TMI Blog1983 (9) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... their completing the age of 59 but before the age of 61 years in each case and the premiums payable on the said policies will be payable out of the profits of the firm and shall be a first charge thereon provided that in the event of any of the said partners resigning or retiring from the firm for any reason whatsoever or is removed therefrom on or before 30-9-1980 the partners concerned shall be liable to refund 50 per cent of the premium paid by the firm and in the event of such resignation or retirement or removal taking place on or before 30-9-1985 the amount refundable by the concerned partner to the firm shall be 25 per cent of the total premium paid by the firm before such resignation, retirement or removal takes effect." 3. During the accounting period relevant to the assessment year 1977-78, the assessee-firm paid the sum of Rs. 45,776 as premium in respect of the life insurance policies of Rs. 1 lakh each taken by it on the life of the aforesaid seven partners. The contention of the assessee before the ITO was that the expenditure of Rs. 45,776 had been incurred by the firm with a view to provide incentive to the partners to stay on with the firm for a longer period, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the policies out of the profits of the firm, this was a case of application of the profits after the same had accrued to the firm. He further pointed out that section 40(b) was not exhaustive and its scope was wide enough to cover payments of premiums, etc., made by a firm on behalf of its partners. Lastly, Mr. Joshi urged that there was no immediate nexus between the expenditure and the business of the assessee-firm and simply because there was a remote chance of the partners staying with the firm on account of the LIC policies, it could not be said that the expenditure on payment of premium had been incurred by the assessee-firm for the purpose of its business. According to him, therefore, the Commissioner (Appeals) was not justified in allowing the same. In support of his arguments, he also relied upon--Meattles Ltd. v. CIT [1968] 68 ITR 79 (Delhi) and CIT v. Crawford Bayley Co. [1977] 106 ITR 884 (Bom.). 7. Shri N.A. Palkhivala, the learned counsel for the assessee, on the other hand contended that the expenditure under consideration was not of personal nature. He urged that under the income-tax law, a firm was a separate assessable entity distinct from its partners and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... good reason to reject the claim of the assessee. Clause 13(b) of the supplementary partnership deed dated 1-10-1975 clearly stipulates that the life insurance policies taken by the assessee-firm would mature at the partners' attaining the ages of 59 to 61 and that in case the partners resign or retire earlier, they would have to refund 25 per cent to 50 per cent of the total premium paid by the firm before such resignation or retirement. Since the paid-up value of the policies would be insignificant this clause would obviously serve as a deterrent for the partners to leave the firm. Rather, it would tempt them to stick on to the firm. Thus, the assessee would be in an enviable position to retain the services of its efficient partners which would in turn inspire confidence in its present and prospective clients. Evidently, therefore, the expenditure in question would enable the firm to conduct and carry on its business more efficiently and more profitably. That being so, we hold that the expenditure is wholly and exclusively laid out for the purposes of the business of the assessee. It is, therefore, allowable under section 37(1). 10. The contention of the learned representative o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the category of the items of expenditure which are enumerated in section 40(b). The scope of section 40(b) is not so wide as to embrace the type of expenditure involved in the present case. The items of expenditure which have to be disallowed are specifically mentioned in section 40(b) and the enlargement of the scope of section 40(b) so as to include the expenditure in question would be opposed to the intention of the Legislature. That apart, the payment for being disallowed under section 40(b) must be made by the firm to the partners. In the present case, the amount on account of premium has been paid by the assessee-firm to the LIC and not to the partners. That being so, the expenditure in question is not disallowable under section 40(b). 13. The authorities cited by the learned representative of the department do not advance his case. The decision of the Delhi High Court in the case of Meattles Ltd. is distinguishable. In that case, the assessee-company carried on speculation business. The managing director of the company owned practically all its shares. By a resolution, the board of directors of the company resolved that the managing director should be insured as provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he application of the rule of diversion of income by an overriding charge is whether the amount sought to be deducted, in truth, never reached the assessee as his income. According to this authority, where, by the obligation income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence does not, in law, follow. It is the first kind of payment which can truly be exempted and not the second. The second payment is merely an obligation to pay another, a portion of one's own income which has been received and is since applied. It is not clear why this authority has been quoted by the learned representative of the department. In our opinion, this decision has no bearing on the present case. In the case of Crawford Bayley Co., the question for consideration was whether the deduction claimed by the assessee under section 10(1) of the 1922 Act was allowable. The High Court held that the payments had to be made by reason of an overriding title and so the claim of the assessee was allowable under section 10(1). The question whether the expenditure wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red accountants, where contacts and personal skill and intellect play an important role in the advancement of the professional activities, to continue as partners of the assessee-firm. The firm having allowed its partners to acquire a stature and experience, at its cost, would like them to continue with it. The continuance of those partners in the service of the firm was ensured by taking an insurance policy maturing at the age of 60 and by providing for penalties for any premature retirement or resignation. When the firm has, thus, secured for its business activities, for that matter for its continued existence, the services of skilled partners, it cannot be but an expenditure incurred by the firm for the purposes of its business. 4. This may give rise to an argument that this is one way of apportionment of profit after the profits have accrued to the firm. It would have been in the nature of apportionment of profit had there not been a stipulation that the premium payable on the policies is a charge on the profits. An expenditure secured on the profits for its payment is an expenditure incurred and not an apportionment of the profits. The stage of apportionment of profits arriv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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