TMI Blog2011 (12) TMI 392X X X X Extracts X X X X X X X X Extracts X X X X ..... t the expenditure incurred in the first instance would lose the flavour of it being 'business expenditure'. - Decided in favor of assessee. Whether on the facts and circumstances of the case, there was any justification to tax the difference between the premium paid by the employer and the surrender value paid by the employee to the employer at the time of assignment of the policy and whether it could be taxed in the year of assignment? - held that:- Section 17(3)(ii) of the Act would come into pay only when the policy is assigned by the employer to the employment as employer cannot be taxed under this Section, which is applicable only to the employee. - no particular amount was received by these Director assessees on assignment. Clause (ii) of subsection (3) of Section 17 taxes "any sum received in a Keyman policy insurance". The word "received" assumes significance. - it was only the surrender value of the policy at the time of assignment or the sum received by an individual at the time of retirement, which is taxable. - Insofar as assignment is concerned, at that time surrender value was paid by the Director and therefore, nothing could be taxed. Therefore, from any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees/Directors receiving surrender value from them. Whereafter, for the remaining period of all those policies, the insurance premium were paid by the assignees. Insofar as the assessee company is concerned, the question is as to whether premium paid by it, after adjusting the surrender value, is to be treated as business expenditure or not as claimed by the assessee. Insofar as other two assessees are concerned in whose favour the 'key man' policies were assigned, the question is as to whether the difference between the actual premium paid and surrender value given by them is to be treated as 'salary' in their hands and is to be taxed accordingly. Another issue qua these two Directors is as to whether the maturity value received by them on the said policy is to be taxed or not. 3. With this little indication of the nature of issues which arise in three sets of appeal, we advert to the facts in detail, which would be common to all the cases. Thereafter, we will refer to specific issues. FACTS: 4. As pointed out above, the assessee company has been taking 'key man' insurance policies on the lives of two employees/Directors in different years. For the sake of brevity and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remium paid by the company. The difference between the premium paid by the company and the surrender value paid by Mr. Nanda was treated as the benefit to be taxed in his hands. In appeal preferred by Mr. Nanda before the CIT (A), the first appellate authority held that as the Director, he was receiving commission income and was having the status of 'employee' and the aforesaid benefit derived by him was to be treated as 'salary' within the meaning of Section 17 of the Income Tax Act (hereinafter referred to as 'the Act'). However, the Tribunal has reversed the decision of the CIT (A) holding that merely by assignment in a particular year when the policy was still continuing, no taxable event had taken place and therefore, no tax could be charged. It has also held that the amount in question cannot be treated as 'perquisite' so as to fall within the scope of Section 17(3) of the Act. This decision in the case of Mr. Nanda is followed in the case of other Director-assessee, viz. Dr. Naresh Trehan. 10. Challenging the orders of the Tribunal, Revenue has preferred appeals in the case of the company as well as in respect of both the said Directors. With these background facts, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyment of the employer, the within mentioned policy will be, ( i ) either surrendered to corporation for its cash value or ( ii ) assigned absolutely in favour of the employee life assured. It is further agreed and declared that the within mentioned policy shall not be allowed to be assigned to anyone except life assured himself absolutely." 14. After pointing out the aforesaid clause of the scheme, argument of Mr. Sahni was that the assessee had acted in contravention of various clauses of the LIC's scheme of keyman insurance policy and had been assigning the policies year after year when they were still continuing with the company and had not left it. 15. His other submission was that the surrender value relates and is applicable only to the LIC when a policy is paid up by the insurer (in this case, the assessee company) and not to keyman or any third person. If a company does not wish to continue the policy, it can surrender the same to the LIC for its cash value or assign it absolutely in favour of employee, as per the scheme. The surrender value is not relevant insofar as the value of the benefit passed on to the keyman is concerned; nor can it be treated as full and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stic formula, nor could it be put in a water-tight compartment so as to be confined in a straitjacket formula. All that the law requires is that the expenditure should not be in the nature of capital expenditure or personal expenditure of the assessee and it should be wholly and exclusively laid out for the purpose of the business. It is well settled that the items of expenditure are to be considered from the point of view of a normal, prudent businessman. The test would merely mean that the Court would place itself in the position of a businessman and find whether the expenses incurred could be said to have been laid out for the purposes of the business. The ultimate analysis of the transaction would depend on the status of the parties as spelt out and nature or character of the trade or the venture, the purpose for which the expenses were incurred and the object which was sought to be achieved in incurring those expenses. Such an expenditure, however, must not suffer from the vice of collusiveness or colourable device. It was submitted that the instant case is a clear case of colourable transactions which are executed by the assessee at behest of its Directors/employees managing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount in the hands of individuals cannot determine or impact allowability of the expenditure in the case of the respondent company. In this regard, he placed reliance on the decision of the Supreme Court in the case of Empire Jute Company Limited v. Commissioner of Income Tax [124 ITR 1 (SC)], wherein it has been observed that a certain payment constitutes income or capital receipt in the hands of recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer. 22. His further submission was that no such case of colourable device could be projected by the Department when assignment of such policies was envisaged in the CBDT's Circular dated 18th February, 1998 itself. It was further argued that the ingredients under Section 37 were duly met and satisfied as the expenditure incurred by the company was only on business considerations and the assignment of policy was also in the larger interest of business. It was, inter alia, submitted in this behalf that the assessee company was able to earn substantial profit by availing services of these individuals (keyman) by incurring the expenditure under reference and it is a fact duly r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Authorities below. Even otherwise, the insurance company had accepted the assignment. So much so, even the Department had accepted the assignment and had taxed surrender value of the assignment and therefore, such an argument could not be raised. 25. After giving our due and thoughtful consideration to the submissions of the parties of both sides, we feel that the assessee has been able to make out a case in its favour and order of the Tribunal does not call for any interference. We are persuaded by the following reasons in support of this view of ours: ( i ) The Department has itself allowed the expenditure incurred on the premium paid for keyman insurance policies in previous years as business expenditure under Section 37 of the Act. Right from 1991-92 upto 1993-94 and thereafter even in respect of Assessment Year 1997-98, the expenditure was allowed. Though thereafter, the expenditure was disallowed, but again the claim was accepted for the Assessment Years 2001-02 and 2002-03. Principle of consistency would, therefore, by applicable in such a case. ( ii ) The Tribunal has rightly referred to and relied upon the CBDT's Circular dated 18.2.1998. This Circular is bin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut for the benefit of the firm, in order to protect itself against the set back that may be caused on account of the death of a partner. The object and purpose 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 the expenditure incurred on the premium paid towards such a policy only to a situation where the policy is in respect of the life of an employee. A Keyman insurance policy is obtained on the life of a partner to safeguard the firm against a disruption of the business that may result due to the premature death of a partner. Therefore, the expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of business." ( iv ) The argument of Mr. N.P. Sahni, learned counsel for the Revenue that taking such keyman insurance policy every year and thereafter assigning the same to the beneficiaries may be treated as colourable device, may not be correct. Though this argument appears to be attractive when we look into the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and circumstances of the case, there was any justification to tax the difference between the premium paid by the employer and the surrender value paid by the employee to the employer at the time of assignment of the policy and whether it could be taxed in the year of assignment? ( ii ) Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was justified in restoring back the matter to the AO to ascertain whether the keyman insurance policy on assignment by the employer to the employee was converted into an ordinary policy so as to determine the question of taxability of the amount received by the employee on the maturity of such a policy; and if answer to the preceding part to this question is in the affirmative, then, whether the insurance money received on maturity by the employee is exempt in full under Section 10(10D) of the Income Tax Act? ( iii ) Whether the Tribunal in spite of being of the view that the keyman insurance policy after its assignment to the keyman assumed the character of an ordinary insurance policy erred in law in holding that out of the sum received on maturity of the said policy, a sum equivalent to the surrender val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions. The Legislature has specifically brought in provisions to tax the maturity value alongwith bonus, etc. as income under salary, business and profession and income from other sources, etc. by incorporating various provisions such as 2(24)( xi ), 17(3)( ii ), 28( vi ) and 56( iv ) of the Act, which govern the taxability of amount received towards Keyman Insurance Policies including the sum allocated by way of bonus, etc. 30. She also hammered the issue of colourable device adopted by the company and echoed the same sentiments as expressed by Mr. N.P. Sahni while arguing the appeals of the Department qua the assessee company and submitted that by this device, company was benefitted by treating the expenditure as business expenditure under Section 37(1) of the Act and Director assessees were benefitted on the ground that the same was exempt under Section 10(10D) of the Act. According to her, such a device was impermissible. She concluded her arguments by submitting that the LIC is a commercial organisation, which formulates its own terms and policies and/or allows conversion of one policy to another, but the same cannot govern the taxability of income, but the same cannot cov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icy and ordinary policy by submitting that in case of keyman policy there have to be two players, viz. , ( i ) one who pays premium to secure the life of the other and ( ii ) the other whose life is secures. In contrast, there is only a single player in an ordinary policy, who gets his life secured and pays the premium himself. In the present case, this person happens to be an employee after policy is assigned to him. In this scenario, learned Senior Counsel argued that Section 17(3)( ii ) comes into picture when the recipient is to be taxed for the amount of insurance received by him on maturity or he is taxed on surrender value as profit in lieu of salary. In other words, if there is no assignment of Keyman Insurance Policy, there is no question of invoking Section 17(3)( ii ) as an employer cannot be taxed under this Section, but only an employee can be taxed. When there is no assignment, Section 37 and Section 28 or Section 56 of the Act will operate. The employer will seek deduction under Section 37 and pay tax under Section 28 or 56 of the Act. Section 17(3)( ii ) of the Act comes into play only if an employee is to be taxed and an employee does not come into picture if ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have already referred to the provisions of Section 10(10D) of the Act, which defines the insurance policy. The scheme of purpose of Keyman Insurance Policy has also been adverted to at that stage. Since two kinds of additions were made by the AO, which are the subject matter of the present appeals, we now take these two aspects for discussion: ( i ) Difference between the premium paid by the company and the surrender value paid by the assessee at the time of assignment: Whether it is 'profit in lieu of salary' within the meaning of Section 17(3)( ii ) read with Section 2(24)( xi ) of the Act: Section 2(24) gives the definition of income which is inclusive as it starts with "income includes " Thereafter, various heads are specified, which would be treated as income. We are concerned with Clause ( xi ), which relates to Keyman Insurance Policy which is worded as under: "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 28;" 38. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In that case, the provision would have attracted. 41. The moot question here is as to whether any such tax event has occurred within the meaning of Section 17(3)( ii ) of the Act. Section 17 defines "salary", "perquisite" and "profits in lieu of salary". The amount in question admittedly is not "salary". However, this provides "in lieu of salary" as defined in Section 17(3) of the Act, then also it would be chargeable to tax under the head "salary". Clause ( ii ) of Sub-section (3) of Section 17 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. Explanation : For the purposes of this sub-clause, the expression "Keyman insurance policy" shall have the meaning assigned to it in clause (10D) of section 10." 42. As n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded/introduced by the said amendment vide Finance (No. 2) Act, 1996. Clause (3) of Section 17 of the Act, on the other hand, was already in existence. When the Legislature intended to cover the amount received under Keyman insurance policy under Clause ( ii ), for the purpose of taxability of amounts received under a Keyman insurance policy, one has to look into this Clause and not Clause ( iii ). ( ii ) Even clause ( iii ) uses expression "any amount due or received". Thus, it is also on receipt of this amount with this Clause gets triggered. ( iii ) The purport of Clause ( iii ) is altogether different. Such an amount due or received by the assessee has to be: ( a ) Before joining any employee; or ( b ) After cessation of its employee. No such contingency occurred when his Keyman insurance policy was assigned by the company in favour of the Director assessees. ( iv ) Other provisions, which were introduced/amended while providing the Keyman insurance policy scheme under the Act by Finance (No. 2) Act, 1996 are Section 28( iv ) and Section 56(2). Section 28 deals with profits and gains of business or profession and Clause ( iv ) thereof reads as under: "( iv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Finance (No.2) Act, 1996, therefore, lays down the tax treatment f the Keyman Insurance Policy. 14.3 Clause (10D) of Section 10 of the Income Tax Act exempts certain income from tax. The Finance (No.2) Act, 1996 mends clause (10D) of Section 10 to exclude any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus of such policy for this purpose. 14.4 The Finance (No.2) Act, 1996, also lays doen that the sums received by the said organization on such policies be taxed as business profits; 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 other persons having no employer-employee relationship the surrender value of the policy or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO. 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 premia 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. 52. Thus, the issue depends on the question as to whether on assignment of the insurance policy to the 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 subjected 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. 53. Once there is no assignment of company/employer in favour of the individual, the character of the insurance policy changes and it gets converted into an ordinary policy. Contracting parties also change inasmuch as after the assignment which is accepted by the insurance, the contract is now between the insurance company and the indivi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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