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[2010] 3 taxmann.com 72 (Bom.)
There is no rational basis to confine allowability of expenditure incurred on premium paid towards a Keyman Insurance policy only to a situation where policy is in respect of life of an employee
Keyman Insurance Policy for section 10(10D) is not confined to a policy taken by a person on life of an employee, but also extends to an insurance policy taken with respect to life of another who is connected in any manner whatsoever with business of subscriber
HIGH COURT OF BOMBAY
CIT
v.
B. N. Exports
ITA No. 2714 of 2009
March 31, 2010
RELEVANT EXTRACTS:
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5. The effect of Clause 10 D is that a sum received under a life insurance policy is not to be included in computing the total income of any person. However, a sum received under a Keyman Insurance Policy forms a part of the total income and is liable to be offered to tax. For the purposes of Clause 10D, a Keyman Insurance Policy is a life insurance policy taken by a person on the life of another person who is or was the employee of the person who subscribes to the policy of insurance or is or was connected in any manner whatsoever with the business of the subscriber to the policy. In other words, a Keyman Insurance Policy for Clause 10D is not confined to a policy taken by a person on the life of an employee, but also extends to an insurance policy taken with respect to the life of another who is connected in any manner whatsoever with the business of the subscriber.
6. The Central Board of Direct Taxes has issued a circular on 18th February, 1998 (Circular 762) which clarifies the scope and purpose of the provision. Paragraph 14.1 of the circular states thus :
“14.1 A Keyman Insurance Policy of the Life Insurance Corporation of India, etc., provides for an insurance policy taken by a business organisation or a professional organisation on the life of an employee, in order to protect the business against the financial loss, which may occur from the employee ’s 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.”
7. The Circular notes that there were certain doubts on the taxability of the income, including bonus, received from such policies and as regards whether the premium paid should be allowed as capital or as revenue expenditure. The circular clarifies that the Act
lays down the tax treatment for a Keyman Insurance Policy. The circular clarifies that the premium paid on a Keyman Insurance Policy is allowable as business expenditure.
9. The effect of Section 10 (10 D) is that monies which are received under a life insurance policy are not included in the computation of the total income of a person for a previous year. However, any sum received under a Keyman Insurance Policy is to be reckoned while computing total income. For that purpose, a Keyman Insurance Policy means a life insurance policy taken by a person on the life of another person who is or was in employment as well as on a person on who is or was connected in any manner whatsoever with the business of the subscriber. The words “is or was connected in any manner whatsoever with the business ” of the subscriber are wider that what would be subsumed under a contract of employment. The latter part makes it clear that a Keyman Insurance Policy for the purposes of Clause 10 D is not confined to a situation where there is a contract of employment. Clause 10 D relates to the treatment for the purpose of taxation of moneys received under an insurance policy. In this appeal, the Court has to determine the question of expenditure incurred towards the payment of insurance premium on a Keyman Insurance Policy. The circular which has been issued by the Central Board of Direct Taxes clarifies the position by stipulating that the premium paid for a Keyman Insurance Policy is allowable as business expenditure. In the present case, on the question whether the premium which was paid by the firm could have been allowed as business expenditure, there is a finding of fact by the Tribunal that the firm had not taken insurance for the personal benefit of the partner, but for the benefit of the firm, in order to protect itself
against the set back that may be caused on account of the death of a partner. The object and purpose of a Keyman Insurance Policy is to protect the business against a financial set back which may occur, as a result of a premature death, to the business or professional organization. There is no rational basis to confine the allowability of the expenditure incurred on the premium paid towards such a policy only to a situation where the policy is in respect of the life of an employee. A Keyman Insurance Policy is obtained on the life of a partner to safeguard the firm against a disruption of the business that may result due to the premature death of a partner. Therefore, the expenditure which is laid out for the payment of premium on such a policy is incurred wholly and exclusively for the purposes of business.
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