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Business
Partnership insurance — Tax implications
QUESTION: What is the treatment of the premium payable on the life of a partner on a partnership insurance policy taken by the firm?
ANSWER: In respect of partnership insurance, the Tribunal in ITO v Thakur Vaidyanatha Aiyar & Co. (1984) 7 ITD 9 (Bom.) had held that the amount payable as premia for the policy was deductible, but Gujarat High Court in CIT v Khodidas Motiram Panchal (1986) 161 ITR 99 (Guj.) denied the same, which recognising right to matured amount without tax in following words: ``We think that the contention that the expenditure is in the nature of capital expenditure is well-founded. By taking out these insurance policies, the assessee-firm desires to ensure the availability of liquid cash for payment to the legal representatives of the deceased partner in the event the surviving partners desire to continue the firm. When the share of the deceased partner is paid off, the shares of the surviving partners in the assets of the firm can be augmented.
What is, therefore, sought to be acquired is capital, that is, liquid cash needed for buying the share of the deceased partner by paying off his legal representatives. If the amount received from the insurance company on the demise of the partner is a capital asset like any other amount borrowed by the partnership firm from third parties, what the partnership firm expends for acquiring that capital asset can only be said to be capital expenditure within the meaning of Sec. 37(1) of the Act.
As pointed out earlier, the sole purpose of taking out these insurance policies was to secure liquid cash at the time it was needed to pay off the legal representatives of the deceased partner. If the amount paid by way of insurance premia is for securing this liquid cash, a capital asset, then the expenditure incurred therefor could only be said to be in the nature of capital expenditure. We are, therefore, of the opinion that the insurance premia was not deductible under Sec. 37(1) either''. Hence the position of law as to deductibility of premium is a matter on which there is yet no certainty either by way of formal circular or a provision in the statute as for insurance moneys received on maturity.
However, it is possible for partnership to go in for a Keyman insurance policy, so that there is no uncertainty as existing for partnership insurance, if the partners adopt Keyman insurance route. It has been clarified by the Life Insurance Corporation of India vide its reference ACTL/1729/4 dated July 24, 2000 that active partners could be treated as Keymen and that it should be open to the firm to subscribe to Keyman insurance policy subject to the following conditions:
``(a) The average turnover of the firm for the preceding three years must be more than Rs. 5 crores. For this purpose the last three years audited copies of balance sheet and profit and loss accounts are to be submitted.
(b) Since the firm cannot give certified copy of Board resolution, a supplementary partnership deed furnishing the name of the Keyman and the person authorised to complete the insurance proposals should also be submitted.
(c) The maximum sum assured will be limited to share capital of the Keyman plus proportionate amount of goodwill as being done in case of partnership insurance. Total goodwill of the firm will be total of last three years net profits''.
The law relating to deductibility of the premium on Keyman policy is settled as such premium is deductible even as clarified in Board's Circular No. 762 dated February 18, 1998 (1998) 230 ITR (St.) 12 at 20-21. The proceeds of the policy are taxable. Since Keyman insurance has some benefit in certain circumstances, notwithstanding the fact that it becomes assessable on maturity, the policies should probably attract better attention than what they have hitherto received, if proper publicity were available for them.
S. Rajaratnam
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