Whether premium paid on insurance policy designed under Unit Linked Investment Plan can be claimed as business expenditure u/s 37 - NO: ITAT

THE issues before the bench are: Whether expenditure incurred on Term Insurance Plan under Keyman Insurance Cover is eligible for deduction u/s 37, even if the assessee firm proves that the said amount has been spent wholly and exclusively for the purposes of the business as per provisions of section 37; Whether in case the insurance companies otherwise invest the funds available with them in debt/stock etc, deduction of the amount invested can be claimed as revenue expenditure; Whether the nature of investment can be a deciding factor in determining the allowability of the premium paid; Whether when the policies are taken from Unit Linked Investment Plan it becomes investment plan, premium of which has been put into growth fund

and it is not a Pure Life Insurance Policy on the life of another person and Whether in case only a fraction of the total premium is meant for risk premium, the balance is for the deployment of purchase of units, can be claimed as business expenditure. And the verdict goes against the assessee.

Facts of the case

Assessee company had debited an amount of Rs. 3 lacs under the head ‘Insurance‘ pertaining to premium paid towards ‘Keyman Insurance Policy’ of Joint MD. Assessee had contended that the amount paid was claimed as expense allowable u/s 37. The amount due on maturity of this policy had been received back in AY 2010-11 and had been offered for taxation in year of receipt. Payment of premium for keyman insurance cover was allowable as a business expense. The law permits deferment of payment of tax on this amount. This amount cannot be taxed twice. The claim of payment of premium was genuine. The nature of insurance plan cannot adversely effect that admissibility of claim.

During assessment, AO held that a unit linked plan can’t be equated with Keyman Insurance Policy as per meaning of the term given in clause (c) of Section 10(10D) and elaborately differentiated between the quoting guidelines and circulars of IRDA, as detailed in the assessment order and held that the expense of Rs. 3 lacs was not to be treated as incurred for the purpose of business of assessee. For making the disallowance, AO relied upon the order of CIT(A) in appeal No.407/-08-09/CIT(A)/Jalandhar dated 29.10.1989 in case of M/s. Suri Son for AY 06-07 where AO had upheld the disallowance on identical facts.

On appeal, CIT(A) had upheld the action of AO and observed that all aspects of the policy and legal proportions were discussed in the details in the order of M/s. F.C. Sondhi & Co. (India) Pvt. Ltd. vs. DCIT Range-1, which need not be repeated/ Facts being parimaterial, there was no reason to deviate from the findings of the CIT(A). In confirmation with the same, it was held that the expense of Rs.3,00,000/- in case of assessee was to be disallowed as not being for the purpose of business of assessee and uphold the action of AO in this regard.

Having heard the matter, Tribunal held that,

++ we find that the facts in the present appeal are identical to the facts in the case of M/s. F.C. Sondhi & Co. (India) Pvt. Ltd. vs. DCIT Range-1, Jalandhar, in ITA No.117(Asr);/2010 for the A.Y. 2006-07 and therefore, our order in the case of M/s. F.C. Sondhi & Co. shall be identically applicable in the present appeals. In that case assessee has claimed deduction on account of Keyman Insurance on the policy of Lifetime from ICICI Prudential – a regular premium – Unit Linked Insurance Plan of premium of Rs.20,00,000/- on the life of Director, Premium Life from ICICI Prudential – a limited premium payment Unit Linked Insurance Plan of premium of Rs.20,00,000/- on the life of another director and a Jeevan Shree-I of Life Insurance Corporation of premium of Rs.19,96,355/- on the life of another director. The policy was with Guaranteed Additions for 5 years and with profits thereafter;

++ during assessment, AO 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. It was further observed 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;

++ the assessee has stated that it is eligible for deduction of claim of Keyman Insurance and 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. Thus, 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 assessee was given show cause notice,in reply to which assessee had submitted that the AO had 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) 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. 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. 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 admit 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(10D) 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. Since, the assessee has taken the Unit Linked Insurance Plan, an Investment Plan, it is not eligible for deduction;

++ in case of Jeevan Shree-I issued by L.I.C. of India, which is the policy with guaranteed additions for 5 years and with profits thereafter. Therefore, it cannot be denied that such policies are for the investment plan and are having guaranteed return and the premium paid by the assessee company to such Insurance Company after deducting for mortality cover and other administrative charges are to be put into investment plan as selected by the assessee company as far as the policies taken from ICICI Prudential are concerned. Whereas LIC has undertaken guaranteed addition for 5 years and later on with profits. These findings of the AO have been found to be correct and no cogent explanation to rebut or reverse such findings of the A.O.has been given before any of the authorities below or even before us. The findings of the AO are also found to be correct and has not been rebutted with cogent explanation before any of the authorities below or even before us that 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 is to be recovered by cancellation of Units, as per the policy document of the Insurance Company. The accident benefit premium is Rs.4,250/- for accident benefit or sum assured of Rs. 25 lacs. Show cause notice was given to the assessee to explain whether the said polices are Unit Linked Investment Plan or not and to justify the claim of deduction in the Profit & Loss Account, the reply of the assessee was that 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. This explanation of the assessee cannot convert investment plan into Pure Life Insurance Plan;

+ there is no dispute as argued by the counsel for the assessee that meaning to Keyman Insurance Policy is taken from the Explanation to the clause (c) of section 10(10D), which has been reproduced hereinabove. As per definition of "Keyman Insurance Policy", a person purchasing life insurance can only do so to the extent of his insurable interest in the assured. With the background of the policies and terms and conditions and from the arguments putforth by the counsel for the assessee and the DR and the relevant material on record, we are of the views that the policies have been taken from Unit Linked Investment Plan is investment plan, premium of which has been put into growth fund and it is not a Pure Life Insurance Policy on the life of another person. Therefore, the policy itself does not fall under the definition of Keyman Insurance Police as defined under explanation to clause (c) of section 10(10D). The findings of the CIT(A) and that of the A.O. in this regard are reasoned one and we find no infirmity in the orders of both the authorities below, in particular, the findings of the A.O. which have been confirmed by the CIT(A) i.e. the findings of the AO in paras 6.1, 6.2 & 6.3. with reference to the Circular of IRDA and the order of the A.O. in para 11, which are well reasoned one and we concur with the views of CIT(A) and that of the A.O. We find no infirmity in the order of the CIT(A) in this regard, who has rightly confirmed the action of the A.O. The arguments of counsel for the assessee before the authorities below were mainly that the Insurance Policies are Keyman Insurance Policies taken on the life of a person and even otherwise also invest the funds available with them in debt/stock etc, which cannot be the deciding factor in determining the allowability of the premium paid. But at the same time, assessee has admitted vide letter dated 12.11.2008 and on perusal of record, it is found that these policies are not in the nature of Life Insurance Policies exactly;

++ on perusal of facts on record and arguments of both the parties and legal position and interpretation of the Act, we are of the view that the arguments made by the DR are found to be convincing and findings of the CIT(A), who has rightly confirmed the action of the A.O. that the assessee-firm has taken policy, which is, in fact, Unit Linked Insurance Plan, an Investment Plan, the purpose of which is guaranteed returns on the premium amount through investment in Units and Unit Linked Insurance Plan for which the premium is paid though wrongly claimed as an expenditure, which is not allowable as an expenditure. The Circular of IRDA has clarified the position and the arguments made by the counsel that it is prospective in nature, cannot be accepted since the circular is clarificatory in nature. In the facts and circumstances of the case, it is not a ‘term Assurance Policy Plan" as per IRDA guidelines. A nominal amount is being charged for mortality charges for life cover and balance amount has been deployed to purchase Units as per assessee’s choice. Only a fraction of the total premium is meant for risk premium, the balance is for the deployment of purchase of units i.e. Investment in Units which in fact, cannot be claimed as business expenditure, which query, in fact, has never been explained by the assessee before any of the authorities below or even before us. It does not fulfill the condition of policy taken by a person on the life of another person as per definition of explanation to clause (c) of section 10(10D). Accordingly, the cases of various courts of law, which have been carefully perused by us are not at all applicable. In the facts and circumstances, the arguments made by the counsel for the assessee, cannot help the assessee for the reasons mentioned hereinabove. Accordingly, we find no infirmity in the order of the CIT(A) who has rightly upheld the order of AO. Thus, the solitary ground raised by the assessee is dismissed. Accordingly, our order hereinabove in the case of M/s. F.C. Sondhi & Co. (India) Pvt. Ltd. vs. DCIT Range-1, Jalandhar, is identically applicable in the present case and accordingly, the appeal of the assessee in ITA No.20(Asr)/2013 for the assessment year 2007-08 is dismissed. In the result, the appeal filed by the assessee in ITA No.20(Asr)/2013 is dismissed.