TMI Blog2014 (7) TMI 994X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 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, has never been explained by the assessee - 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 – thus, there was no infirmity in the order of the CIT(A) who has rightly upheld the order of AO – Decided against Assessee. - IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reply of the assessee the AO held that a unit linked plan can t be equated with Keyman Insurance Policy as per meaning of the term given in clause (c) of Section 10(10D) of I.T.Act. He elaborately differentiated between the quoting guidelines and circulars of IRDA, as detailed in the assessment order and held that the expense of ₹ 3 lacs was not to be treated as incurred for the purpose of business of assessee. For making the disallowance, he relied upon the order of CIT(A) in appeal No.407/-08-09/CIT(A)/Jalandhar dated 29.10.1989 in case of M/s. Suri Son for AY 06-07 where he has upheld the disallowance on identical facts, as discussed by the AO in the present case in his assessment order. 4. The Ld. CIT(A) vide para 9 10 of his order upheld the action of the A.O. The order of the ld. CIT(A) in para 9 10 for the sake of convenience is reproduced as under: 9. I have carefully considered the submissions and the assessment order. I have also gone through the order of my Ld. Predecessor in case of M/s. Suri Sons in appeal No. 407/08-09/CIT(A)/Jal dated 29.10.2009 and find that facts are similar. In both the cases the payment is made in unit linked policy and pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Jalandhar, in ITA No.117(Asr);/2010 for the A.Y. 2006-07 and therefore, our order in the case of M/s. F.C. Sondhi Co. (India) Pvt. Ltd. vs. DCIT Range-1 (supra) shall be identically applicable in the present appeals. The facts in the case of M/s. F.C. Sondhi Co. (India) Pvt. Ltd. vs. DCIT Range-1, Jalandhar (supra) and our decision dated 21.04.2014 for the sake of convenience is reproduced hereunder: 2. The brief facts of the case are that the assessee has claimed education 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 ₹ 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 ₹ 20,00,000/- on the life of Mr. Rajeev Anurag Sondhi. (c) Jeevan Shree-I of Life Insurance Corporation of premium of ₹ 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 peru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,00,000/- has been calculated at ₹ 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 59,96,365/- and not ₹ 60,00,000/-. It has been suggested by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olicy. 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 employeremployee 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 ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05, 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 regula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efits 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate 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 vs. JCIT reported at 23 DTR 33 (Madras) and in the case of Southern Technologies Ltd. vs. 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. vs. CIT 108 ITR 345 (SC) Orissa State Warehousing Corpn. vs. CIT 237 ITR 589 (SC) Dilharshankar C. Bhachech vs. CED 158 ITR 238 (SC) Elel Hotels Investment Ltd. vs. UOI 178 ITR 140 (SC) Mittal Cold Storage vs. 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 ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ₹ 25 lakhs with a premium of ₹ 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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