Keyman insurance premium valid biz deduction: ITAT

Mumbai: In its recent order, the Income Tax Appellate Tribunal (ITAT), Kolkata bench, has allowed as a business deduction in the hands of a private company a significant sum paid by it as insurance premium for covering three of its directors under a keyman insurance policy. The ITAT held that this premium was for the benefit of the company to protect itself from any risk that it would sustain on losing the valuable services of its directors owing to accident or death.
Thus, it was an expenditure “wholly incurred for the purpose of the business” and should be allowed as a deduction from the business profits to arrive at the taxable component.The ITAT also relied upon a 1998 circular issued by the Central Board of Direct Taxes and a decision of the Bombay high court.
Marcopolo Products, a private limited company, had filed an income-tax (I-T) return for the financial year 2008-09, showing a taxable income of Rs 27.82 lakh. It had claimed Rs 45 lakh as a business deduction towards keyman insurance premium, which was paid by it in cash. The keyman insurance policy had a coverage of five years and the sum assured was Rs 75 lakh.
During assessment, the tax official added back this sum of Rs 45 lakh to the taxable profits of the company, as the company was unable to justify the expenditure.
At the first stage of appeal, the Commissioner of I-T (Appeals) noted that the persons covered under this policy were highly qualified in the company’s line of business and had several years of experience in marketing and business development and directed the tax official to allow the deduction. However, the I-T department filed an appeal with the ITAT, which in its recent order dated May 6, decided in favour of the company.
Tax officials state that it is for a company to substantiate the genuineness of its claims. Without specific reference to this case, they point out that the Budget 2013 plugged a major loophole. Else a few unscrupulous companies used to assign the keyman insurance policy to the concerned employee, during the tenure of the policy. In return, the employee would pay the surrender value of the policy (which was minuscule as compared to the premiums paid or the maturity value of the policy).
The company would claim the insurance premium as a business deduction, and on maturity the employee would claim the proceeds as tax-free.
Now, if a keyman insurance policy has been assigned, no exemption is available on maturity of the policy. Further, the Insurance Regulatory and Development Authority (IRDA) only permits term insurance policies to be bought as keyman insurance. This has reduced the scope for any mischief, claim tax officials.