TMI Blog1985 (10) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... partners, Ambalal taking 30 ps. in a rupee and the other two partners 25 ps. each. However, so far as the liability to share the losses was concerned, Ambalal was liable to the extent of 50 ps. in a rupee while the other two adult partners were each made liable to the extent of 25 ps. in a rupee. The partnership was at will. It appears that the firm desired to insure the lives of its partners Ambalal Khodidas, Chandrakant Khodidas as well as the minor, Manubhai Khodidas. The firm submitted proposals in that behalf to the Life Insurance Corporation of India. The Life Insurance Corporation by their letter dated February 28, 1970, informed the firm that ordinarily a partnership firm does not have an insurable interest on the life of any of the partners per se, but it will have an insurable interest if by the death of any partner, it will sustain a loss or pecuniary liability. In view of this, it expressed willingness to consider the proposals only after the partners entered into an agreement to the effect that the insurance money will be payable to the firm on the death of the, insured partner and the firm will purchase the share of the deceased from the amount of insurance money r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed by, paid for by and payable to the partnership firm ". The agreement then proceeds to stipulate as under: "If during the continuance of the partnership, any partner shall die or retire or become insolvent or permanently incapable of performing his duties as partner or be expelled from the firm by any majority of the partners acting in good faith, the share of the deceased or outgoing partner shall as from his so dying or ceasing to be a partner belong to the remaining (surviving or continuing) partner or partners and if more than one in shares proportionate to their shares in the profits of the partnership and the partnership shall be continued between the remaining partners if more than one under the provisions of this agreement so far as applicable and the outgoing partner or his estate or the legal representatives of the deceased partner (as the case may be) shall be entitled to sum equal to the value of the share of such outgoing or deceased partner in the said partnership..." The agreement lastly provides that upon the termination of the partnership, each partner shall be entitled to acquire the policies on his own life after completing necessary financial adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum assured in the event of maturity or death of the assured and hence the expenditure incurred by way of premia was deductible under section 36(1)(i) of the Act. The Income-tax Officer, however, did not accede to this claim made by the assessee-firm. Being aggrieved by the decision of the Income-tax Officer refusing permission to deduct the amount of insurance premia from the taxable income of the firm, the assessee preferred an appeal to the Appellate Assistant Commissioner, Ahmedabad. It was contended before the said appellate authority that the expression " stock " would include any partnership property and since the insurance money was to be paid to the partnership firm on the death of a partner for payment to his heirs, it would attract the provisions of section 36(1)(i) of the Act inasmuch as the policies cover the risk of the partnership assets getting depleted on being required to pay the share capital belonging to the deceased partner on his demise to his heirs. Alternatively, it was contended that this was an expenditure wholly and exclusively incurred for the purposes of business and would, therefore, be deductible under section 37(1) of the Act. This line of reasoning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he insurance company in the event of retirement of the assured from the firm or his expulsion therefrom or his exit from the partnership or any other eventuality. At the most, what can happen is that the partnership firm would be in position to surrender the policy and secure the surrender value thereof from the insurance company. However, in the event of death, the full amount would be payable to the assessee-firm by the insurance company which could be utilised by the firm to buy the share of the deceased partner by paying off his legal representatives. In that event, on the legal representatives being paid the amount due to them, the value of the shares of the surviving partners would get proportionately augmented. Briefly stated, therefore, the underlying object of covering the lives of the partners including the minor was to ensure the availability of liquid cash in the event of death of a partner for paying off his legal representatives. The question then is, whether the assessee-firm was entitled to deduction of the insurance premium of Rs. 9,839 paid under the aforesaid four policies either under section 36(1)(i) or under section 37(l) of the Act. Section 36(1)(i) in so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cks " used in section 36(1)(i) of the Act. We think that this reference can be disposed of on the premise that the word " stocks " in the said sub-section is used in the widest sense so as to include a sum of money invested as the capital of the firm. The moot question, however, is, whether it can be said that the four insurance policies in question were taken out to cover risk of damage or destruction to stocks. The word " damage " would mean injury or harm that impairs the value of any property. " Destruction " of property would take place where the injury caused thereto is beyond repair or reduces the utility of the property to nil or results in complete ruination of the property. Now, can it be said that these insurance policies were taken out to cover any risk of injury to stocks no matter whether the said injury was limited in nature such as would bring about total ruination of the stocks? It was urged, on behalf of the assessee, that these insurance policies were taken out to provide for ready cash in the event of the death of one of the partners so that the legal heirs of the partners could be paid off by the surviving partners who are inclined to continue the firm, without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would come to an end but it is difficult to say that on his death there would be damage or destruction of stocks unless provision for liquid cash is made in advance. In our opinion, therefore, the insurance policies in question did not cover any risk of damage or destruction of stocks used for the purposes of business within the meaning of clause (i) of section 36(1) of the Act. These policies were taken out to provide for liquid cash as the partners very well knew that on the death of one of the partners, the legal representatives of the deceased partner will have to be paid their share in the partnership assets unless they are admitted as partners. To provide for buying the share of the deceased partner, the partnership firm took out the insurance policies in question. If provision is made for liquid cash, it is undoubtedly foresight on the part of the partners so that they may not have to rush for liquid cash at the last moment but it is difficult to say that the insurance policies cover risk of damage or destruction to the stocks used for the purposes of business. We are, therefore, of the opinion that the case does not fall within the ambit of section 36(1)(i) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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