN THE BUSINESS OF THE ASSESSEE. AS NOTED ABOVE THE POLICY WAS TAKEN FOR THE BENEFIT OF THE BUSINESS OF THE ASSESSEE THEREFORE THE AMOUNT INC URRED FOR OBTAINING KIP POLICY SHALL HAVE TO BE CONSIDERED AS REVENUE E XPENDITURE. THE KIP IS NOT CONFINED TO A SITUATION WHERE THERE IS A CONTRA CT OF EMPLOYMENT PREMIUM OF KIP OF PARTNERS OF THE FIRM IS WHOLLY AN D EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND IS ALLOWABLE AS BUSINESS EX PENDITURE. THE SAME VIEW IS TAKEN BY THE ITAT AHMEDABAD BENCH IN THE CA SE OF M/S. GEM ART (SUPRA) IN WHICH DEPARTMENTAL APPEAL HAS BEEN DISMI SSED ON THE IDENTICAL ISSUES. THE VIEW OF THE AO THAT IT IS CAP ITAL EXPENDITURE IS NEGATED BY THE LEARNED CIT(A) AND THERE IS NO CHALL ENGED TO THE FINDING OF THE LEARNED CIT(A) IN THIS REGARD. SINCE THE AMOUNT IS LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THAT AC CORDING TO SECTION 28(VI) OF THE IT ACT WITH EFFECT FROM 01-10-1996 TH E SUM RECEIVED UNDER KIP IS TAXABLE INCOME THEREFORE THE AUTHORITIES B ELOW SHOULD HAVE HELD THAT THE AMOUNT INCURRED BY THE ASSESSEE FOR OBTAIN ING KIP WAS A REVENUE EXPENDITURE EXCEPT IN THE CASE OF SLEEPING PARTNER WHO HAS ITA NOS. 4369/AHD/2007 M/S. PARMESHWAR ENGINEERS VS ACIT CIR ((2) SURAT 10 NOT BEEN TAKING ANY ACTIVE PART IN THE BUSINESS OF THE ASSESSEE AND HAD NOT BEEN CONNECTED WITH DAY TO DAY BUSINESS ACTIVIT Y OF THE ASSESSEE. 9. CONSIDERING THE ABOVE DISCUSSIONS WE ARE OF THE VIEW THAT KIP OBTAINED BY THE ASSESSEE FIRM IN THE NAMES OF THE P ARTNERS MR. ASHISHBHAI M. AMIN ON PAYMENT OF RS.10 00 000/- IS ALLOWABLE AS REVENUE EXPENDITURE. WE ACCORDINGLY SET SIDE THE O RDERS OF THE AUTHORITIES BELOW AND DELETE THE ADDITION OF RS.10 00 000/-. THE ADDITION OF RS.1 00 000/- IS HOWEVER CONFIRMED IN RESPECT O F THE SLEEPING PARTNER. IN THE RESULT GROUND NO.1 OF THE APPEAL OF THE ASS ESSEE IS PARTLY ALLOWED. 10. ON GROUND NO.2 THE AO DISALLOWED ONE FIFTH O F EXPENDITURE BEING PERSONAL IN NATURE. THE LEARNED CIT(A) CONFIRMED TH E ADDITION. CONSIDERING THE ABOVE FINDING OF THE AUTHORITIES BE LOW WE DO NOT FIND IT TO BE A FIT CASE FOR INTERFERENCE BECAUSE THE EXPEN DITURE MENTIONED ON THESE HEADS LIKE VEHICLE AND TELEPHONE EXPENSES TH E SAME COULD BE USED BY THE PARTNERS AND THEIR FAMILY MEMBERS FOR PERSON AL PURPOSE. NO RECORD IS PRODUCED BEFORE US TO SHOW THAT THE SAME WERE EXCLUSIVELY USED FOR THE PURPOSE OF BUSINESS. THEREFORE NO INTERFER ENCE IS CALLED FOR IN THIS MATTER. AS A RESULT GROUND NO.2 OF THE APPEAL OF T HE ASSESSEE IS DISMISSED. 11. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 20-08-2010 SD/- SD/- (D. C. AGRAWAL) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 20-08-2010 LAKSHMIKANT/- ITA NOS. 4369/AHD/2007 M/S. PARMESHWAR ENGINEERS VS ACIT CIR ((2) SURAT 11 COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR ITAT AHMEDABAD 6. GUARD FILE BY ORDER DY. REGISTRAR ITAT AHMEDABAD