The High Court clarified in a recent case that the Keyman Insurance Premium paid by the partnership firm on the life of its two partners shall be allowed as business expenditure.  

Case: Commissioner of Income Tax vs. Agarwal Enterprises

Facts:

The assessee being a partnership firm, was engaged in the business of purchase and sale of securities and investment in capital market. The assessee took keyman insurance policy on life of two partners. Insurance premium was paid by the assessee and was claimed u/s 37(1).

AO’s View:

The AO disallowed 20% of the expenditure on the ground that the insurance premium shall be treated as personal expense of the partners. The AO was of view that it was not incurred wholly and solely for the purpose of business of the assessee firm.

On Appeal:

The CIT(A) and the Tribunal decided in favour of the assessee.

Held:

The High Court was of the same view as that of the assessee. This expenditure was incurred by the firm to protect the business from loss which may arise due to death of partner. The beneficiary of the insurance policy was the firm itself and not individual partners. Such expenditure was incurred for benefit of firm. Moreover, the department itself has clarified that premium paid on the Keyman Insurance Premium is allowable as business expenditure.

There was no basis, therefore, for making any deduction or disallowance. It is in these circumstances that the disallowance was deleted. Hence, keyman insurance premium incurred for benefit of firm shall be allowabe as business expense.

Thus, the appeal of the Revenue was dismissed.

 

Keyman Insurance Policy: is a life insurance 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. It is used for business succession or business protection purposes. Its aim is to compensate the business for losses incurred with the loss of a key income generator and facilitate business continuity.

_____________________________________________________________________________________________________