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KEYMAN INSURANCE POLICIES WHITE PAPER The Life Insurance Policies which are proposed to be an organization (employer) on life

of some of its key persons will be deemed to be a keyman insurance policies. Premium paid will be allowed as an expenditure as per ircular of the !oard and also as decided by !ombay "igh ourt. The sum recei#ed on such policy (except on the sad e#ent of death of insured person) shall be taxable as income under the head business or other sources. $ny sum recei#ed under a keyman policy is considered as business income u%s &' (#i). This may be in hands of company or keyman. In case of death of insured( sum recei#ed by legal heirs or nominee shall be income from other sources if not assessed under the head business or salaries. "owe#er( for allowability of premium as business expenditure there must be clear and undisputed link between ser#ices of insured person with business of employer. The amount recei#ed by employer will be taxable as business income. In case the proposer of insurance policy is not employer but the employee( then premium paid by employer will be per)uisite in hands of employee. *ele#ant pro#isions which may be applicable in case of employer or employee are reproduced below (this list is not exhausti#e( because general pro#isions are not reproduced)+ I, -./0T$1 $ T( 2342 567 -8 23429 $n $ct to consolidate and amend the law relating to income0tax and super0tax !e it enacted by Parliament in the Twelfth :ear of the *epublic of India as follows+

"$PT/* I P*/LI.I,$*: ;hort title( extent and commencement.

2. (2) This $ct may be called the Income0tax $ct( 2342. (&) It extends to the whole of India. (7) ;a#e as otherwise pro#ided in this $ct( it shall come into force on the 2st day of $pril( 234& (&6) <income< includes= (i) profits and gains > (i#) the #alue of any benefit or per)uisite( whether con#ertible into money or not( obtained from a company either by a director or by a person who has a substantial interest in the company( or by a relati#e of the director or such person( and any sum paid by any such company in respect of any obligation which( but for such payment( would ha#e been payable by the director or other person aforesaid > 5(i#a) the #alue of any benefit or per)uisite( whether con#ertible into money or not( obtained by any representati#e assessee mentioned in clause (iii) or clause (i#) of sub0section (2) of section 24? or by any person on whose behalf or for whose benefit any income is recei#able by the representati#e assessee (such person being hereafter in this sub0clause referred to as the <beneficiary<) and any sum paid by the representati#e assessee in respect of any obligation which( but for such payment( would ha#e been payable by the beneficiary >9 5(xi) any sum recei#ed under a @eyman insurance policy including the sum allocated by way of bonus on such policy. /xplanation.=8or the purposes of this clause( the expression <@eyman insurance policy< shall ha#e the meaning assigned to it in the /xplanation to clause (2?A) of section 2? >9

"$PT/* III I, -./; B"I " A- ,-T 8-*. P$*T -8 T-T$L I, -./ Incomes not included in total income 5 lause (2) to lause (2?A)9 2?. In computing the total income of a pre#ious year of any person( any income falling within any of the following clauses shall not be included=

C65(2?A) any sum recei#ed under a life insurance policy( including the sum allocated by way of bonus on such policy( other than= (a) any sum recei#ed under sub0section (7) of section '?AA or sub0section (7) of section '?AA$> or (b) any sum recei#ed under a @eyman insurance policy> or (c) any sum recei#ed under an insurance policy issued on or after the 2st day of $pril( &??7( CC5but on or before the 72st day of .arch( &?2&9 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum C'5assured> or9+ C35(d) any sum recei#ed under an insurance policy issued on or after the 2st day of $pril( &?2& in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured9> Pro#ided that the pro#isions of '?5sub0clauses (c) and (d)9 )9 shall not apply to any sum recei#ed on the death of a person+ Pro#ided further that for the purpose of calculating the actual capital sum assured under '25sub0 clause (c)9( effect shall be gi#en to the CD5/xplanation to sub0section (7) of section '? or the /xplanation to sub0section (&$) of section ''( as the case may be9. '&5/xplanation 2.=8or the purposes of this clause( <@eyman insurance policy< means a life insurance policy taken by a person on the life of another person who is or was the employee of the first0mentioned person or is or was connected in any manner whatsoe#er with the business of the first0mentioned person> /xplanation &.=8or the purposes of sub0clause (d)( the expression <actual capital sum assured< shall ha#e the meaning assigned to it in the /xplanation to sub0section (7$) of section '? >99 A.=Profits and gains of business or profession Profits and gains of business or profession. A.=Profits and gains of business or profession Profits and gains of business or profession.

&'. The following income shall be chargeable to income0tax under the head <Profits and gains of business or profession<(= 5(#i) any sum recei#ed under a @eyman insurance policy including the sum allocated by way of bonus on such policy. /xplanation.=8or the purposes of this clause( the expression <@eyman insurance policy< shall ha#e the meaning assigned to it in clause (2?A) of section 2?.9 Income from other sources. D4. (2) Income of e#ery kind which is not to be excluded from the total income under this $ct shall be chargeable to income0tax under the head <Income from other sources<( if it is not chargeable to income0tax under any of the heads specified in section 26( items $ to /. (&) In particular( and without preEudice to the generality of the pro#isions of sub0section (2)( the following incomes( shall be chargeable to income0tax under the head <Income from other sources<( namely += (i) xx 5(i#) income referred to in sub0clause (xi) of clause (&6) of section &( if such income is not chargeable to income0tax under the head <Profits and gains of business or profession< or under the head <;alaries<>9 5Aeduction in respect of maintenance including medical treatment of a dependant who is a person with disability. '?AA. (2)xxxx (7) If the dependant( being a person with disability( predeceases the indi#idual or the member of the "indu undi#ided family referred to in sub0section (&)( an amount e)ual to the amount paid or deposited under clause (b) of sub0section (2) shall be deemed to be the income of the assessee of the pre#ious year in which such amount is recei#ed by the assessee and shall accordingly be chargeable to tax as the income of that pre#ious year. 25Aeduction in respect of life insurance premia( deferred annuity( contributions to pro#ident fund( subscription to certain e)uity shares or debentures( etc. '? . (2)

(7) The pro#isions of sub0section (&) shall apply only to so much of any premium or other payment made on an 35insurance policy( other than a contract for a deferred annuity( issued on or before the 72st day of .arch( &?2&9 as is not in excess of twenty per cent of the actual capital sum assured. /xplanation.=In calculating any such actual capital sum assured( no account shall be taken= (i) of the #alue of any premiums agreed to be returned( or (ii) of any benefit by way of bonus or otherwise o#er and abo#e the sum actually assured( which is to be or may be recei#ed under the policy by any person. 2?5(7$) The pro#isions of sub0section (&) shall apply only to so much of any premium or other payment made on an insurance policy( other than a contract for a deferred annuity( issued on or after the 2st day of $pril( &?2& as is not in excess of ten per cent of the actual capital sum assured. /xplanation.=8or the purposes of this sub0section( <actual capital sum assured< in relation to a life insurance policy shall mean the minimum amount assured under the policy on happening of the insured e#ent at any time during the term of the policy( not taking into account= (i) the #alue of any premium agreed to be returned> or (ii) any benefit by way of bonus or otherwise o#er and abo#e the sum actually assured( which is to be or may be recei#ed under the policy by any person.9 *ebate on life insurance premia( contribution to pro#ident fund( etc. ''. 25 &?5(&$) The pro#isions of sub0section (&) shall apply only to so much of any premium or other payment made on an insurance policy other than a contract for a deferred annuity as is not in excess of twenty per cent of the actual capital sum assured. /xplanation.=In calculating any such actual capital sum( no account shall be taken= (i) of the #alue of any premiums agreed to be returned( or (ii) of any benefit by way of bonus or otherwise o#er and abo#e the sum actually assured( which is to be( or( may be( recei#ed under the policy by any person.9

*ele#ant ircular0 extracxt from

ircular

8rom &7? IT* 2& (;t.) rele#ant para 26 is at page &?0&2 .!.A.T. irculars ircular ,o.C4&( dated 2'th 8ebruary( 233'. ;ubEect + 8inance (,o. &) $ct( 2334 F /xplanatory ,otes on pro#isions relating to Airect Taxes. Taxation of a sum recei#ed under the keyman insurance policy 26.2 $ @eyman Insurance Policy of the Life Insurance orporation of India( etc.( pro#ides for an insurance policy taken by a business organization or a professional organization on the life on an employee( in order to protect the business against the financial loss( which may occur from the employeeGs premature death. The H@eymanI is an employee or a director( whose ser#ices are percei#ed to ha#e a significant effect on the profitability of the business. The premium is paid by the employer. 26.& There were some doubts on the taxability of the income including bonus( etc.( from such policy and also regarding the treatment of the premium paid F whether it should be allowed as a capital expenditure or as a re#enue expenditure. The $ct( therefore( lays down the tax treatment of the @eyman Insurance Policy. 26.7 lause (2?A) of section 2? of the Income0tax $ct exempts certain income from tax. The $ct amends clause (2?A) of section 2? to exclude any sum recei#ed under a @eyman Insurance Policy including the sum allocated by way of bonus on such policy for this purpose. 26.6 The $ct also lays down that the sums recei#ed by the said organization on such policies( be taxed as business profits > the surrender #alue of the policy( endorsed in fa#our of the employee (@eyman)( or the sum recei#ed by him at the time of retirement be taken as Hprofits in lieu of salaryI for tax purposes> and in case of other persons ha#ing no employer0employee relationship( the surrender #alue of the policy or the sum recei#ed under the policy be taken as income from other sources and taxed accordingly. The premium paid on the @eyman Insurance Policy is allowed as business expenditure. taxmanagementindia.com 26.D The amendments take effect from the lst day of -ctober( 2334. 5;ection 7( 6( '( 2? and &29 8rom the Judgment of !ombay "igh ourt in case of IT #. !. ,. /xports

&?2? (7) T.I 2'4 0 !-.!$: "IK" -L*T M @eyman Insurance Policy for section 2?(2?A) is not confined to a policy taken by a person on life of an employee( but also extends to an insurance policy taken with respect to life of another who is connected in any manner whatsoe#er with business of subscriber There is no rational basis to confine allowability of expenditure incurred on premium paid towards a @eyman Insurance policy only to a situation where policy is in respect of life of an employee "IK" -L*T -8 !-.!$: IT #. !. ,. /xports IT$ ,o. &C26 of &??3 .arch 72( &?2? */L/N$,T portion with high lights+ OO OO OO OO OO OO OO OO OO OO OO OO

D. The effect of lause 2? PA is that a sum recei#ed under a life insurance policy is not to be included in computing the total income of any person. "owe#er( a sum recei#ed under a @eyman Insurance Policy forms a part of the total income and is liable to be offered to tax. 8or the purposes of lause 2?A( a @eyman 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 whatsoe#er with the business of the subscriber to the policy. In other words( a @eyman Insurance Policy for lause 2?A 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 whatsoe#er with the business of the subscriber.

4. The entral !oard of Airect Taxes has issued a circular on 2'th 8ebruary( 233' ( ircular C4&) which clarifies the scope and purpose of the pro#ision. Paragraph 26.2 of the circular states thus + H26.2 $ @eyman Insurance Policy of the Life Insurance orporation of India( etc.( pro#ides 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 Gs premature death. The H@eyman I is an employee or a director( whose ser#ices are percei#ed to ha#e a significant effect on the profitability of the business. The premium is paid by the employer.I C. The ircular notes that there were certain doubts on the taxability of the income( including bonus( recei#ed from such policies and as regards whether the premium paid should be allowed as capital or as re#enue expenditure. The circular clarifies that the $ct lays down the tax treatment for a @eyman Insurance Policy. The circular clarifies that the premium paid on a @eyman Insurance Policy is allowable as business expenditure. 3. The effect of ;ection 2? (2? PA) is that monies which are recei#ed under a life insurance policy are not included in the computation of the total income of a person for a pre#ious year. "owe#er( any sum recei#ed under a @eyman Insurance Policy is to be reckoned while computing total income. 8or that purpose( a @eyman 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 whatsoe#er with the business of the subscriber. The words His or was connected in any manner whatsoe#er with the business I of the subscriber are wider that what would be subsumed under a contract of employment. The latter part makes it clear that a @eyman Insurance Policy for the purposes of lause 2? PA is not confined to a situation where there is a contract of employment. lause 2? PA relates to the treatment for the purpose of taxation of moneys recei#ed under an insurance policy. In this appeal( the ourt has to determine the )uestion of expenditure incurred towards the payment of insurance premium on a @eyman Insurance Policy. The circular which has been issued by the entral !oard of Airect Taxes clarifies the position by stipulating that the premium paid for a @eyman Insurance Policy is allowable as business expenditure. In the present case( on the )uestion whether the premium which was paid by the firm could ha#e 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 obEect and purpose of a @eyman 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. $ @eyman 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 exclusi#ely for the purposes of business. Araft explanatory letter to the $- or other authorities about claim for keymen insurance policies+ *eg. + @eymen Insurance Policies F about allowability of premium paid by assessee The policies on life of key men (in our case partners % Airector% executi#es) of the firm% company ) co#er life risk of key men who are associated with the firm % company in its business as main pillars of business. In case of unfortunate e#ent of death of life of co#ered key man the firm % company and %or the concerned key man will get insurance money. This will help the firm to face difficulties( which it may otherwise face in case of sudden death of any key man. "a#ing key menGs policies pro#ide financial stability and key manpower stability. These are #ery important for long0term stability and good will of business and confidence of customers (suppliers( ser#ice pro#iders and employees of the firm% company. Therefore( the premium paid for such policies is in the nature of Qinsurance premiumG incurred in the normal course of business of the firm% company. 2) The expenses are on account of insurance premium. &) The premium paid is not a personal expense of the firm % company and it is also not a capital expenditure F it is recurring expense to get co#er of risks. 7) @eymanGs insurance policies are taken on life of #arious keymen of the firm% company to reduce risks and financial uncertainties which may caused due to death of key men of the firm% company. Thus( the expenses on this account is wholly and exclusi#ely incurred for the purpose of business. 6) In ircular ,o.C4&( dated 2'th 8ebruary( 233' issued by the !AT in para 26.6 it is stated that H The premium paid on the @eyman Insurance Policy is allowed as business expenditure.I

*ele#ant para 26 of the circular which was issued in relation to key menGs insurance premium0 taxability of insurance money and allowability of premium is attached. This is reported in &7? IT* 2& (;t.) rele#ant para 26 is at page &?0&2 The abo#e circular is fully applicable in our case and it is also binding. In #iew of the same we re)uest your honor to kindly allow keymens insurance premium. Be also rely on Eudgment of the !ombay "igh ourt in case of IT #. !. ,. /xports &?2? (7) T.I 2'4 0 !-.!$: "IK" -L*T a copy of which is also attached. Be hope the abo#e explanation will be found satisfactory. Thanks. @eymens policies are financing and tax deferment tools+ It can be said that keymens insurance policies are suitable tools for deferment of tax liability. !ecause keymens policies are generally proposed when there is good profit in an organization. These policies also pro#ide facility to obtain loan against policy based on its surrender #alue. Therefore( in case of need the organization can also take loan and such loan being secured loan carry lower rate of interest. Thus some financial le#erage can be pro#ided. In case at some time business has problem( there is loss( and financial position is tight due to which it is not possible to pay premium and funds are re)uired( then the policy can be surrendered to realize funds. This should be after due consideration of all other options a#ailable and loss on surrender of policy. ,ot to treat as apital /xpenditure or in#estment+ The premium cannot be considered as in#estment or capital expenditure for the purpose of Income0tax $ct. This is because if the sum paid is considered as a capital expenditure or an in#estment then the following conse)uences will take place. a) The amounts paid will be disallowed and therefore there will be no sa#ing of tax. b) The amount recei#ed on the policy including bonus or other profit shall be treated as income u%s &' although( the payments made were not allowed. Therefore( this will amount to double taxation. Therefore( it is clear that the legislature ha#e considered taxability of sums recei#ed as income and payment will be allowable.

The purpose of amendment of section &'+ To curb the chances of claim of premium as business expenditure and to claim money recei#ed on policy as capital receipts( #arious amendments were made in the $ct by the 8inance ( ,o.&) $ct( 2334. The clause (#i) in section &' was inserted by the 8inance (,o.&)( $ct 2334 w.e.f. from l.2?.34. $t the same time( section 2C was also amended whereby it was pro#ided in section 2C(7)(ii) that any sum recei#ed under a keymanGs insurance policy including the sum allocated by way of bonus on such policy shall be considered as profits in lieu of salary. ;ection 2? (2?A) was also amended to pro#ide that sum recei#ed under key manGs insurance policy shall not be tax free. Therefore( if any amount under keymanGs policy is recei#ed by the employee then it will be considered as income of employee under the head income from salaries and if the amount is recei#ed by the employer or any other person who is not employee then the amount recei#ed by employer or such other person shall be considered as business income of the employer or such other person u%s &'. In case the amount is not so considered( then the same will be considered as income under head Qother sourcesG. $nother way to look at @.I @eymanGs premium as in#estment+ ;uppose accounting policy to treat premium paid as in#estment is adopted( in that case premium paid can be considered as in#estments( thereby increasing book profit. ;imilarly income earned and accumulated on @.I can be considered as income and debited to in#estment account. !y this way financial position of the company shall impro#e as reser#es will be on higher side. In income tax return the premium can be claimed and money recei#ed can be considered as income in the year of receipt as per ;. &'. "owe#er( in that case the $ssessing -fficer may draw ad#erse inference in #iew of accounting policy adopted by the company. $lthough the circular of the !oard is binding on the re#enue authorities( and it being a beneficial circular has to be followed. "owe#er( in that case scope of dispute shall increase. $nother aspect to be considered is that in case of treating premium as in#estment( the book profit of company will increase( therefore there can be higher liability of .$T u%s 22DJ!. BUDGET 2013 AMENDMENT:

If the p !"#$ "% & t '%%"(&e)* '!! '+ ,&t% -e#e".e) /$ the e+p! $e- "% t'0e) ,&)e- PGBP 1%'+e '% /ef -e23 1P- f"t '&) ('"&% f- + B,%"&e%%4p- fe%%" &2 If the p !"#$ "% '%%"(&e)* "t "% t'0'/!e "& the h'&)% f the e+p! $ee ,&)e- I&# +e f- + S'!'-$3 If the p !"#$ "% '%%"(&e) '&) the e+p! $ee )"e%* the '+ ,&t "% -e#e".e) /$ the !e('! he"- f the e+p! $ee '&) "% t'0e) '% I&# +e f- + Othe- S ,-#e%3

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