2009 (10) TMI 597 - AT - Income Tax

Assessment framed under section 43(3) of the Income-tax Act 1961 (the Act). - The assessee is a reputed heart care institute and consisted on its panel of directors consisted of eminent persons - to cover risk assessee purchased keyman insurance policies on these persons and paid premiums thereon Hence AO disallowed the expenses incurred on these keyman policies Assessee preferred first appeal and represented before CIT(A)- the health of any company it is not only the turnover that is relevant but also its profitability - Achieving higher turnover one does not gain anything unless the same is to result in profits - A sound businessman can make the organization profitable - The business is always carried on for the purpose of earning income and if profit is not the guiding factor what else can be a guiding factor as to whether business is well run or not. If a person is always to incur loss even though it may result into achieving higher turnover the same will never be carried on for long and no one can incur losses for ever and there cannot be an intention for carrying on such business also - The profitability for subsequent year has shown that when these persons left the assessee reduced its earning capacity and ended in loss in financial year Keypersons are also equally involved in carrying on the business of the assessee and insurance premium paid on the keyman insurance policy taken on their lives qualifies for deduction under section 37(1) of the Act Disallowance of Rs. 1, 77, 028 out of software development expenses- These are not the acquisition of any new software but consultancy charges for software maintenance - since no new software was brought in the expenses are allowable as revenue expenditure - The appeal of the assessee is allowed

Summary

Issues:
1. Disallowance of premium paid on Keyman Insurance Policies.
2. Allowability of premium paid in respect of key persons.
3. Interpretation of keyman concept and its impact on business profitability.

Detailed Analysis:
1. The judgment involves cross-appeals by the assessee and the revenue against the order of the Commissioner of Income-tax (Appeals)-II, Delhi, regarding the disallowance of a premium paid on Keyman Insurance Policies under section 43(3) of the Income-tax Act, 1961. The Assessing Officer disallowed a substantial sum paid on policies assigned to key individuals associated with the assessee-company, leading to the appeals.

2. The key issue revolves around the allowability of the premium paid on keyman insurance policies taken on the lives of Dr. Naresh Trehan, Shri Rajan Nanda, and Smt. Ritu Nanda. The Assessing Officer disallowed the premium, citing lack of business purpose and benefit conferred on the individuals. The assessee contended that these key individuals played a crucial role in the business, justifying the protection through keyman insurance policies. The learned CIT(A) differentiated between the key roles of Dr. Trehan and the other two individuals, ultimately disallowing a portion of the premium.

3. The interpretation of the keyman concept and its impact on business profitability forms a significant aspect of the judgment. The Tribunal considered past decisions and the importance of key individuals in the organization. It highlighted the relevance of profitability along with turnover in assessing the health of a company. The judgment emphasized that the departure of key persons resulted in reduced profits for the assessee, indicating their critical role in the business. The Tribunal upheld the allowability of the premium on keyman insurance policies for all three individuals, emphasizing the need for a balanced approach considering both turnover and profitability in evaluating business sustainability.

4. The judgment underscores the complexities of determining keyman status and the genuine business purpose behind keyman insurance policies. It clarifies that profitability is a crucial factor alongside turnover in assessing business performance. The decision provides insights into the interplay between key individuals, business acumen, and the financial implications of keyman insurance policies, offering a comprehensive analysis of the legal and financial aspects involved in such disputes.