Cit v. Naresh Trehan

./ /- t * o/o

(1)

(2)

(4) I

(3)l I I

(s)

(6) IN T'I-IE HIGH COURT OF DELHI AT NIEW DELHI AN NANDA Decision Delivered On: 16th December. 2011 . Appellant . Respondent . Appellant . . .Respondent -II ...Appellant . . .Respondent . Appellant .Respondent . . . Appellant . Respondent Pagg 1 of 4 I I -II rrA 1428 1,2o0A ttl RAJAN NANDA COMMISSIONER O Iii .l ivrnsus I NCOME TAX il ,, I MISSIONER OF INCOME TAX CE NANDA Certify that the digital file and physical file have been compared and the digital data is as per the physical file and no page is missing.

(7)

(p)

(10) t; I l I COMMISSI I ONER OF INCOME TAX VERSUS i,lr RA]AN NANPA ttl rr42o7t5/P,01o1 :ll I .TTiI vrr ' I ..,'l";i 'l i RAJAN NANDA ll : trsq"/iEl I RA]AN hIANDA VERSUS VERSUS VERSUS TREHAN '-I TREHAN (a . . .APPellanY . .Respondent . ApPellant .Respondent . Appellant . .ResPondent . . APPellant I i ,.1 . .ResPonoenq 'l . .ResPondent . .ResP . . ApPell I ant I I tlilii ent: I I r"1 I ond I I I I I Page I I I' F I I I .l II I

(L2) rTA 2-q73 1',2O1O. il ruNN SH TFI.EHAN Vrnsus ,. VERSUS VERSUS I INCOME TAX VERSUS MISSIPNER O RTS HEART INSTITUTE AND qRCFt CrrurnF lrp. ' tl NTSSi.OTTR OF INCOME TAX , 1 vrnsus 'll ORTS IHEART INSTITUTE AND EARCI'.I CENTRE LTD. I l"' - --'- '-'*1--1--'' ,'"'-. '-l' \( . . . ApPellant . . .ResPondent . . . APPellant . . .ResPondent . . . APPellant . . .ResPondent . . . APPellant . . .ResPondent . . ApPellant . . .ResPondent I . . , APPellant I I RagL a of a ))_ ESCORTS itEART IrySTITUTE I

(18) rrA 1e1e4291o I i ltltl ^r.T i tl I ll urr I :l I ll r..llllI iii ll 'vrnsus rt i.;!ll'' ,llll:_.._. ESCORTS .H EART INSTITUTE 'llll,i VERSUS Ii rt No.400 of 2008' I I .Respondent . Appellant .Respondent . . Appellant . ' .ResPondent pra, Sr. Standing Counsel, i Aggarwal, Sr. Standing Advocate with Mr. V.N' itu ll;l (1?) rrA +7s:' illlllli I clr :I ll,i I r ;lllivrnsus ' | ;ii:ivtrK)ur :llil ESCORTS :HEART INSTITUTE AND RESEARCH CENTRE LTP. lounr"t for tllre Revenue'i i wts' Rastrmi Ch< Mr. N.p,. Sahnii Sr. Stalding,Counsel, Ms' Sur E;;;';:i.rs "," - -'-i- 'i f.ri"f , ror tlne n"""fr""-' tut'' o's' Bajpai pou4sil for the Assessee-rvlr' u'5' DaJIJ Jha, Adivocate., I rtri.'V.pl. Gupta]with Mr] Basant Kumar, Adv tulr. ti.M. Meht$, Advocqte. llr rnnivr [- I L__ irdN'eLE THE AFTTNG cHrEF lu! Sr. tes. 'BLE| MR. JqSTrcE M.L' MEHT ii DECEM I , see I[A ZOLL/ pmc Q.<-<l"l n(r.r.hrtrrn)\- JUDGE t orders a : I,. i ER 1$, I.l i 'i ' ,l Pale 4 of 4 --,i lr i I I I I I * IN TFIE HIGH COURTOF DELHI AT IVEW DELFII I o/o Decision Delivered On:'16th Decembi-L2Qll

(1) rrA 4ool2oo8 , COMMISSIONER OF INCOME TAX . . .,Appellant VERSUS RAJAN NANDA

(2) TTA L42A I2OOA RAJAN NANDA . . .Respondent . . . Appellatnt VERSUS COMMISSIONER OF INCOME TAX

(3) ITA 142912oos & CM No.17975l2GoB RAJAN NANDA . . . Appellant VERSUS COMMISSIONER OF INCOME TtX ' ' 'Respondent

(4) ITlA.zxq/eloe coMMISSIONER OF INCOME TAX CENTRAL-II ' . . Appellant VERSUS RAJAN NANDA

(s) rTA 84el2o1o COMMISSIONER OF INCOME TAX CENTRAL-II, J HAN D EWALAN, NEW DELIIJ VERSUS RAJAN NANDA ITA No.400 of 2008, etc' . . .Respondent . . . Appellant .R.esPondent I Page L of 49 lq

(6) rrA Bss/zolo t I COMMISSIONER OF INCOME TAX CENTRAL-II ' ' ' Appellant VERSUS RA]AN NANDA

(7) COMMISSIONER OF INCOME TAX VERSUS RAJAN NANDA

(8) trA2c/75laOLO CIT VERSUS RA]AN NANDA

(9) rTA s18 /2011 CIT VERSUS . . .Respondent I . . . APPellant . . .Respondent . . . ApPellant . . .ResPondent . . . APPellatnt . . .ResPondent . . . ApPellant . . .ResPondent . . . APPeltant Page 2 ol'49 I RA]AN NANDA

(10) rrA 16sl2O11 CIT . VERSUS NARESH KUMAR TREHAN

(11) rrA 22lzaoe COMMISSIONER OF INCOME TAX iTA No.400 of 2008, etc' VERSUS PT. ruNNTSH KUMARTREHAN

(L2) rrA loxo/2010 CIT VERSUS - NARESH TREHAN

(13) \TA 2O73I2OLO CIT VERSUS NARESH TREHAN

(14) TTA LszlZOLL CIT NARESH TREHAN r15) trA 232120LL I CIT VERSUS VERSUS NARESH TREHAN

(16) rTA 398/2OOe COMMISSIONER OF INCOME TAX VERSUS ESCORTS HEART INSTITUTE AND. RESEARCH CENTRE LTD' iTA No.400 of 2008, etc. .Respondent . Appellant . . .Respondent . Appellant .Respondent . . Appell.tnt . . .Respondent . . . Appellant . Respondent . . Appellant .Respondent la

(r7) TTA 4A4{2OO9 COMMiSSIONER OF INCOME TAX . . ' APPCIIANT VERSUS ESCORTS HEART INSTITUTE AND . . .ResPondent RESEARCH CENTRE LTD.

(18) rTA 1918 ''ot o CIT " ' APPellant VERSUS ESCORTS HEART INSTITUTE ' ' 'Respondent 'n ' '

(19) rrA 1919/2010 CIT ' ' APPellant VERSUS '- ESCORTS HEART INSTITUTE ' 'Respondent

(20) rTA L7s tzoLL CIT ' ' APPellant VERSUS i F?33[ffiJEift+J]srlrurE AND Respondr:nt Counse|fortheR,evenue-Ms.Ras|.rmiChcrpra,Sr.StandingCounse|, Mr. N.p. sahni, sr. iianding counsel, Ms. Surgclii Aggarwal, sr. stancling Counsel' CounselfortheAssessee-Mr'O'S'Bajpai'Sr'AdvocatewithMr'\/'N' Jha, Advocate. f"f t.'V.p. Gupta with Mr' Basant Kumar' Advocates' Mr. R,M. Mehta, Advocate' Page 4 ol'49 ITA No.400 of 2008, etc' CORAM :. HON'BLE THE ACTING CHIEF J["[STICE HON'BLE MR. JUSTICE M'I-. MEHTA

¶1All these appeals relate to the same episode' which is re-enacted year after year and therefore' various assessmentyearsareinvo|ved'Eventhecharactersint|re said episode are the same, who are three aSSeSSees, though forthepurposeoftaxabi|ityquaeachofthem,separate cases have originated. However, the disputes which have arisenflowfromthesamesetoffacts,althoughnatureof dispute in respect of one assessee is little different fronr the disputes in resPect of other two' oneassessee,viz.,EscortsHeartlnstitute&Research CentreLtd.isthecompanywhichhadtaken'.keymi]n,, policy for the other two assessees' who were employees/Directors of the assessee company' After nursing these policies for scmetime by paying premium thereupon,theywereassignedtoothertwoassessees'i'€'' employees/Directorsreceivingsurrendervaluefromthem' i Whereafter, for the remaining period of all those policies' the insurance premium were paid by the assignees' ln'ofu' u' the assessee company is concerned' the question is as to ITA No.400 of 2008, etc'

¶2f,! whether premium paid by it, after adjusting the surrender vg|ue, is to be treated as business expenditure or not as claimed by the assessee. Insol'ar as other two assessees are concerned in whose favour the 'key man' policies were assigned, the question is as to whether the difference between the actual premium.paid and surrender value given by them is to be treated as 'salary' in their hands and is to be taxed accordingly, Another issue qua these two Directors isastowlretherthematurityva|uereceivedbythemonthe said PolicY is to be taxed or not' 3, with this little indication of the nature of issues which arise in three sets of appea|, We advert to the facts in detai|, which would be common to all the cases' Thereafter, we rruill refer to sPecific issues' FACTS:

¶4As pointed out above, the assessee company has been taking 'key man' i.nsurance policies on the lives of two 'emplgyees/Directors in different years' For the sake of brevityandc|aritY,W€sha||givefactsinrespectofsuch.key man,poligytakenbytheaSsesseeccimpanyontheIifeofMr. Rajan Nanda, its Chairman and Director' ITA No.400 of 2008, etc. Page 6 ol'49 l'l been taking the 'key man' covering Mr. Rajan Nanda arrd in favour of Mr. Nanda in the , of the policies are as under: i ---r-T--[ ]__ I l= I -'- -cF I lb*i yl:ls6 €E I :c lEHsel riie -.e I Yi IEtsE.bl E_u"g ;s I se leE"nl FeI <e I l5= | €'-e ---r-l---1.--- ttllt_l E I X latb | | x lHlfl | q lSlF ql'{lc4 l ---t-lt llt I s I p lElB : I R lFlH R I : tst- ---lrrrllll,l-rlSlRlo : I fi lElH slnlsln N I ____l_: I ---_l-_ | ' ll,i s l p lBll r I fi lslD I I q lnl* Nl-l-l | ----t'--*----- The assessee company had insurance policies in its name these policies were assigned subsequent Year. The details

¶5I I I -l I -U_ E.9 H 3 >-E -ugr .E 3 > g(g < z (J= -c I -ic, I vvl -ccl I =" ! ol -.-li.e I <x I I I I olololTI 3l orl F'il -_-_-l---_-. IN N r{ @\o NFl F{ c!o Ir{ N co N N N Ol roN J t{ \o cfl rON t{ H I N N t{ N N I !-{ N r.) N co \o OlN r+ ,t, iTA No.400 of 2008, etc' l-- Or! Y r{ I tn s Lr} 6, Insofar as . the assessee company is concerned, the Assessing Officer (AO) tool< the view that since the i expenditure incurred on the premia paid on the said keyman insurance policies was much rnore that the amount realized by the assessee company on the. assignment of these . policies to,the employees/Directors, i.e., the surrender value only was received, the amount paid by the assessee company as premia on the said'policies could not be treated as expenditure incurred wholly and exclusively for Lhe business purpose of the assessee company. Therefore, Lhe AO disallowed the premium paid, in different years which was claimed as business expenditure, holding that it was a colourable device adopted by the assessee company to claim a business expenditure, which was not wholly and exclusively for the business of the assessee company.

¶7The assessee company preferred appeal against the assessment orders and succeeded before the cIT (A), whcl held it to be the business expenditure' iTA No.4O0 of 2008, etc. Page B of 49

(f) N N NF N Ol rl(f) H t{ )( B.

¶9The view of the CIT (A) was r-ipheld by the Income T'ax Appellate Tribunal (hereinafter referred to as'the Tribunal')' Insofar as Mr. Nanda is concerned, in his case, the Ao took the view that he had taken substantial benefit by paying only surrender value as against much higher amount of premium paid by the company. The difference between the premium paid by the company and the surrender value paid by Mr, Nanda was treated as the benefit to be taxed in his hands. in appeal preferred by Mr. Nanda before the cIT (A), the first appellate authority held that as the Director, lre v'ras receiving commission income and was having the status of .employee' and the aforesaid benefit derived by him was to. be treated as'salary' within the meaning of Section 17 of the Income Tax Act (hereinafter referred to as 'the Act') ' However, the Tribunal has reversed .the decision ef 16s |SIT

(A) holding that merely by assignment in a particular year when the policy was still corltinuing, no taxable event tracl taken place and therefore, no tax could be charged. It has also held that the amount in question cannot be treated as .perquisite' so as to fall within the scope of section 17(3) of the Act. This decision in the case of Mr. Nanda is followed in the case of other Director-assessee , viz. Dr. Naresh Trehan. ITA No.400 of 2008, etc. )r

¶10Challeriging the orders of the Tribuna.l, Revenue has preferred appeals in the case of the company as well as in respect of both the said Directors. With these background facts, we revert to each set of appeal' Appeals qua Assessee CornlDanv:

¶11Basic facts and events in this behalf have already been noted above. The appeals of the'Revenue were admitted on the following substantial question of law, whlch is comrnon to all these appeals filed by the Revenue against the assessee company: ' "whether the I.T.A.T. was correct in law in deleting tlre addition made by the Assessing officer by disallowing tlre businessexpenditurec|aimedinrespectof|<eyman insurance Premium?"

¶12Mr. N.P. Sahni, learned counsel who appeared for the , Revenue submitted that the admitted facts would show tlrat the assessee had been taking keyman insurance policy year after year in the name of its employees/Directors paying ' huge premia and thereafter assigning the same in the very next year to the said keyman at a very nominal value, said to be the surrender value, though the policies were ror a ' period of five years each. This modus operandi adopted by i the assessee was a clear colourable device to benefit the said keymen who were, in. fact at the helm of affairs and' ITA No.400 of 2008, etc. Page 10 <lf 49 managing the company. such an expenditure could not be treated as expenditure wholly or exclusively for the purposes of business. The difference betwebn the premium paid and the surrender value received on assignment is substantial in respectofeachpo|icy'Theassesseehasnotbeenab|eto justifyassigningthepo|iciesatanomina|va|uewhent|re same could be continued for another four years and then acquiring fresh policies again in that year by paying heavy premium.

13.Mr'Sahnialsoinvitedourattentiontotheschemeof keymaninsurancepo|icyasintroducedbytheLifelnsurance Corporationoflndia.Hearguedthatitisclear|ystated therein that'the object of l<ayman insurance is to indemnify thecompanyforthe|ossofearningresu|tingfromthedilte ofva|uableemployeeandrep|acementofanytrainedpers;on to perform his functions' Clause (3) of the Scheme states that..Assignmentnota||owedexcept,abso|uteassignmentin favourofkaymanincaseofhisleavingthejobof.the company". Clause 4(e) on the same page reads as under: ' "The following endorsement shall be placed on. the potiiy for whictr prior consent from the employer snouio be obtained before the completion ol i1',u propoiat.Itisherebyagreedanddgc|aredthatinthe eventoftheemp|oyeeliflassured|eavingemp|oyment ITA No.400 of 2008' etc. Page L1 of 49 )l \! L4. of the emptoyer, the within mentioned policy will be, (i) either surrendered to corporation for its cash value or

(ii) assigned absolutely in favour of the employee life assured. It is further agreed and declared that the within mentioned policy shall not be allowed to be assigned to anyone except life assured himself absolutely." After pointing out the aforesaid clause of the scherne, ' argument of Mr. sahni was that the assessee had acted in contravention of various clauses of the LIC',s scheme of keyman insurance policy and had been assigning the policies year after year when they were still continuing with the company and had not left it. His other submission Was that the surrender value relaLes and is applicable only to the LIC when a policy is paid up by the insurer (in this case, the assessee company) and not to keymanoranythirdperson.IfaCompanydoesnotWishto continue the policy, it can surrenderthe same to the LIC for its cash'value or assign it abs;olutely in favour of emploV€€, as per the scheme. The sllrrender value is not relevant insofar as the value of the benefit passed dn to the keyman is concerned; nor can it be treated as full and true value of the consideration for assigning the policy before its maturity' The position is akin to various . schemes of statutory authorities lil<e DDA, HUDCO, etc. where plots/flats are

¶15Page 12 ctf 49 iTA No.400 of 2008, etc. L{ allotted and if the same are Surrendered, only the amount as per allotment scheme is paid even, if the market value is much higher. In some such schemes, even unearrted increase has to be shared with the concerned authority' l-he assessee company is, thus, not justified in asserting that it has shown the surrender value recei\{ed from kayman as its income and the huge premiun"t paid cannot be tinkered with or disallowed under Section 37(L) of the Act'

¶16Mr. Sahni further argued that the Tribunal placed reliarrce upon Circular No.762 dated lBth February, 1998 explaining the tax aspect relating to keyman insurance policy was not appropriate and the Tribunal neither appreciated the import of the said circular in a proper manner, nor it exarnined t-he ' effect of Sectio ns 2(2$(xi), 10(10D) and 37(1) of the Act in a proper perspective. . He argued that as per the aforesaid circular, the object of a keyman insurance policy is to enable business organizations to insure the life of a keyman in order to protect the business against the financial loss which nray occur in the likely eventuality of premature death' It tryas submitted that the main thrust of argument of the respondent before the cIT (A) as well as the Tribunal was that the payment of keyman insurance premium is allowerble ITA No.40O of 2008, etc. I a as revenue expenditure in view of the aforesaid Circular i dated l8th February, 1998, While not disputing that the i payment of keyman insurance policy premium paid by the company was allowable in view of the said circular, hu i i argued that the Tribunal failed to appreciate the true spirit of { this circular as the purpose was to cover the risk of i premature death of the key persons of the organization and it could not be applicable i1 the instant case where the assessee company WaS assigning these keyman policies in the subsequent years, thougl-r the term of the policy was 5 years. According to Mr. Sahni, in such eventuality, payment of eXceSS 'premium could not be treated as 'business expenditure' under section 37(l) of ihe Act, as there was no commercial expediency on the part of the assessee to milke such exorbitant payment. ' He argued that the test of commercial expediency could not be'reduced to the shape of a ritualistic formula, nor could it be put in a water-tight compartment so as to be confined in a straitjacket formurla. All that the law requires is that the expenditure should not be in the nature of capital expenditure or personal expenditure of the assessee and it should be wholly and e.xclusively laid out for the'purpose of the business. lt isl ITA No.400 of 2008, etc. )A o Page 14 of 49 I I i I lry well settled that the items of expenditure are to lle considered from the point of view of a normal, prudent businessman. The test would merely mean that the Court would place itself in the position of a businessman and find whether the expenses incurrecl could be said to have been laid out for the purposes of the business. The ultimate .analysis of the transaction would depend on the status of the parties as spelt out and nature or character of the trade or the venture, the purpose for which the expenses were incurred and the object which was sought to be achieved in incurring those expenses. such an expenditure, hotntever, must not suffer from the vice of collusiveness or colourable device. It was submitted that the instant case is a clear case of colourable transactions which are executed by the assessee at behest of its Directors/employees managing the assessee company. t7. It was further submitted that colourable devices cannot be partoftaxp|anninganditwou|dbewrongtoencourageor entertain the belief that it is honourable to avoid the paymentoftaxbyresorttodubiousmethodsashe|dinLhe ,caseofMcDoweII&Co'Ltd'Vs,cTo|I54ITR14B(SC)]. ReIiancewasalsoplacedonthedecisionsofSupremeCourt ITA No.400 of 2008,'etc. in the case of CIT Vs' Durga Prasad More [82 ITR 540

(sc)1. In the latter case, the Apex.court in arriving at its conclusion has laid emphasis on the surrounding circumstances and test of human probabilities'

¶18Per contra, the submission of Mr. v.P. Gupta, learned counsel appearing for the assessee company that the cIT

(A) as well as the Tribunal had followed its earlier orders in I the case of group companies. It was pointed out in the impugned order dated 29th August, 2008 (which is the subject matter in ITA No.39B of 2009), the Tribunal had referred to the orders for Assessment Years L99I-92, 1992-93, 1993-94 and L997-98. In fact, the claim of the assessee company was also accepted for the Assessment Years 20f11-02 and 2oo2-o3, on this premise, it was argued that premium paid by the assessee company on keyman insurance policy had been held to be allowable as business expenditure under Section 37(L) of the Act for number of years and the order of the .Tribunal had been accepted by the Department. Therefore, principle of consistency should be followed and the Department should not be allowed to rake uP tlris issue ITA No.400 of 2008, etc. Page L6 of 49 >\

¶19on merits, it was argued that the scheme of the Act wirs quite clear in this behalf, which was amply clarified vide CBDT,s Circular dated l8th FebrVarY, 1998 that the premium paid to the keyman insurance policy is allowable as business expenditure. This circular was binding on the Department. Mr.GuptaalsoreferredtothejudgmentoftheBombayHigh Court in the case of Commis;sioner of Income Ta.x V,s" B,N, Exports t(2010) 323 I-fR I78 (Bom')' wherein the insurancepremiumonkeymaninsurancepo|icyhadbeen considered to be allowable' 2t. Mr, Gupta also argued that the allowability of the deducLion isbeingdisputedon|yforthereasonthattheconcerned individuals have raised claim in their cases regarding non-taxabilityofthematurityva|uereceivedbythempursuantto assignment of policies in their favour. claim made regarding exemption of amount in the hands of individuals cannot .determineorimpactal|owabilityoftheexpenditureinthe case of the respondent company. In this regard, he placed reliance on the decision of the'supreme court in the case of ' , EmpireluteCompanyLinnitedVs'Commissionerof Income Tax l!24 ITR 1 (SC)l' wherein it has been obs€rvedthatacertainpaymentconstitutes-incomeor, iTA No,400 of 2008, etc'

¶20)e capital receipt in the hands of recipient is not material in determining whether the payment is revenue or capital disbursement qua the PaYer. I ,22. His further submission was that no such case of colourable I device could be projected by the Department when I i assignment of such policies was envisaged in the CBDT's Circular dated lBth February, 1998 itself. It was furtlrer argued that the ingredients under Section 37 were duly nret ' and satisfied as the expenditure incurred by the company was only on business considerations and the assignment of policy was also in the larger interest of business. It was, inter alia, submitted in this behalf that the assessee company was able to earn substarrtial profit by availing services of these individuals .(keyrnan) by incurring Lhe expenditure under reference and it is a fact duly recorded by the Tribunal in the. impugned order that these persons were very important in the aSSeSSee organization and when they left their assignments, its profit were drastically reduced' Accordingly, the expenditure was incurred only with business , consideration and is, therefore, an allowable deduction

¶23Another dimension, which was given by the learned counsel for the assessee company was that the Department could ITA No.400 of 2008, etc' ; A, not sit on the armchair of the assessee and decide as to ) | whether it was appropriate, as a business expediency, for the assessee to incur certain e><penditure or not. It was for the assessee company to arrange its affairs in a manner whichreduceitstax|iability.ThereWaSnoprovisionintlre Act, which had been violated by assigning the policies in l favour of the individuals. Reference in this regard was ma{e to the decisions of Punjab & Har:yana High court in the case of Commissioner of Income Tax Vs, Pivete Finance Ll'd" t(2010)192Taxman2I(P&H),whereinitwasa||egedby, the Department that the assessee has been consistently resorting to colourable device with the object for reducing the tax liability by transferring shares to another group of companies with a view to reduce the table income. The Court reiterated its holding in earlier decision in the case of Porrits&spencer(Asia)Ltd'Vs'Cornmissionerof Income 'Fax l(2o10) 190 Taxman L74 to the effect that if the transaction was otherwise valid in law and a part of tax planning then merely because it has resulted in reduction of tax, it cannot be ignored on the ground that the under|ying motive of entering into such a transaction by the assessee was to reduce its tax liability to the state. He also drew our ITA No.400 of 2008, etc. Page 19 of49 3-t_ attention to the judgment of this CourL in the case of I Commissioner of Income Tax Vs, 'Fanacea Biotech !-lid' t(2010) 324 ITR 311 (Del.) wherein this court has observed in connection with the claim of the assessee for allowability of depreciation on purchase of a flat'towards the end of the previous year that obviously, the assessee must have i purchased this flat within the relevant financial year to ta'ke benefit of depreciation as tax planning.

¶24Rebutting the arguments of Mr. sahni, predicated on the alleged violation of terms of scheme of keyman insurance policy by assigning the Same to the kayman, it was argued that no such contention was.ever raised before the Authorities below. Even otherwise, the insurance compelny had accepted the assignment. So much so, even the Department had accepted the assignment and had ta>ted surrender value of the assignment and therefore, such an ' argument could not be raised.

¶21After giving our due and thoughtful consideration to Ehe submissions of the parties of both sides, we feel that the aSSeSSee has been able to malce out a case in its favour and order of the Tribunal does not call for any interference' We ITA No.400 of 2008, etc. are persuaded bY the following view of ours: ITA No.400 of 2008, etc. reasons in suPPort of this i

(i) The Department 'has itself allowed the expenditure incurred on the premium paid for keyman insurance policies in previous years as i I business expenditure under Section 37 of l"he I Act. Right from t99L-92 upto L993-94 ernd . thereafter even. in relspect of Assessment Yr:ar IggT-g8, the expenditure was allowed' Thor-rgh thereafter, the expenditure was disallowed, but again the claim was accepted for the Assessment Years 2OOI-02 and 2002-03. Principle of consistency would, therefore, bY applicable in such a case.

(ii) The Tribunal has rightly referred to and reliecl upon the CBDT's Circular dated IB'2'1998' l'his Circular is bincling on the Income -fax Department, which categorically stipulates that premium on keyman policy should be allowed as business expenses. The assessee wot'tld,; naturally, take into . consideration such clarifications issued by the CBDT and would act on the basis thereof. When the assessee was given the impression, 'by means of the aforesaid circular, that if expenditure is incurred on tlre keyman policy, it would be treated as business expenditure. There is no reason for tlre Departmenttodeviatetherefromwhenitcomes to the assessment,

(iii) The nature of expenditure incurred on keyman iniurance policy has even been judicially consideredandBombayHighCourthashe|din B,l{, Exports (sup'ra)' that this expenditure is to be allowed as business expenditure, in the following words: "The effect of Sdction 10(10D) is'that monies which are received under a life insurance policy are not included in the computation of the total incorne of a person for a previous year. However, any sum received under a Keyman insurance policy is to be reckoned while computing the total intome' 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 connectr:d in a nY ma n ner 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 than what would be subsumed 'under a contract of employment. The latter part makes it clear that a Keyman insurance policy for tlre a ITA N0.400 of 2008, etc' purposes of Clause (10D) is not confined to a situation where there is a contract of employment. Clause (10D) 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 rnay 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 confi:re 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"' 3s-ITA No.400 of 2008, etc'

(iv) The argument of Mr' N.P. Sahni, learned counsel for the Revenue', that taking such keyman insurancepoIicyeveryyearandthereal=ter assigning the same to the beneficiaries may be treated as colourable device, may not be correct' , Though this argument appears to be attractive l when we look into the fact that the assessee had beentakingthepo|iciesairdthereafterassigning the same year after year !n favour of the beneficiaries, what cannot be ignored that this course of action is permitt-ed by the Departmernt itself as stated in CBDT's Circular datecl l.8.2.1998.

(v) The expenditure incurred has to be tested on the touchstone of Section 37 of the Act and to see as to whether such expenditure is permissible or not. No doubt, the object of a keyman insurance policy is 'to enable business organizations to insure the life of a keyman in order to protect the business against the finAncial loss whlch may occur in the likely eventuality of premature death. Such arl expenditure is treated as business expenditure by' the Department it:;e|f r and recognized as such in Circular dated L8.2.1998. The expenditure is to be seen at [hei 7L iTA No.400 of 2008, etc. time it is incurred, was assigned after that the exPenditure Merely because the PolicY sometime wou.ld not rnean , incurred in the first instance would lose the flavour of it being'business expenditure'.

(vi) once the legal provisions and the outlook or= ' Departmentitse|fbasedonsuch|ega|provisions permit the assessee to have the tax planning of thisnature,andthecourseofactiontakenbyt|re assesseeispermisr;ible'underlaw,theargument of colourable device cannot be advanced by the Revenue, When expendrture of this nature is treated 'business expenditure' per se by the Department itself, there cannot be any question . of raising the issue of want of business expediency. The learned counsel for the respondent is right in his submission that the Departmentcou|dnotsitonthearmchairofthe assessee and decide as to whether it was appropriate on business expediency for the assesseetoincursuchanexpenditureornot'If - the transaction is otherwise valid in law and is a Page 25 o{ 49 j\ ITA No,4Q0 of 2008, etc.

26.

¶27part of tax planning, merely because it has resulted in reductioh of tax, such expenditure cannotbeignoredraisingtheissueofunder|ying motive of entering into this type of transacti.n. I Variousjudgmentscitedbythelearnedcounsel for the respondents clearly get attracted to tlris : C:ourt' The question of law is, thus, decided against the Revenue. As a result, appeals filed by the, Revenue against the assessee. companY are dismissed. Appeals trua Directons A6sL:ssee: These appeals were admitted on the following questions of law:

(i) whether on the fercts and circumstances of the .case,therewasanyjustificationtotaxthe difference between the premium paid by the employer and the surrender value pald by the employee to the employer at the time of assignmentofthepo|icyandwhetheritcouIdbe taxed in the Year of assignment?

(ii) whether on the facts and circumstances of the case,thelncomeTaxAppe|lateTribunaIvva5 ITA No.400 of 2008, etc. justified in restoring back ihe matter to the AO to ' ascertain whether the keyman insurance policy on assignment by the employer to the etnployee wa's converted into an ordinary policy so as to , determine the question of taxability of the amount received by the employee on the maturity of such a policy; and if answer to the preceding part to this question is in the ' affirmatiVe, then, whether the insurance money received on maturity by the employee is exempt in full under Section 10(10D) of the Income l-ax Act?

(iii) Whether the Tribunal in spite of being of the view that the keyman insurance policy after its assignment to the keyman assumed the character of an orclinary iltsurance policy erred in law in holding that.out of the sum received on maturity of the said policy, a sum equivalent to the surrender value of the policy at the time of assignment in favour of the assessee Uu i subjected to tax? Page27 of 49 s\ iTA No.400 of 2008, etc. I' 1o

(iv) whether the Tribunal erred in directing the ' surrendervalueofRs.35,28,Bl5/-tobetaxedin spiteofthefactt|.ratatthetimeofassignment i theassesse.ehadmadeapaymentofthesaid amount to-the assignor, i.€., the employer company?

(v)WhethertheTribunalWaSjustifiedin|awin rejecting the alternative the alternative claim of the assessee that in the eventuality that the amount received on maturity becomes liable to taxthendeductionbea||'owedinrespectofthe premiums paid by the assessee after assignment to him of the policies in question as also the surrender value perid by him to the employer at the time of assignrnent and which was embedcled in the figure of Rs'2,85,00,0OO/-? 28' Ms. Rashmi Chpora, Iearnec| counse| appeared for the Department in these appeals. she reiterated and highlighted the modus adopted by the company in talcing Keyman Insurance Policy year after year in the name of Lhe two Directors and then assigning the same in favour of thr=se Director assessees at a value much less than the amount ITA No.400 of 2008, etc. paid by the companies in the. very next year of taking the policy. Her submission was that in this manner, by assigning the policy and receiving only surrender value as against the actual premia paid, which was much higher, the difference between two amounts was'the benefit received by the Director assessees, which would. be treated as incorne assessable to tax. Taxability was sought to be covered by the provisions of section L7 of the Act treating the same as profits in lieu of salary, i.e., perquisite in the hands of emploYee.

¶29Shi further submitted that the maturity amount received by the assessee on the export of premium of policies, which is generally five years, was also taxable income as per section 2(24) of the Act. Her submission was that the letter from LIC on surrender the Keyman Insurance Policy turns into an ordinary policy is of no consequence as the treatment by the LIC under the Rules and Regulations therein and for such purpose cannot govern the taxabilitl; sf income is governeci ' by the provisions of Act, wlrich is self-contained stature' Original terms and conditiotts of the Keyman Insurance Policy ca.nnot change on surrender as the quantum of premium and maturity amount remains as per the original ITA No.400 of 2008, etc. \r terms and conditions. The. Legislature has specifically brought in provisions to tax the maturity value alongwith bonus, etc. aS income under salary, business and profession I and income from other Sources, etc. by incorporating various provisions such as 2(24)(xi), 17(3)(ii), 28(vi) and 56(iv) of the Act, which govern the taxability of amouqt received towards Keyman Insurance . Policies including the sum allocated bY waY of bonus, etc.

¶30she also hammered the issue of colourable device adopted by the company and echoed the same sentiments as expressed by Mr. N.P. Sahni while arguing the appeals of the - Department qua the assessee company and submitted that bythisdevice,.companyWaSbenefittedbytreatingthe expenditure as business experrditure uhder Section 37(1) of the Act and Director assess;ees were benefitted on the ground that the same was exempt under section 10(10D) of the,Act. According to her,,Such a device was impermissib|e. she concluded her arguments by submitting that the LIC is a commerciaIorganisation,whichformuIatesitsownterms andpoliciesand/oral|owsconversionofonepolicy.o, another, but the Same cannot govern the taxabiIity oti income, but the same cannot cover the taxability of income ITA No.400 of 2008' etc. \u which has to be determined * on the basis of specific provisions of the Act.

¶31The aforesaid submissions were refuted by Mr. R.M. Mehta and Mr. Bajpai who appeared for the assessee. Mr. Mehta argued that the case had to be examined having regard to the specific provision incorporated under the Act relating to . the Keyman Insurance Policy with effect from 01.10.L996' on that basis, it was to be found as to whether the difference between the premium paid by the company prlor to the date of assignment and the surrender value of the policy as computed by the LIC could be treated as income at the hands of the assessee, viz.., whether such a difference was 'perquisite' within the meaning of section 17(3)(ii) of the Act as done by the Ao. His submission, in this behalf, was that the Tribunal rightly came to the conclusion that section 10(10D) of the Act ers well'.as other consequenl-ial Amendments read with CBDT,s Circular No.762 da|.ed L8.2,1998 would clearly demonstrate that it is only "sum received" under the Keyman Insurance Policy, that would be treated as "profits in lieu of sarlaiy" in terms of Section 17(3) ' of Act. CBDT Circular datecl 18.2,1998 clearly postulates thaton|ythesurrenderVa|ueofthepolicyatthetimeofl I I '' iTA No.4O0 of 2008' etc. "13 I assignment or the sum received by ain individual at the time f retirement was taxable, on the second issue, viz., taxability of the amount at the time of inaturity of the insurance policy was untenable inasmuch as after the assignment of the policy, at the hands of the assessee, it became an ordinary policy and flo ol-l€ I assignment Keyman Policy for the balanced terms of the ' policy insurance premium was paid by the assessee as payable in an ordinary policy. Therefore, as per CE'DT Circular itself, which was rightly relied upon by the Tribunal, such an amount received.on maturity could not be added as income of the assessee. Mr. O.S. Bajpai specifically rel=uted the arguments of learned counsel for the Revenue by giving his own analysis to the various provisions of the Act. His submission, in this behalf, was that the concept of assignment is embedded in the very scheme of Keyman Insurance Rolicy. He submitted tlrat tlre .provisions of section 10(1OD) of the Act were to be rr:ad conjointly with Section 17(3)(ii) of the Act'

¶34', He first sought to highlight distinction between the Keynran ' Insurance Policy and ordiriary policy by submitting that in case of keyman po|icy there have to be two p|ayers, ViZ., (i) ITA No.400 of 2008, etc' Page 32 of49 ; Y1

32.

¶33Ys one who pays premium to secure the life of the other and (ii) the other whose life is Secures, In contrast, there is only a ' single player in an ordinary policy, who gets his life ,u.rr"d ' and pays the premium himseif. In the present case, "this person happens to be an employee after policy is assigned to ' him. In this scenario, learned senior counsel argued that section 17(3)(ii) comes into picture when the recipient is to be taxed for the amount of insurance received by him on maturity or he is taxed on surrender value as profit in lieu of salary. In other words, if there is no assignment of Keyman Insurance Policy, there is no question of invoking section 17(3)(ii) as an employer cannot be taxed under this Section, but only an employee can be taxed. when there is no assignment, section 37 and section 28 or section 56 of the Act will operate. The tdmployer wilt seek deduction under section 37 and pay tax under section 28 or 56 of the Act' Section 17(3)(ii) of the Act comes into play only if an employee is to be taxed and an employee does not come into picture if there is no assignment' If employer does not continue the policy and surrenders it midway, he too would get only surrender value, But when there is assignment, the emp|oyeecomesintopictureandSectionlT(3)(ii)oftheAct ITA No.40O of 2008, Pagc 33 of 49 etc. I rVt i l'o becomes operative. T-hus, in the case of an employee, section 17(3)(ii) of the Act can co-exist only utith assignment to the employee. This niakes assignment a part of the scheme of the Act itself. H€, thus, argued that the assignment leads to conversion and changes the character of keyman insurance policy into an ordinary policy. Further, assignment is a followed transaction between the LIC's employer and employee. witlr this assignment, LIC not only agrees to convert the policy from keyman insurance policy to general . insurance policy, it also agrees to receive the premium from the employeg. when such a course is legally permissible, there is no question of adoption of colourable device, was the submission of Mr. Bajpai for which lre referred to the judgment of the Supreme Court in the case of llnion of India vs. Azadi tsacha.o Andolan, (2oo3) ?-63 ITR 706 (SC) followed in waffart share & sfoc/< Brokers P. Ltd. v" CIT [2010] 326 ITR. 1 (SC).

¶35On the aforesaid premise, his submission was that when the amount received by the employee on maturity of the policy I is the amount received in respect of ordinary policy; it was exempt from taxation by the statutes itself and, therefore,i such an amount could not be Laxed at all I ITA No.400 of 2008, etc. I

¶36Insofar as taxability of difference between the premium paid by the employer and the surrender value paid by the employee (assessee) is concerned, the same was to be examined only if it was (perquisites within the meaning of section L7(3)(ii) of the Act. His submission, in this behalf, Was that the 'keyman insurance'is taxable under Section t1 17(3)(ii) of the Act as a 'profit in lieu of salary' only when it is actually received. If it is not actually received, the condition of taxability is not satisfied and it cannot be ta><ed under Section 17(3)(ii) of the Act. 'He highlighted tlre fact that section 2$(iv), section 56(2)(iv) as well as Sectir:ns zQil{oi) and section 17(3)(ii) of the Act used the word "received" afd therefore, unless the amount is received under Keyman Insurance Policy, it could not be taxed under any other provision.

¶37While dealing with the case of the assessee comPanY, we have already referred to the provisions of Section 10(10D) of the Act, which defines the insurance policy. The schemet of purpose of Keyman Insurance Policy'has also been adverted to at that stage. Since two kinds of additions were made by the Ao, which are the subject matter of the present appeals, we now take these two aspects for d:scussion: I ITA No.400 of 2008, etc. '1ry \u

(i) Difference between t['le prermium paid hy the company and the sunrender value paid by the assessee at tl.le tlrne clf assignmentl Whether ili is 'profit in lieu of salany' within the nneaninE of Section 17(3xii) read with Section 2(?4)(xi) of the Act: Section 2(24) gives the definition of income which is inclusive as it starts with "income inclucles......" . Thereafter, various heads are.specified, which woulcl be treated as income. we are concerned with clause

(xi), which relates to Keyma,n Insurance Policy which is worded as under: "any sum received under a Keyman insurance policy including the sum allocated by way of bonus on su.ch 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 2B;" ;

¶38For the purpose of this Clause, expression "Keyntart Insurance Policy" shall have the meaning assigned to Clause

(10D) of Section 10 of the Act, which reads as under: ' \'Keyman insurance policy" means a life insurance po|icytakenbyapersonon'the|ifeofanotherperson who is or was the employee of the first-mentioned oersonorisorwasconnectedif.anymannerl ITA No.400 of 2008, etc. whatsoever with the business of the first mentioned person."

¶39Section 10 is the first Section in Chapter III entitled 'Incomes which do not form part of total income'. In Section I I 10 of the Act, various kinds of incomes are stipulated, which i I are not to be included in total income. This Section excludes, I those SumS from income, which are received under a l-ife' Insurance Policy, including the sum allocated by way o1= I, bonus of such policy, However, there are certain surns, which are specifically excluded meaning thereby those sums are not excluded from income.. sub-clause (b) of clause ,i'

(10D) mentions any sum received under a Keynran insurance policy, It would follow that sum received und€:r a Keyman insurance policy under an Insurance policy ts not to be excluded from total income and it would be treated as ' income. That is provided by Clause (xi) of Section 2(2a) ot the Act, Since Explanation to Clause (xi) states that Keynran insurance policy shall have the same meaning as assigned to it in Explanation to clause (10D) of Section 10 of the Act, we merely reproduce the said Explanation: "Explanation For the purposes of this clause, "Keymaninsurancepolicy"meansalifeinsurance po|icytakenbyapersononthelifeofanotherperson, who is or was the employee of the first-mentioned person or is or was connected in any manner iTA No.400 of 2008, etc' '11 ,fh whatsoever with the business of the first-mentioned person. "

¶40This Explanation, thus, gives the. meaning to "Keyrnan insurance policy" and only that Sum received under this l policy would be treated as income. As per this Explanation, I Keyman insurance policy is the on3 which is taken b)t a I person on the life of another person who is or was the I employee of the first mentioned person, etc. It means, in ' our context, the person who has taken the policy is Lhe company/employer and the person on whose life the policy taken is the Director assessee. It is not a case where the emplgyer kept the policy with itself till end and on maturity, the amount received was glven to the employee' In tlrat case, the provision would have attracted' 4L The moot quebtion here is as to whether any such tax event has occurred within the meaning of Section 17(3)(ii) of the Act. Section 17 defines "salary", "perquisite" and "profits in lieu of salary". The amount in question admittedly is not ..salary,'. However, this provides "in lieu of salary" as ' defined in Section L7(3) of the Act, then also it would be chargeable to tax under the head "salary". Clause (ii) of Sub-section (3) of Section 17 reads as under: ' ITA No.400 of 2008, etc' "(ii) Any payment other than any payment referred to in clause (10), clause (10A), clause (108), clause (11), clause (tZ), 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 sutTl received under a Keyman insurance policy including the sum allocated by way of bonus on such PolicY' Explanation : For the purposes of this sub-clause, the expression "Keyman insurance policy" shall have the meaning assigned to it in clause (10D) of section 10'"

¶42As npted above, the contention of the Department is that tlre amount in question is received in the form of difference between the amount paid by the employer to the insurance company and the amount received from the employee in tlre form of surrender value. The'contention of the Director assessee, on .the other hand, is that on the assignmenl-of policy, no such amount is received, The contention of the assessee is predicated on the following expression in Clause

(ii) of sub-section (3) of Section 17 of the Act: "Any sum received under a Keyman insurance policy....... ..........."

¶43Obviously, Section 17(3xii)'of the Act would come into PaY, by the emPloYer to the. only when the employment as policy is assigned employer cannot be taxed under this ITA No.400 of 2008, etc. s/ Section, which is applicabie only to the employee. assignment, there may be two situations, viz.,

(i) Employee does not continue ' not pay further Prremiums, only surrender value; or

(ii) EmploYee continues the subsequent Premiums, then amount on maturitY.

¶44After -!'l the pclicy and does then he would get policy and paYS he would get full In the present case, second situation has occurred as on assignment, the Director assessee did not surrender the same to the LIC and chose to continue with the policy by mal.:ing payment for remaining period of the policy. It is also to be borne in mind that the LIC has accepted the said assignment and from the date of assignment, it has become a policy between the LIC and the Director assessee, viz., the employees. However, no particular amount was received by these Director assessees on assignment. Clause (ii) of sub-section (3) of Section 17 taxes "any sum received in a Keyrnan pOliCy insurance". The word "received" assumes significar"lce' The Legislature in its wisdom tlroughtito tax only that payment, *t'.ti.t'' is received by the employee aSSeSSee under Keyrnan insurance PolicY. iTA No.400 of 2008, etc'

¶45once we find that for Keyman insurance-policy, specific I provision is made under clause (ii) of sub-section (3) of Section, L7 of the Act and the case is not covered by that clause. Can it be treated as covered under Clause (i.ii)? Answer has to be in, the negative for Various reasons, which are underlined belorlr: ,

(i)SectionlT(3)(ii)Wasamendedbyincorporatingthe provision of Keyman'insurance policy with effect fromOl.lO.1996tcltakecareofspecificschemeof . Keyman insurance policy added/introduced by the said amendment vide Finance (No'z) Act, 1996' Clause (3) of Section t7 of the Act, on the other hand, was already in existence' When the Legislature intended to cover the amount received underKeymaninsurance'po|icyunderC|ause(ii), forthepurposeoftaxabi|ityofamountsreceived under a Keyman insurance policy, one has to look into this Clause and not Clause (iii)'

(ii) Even.clause (iii) uses expression. "any amoLnt due or received". Thus, it is also on receipt of this amount with this Clause gets triggered' , I

(iii) The purport of Clause (iii) is altogether different.l Such an amount due or i.eceived by the asses;see, has to be: ITA No,400 of 2008, etc. SJ

(a) Before joining anY emPloyee; or

(b) After cessation of its employee' NosuchcontingencyoccurredwhenlrisKeynran insurance policy was assigned by the company in favour of the Director assessees' i

(iv) other provisions, which were introduced/amendecl while providing the Keyman insurance policy scheme under the Act by Finance (No.2) Act, 1996 are Section 28(iv) and Section 56(2)' Section 28 deals with profits and gains of business or profession and Claube (iv) thereof reads as under: "(iv) The value of any benefit or pbrquisite, whether convertible into money or not, arising from business or the exercise of a profession; " This Section would obviously apply when the assessee is assessed under for income under the headt.profitsandgainsofbusinessorprofession,' which is specific head provided under Section 28 of the Act. Even qua such an assessee, the amountismadetaxab|easincomeon|ywhenthe sum is "received".

¶46Section 56 deals with "income from'other Sources", which is income No. F of stipulated in section L4 of the Act' clause (iv) ITA No.400 of 2008, etc' Pag,e 42 of 49 ss of sub-section (2) of section 56 makes particular income referred to in Section 2Qa)$i).chargeable as tax if it is not taxed under the head "profit and gains of business or profession" or under the head "salary". Thus, we fall back on Section 2(24)(xi), which also uses the expression "received" and would imply that the amount shculd have been actually , received. w€, thus, agree with the opinion of the learned; Tribunal that the tax event dicl not occur, as no such amount, was received at the time of assignment of the policy by the company.as employer to the Director assessee, as employee. It is trite that income can be charged only. if it comes under tlre heads of section t4. fsee frta/n ikant Ambalal Mody lfs', Commissioneroflncome-,Tax,Bornbay,(1966)61ITR 428 (sc)l.

¶47The scheme of the Act by introducing Keyman insurance po|icy, c|ear|y provides that such an amount can be taxed eitlrer as business profits or surrender value of the policy endorsed in favour of the ernployee (Keyman) or the sum received by him at the time of retirement and in all these cases, it would be profits in lieu of salary for tax purpose. In i case there is no employee-employer relationship, then the surrender value of the policy or the business profits are to ITA No.400 of 2008, etc. I I I our I ^t4 be taken from conclusion by other sources.' We are also supported CBDT's Circular No.762 dated IB'2.1998, I which reads as under "Taxation of a sum received under the Keyman insurance PolicY. L4.7 A 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 employee's premature death. The "Keyman" is an employee or a director, whose services aie perceived to have a significant effect on the profitability of the business. The premium is paid by the employer. I4.2ThereWeresomeooubtsontlretaxabilityof 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 Finance (No'2) Act, Lgg6,therefore,laysdownthetaxtreatmentfthe KeYman Insurance PolicY. i t4.3 Clause (1OD) of Section 10 of the Income Tax Act exempts certain income from tax' The Finance (No.2) Act, 1996 mends clause (10D) of Section 10 to exclude any sum received under a Keyman Insurance Po|icyinc|udingthesumalIocatedbywayofbonusof such policY for this Purpose. L4.4 The Finance (No.2) Act, 1996, also lays doen that the sums received by the said organization on suchpoliciesbetaxedasbusinessprofits;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 ofsalary"fortaxpurposes;andincaseotherpersons having no employer-errployee relationship the Surrendgrva|ueofthepo|icyorthesumreceived under the policy be taken as income from other sourcesandtaxedaccording|y.Thepremiumpaidon ITA No.400 of 2008, etc' Page 44 oi 49 s?

48.

¶49the Keyman Insurance Policy is allowed as business expenditure.

14.5 The amendments tal<e effect from the 1" day of October, !996." It also follows from the aforesaid , that it was only the surrender value of the policy at the time of assignment or the sum received by an individual at the time of retirement, which is taxable. Insofar as assignment is concerned, at that time surrender value was paid by the Directgr and therefore, nothing could be taxed. Therefore, from any angle, matter is to be loolced into, this component cannot be taxed at the hands of the Director assesses as mentioned. received by the assessee is taxahle:

¶50The Tribunal has taken the view that the Keyman insurance policy was taken in a particular year and assigned in the next year and both these events had taken place in the years preceding the assessment year in question' -fhe Tribunal took note of the certificate obtained by the assessee from the LIC whereby it l{ad certified that a Keynran insurance policy after assignrneht assumed the status of an ordinary insurance policy. The Tribunal also took note of the, ITA No.400 of 2008, etc. i I , sE

¶51relevant provisions of the Act and the aforesaid CBDT Circular to hold as under: "All this shows that from the time of taking out the policy upto 'its maturity, the Legislature has envisaged the treatment to be given with regard to sums involved in the hands of the players involved' The players involved obyiously are two-one, the person on the life of whei'n the insurance policy is taken out and second he pdrson who takes out such policy. The premium is,borne"by the second person' Where such a dual role comes to an end, the very essence of the Keyman Insurance Policy is lost. This is the reason why the LIC of India confirmed that after assignment of a Keyman Insurance Policy in the name of the individual and the premiums thereafter being paid by such individual, the hitherto Keyman Insurance Policy becomes an ordinary policy' In this case, on the date of maturity, the policy in question is rightly to be accepted as an ordinary insurance policy." The Tribunal while giving requisite relief brought to tax the amount of surrender value at the time of assignment subject to verification by the AO. it also rejected the alternal'ive arqument of the assessee that in case the sum received on maturity was held to be taxerble then deduction be allowed for the.premia 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'

¶52Thus, the issue depends on the question as to whether on assignment of the insurance policy to the assessee, it changes its character from Keyman insurance also to an ITA No.400 of 2008, etc' ordinary policy. It is because of the reason that if it remetins Keyman insurance policy, then the maturity value received is subjected to tax as per section 10(10D) of the Act. on the I 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 ta><. I Once there is no assignment of company/employer in favour of the individual, the character of the insurance policy changes and it gets converted into an ordinary policy. Contracting parties also change inasmuch as after 'the assignment which is accepted by the insurance, the contract is now between the insurance company and the indiviclual and not. the company/employer which initially tool< the policy. such company/employer no .more remains the contracting parties. We have to "bear in mind that law permits such an absignment 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 remaln a keyman policy and gets converted into an ordinary poiicy. ITA No.400 of 2008, etc. Page 47 <tf 49 -ry

¶53o () In these circumstances, it is not open to the Revenue to still allege that the policy in question is keyman policy and when it matures, the advantage drawn therefrom is taxable. one has to keep in mind on maturity, it does not the .o-puny but who is an individual getting the matured value of the insurance

¶54No 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' Lalv is clear. Every assessee has right to plan its bffairs in suclr a manner which may result in payment of least tax possible, albeit, in conformity with the provisions of Act. It is also permissible to the 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 t 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 wbuld not amount to tax evasion. Benefit inured owing to the combined effect clf a prudent investment and statutory exemption provided under ITA No.400 of 2008, etc. section 10(10D) of the Act, the.section does not envisage of 1ny 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

¶55Accordingly, we answer the questions of law as framed in favour of the assessees and against the Revenue. As a result, the appeals of the Revenue are dismissed and those of the assessees are hereby allowed. ACTIN CI-IIEF JUSTICE /l ; -d--,-c**q (M.L.MEFlrA) JUDGE DECEMBER 16,20L1 omc ITA No.400 of 2008, etc'