INCOME TAX ACT, 1961

--Business expenditure--Insurance premiumCompany paying premium for keyman insurance policy--Assessee had taken 'key man' policy for the employees/Directors of the assessee-company. After nursing these policies for sometime by paying premium thereupon, they were assigned to such employees/Directors receiving surrender value from them. Where after, for the remaining period of all those policies, the insurance premium were paid by the assignees. The AO took the view that since the expenditure incurred on the premia paid on the said keyman insurance policies was much more 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 the business purpose of the assessee-company. Therefore, the 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. Held: The expenditure incurred had to be tested on the touchstone of section 37 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 which may occur in the likely eventuality of premature death. Such an expenditure is treated as business expenditure by the department itself and recognized as such in Circular dt. 18-2-1998. The expenditure is to be seen at the time it was incurred. Merely because the policy was assigned after sometime would not mean that the expenditure incurred in the first instance would lose the flavour of it being 'business expenditure'.