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2015 (9) TMI 798 - ITAT AMRITSAR

2015 (9) TMI 798 - ITAT AMRITSAR - [2015] 44 ITR (Trib) 700 (ITAT [Amrit]) - Disallowance towards premium of keyman insurance policies - Held that:- The keyman insurance policy is a defined concept and as long as it meets the requirements of this definition, the terminology given by the insurers have no relevance for the purposes of the Income Tax Act. All that is necessary is that it should be a life insurance policy, whether pure life insurance policy or not- as such criterion is not set out a .....

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ce regulator and insurance service provider. However, once it has been sold as a life insurance policy on the keyman to the business, as long as it is in the nature of life insurance policy, whether pure life cover or term cover or a growth or guaranteed return policy, it is eligible for coverage of Section 10(10D). It is not open to us to infer the words which are not there on the statute and then proceed to give life and effect to the same.

When benefit of policy was assigned to the .....

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r the decision making.

As for the statement made by the employees of the insurance companies, nothing turns on these statements. What constitutes a keyman insurance policy under section 10(10D) is not dependent on what is it treated even by the insurer; as long as the assesse is allowed to take life insurance policy on its keymen, as have been undisputedly taken in this case, the same satisfies the requirement of Section 10(10D). In view of these detailed discussions, as also bearing .....

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(3) of the Income Tax Act, 1961, for the assessment year 2006-07. Although the assessee has raised as many as eight grounds of appeal, the short grievance of the assessee is that, on the facts and circumstances of this case, learned CIT(A) erred in upholding the disallowance of ₹ 1,49,99,922 towards premium of keyman insurance policies. 2. Briefly stated, the relevant material facts are like this. During the course of the scrutiny assessment proceedings, the Assessing Officer noted that th .....

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on the insurance premium amounts, rather than life insurance, and this main objective was to be achieved by investing in units. The Assessing Officer was of the view that a unit linked endowment plan, under Kotak Safe Investment Plan, "cannot be keyman insurance policy as per definition of keyman insurance given in the Income Tax Act". The AO was of the view that keyman insurance policy can include only a 'life insurance policy' and "the scope of cover should not be wider .....

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llowed. The Assessing Officer also referred to the circular issued in April 2005 by the Insurance Regulatory and Development Authority (IRDA) referring to misuse of keyman insurance policies and warning the insurance companies and their agents of such malpractices. The AO observed that "Even as per the IRDA, only term insurance policies can be issued as keyman insurance cover". The AO further examined an employee of the Kotak Mahindra Life Insurance Ltd who stated that the policy in qu .....

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2003-04 to ₹ 12 crores in the assessment year 2004-05 and it has further come down to ₹ 9 crore in the present year. This fall in turnover, apparently according to the Assessing Officer, shows that there was no commercial benefit from taking the keyman insurance cover. The insurance policy was taken for the benefit of the partner rather than the firm. No necessity or expediency of the person being keyman and the policy being taken for the benefit of the firm was established. When be .....

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of the assessee firm (emphasis, by underling, supplied by the AO)", the Assessing Officer disallowed ₹ 1,49,99,922. The Assessing Officer made some other observations in this regard also, but, for the reasons we will set out in a short while, it is not really necessary to deal with those aspects of the matter. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in further appeal before us. 3. We have heard th .....

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an income not chargeable to tax under section 10(10D), could fall in that category? (b) Whether, in order to deal with the question 'a' above, is it permissible to bifurcate the keyman insurance policy premium into the portion relatable to the risk premium and the investment component? (c) Whether even when none of the parties has raised that aspect of the matter before us, is it permissible for us, particularly in the light of the Special Bench decision in the case of Tata Communicatio .....

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referred to Hon'ble President for the constitution of a special bench, consisting of three or more members, under section 255(4) of the Income Tax Act, 1961? 5. On these issues, learned counsel has submitted that the provisions of Section 14 A do not come into play in this case as the receipts in question are not exempt under section 10(10D) and, therefore, all other related questions are academic. He, however, hastens to add that the decisions in the case of Shri Nidhi Corporation (supra) .....

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tsar - Trib.)], is per incurium inasmuch as it does not follow earlier decisions on the same issue in the cases of Shri Nidhi Corporation (supra) and Emdee Apparel (supra), and, following decisions of this Tribunal in the case of JKT Fabrics v. DCIT (4 SOT 84), it is not a binding judicial precedent. It is also pointed out that a rectification petition has already been filed against the said decision and this rectification is already heard, and order is reserved thereon, by the Tribunal on 2nd J .....

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no income is claimed exempt and the proceeds of insurance policy is not exempt from tax as the same shall form part of income as per provisions of Section 28(iv) of the Income Tax Act, 1961. (b) Not applicable, in view of the above. (c) Not applicable, in view of the above. (d) The decision in the case of Shri Nidhi Coorporation v. ACIT (151 ITD 470) is not applicable on the facts of this case as, in the policy submitted by the assessee, the assessee was given the liberty to choose the investme .....

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me has no relevance to the subject matter of these appeals. (e) It is submitted that the Hon'ble bench has already decided the issue in favour of the department in the case of F C Sondhi & Co, and it is, therefore, prayed that the said order be followed. Without prejudice to this submission, it is submitted that if the Hon'ble bench is of the opinion that the said order is not to be followed, then it is an ideal situation where the issue should be referred to the President for consti .....

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C Sondhi decision, relied upon by the learned Departmental Representative, we may point out that, while delivering this decision, an earlier decision on the same issue in the case of Shri Nidhi Corporation (supra), which decides the issue in favour of the assessee inasmuch as it holds that even non- pure life insurance policies are eligible for being treated as keyman insurance policies and that the IRDA circulars cannot, in any case, have a retrospective effect, was not taken note of by the Tr .....

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the case against the assessee by following the Bombay High Court judgment in the case of Indian Rayon Corpn. Ltd. v. CIT [2003] 182 CTR (Bom) 247 : [2003] 261 ITR 98 (Bom). What is missed out, however, is the fact that in Plastiblends India Ltd.'s case (supra), the co-ordinate Bench had duly considered Indian Rayon Corpn. Ltd.'s case (supra) and then came to the conclusion that Indian Rayon Corpn. Ltd.'s case (supra) decision has no bearing on the question before the Tribunal. Once .....

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r alia, observed as follows : "It is true that a Bench of two Members must not lightly disregard the decision of another Bench of the same Tribunal on an identical question. This is particularly true when the earlier decision is rendered by a larger Bench. The rationale of this rule is the need for continuity, certainty and predictability in the administration of justice. Persons affected by decisions of Tribunals or Courts have a right to expect that those exercising judicial functions wil .....

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er decision if and when subsequent proceedings bring to light what is perceived by them as an erroneous decision in the earlier case. In such circumstances, it is but natural and reasonable and indeed efficacious that the case is referred to a larger Bench." 6. In the case of Venus Jewels (supra), the co-ordinate Bench held the issue in favour of the Revenue on the basis of Hon'ble Bombay High Court's judgment in the case of Indian Rayon Corpn. Ltd. (supra) and on the basis of the H .....

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of account, the same cannot be thrust upon the assessee for the purpose of computing the deduction under s. 80-IA. Following the Hon'ble Supreme Court's judgment in Paras Laminates (P) Ltd.'s case (supra) it was not open to the Bench to take any other view of the matter than the view taken by the co-ordinate Bench. The decision in Venus Jewels' case (supra) also appears to be per incurium. 7. No doubt that when a co-ordinate Bench doubts the correctness of decision of another co .....

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inding effect of a per incurium decision, we can do no better than to quote the Hon'ble Andhra High Court in the case of CIT v. B.R. Constructions [1993] 113 CTR (AP)(FB) 1 : [1993] 202 ITR 222 (AP)(FB). In his inimitable style, Justice S.S.M. Quadri (as he then was) has articulated the views of the Full Bench of Hon'ble Andhra Pradesh High Court as follows : "In a country like ours which is governed by rule of law, law has to be certain and uniform which is fundamental to the rule .....

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are the core of judicial discipline.' That is why the doctrine of stare decisis is part of our judicial system. This doctrine means 'to abide by former precedents'. Blackstone elucidated the doctrine thus : 'For it is an established rule to abide by former precedents, where the same points come again in litigation : as well as to keep the scale of justice even and steady and not liable to waiver with every new Judge's opinion, as also because the law in that case being solem .....

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ound by the decision of all Courts higher than itself. A High Court Judge cannot question a decision of the Court of Appeal, nor can the Court of Appeal refuse to follow judgments of the House of Lords. A corollary of the rule is that the Courts are bound only by decisions of higher Courts and not by those of lower or equal rank. A High Court Judge is not bound by a previous High Court decision, though he will normally follow it on the principle of judicial comity, in order to avoid conflict of .....

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53. They are as follows : 'A single Judge is bound by a decision of a Division Bench exercising appellate jurisdiction. If there is a conflict of Bench decisions, he should refer the case to a Bench of two Judges who may refer it to a Full Bench. A single Judge cannot differ from a Division Bench unless a Full Bench or the Supreme Court overruled that decision specifically or laid down a different law on the same point. But he cannot ignore a Bench decision, as I am asked to do on the ground .....

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141 of the Constitution embodies the rule of precedent. All the subordinate Courts are bound by the judgments of the High Court. A single Judge of a High Court is bound by the judgment of another single Judge and a fortiori judgments of Benches consisting of more Judges than one. So also, a Division Bench of a High Court is bound by judgments of another Division Bench and Full. A single Judge or Benches of High Courts cannot differ from the earlier judgments of co-ordinate jurisdiction merely b .....

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Division Bench except when that decision or a judgment relied upon in that decision is overruled by a Full Bench or the Supreme Court, or when the law laid down by a Full Bench or the Supreme Court is inconsistent with the decision. It may be noticed that precedent ceases to be a binding precedent : (i) if it is reversed or overruled by a higher Court, (ii) when it is affirmed or reversed on a different ground, (iii) when it is inconsistent with the earlier decisions of the same rank, (iv) when .....

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e it must follow that decision; or when the decision is given in ignorance of the terms of a statute or rule having statutory force.' In Punjab Land Development & Reclamation Corpn. Ltd. v. Presiding Officer, Labour Court [1990] 3 SCC 682 : [1990] 77 FJR 17 (SC), the Supreme Court explained the expression 'per incuriam' thus : 'The Latin expression per incuriam means through inadvertence. A decision can be said generally to be given per incuriam when the Supreme Court has act .....

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udgment cannot be ignored as being per incuriam. In Salmond on Jurisprudence, Twelfth Edition, at p. 151, the rule is stated as follows : 'The mere fact that (as is contended) the earlier Court misconstrued a statute, or ignored a rule of construction, is no ground for impugning the authority of the precedent. A precedent on the construction of a statute is as much binding as any other, and the fact that it was mistaken in its reasoning does not destroy its binding force.' In Choudhry Br .....

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e change in the provisions of the Act was present in the mind of the Court which decided Ch. Atchaiah's case (supra). Merely because the conclusion arrived at on construing the provisions of the charging section under the old Act as well as under the new Act did not have the concurrence of the latter Bench, the earlier judgment cannot be called per incuriam. Though a judgment rendered per incuriam can be ignored even by a lower Court, yet it appears that such a course of action was not appro .....

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ble only in the rarest of rare cases. Therefore, when a learned single Judge or a Division Bench doubts the correctness of an otherwise binding precedent, the appropriate course would be to refer the case to a Division Bench or Full Bench, as the case may be, for an authoritative pronouncement on the question involved as indicated above. The abovesaid two questions are answered as indicated above." 9. It is thus beyond dispute that a decision which is per incuriam is not a binding judicial .....

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me, cannot but be viewed as per incuriam. Therefore, following the Hon'ble Andhra Pradesh High Court Full Bench decision in the case of B.R. Constructions (supra), such a decision of the co-ordinate Bench has no precedence value 7. The coordinate bench decision in the case of F C Sondhi & Co (supra), for the reasons set out above, does not constitute a binding judicial precedent. That apart, this decision now stands recalled as some of the contentions raised by the appellant were not dis .....

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idance from the Explanation below Section 10(10D), as it stood at the relevant point of time, which defined the keyman insurance policy as follows: 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 first-mentioned person or is or was connected in any manner whatsoever with the business of the first-mentioned person 9. Vide Finance Act 2013, the following words have b .....

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is any manner. 11. Dealing with both the limbs of the above requiremenst, a coordinate bench of this Tribunal, in the case of Shri Nidhi Corporation (supra), has observed as follows: It appears that after the assessee has purchased these policies, IRDA came up with circular dated 27th April 2005 that partnership insurance in the name of partner will not be covered under Keyman insurance but as a term insurance cover. Thus, such IRDA circular cannot be adversely viewed in case of the assessee as .....

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ard the firm against a disruption of business, then the payment for premium on such policy is liable for deduction as business expenditure. Thus, even if a Keyman insurance has been taken in the name of a partner by the partnership firm, then also the deduction has to be allowed on the payment of premium. The other main objections of the learned Commissioner (Appeals) has been that firstly, these are not insurance policy as such but are mainly for capital appreciation under the investment scheme .....

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tment scheme, will not make any material difference. (Emphasis, by underlining, supplied by us) 12. We are in considered agreement with the views so expressed by our distinguished colleagues. As long as a policy is an insurance policy, whether it involves a capital appreciation or is under any other investment scheme, it meets the tests laid down under section 10(10D). 13. The requirement of pure insurance policy is something which is not laid down by the statute. Yet, it is this which has been .....

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issions. Relying upon Hon'ble Supreme Court's judgment in the case of Tarulata Shyam v CIT [(1977) 108 ITR 245 (SC)], a coordinate bench of this Tribunal, in the case of Tata Tea Limited v JCIT [(2003) 87 ITD 351 (Cal)], has explained this principle as follows: 8. Casus omissus, which broadly refers to the principle that a matter which has not been provided in the statute but should have been there, cannot be supplied by us, as, to do so will be clearly beyond the call and scope of our d .....

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the statute the words which are not there. Such interpretation would be, not to construe, but to amend the statute. Even if there be a casus omissus, the defect can be remedied only by legislation and not by judicial interpretation ..... To us, there appears no justification to depart from normal rule of construction according to which the intention of legislature is primarily to be gathered from the words used in the statute. It will be well to recall the words of Rowlatt. J. in Cape Brandy Sy .....

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mind to be." Even in the case of CIT v. National Taj Traders (supra), relied upon by the assessee, Their Lordships of Hon'ble Supreme Court have referred to, with approval, Maxwell on Interpretation of Statutes' observation that "A case not provided for in a statute is not to be dealt with merely because there seems no good reason why it should have been omitted, and that the omission appears in consequence to have been unintentional". Their Lordships then observed that &q .....

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akes a consistent enactment of the whole statute". 15. It is also important to bear in mind the fact that the IRDA guidelines, no matter how relevant as these guidelines may be, have no role to play in the interpretation of the statutory provisions. IRDA is a body controlling the insurance companies and its guidance is relevant on how the insurance companies should conduct their business. Beyond this limited role, these guidelines do not affect how the provisions of the Income Tax Act are t .....

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guidelines of the IRDA to interpret the provisions of the Income tax Act, 1961. In this view of the matter, learned Assessing Officer's observations to the effect that, ""that the policy taken is keyman as per definition given in the Income Tax Act, i.e. policy taken by a person on the life of another person and also fulfilling the terms and conditions laid down by IRDA in this regard, necessity and expediency of the person being keyman and the policy taken for the benefit of the a .....

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n the contention that the insurance policies in question were not termed as keyman insurance policies but nothing turns on that aspect, even if that be so, either. The keyman insurance policy is a defined concept and as long as it meets the requirements of this definition, the terminology given by the insurers have no relevance for the purposes of the Income Tax Act. All that is necessary is that it should be a life insurance policy, whether pure life insurance policy or not- as such criterion i .....

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circulars issued by the IRDA. IRDA, i.e. Insurance Regulatory and Development Authority, is set up under the Insurance Regulatory and Development Act 1999. Section 14 of the Insurance Regulatory and Development Act, 1999, describes the duties, powers and functions of the IRDA as follows: 14. DUTIES, POWERS AND FUNCTIONS OF AUTHORITY. (1) Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly g .....

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im, surrender value of policy and other terms and conditions of contracts of insurance; (c) specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents; (d) specifying the code of conduct for surveyors and loss assessors; (e) promoting efficiency in the conduct of insurance business; (f) promoting and regulating professional organisations connected with the insurance and re-insurance business; (g) levying fees and other char .....

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er section 64U of the Insurance Act, 1938 (4 of 1938); (j) specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries; (k) regulating investment of funds by insurance companies; (l) regulating maintenance of margin of solvency; (m) adjudication of disputes between insurers and intermediaries or insurance intermediaries; (n) supervising the functioning of the Tariff Advisory Committee; (o) .....

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insurance business". In doing so, as evident from Section 14(2)(a) to (q) above, it regulates the conduct of the service providers in the business of the insurance. It does not, and cannot, regulate the conduct of the policy holders. As in Section 14(2)(b), if at all it has anything to do with the policyholders, it is protection of interest of the policyholders. It is in this background that we have to see the circulars issued by the IRDA. In the circular dated 27th April, 2005, the IRDA st .....

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re that your company follows this circular till fresh guidelines are issued. 17. A plain look at the above circular shows that it deals with aberrations in sale of keyman insurance policies and it is was a direction to the insurance companies that effect 27th April 2005 only term insurance policies should be issued as keyman insurance cover. That is between the regulatory authority and the insurance companies as to what should be allowed to be marketed as keyman insurance cover. However, it does .....

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cover or term cover or a growth or guaranteed return policy, it is eligible for coverage of Section 10(10D). It is not open to us to infer the words which are not there on the statute and then proceed to give life and effect to the same. We had detailed discussions about this aspect of the matter in paragraph numbers 10 to 15 above, and, as we have held there, such an exercise is not permissible under the scheme of the Act. 18. What IRDA regulates is issuance of life insurance policies by the in .....

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person". The mandate of Section 10(10D) does not put any further tests, nor can we infer the same. 19. The Assessing Officer has questioned commercial expediency of taking the keyman insurance policies on the short grounds that (a) the fall in turnover, apparently according to the Assessing Officer, shows that there was no commercial benefit from taking the keyman insurance cover; (b) the insurance policy was taken for the benefit of the partner rather than the firm; and (c) no necessity or .....

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available at the point of time when business decisions are made; more often than not, these are the tools of post mortem of events, rather than inputs for the decision making. As for the other issues raised by the Assessing Officer as such, we may refer to the following observations made, in this context, by Hon'ble Delhi High Court in the case of CIT v. Rajan Nanda etc. [(2012) 349 ITR 8 (Del)]: 25. After giving our due and thoughtful consideration to the submissions of the parties of both .....

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nditure 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 binding on the Income Tax Department, which categorically stipulates that premium on keyman policy should be allowed as business expenses. The assessee would, n .....

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Court has held in B.N. Exports (supra) that this expenditure is to be allowed as business expenditure, in the following words: "The effect of Section 10(10D) is that monies which are received under a life insurance policy are not included in the computation of the total income of a person for a previous year. However, any sum received under a Keyman insurance policy is to be reckoned while computing the total income. For that purpose, a Keyman insurance policy means a life insurance policy .....

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s a contract of employment. Clause (10D) relates to the treatment for the purpose of taxation of moneys received under an insurance policy. In this appeal, the court has to determine the question of expenditure incurred towards the payment of insurance premium on a Keyman insurance policy. The circular which has been issued by the Central Board of Direct Taxes clarifies the position by stipulating that the premium paid for a Keyman insurance policy is allowable as business expenditure. In the pr .....

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y 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 w .....

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assigning the same year after year in favour of the beneficiaries, what cannot be ignored that this course of action is permitted by the Department itself as stated in CBDT's Circular dated 18.2.1998. (v) The expenditure incurred has to be tested on the touchstone of Section 37 of the Act and to see as to whether such expenditure is permissible or not. No doubt, the object of a keyman insurance policy is to enable business organizations to insure the life of a keyman in order to protect the .....

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isions and the outlook of Department itself based on such legal provisions permit the assessee to have the tax planning of this nature, and the course of action taken by the assessee is permissible under law, the argument of colourable device cannot be advanced by the Revenue. When expenditure of this nature is treated ^business expenditure' per se by the Department itself, there cannot be any question of raising the issue of want of business expediency. The learned counsel for the responden .....

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