(1.) This appeal of the assessee arises from the order of the CIT(A), Jalandhar, dated 04.01.2013 for the assessment year 2009 -10. The assessee has raised following grounds of appeal:
WHETHER on the facts & circumstances of the case, the CIT(A) is right in deleting the addition of Rs. 59,14,720/ - made by the AP treating the maturity proceeds of insurance policy as taxable by ignoring the fact that assignment of policy just two days before the completion of three years i.e. on 29th March, 2009 was done not for any financial or commercial consideration but just to avoid tax.
WHETHER on the facts & circumstances of the case, the CIT(A) has ignored the clause 4 (iv) and 4(v) of the policy which reproduced as under:
(iv) A proportion of each premium the investment content, will be used to buy units in the Fund(s) of your choice. The current investment content rate for all premiums is specified in the policy schedule.
(v) If you have chosen more than one Fund, we will split the investment content in accordance with your instructions before we allocate units in each fund.
It is evident from the above clauses that the policy was not mere an insurance policy but was an investment tool for the firm.
Whether on the facts & circumstances of the case, the CIT(A) is justified in restricting the disallowance of expenses like petrol, car, business promotion expenses etc. incurred in by the assessee to Rs. 40,000/ - and not to 50% of the balance expenditure of Rs. 1,76,408/ - after allowing telephone expenses amounting to Rs. 2,16,216/ - whereas the ld. CIT(A) himself observed that the assessee was engaged in the business commodity trading which is mainly done by sitting in the office on telephone.
THAT the appellant craves leave to add or amend any ground of appeal before it is finally disposed off.
(2.) The brief facts of the case as arising from the order of the AO at pages 2 to 7 are reproduced for the sake of convenience as under:
2. From the capital account of the assessee, it was noticed that an amount of Rs. 59,14,702/ - was credited to this account on 26.04.2008. There was no reference to this amount in the return of income or other details. Accordingly, vide letter dated 31.10.2011 the assessee was asked to intimate the nature and source of this amount. It was intimated vide letter filed on 14.11.2011 that M/s. J.V. Steel Traders, a firm in which the assessee was a partner, had taken a Keyman's Insurance Policy from HDFC Life Insurance Co. in the name of the assessee. The same was assigned to him by the firm on 29th of March, 2008. The reason for the same has been stated to be inability of the firm to pay the premium due to losses. That policy was surrendered by the assessee, in April 2008 and the amount of Rs. 59,14,702/ - is the proceeds of that policy. The matter was discussed at length with Sh. Janak Raj, father of the assessee and Sh. Yogesh Thakur, CA counsel for the assessee on 01.12.2011. During discussion the following salient facts regarding the policy emerged:
i) The policy was purchased by the firm on 31st March, 2005 and the first premium was paid on that date.
ii) The second and third premiums were paid on 31st March, 2006 and 31st March, 2007 respectively.
iii) The firm claimed and was allowed deduction of these amounts for the respective assessment years u/s. 37(1) of the Income Tax Act, 1961.
iv) As per the terms of the policy, the firm was required to pay premium for at least 3 years, which had been paid by it as above.
v) After payment of the premium for 3 years, the firm could surrender the policy at any time and would get the unutilized value of the units at the credit of the policy. However, before the completion of three years from the date of the policy i.e. 31st March, 2008, this value would be ZERO.
vi) The policy was assigned by the firm to the assessee on 29th of March, 2008.
vii) The next premium due on 31.03.2008 was not paid by the assessee.
viii) The assessee surrendered this policy to the company in April, 2008 and got the proceeds in his account on 26th April, 2008 i.e. within one month from the date of assignment.
ix) Out of the above sale proceeds, an amount of Rs. 59,14,000/ - was transferred to the same firm i.e. M/s. J.V. Steel Traders by the assessee on Ist May, 2008.
2.1. In this manner, the whole process of assignment of the policy by the firm to the assessee, its surrender and encashment by him and transfer of the funds to the firm was completed in a period of about a month. Had the policy not been assigned and been surrendered and encashed by the firm itself, the proceeds would have been taxable in its hands. However, the assessee has not included this sum in his taxable income. Accordingly, vide note sheet entry dated 01.12.2011, the assessee was asked to explain as to why the amount of Rs. 59,14,702/ - may not be treated as his taxable income and added to his income. The case was adjourned to 15.12.2011. On 15.12.2011, the case was attended by Sh. Janak Raj, father of the assessee, alongwith Sh. Yogesh Thakur, CA, Counsel and written reply was filed. The gist of the same is reproduced as below:
As already submitted in our last reply that the assessee has received a sum of Rs. 59,14,702/ - on account of surrender value of unit link endowment policy no. 10197551 of HDFC, M/s. J.V. Steel Traders, Ludhiana where he was a key partner as on 29.03.2008. This policy was purchased by the firm in the name of the assessee under keyman insurance policy in the year 2005. The premium for the year ending 2005, 2006 and 2007 were paid by the firm amounting to Rs. 15 lac each and deduction has been claimed by the firm u/s. 37(i) of the Act on the premium so paid. In March, 2008, the keyman insurance policy was assigned by the firm in the favour of keyman. At the time of assignment of this policy, the surrender value of the policy was Nil. It is further submitted that assignment of the policy no longer answers description of keyman insurance policy because on assignment the keyman becomes policy holder and since the policy is on his life, the policy gets converted into ordinary life policy and loses the characteristics of keyman insurance policy and hence amount received on maturity by keyman in whose favour policy is assigned is exempt u/s. 10(10D). Therefore, the amount of Rs. 59,14,702/ - received by the assessee, on account of surrender value of policy no. 10197551 is exempt u/s. 10(10D) of the Act. The photo copies of policy documents and surrender value certificates issued by the HDFC Life Insurance Co. were also submitted before your goodself at the time of last hearing of the case.
In support of this plea, it is submitted that at the time of assignment, the surrender value is taxable as profits in lieu of salary u/s. 17(2)(iii) in the assessment of the employee as stated by board in para 14.4 of circular 762 dt. 18th Feb., 1998 and if amount received on maturity is taxed again there would be double taxation of the same income which could not have been intended. The second submission that the assessee could make is to the effect that assignment which is irrevocable and unalterable of the policy, effects an absolute transfer of interest or benefit under the policy to the assignee and on assignment the assignee, becomes the only person entitled to the benefit under the policy and is subject to all liabilities and equities to which assignor was subject on the date of assignment and this means that assignee is not merely entitled to received the sum but has a right to policy money itself [see CED vs. Kewelran : (1989) 77 CTR (MP) 223: (1989) 179 ITR 254 (MP)]. Originally it was policy taken by one person on life of another person. After assignment it is a policy on the life of the policy holder himself and it does not come within the ambit of definition of 'Keyman insurance policy". The original policy may not have been cancelled and new policy may not have been issued but the assignment has totally altered the characteristic of original policy. Since after assignment assessee is policyholder and since policy is on his life, the sum received on maturity would be regarded as sum received under a life insurance policy and not sum received under keyman insurance policy and hence it would be exempt.
Your goodself kind attention is further invited to the recent decision of "The Delhi Tribunal" in the case of "DR. Naresh Trehan v. Deputy CIT [2010 -TIOL -418 -ITAT -Del] in which it has been held that "on assignment of Keyman insurance policy -total sum received on maturity (after reducing surrender value of the policy at the time of assignment) is exempt from tax.
In a recent ruling of the above said case, the Delhi Tribunal held that upon assignment of the keyman insurance policy by the company to the individual assessee, the total amount of the maturity value, as reduced by the amount equivalent to the surrender value of the policy at the time of assignment is not to be taxed.
2.2. The case was discussed at length. The policy is claimed to have been assigned by the firm to the assessee as the former was not in a position to pay the premium due to losses. Another contention of the assessee is that, after the policy was assigned by the firm to the assessee, it was no more Keyman's Insurance Policy and it became the normal Life Insurance Policy. It has also been stated that, as per the terms of the policy, it could be assigned at any time. Hence, the action of the firm was legal. In support of these contentions, decisions of the Hon'ble ITAT, Delhi Bench in the case of Dr. Naresh Trehan and Sh. Rajan Nand have been cited.
(3.) The above reply and various contentions raised by the assessee have been considered and are being dealt with as under:
3.1. The first contentions of the firm being in loss and not affording to pay the premium does not hold any ground. In fact, it contains its rebuttal in itself. The policy is not merely a policy on the life of the assessee. This is in fact an investment policy. This is amply clear from clauses 4(iv) and 4(v) of the policy, which is reproduced as under:
(iv) A proportion of each premium, the investment content, will be used to buy units in the Fund(s) of your choice. The current Investment Content Rate for all premiums is specified in the policy schedule.
v) If you have chosen more than one Fund, we will split the Investment content in accordance with your instructions before we allocate units in each fund.
The above clauses show it beyond any doubt that the policy was an investment tool for the firm. It had the option to invest in a particular fund or even to split the investment in more than one funds of its choice. No one gives away ones right just for the sake of it. The firm had already paid three installments of the premium and could have continued to hold the policy without making any further payment. It very well knew that a substantial part of premiums paid by it have gone into investment in fund(s) of its choice. Just two days after the policy was assigned, it would have completed 3 years and would be able to encash that investment. Rather, it chose to transfer the policy, because if it had been retained and encashed, the proceeds would have been subject to tax. The policy was assigned on 29th March, 2009 not for any financial or commercial consideration but just to avoid tax.
3.2. The second contention of the assessee is that after assignment, the policy is no more Keyman's Insurance Policy, but a normal Life Insurance Policy. Before dealing with this contention, it will be worthwhile to go into the legal position relating to this issue. Section 17(3) of the Income -tax Act, 1961 deals with 'Profits in lieu of salary'. Clause (ii) of this section 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.
The underlined portion of the above clause was inserted vide finance ( No. 2) Act, 1996 w.e.f. 01.10.1996. The provision was explained by the CBDT through circular No. dated 18.02.1998. Para 14.4 of this circular, which had been referred to by the counsel for the assessee also in the reply filed on 15.12.2011, is reproduced below:
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 purpose; and in case of other persons having no employer -employee relationship, the surrender value of the policy or 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.
From the above, it is clear that the law envisages taxation of any sum received under Keyman's Insurance Policy. Even bonus on the same is also taxable. The position has been reiterated by the CBDT also in the above referred circular. Accordingly the contention of the assessee is not valid. The assessee is trying to misinterpret the decisions of the Hon'ble ITAT, Delhi. The Hon'ble ITAT has held that the surrender value of the policy is taxable in the hands of the transferee, in this case the assessee. It is being claimed that on the date of transfer, the policy had no surrender value. This claim is based on the technical ground that the policy had not completed 3 years. However, for all practical purposes, the policy had completed 3 years. It is only due to malafide intention of the assessee to evade tax, that it was got transferred just two days before completion of three years. This intention of the assessee is further strengthened by the fact that the assessee did not pay the premium due on 31.03.2008. This shows that he intended to encash the policy immediately after it completed three years. Thus, in the instant case, the question is a little bit different. This involves assignment of a policy for a mala fide purpose. It involves lifting of veil between the firm and the partner and looking at the whole affair as one. As such this contention of the assessee is not valid in the given circumstances.
3.4. After over -ruling the contentions given by the assessee, it is time to go into the real purport of the whole game. Considering all the facts, it is crystal clear that the only purpose of all this is to evade the payment of tax, that would have been otherwise payable. As mentioned above, the firm could surrender the policy at any time after retaining it for at least three years. It had done so, for almost this period. It was in need of funds, as stated by the assessee that it was in loss. To overcome the shortage of funds, surrender and encashment of the policy would have been a handy tool. The firm, in fact, resorted to the same. This is clear form the fact that after assignment, the assessee did not pay the next premium due on 31.03.2008. This shows that at the very outset, they intended to encash the policy immediately after completion of three years. However, if it was encashed in its own hands the proceeds would have been liable to income tax. To avoid the same, it chose this circuitous route. By doing so, it intended to kill two birds with one stone. One the one hand, it got the required funds and on the other hand, it would go away without paying the due tax. In these circumstances, the action of the assessee is a clear case of manipulation and adoption of colourful method to avoid the payment of due taxes. In these circumstances, the findings of the Hon'ble Supreme Court of India in the case of McDowell & Co. : 154 ITR 148 are squarely applicable. The gist of the same is that any action, which is otherwise legal, becomes illegal and sham, if done with malafide. By the same ratio, the whole affair is rendered sham and the assessee is liable to pay tax on the amount of Rs. 59,14,702/ -. Moreover, in view of the legal position discussed in para 3.1 above, the sum received under the policy is taxable in the hands of the assessee as he is the receiver of the sum.
4. Keeping in view the above discussion, the amount of Rs. 59,14,702/ - is treated as taxable receipt in the case of the assessee and added to his income.
3. The Ld. CIT(A) vide para 6 to 7 of his order deleted the addition so made and the relevant decision of the ld. CIT(A) for the sake of convenience is reproduced hereunder:
6. I have considered the basis of additions made by the AO and the arguments of the AR on the issue. It is seen that the various steps taken by the firm in which the assessee is a partner in first purchasing the keyman Insurance policy, then paying the stipulated premium in three installments, assignment of the policy in favour of the assessee and finally maturity receipts in respect of the policy received by the assessee make it clear that in terms of legality there is nothing irregular about the transaction except for the fact that the entire arrangement has led to non taxability of impugned receipts of Rs. 59,14,702/ -. On the one hand, the firm while paying the insurance premium has lowered its tax liability and on the other hand the amount received on maturity of keyman insurance policy has also been claimed as tax free u/s. 10(10D). This particular sequence of arrangement had been subject matter of litigation before the Hon'ble Delhi Bench of ITAT in number of cases pertaining to Dr. Naresh Trehan, Mr. Rajan Nanda etc. and it was held that the maturity proceeds as reduced by the surrender value would not be liable to tax as per the provisions of section 10(10D) s as the same could be said to have been received under an ordinary insurance policy i.e. not Keyman Insurance Policy subsequent to the assignment of keyman Insurance Policy. The cases thereafter went up to the Hon'ble Delhi High Court which has delivered a judgment in favour of the assessee. It has been held that on assignment of the Keyman Insurance Policy to the employee, it ceases to be a keyman insurance policy with reference to the employee but becomes an ordinary Life Insurance Policy with reference to the employee but becomes an ordinary Life Insurance Policy eligible for exemption u/s. 10(10D). The Hon'ble Court has relied upon the certificate given by Life Insurance Corpn. of India Ltd. to the fact that the keyman insurance policy after assignment assumes status of ordinary insurance policy. The specific observations of the Hon'ble Court on this crucial issue are as under:
i) The Tribunal while giving requisite relief brought to tax the amount of surrender value at the time of assignment subject to verification by the A.O. 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 premium 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.
ii) Thus, the issue depends on the question as to whether on assignment of insurance policy to 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 subject 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.
iii) Once there is no assignment of company/employer in favour of the individual, the character of the changes and it gets converted into an ordinary policy. Contracting parties also change in as much as after the assignment which is accepted by the insurance, the contract in now between the insurance company and the individual and not the company/employer which initially took the policy. Such company/employer no more remains the contracting parties. We have to bear in mind that law permits such an assignment even LIC accepted the assignment and the same is permissible. There is no prohibition as to the assignment or conversion under the Act. Once there is an assignment, it leads to conversion and the character of policy changes. The insurance company has itself clarified that on assignment, it does not remain a keyman policy and gets converted into an ordinary policy. In these circumstances, it is not open to the Revenue to still allege that the policy in question in keyman policy and when it matures, the advantage drawn there from is taxable. One has to keep in mind on maturity, it does not the company but who is an individual getting the matured value of the insurance.
iv) No doubt, the parties here viz.; the company as well as the individual taken huge benefit of these provisions, but it cannot be treated as the case of tax evasion. It is a case of arranging the affairs in such a manner as to avail the state exemption as provided in section 10(10D) of the Act. Law is clear. Every assessee has right to plan its affairs in such a manner which may result in payment of lease tax possible, albeit, in conformity with the provisions of the Act. It is also permissible to assessee to take advantage of the gaping holes in the provisions of the Act. The job of the Court is to simply look at the provisions of the Act and to see whether these provisions allow the assessee to arrange their affairs to ensure lesser payment of tax. If that is permissible, no further scrutiny is required and this would not amount to tax evasion. Benefit insured owing to the combined effect of a prudent investment and statutory exemption provided u/s. 10(10D) of the Act, the section does not envisage of any bifurcation in the amount received on maturity on any basis whatsoever. Nothing can be read in section 10(10D) of the Act, which is not specifically provided because any attempt in that behalf as contended by Revenue would be tantamount to legislation and not interpretation.
7. Since the issue has been categorically decided in favour of the assessee by the Hon'ble Delhi High Court as detailed above and there is no contrary decision on the issue, the addition made by the A.O. is directed to be deleted.
4. We have heard the rival contentions and perused the facts of the case. As regards the nature of the Policy whether it is Keyman Insurance Policy or is an investment policy, the issue is squarely covered by our decision in the case of M/s. F.C. Sondhi & Co. (India) Pvt. Ltd. vs. DCIT, Range -1, Jalandhar, in ITA No. 117(Asr)/2010, dated 21.04.2014, the relevant portion of which is reproduced for the sake of convenience and better clarification as under:
2. The brief facts of the case are that the assessee has claimed deduction 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 Rs. 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 Rs. 20,00,000/ - on the life of Mr. Rajeev Anurag Sondhi.
(c) Jeevan Shree -I of Life Insurance Corporation of premium of Rs. 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 perusal of the terms and conditions of the policies taken by the assessee, it is found that the assessee company has taken the investment, plans floated by the Insurance Company. In the case of the two policies of ICICI Prudential, the assessee company was even given the option of choosing the investment plan out of the four investment plans tailored made by the Insurance Company. In the case of the policy taken from LIC of India, the policy Jeevan Shree -I is policy with Guaranteed Additions for 5 years and with profits thereafter. Thus, all the policies taken by the assessee company are Investment Plan & Guaranteed Return/Addition Plan and the premium paid by the assessee company after deducting for mortality cover & other administrative charges are to be put into investment Plan as selected by the assessee company in the case of ICICI -Prudential Insurance Company and the LIC has undertaken guaranteed addition for five years and later on with profits. Out of total premium amount, mortality charges is nominal and depends upon the death benefits. Mortality charges, in the case of ICICI Prudential policies are being recovered on the date of commencement of the policy and on each monthly due date while the policy remains in force and shall be recovered by cancellation of Units, as per the policy document of the Insurance Company. In the case of the policy of guaranteed additions of LIC Policy, document is not legible and the assessee did not furnish the legible copy. However, on the perusal of first page which is somewhat legible, it could be made out that premium for main plan is Rs. 19,91,265/ - and sum assured is Rs. 56,00,000/ -, whereas Accident Benefit Premium is Rs. 4250/ - for Accident Benefit Sum Assured at Rs. 25,00,000/ -. Thus, the main purpose of the three policies taken by the assessee was investment of the premium accounts in Units after deducting mortality charges and other administrative expenses.
2.2. Further, on perusal of the contents of the policy issued by the Insurance Company, it was found that the policy taken is Unit Linked Insurance Plan. In view of the fact that the assessee has taken "Unit Linked Insurance Plan", the assessee was asked to explain & justify the claim of deduction under the head Keyman Insurance Policy in its profit and loss account vide order sheet noting dated 31.10.2008 & letter dated 03.11.2009. 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 Top -up Single Premium paid by him among one or more of the Plan(s) for purchase of units thereof.
c) The Policy enables the policyholder to participate only in the investment performance of the Plan, to the extent of allocated units.
d) Mortality charges; these charges are calculated on a yearly basis, but deducted every month from the units allocated. Mortality charges are put for the risk calculated (for Life Cover) depending upon the age and the mortality rating, as applicable.
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.
f) There are four plans and the investment objectives of all the tour plans alongwith indicate portfolio Allocation are given in the policy document.
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 and subject to conditions u/s. 80C, 80D and 10(10D) of the I.T. Act.
j) Copy of first premium receipt shows Type of Policy as Keyman but there is no mention of "Keyman Insurance Policy' in the Policy document.
6.2. Premium Life. It is a limited premium payment unit linked insurance plan:
a) The Plan: Premium Life is a limited premium payment 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 Top -up Single Premium paid by him among one or more of the Plan(s) for purchase of units thereof.
c) The Policy enables the policyholder to participate only in the investment performance of the Plan, to the extent of allocated units.
(d) Mortality charges; These charges are calculated on a yearly basis, but deducted every month from the units allocated. Mortality charges are put for the risk calculated (for Life Cover) depending upon the age and the mortality rating, as applicable). Mortality charges for annual premium of Rs. 2,00,000/ - has been calculated at Rs. 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 for main plan is Rs. 56 lacs.
c) The accident benefit premium is of Rs. 4,250/ - separately calculated for accident benefit sum assured of Rs. 25 lacs and charges.
d) As per the guaranteed additions undertaken by the Insurance Company, it is mentioned that a guaranteed addition of Rs. 50 per thousand. Sum assured will be made to the sum assured at the end of the each policy year for each year's premium paid for first five years.
e) After the completion of five years the policy shall participate in profits of "with profits assurance policy".
f) Policy is not the term assurance policy and not on the life of another person. It is a investment plan with guaranteed additions and with profits.
g) Thus, the LIC will invest the premium amount for guaranteed additions/guaranteed returns.
h) There is no mention of "Keyman Insurance Policy" in the policy document. This is not a term assurance plan and as such does not fit into the definition of Keyman Insurance Plan as per explanation to the clause (c) of section 10(10D) of the Income Tax Act.
2.3. In the light of the above facts, the AO was of the view that the assessee has invested in Unit Linked Insurance Plan under Keyman Insurance Plan and it is not Keyman Insurance Policy as per the meaning given in the Income Tax Act. The AO by referring to the Circulars dated 27.04.2005 and 30.01.2006 of IRDA which are reproduced at page 7 & 8 of his order in para 8.2 & 8.3 observed vide para 8.4, which for the sake of convenience is reproduced as under:
8.4. Thus, the insurance regulator has categorically barred selling the keyman policy through endowment or unit -linked plans. It has said the keyman insurance cover can be sold only through term assurance, which combines life, accident and disability insurance policies to protect business of a company from the death or disablement of a key employee.
All the insurers are advised strictly to ensure that where the premium for the insurance on the life of an employee is paid by the employer, or where the premium on the life of a partner is paid by another partner or by the partnership firm, the scope of cover is not wider than term assurance. Insurance Regulatory and Development Authority (RDA) said in its circular.
The rough stance of IRDA came after it found 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 Rs. 59,96,365/ - and not Rs. 60,00,000/ -. It has been suggested by you that since our keyman policies are unit linked insurance plans, these are not keyman insurance policies in view of the circular of IRDA. In view of the above, it has been stated that the policy taken is unit linked insurance and consequently the premium paid is proposed to be disallowed.
(b) It is further submitted that as far 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.
(c) The mode in which the amount is to be invested by the insurance company. The insurance companies even otherwise invest the funds available with them in debt/stock etc. and this cannot be the deciding factor in determining the allowability of the premium paid.
(d) We have paid premium for the life cover as per the policies issued by the insurance companies and the purpose of the policy is to cover life risk.
(e) Even if the policies are unit linked, these are on the life of the person referred to by you and this will not affect the real nature of the policy as being a keyman insurance policy. The premium thus paid by us is fully allowable as revenue expenditure.
(f) Since the policies are not exactly in the nature of life insurance policies, the amount to be received back is to put to tax in the hands of the company in contradistinction to pure life policies whose maturity proceeds are exempt. The fact that the Keyman Insurance policies are unit linked does not adversely affect the position as far as the allowability of premium of these policies is concerned.
(g) As far as the circular of IRDA, a copy of which has been provided to us, it will not override the provision of Income Tax Act. Though the guidelines of IRDA will not affect the provisions of the Income Tax Act. It has been clarified by the insurance company that the date as mentioned in the circular of IRDA will apply after 10.05.2005.
(h) We are, however, of the view that as per the Income Tax Act, once a policy has been issued as a Keyman policy, the benefits of the same shall be available to the assessee and the circular of IRDA which does not override the Income Tax Act shall have not affect.
(i) As far as the choice of investment in the case of policies of ICICI Prudential are concerned, the appropriate 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 and these provisions of the I.T. Act are in place when the policy has been taken by the assessee. In the brochure also, the Insurance Company does not claim of any such benefit except tax benefit u/s. 80C of the I.T. Act. The Circular issued by the IRDA warning insurers confirm that the fact that "Term Assurance Plan under Keyman Insurance Policy and not Unit Linked Endowment Assurance Plan would be eligible for deduction." The assessee further admits that policies are not exactly in the nature of life insurance policies [10(f) above]. Once the assessee itself admits this, it is evident that the policy does not fulfill the condition of "Keyman Insurance Policy" as per explanation to clause (c) to section 10(10D0 of the I.T. Act and it is not Keyman Policy as per Income Tax Act. Only Term Insurance Plan under Keyman Insurance Cover i.e. Policy of life not beyond it is eligible for deduction as per provisions of the I.T. Act provided the assessee firm proves that necessity and expediency of the person being Keyman and the policy taken for the benefit of the assessee so that premium paid could be justified as expenditure has been laid out on expended wholly and exclusively for the purposes of the business as per provisions of section 37 of the I.T. Act. Since, the assessee has taken the Unit Linked Insurance Plan, an Investment Plan, it is not eligible for deduction.
2.7. Ultimately, the AO disallowed deduction of premium paid amounting to Rs. 59,96,355/ - and the necessary observations in para 11 are being reproduced hereinbelow for the sake of convenience:
11. Gist of the case & discussion:
The gist of the queries, enquiries, information, investigation, carried out & submission of the assessee is summarized here: -
(i) The assessee firm has taken policy, the type of which is Unit Linked Insurance Plan an Investment Plan. The purpose of Guaranteed Returns on the premium amount through investment in Units. It was claimed as Keyman Policy and amount of premium of Rs. 59,96,355/ - per annum has been claimed as deduction.
ii) The policy taken as Unit Linked Insurance Plan " an investment Plan" of ICICI Prudential & Jeevan Shree -I of LIC of Guaranteed returns and profits and not Keyman Insurance Policy as per definition of Keyman Insurance Policy, explanation to clause (c) to section 10(10D) of the I.T. Act. It is not Term Assurance 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 and the policy taken for the benefit of the assessee company but the assessee failed to prove that.
iv) It does not fulfill the condition of policy taken by a person on the life of another person as per definition of Keyman in the I.T. Act, i.e. pure life insurance as also admitted by the assessee in its submission. The IRDA was aware of manipulation by the Insurance Agencies of selling "Unit Linked Insurance Plan" under Keyman Insurance Policy instead of Term Assurance Plan under Keyman as per Income Tax Act and the assesses thereby wrongly depriving the revenue of its rightful taxes by naming the policy as Keyman and claiming huge amount of premium as deduction.
v) The assessee claims that the Insurance company has said that it has issued under 'Keyman Policy'. The policy may be termed as "Keyman" by the Insurance Company for its own purpose and guidelines might have been issued by IRDA subsequently, these guidelines and term as "Keyman" by Insurance Company cannot override the provision of "Keyman Insurance Policy" as per I.T. Act which are applicable and in place at the time of policy being taken by the assessee. Even the brochure of the Insurance Company says regarding tax benefits under section 80C only and section 10(10D) of the I.T. Act for receipts to be exempted if conditions fulfilled.
Thus, the claim of deduction of such expenditure on account of payment of this premium of Rs. 59,96,365/ - which has been invested in "Units" as per assessee's option in ICICI Prudential Fund and Jeevan Shree -I Policy of guaranteed addition could not be said to have incurred for the purpose of the business and is thus not allowable as business expenditure of the assessee firm.
3. Before the ld. CIT(A), the assessee adduced certain additional evidences which were admitted and forwarded to the A.O. and comments taken and thereafter the ld. CIT(A) confirmed the action of the A.O. The order of the ld. CIT(A) in paras 2.5 to 2.14 for the sake of convenience is reproduced as under:
2.5. I have considered the rival submissions carefully. Sub -section (10D) of section 10 of the I.T. Act exempts any sum received under a life insurance policy from the ambit of the total income of a person. Certain exceptions to this general exemption are, however, provided in the sub -section. The sub -section is extracted below:
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 the Explanation to sub -section (2A) of section 88, as the case may be.
Explanation. - -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 [and includes such policy which has been assigned to a person,
2.6. Amounts received under the Keyman Insurance Policy have been included in the definition of income in section 2(24) of the I.T. Act, as under:
In this Act, unless the context otherwise requires;
24) "Income" includes -
(xi) 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 10;
2.6.1. The Act further provides for taxing of the receipts from a Keyman Insurance Policy as salary income, business income or under the head "income from other sources" in section 17(3)(ii), section 28(vi) and section 56(2)(iv) respectively. The scope of the taxability of receipt on Keyman Insurance Policy and deduction of premium paid for Keyman Insurance Policy were explained in CBDT Circular No. dated 18.2.1998 as under:
Taxation of a sum received under the Keyman Insurance Policy
14.1 Keyman Insurance Policy of the Life Insurance Corporation of India, etc. provides for an insurance policy taken by a business organization or a professional organization on the life of an employee, in order to protect the business against the financial loss, which may occur from the employees' premature death. The 'Keyman' is an employee or a director, whose 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 Act, therefore, lays down the tax treatment of the Keyman Insurance Policy.
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 employer -employee 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 other person is or was the employee of the first person or is or was connected in any manner with the business of the first person. To be eligible to the classified as a Keyman Insurance Policy the essential ingredients are that the life insurance policy must be taken by one person for coverage of the risk on the life of another person who is either an employee or is connected is with the business of the first person. It should also be a 'life insurance' policy.
2.8. The AO has held that the Life Insurance Policy for the purpose of Keyman Insurance can only be a "Term Assurance Policy". A term insurance policy is normally one in which there is no accumulation of income, as has been contended by the appellant. A term policy is given by the insurance company for a specified period of time and assures payment of the sum assured on the death of the person insured before the expiry of the term or period of the policy. The AO has derived support for his proposition from the two Circulars issued by the Insurance Regulatory and Development Authority (IRDA) in respect of Keyman Policies. On 27.4.2005 the IRDA issued a Circular stating that certain aberrations had taken placed in the matter of sale of Keyman Insurance. It was further stated that detailed guidelines would be issued in this regard, and, in the meanwhile, only Term Insurance Policies should henceforth be issued as Keyman Insurance Cover. On 30.1.2006 the IRDA issued another Circular in it was noted that despite the Circular dated 27.4.2005, certain insurers were still selling partnership insurances through endowment or Unit Linked Plans disregarding the spirit behind the earlier Circular. It was informed that a persons purchasing Life Insurance could only do so to the extent of his insurable interest in the person insured and that an employer buying Keyman Insurance for his own benefit or a partner of a firm buying insurance on the life of another partner for own benefit could not provide insurable interest beyond a certain cover protecting against death of the person insured. The Circular advised all insurers to ensure that the scope of cover purchased by an employer or a firm was not wider than a Term Assurance.
2.9. In my opinion, the AO's contention that a Keyman Insurance Policy is one which is of the nature of a 'term insurance' policy has force. The IRDA Circular dated 27.4.2005, 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 regulating the insurance business in India. The Authority noted that certain insurers had issued or were issuing Keyman insurance policies which were "aberrations", as noted above. They clarified that the cover under Keyman Policies could not be wider than that in 'term insurance' and directed insurers to follow their directive. The IRDA Circular dated 30.1.2006 is, thus, clarificatory in nature and states that a Keyman Insurance Policy should not have cover more than a term assurance policy because that was the essence of a keyman insurance policy.
2.9.2. It is the contention of the appellant that based on the principle of literal interpretation, a Keyman Insurance Policy was a policy taken by a person on the life of another person and nothing more can be read into the provision of I.T. Act. In the case of United Airlines vs. CIT (supra) relied upon the appellant, the Hon'ble High Court have held that in a taxing statute the principle of literal interpretation was very strictly applied and while interpreting a taxing statute one could not go by the notion as to what was just and expedient. It was held that there was no equity in a tax and considerations of equity were wholly out of place in the taxing statute. In this case, the Hon'ble High Court held that any payment for use of the land of airport, whether it was on landing or parking of the aircraft in the airport, would amount to payment of "rent". The Hon'ble High Court based their decision on the definition of the word "rent" in section 194 -I of the Act where any payment for use of land etc., by whatever name called, is included in the definition of "rent". The issue in the present case is somewhat different. Though the term "Keyman Insurance Policy" has been defined in section 10(10D) of the Act, the term "Life Insurance" has not been so defined in the Act. Under the circumstances, the interpretation of the term "Life Insurance" in the context of Keyman Insurance Policy by Insurance Regulatory Authority assumes much greater importance and would prevail in a situation where the Insurance Companies try to give another interpretation which is not in consonance with the interpretation by the Regulatory Authority.
2.9.3. The appellant has also contested the reliance on the Circular issued by IRDA on the ground that compliance to other Acts could not be examined for the purpose of claiming benefits 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 other hand, decided to abide by the interpretation given by IRDA. Once this is so, and it is taken that the Keyman Insurance Policies were being misused and a Keyman Insurance Policy, as explained by the IRDA, was only a term insurance policy, in my opinion, cognizance needs to be taken of such interpretation by the Regulatory Authority and affect should be given to such explanation while implementing the provisions of I.T. Act. The appellant's contention in this regard is, therefore, rejected.
2.10. Moreover, the AO has examined the nature and terms of the policies and pointed out various factors to show that the policies purchased were not an insurance cover on life per se' rather they were investment plans with accompanying insurance benefits. As per the terms of the policies issued by ICICI Prudential, the investment risk in the investment portfolio was to be borne by the "Policy Holder". These are unit linked plans that combine the benefits of insurance and capital market returns into one. They give a guarantee maturity value of with varying degrees of equity exposure depending upon the risk appetite of the policy holder. It is apparent from the terms of the policies purchased that the policies are basically investment vehicles in which money can be paid at regular intervals by the policy holder and the policy holder can ask the insurance company to invest the money in different Funds depending upon the risk appetite of the policy holder. This is like the insurance company acting as Mutual Fund which invests money in the stock markets and gives units to the investor to represent his investment. The company is levying charges (which are deducted from the premium) which are similar to those levied by Mutual Fund Companies as entry and exist loads. The company alongwith the investment, provides insurance cover to the investor and the premium for providing the life cover is deducted from the funds invested by the investor on a regular basis. The returns on such policies are subject to market risks. These are schemes where the decision of investment is made first and the insurance cover comes as an additional benefit. The policies are predominantly investment policies with a small portion of the premium paid for actual life cover. Under the cover of such a small proportion of the premium for life cover, the appellant has claimed that this is a life 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. (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 that the policy is for a period of five years, though the premium paying term is three yeas only. As per the policy document, the sum assured for main plan is Rs. 56 lacs, whereas the "Term Assurance" sum assured is Nil. The premium for the main plan is Rs. 19,91,265/ - which is 35.5% of the sum assured. Thus, the appellant gets approximately all the amount invested as an assured return, after including the guaranteed additions, with mortality charges built into the policy. In addition, the assessee has an accident benefit sum assured of Rs. 25 lacs with the premium of Rs. 4,250/ -. This shows that the premium amount for the sum assured is not only for the mortality cover, but is for the return on the investment made also. The policy provides for a payment of Rs. 50/ - per thousand of sum assured for which indicates return of Rs. 2,80,000/ - every year in addition to the sum assured. The terms of the policy show that this policy did not have any term insurance benefits but was mainly an investment policy with death benefits built into the policy and accident benefit added to the policy. Hence, this policy also does not fall within the definition of Keyman Insurance Policy as explained by the IRDA. The appellant's reliance on the certificate issued by LIC to the effect that the policy issued was Keyman Insurance Policy does not take away the affect of the IRDA Circulars. Hence, even though the documents sought to be admitted -since the AO did not provide sufficient opportunity to the assessee during asstt. Proceedings. They do not help the case of the appellant. Merely, terming a policy as "Keyman" Insurance Policy will not make the policy a keyman policy as explained by the IRDA.
2.12. The appellant has contended that the IRDA Circular had prohibited the issue of Keyman insurance policies unless they were term insurance policies only after 10.5.2005 and that all its policies were issued on or before 10.5.2005. While the policies may have been issued prior to 10.5.2005, the issues mentioned in the IRDA Circulars showing misused of the Keyman Insurance Policy Scheme issued earlier and explaining what a Keyman Insurance Policy means will also affect the policies issued prior to 10.5.2005. In fact, the IRDA specifically mentioned that there had been aberrations in the matter of sale of Keyman Insurance in the Circular dated 27.4.2005, 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:
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.
He argued that the AO has derived support from two circulars issued by IRDA dated 27.04.2005 & 30.01.2006. He argued that the artificial restriction placed by the A.O. and Ld. CIT(A) with reference to Keyman Insurance as being term insurance only is thus not justified and a keyman insurance policy may be a non -term insurance policy also. He argued that the said Circular is basically in the context of partnership of Insurance Policies. He argued that the circular does not state that the policies are not in compliance and will be illegal and will not be treated as keyman insurance policies. The Ld. CIT(A) has not appreciated the decision of Hon'ble Delhi High Court in the case of United Airlines vs. CIT reported at : 287 ITR 281 wherein it has been referred that in taxing statute the principal of literal interpretation is very strictly applied while interpreting taxing statute one cannot go by the notion as to what is just and expedient. Similar view has been expressed by the Hon'ble Madras High Court in the case of CIT vs. Micromax Systems P. Ltd. reported at : 277 ITR 409. The Ld. counsel further went ahead to explain the functioning of IRDA which was explained with certain objectives to regulate, promote and ensure orderly growth of the insurance business and the IRDA has no relevance as far as the allowability or premium under the Income Tax Act or taxation of policy proceeds is concerned. The Income Tax Act specifically mentions where another Acts have to be referred for our interpretation purposes like section 2(25A), 2(29D), 2(38), 2(42A) and Sec. 2(47)(V) and since IRDA has not referred to for defining Keyman Policy or Life Insurance, its circulars cannot be relied upon for Income Tax purposes. The words "Life Insurance" should be understood as in common parlance. He further relied upon the decisions in the case of CIT vs. Lake Palace Hotels : 226 ITR 561 (Raj), Swedish East India Co. vs. CIT 133 ITR 407 and Indian Hotels vs. ITO : 245 ITR 538 (SC).
4.1. He argued that the Ld. CIT(A) has failed to appreciate that despite the fact that RBI has the power to regulate 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 benefits of insurance and capital market into one. He has further observed that it is apparent from the policies that these are investment vehicles in which money is paid in regular intervals by the policy holder and the policy holder can ask the insurance company to invest in different funds depending upon the risk appetite of the policy holder. This is like insurance company acting as Mutual Fund. He has also stated that the company is levying charges (which are deducted from premium) which are similar to those levied by Mutual Fund. The CIT(A) has concluded that the policies are predominantly investment policies and the intent and purpose of Keyman Insurance Policies envisaged in the I.T. Act and clarified by IRDA cannot be lost sight of the CIT(A) has also referred to circular No. dated 18/02/1998 wherein Keyman Insurance Policy has been defined and reiterated that this is for the benefit of business on the death of the person concerned. The Ld. CIT(A) has also referred to the circular No. which contemplates money being received in circumstances other than death also and this is in contrast to the definition of term insurance which according to the CIT(A) is the essence of Keyman Insurance Policy. The view thus taken by CIT(A) is not correct. The CIT(A) as also observed that policies which carry inherent risk of return cannot provide such benefit to business. In the policies of the assessee, it is an undisputed fact that money i.e. assured value is receivable on death and as such the view of CIT(A) is not correct. Also the insurance companies do not sit cover money. Even where no option is given to the policy holder, the amount of premium (after expenses including commission) is invested so that some return is given to policy holder on maturity. The observation regarding money being invested as per the directions is thus irrelevant. The Keyman Insurance Policies, in this case are life insurance policies as the policy value is receivable on the death of the persons and this is an undisputed fact (submission before the CIT(A) -last five lines at page No. 6 of the paper book). No further test of using IRDA circulars to interpret the policy has been provided in the Income Tax Act. The life insurance policies issued as Keyman Insurance policies by insurance companies have to be accepted as such. To take an analogy, if loan is sanctioned by bank in violation 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 in para 2.11 stated that there is an accident benefit of Rs. 25 lakhs with a premium of Rs. 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 Rs. 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 guidelines. The Ld. CIT(A) then proceeds to go beyond the circular of IRDA and in view of the circular intimating misuse of Keyman Policies issued earlier has held that it will affect the policies issued prior to 10.05.2005. This clearly shows that the CIT(A) was bent upon taking a view against assessee and does not even accept the views of IRDA. At worst, the CIT(A) could have taken an adverse view for the policies issued after 31.01.2006. In para 2.13, the ld. CIT(A) has observed that the manner of investment of life insurance policy significantly effects the issue at hand. He is of the view that if risk is involved in investment, it is not going to benefit the employer and the manner of investment therefore does determine whether the Keyman Insurance Policy is a proper Life Insurance Policy. The Ld. CIT(A) is confusing the life insurance policy with the possible return on the maturity of the policy. The two are entirely different concepts and should not be confused. Even without the direction of the client, the insurance companies invest in debt and equity. Money is recoverable on the death of the Keyman and thus is a sufficient test. The Ld. CIT(A) has thus formed a wrong view and the addition in respect of Keyman Insurance Policies deserves to be deleted in view of the above submissions. It may also be submitted that an assessee is permitted to plan his affairs and if the transaction is genuine, merely because it results in saving of tax cannot be a reason for any disqualification. Also where two views possible one favouring the assessee is to prevail. CED vs. R. Kanakasabai reported at : 89 ITR 251 (SC).;