Date:20/10/2008 URL: http://www.thehindu.com/2008/10/20/stories/2008102055381500.htm

Business

Treatment of partnership insurance

Ours is a partnership firm. To protect the interest of the firm on the untimely death of any of the partners while settling his account, an insurance policy for Rs. 1 lakh was taken in the name of each partner and the premium is being paid by the firm, which is claimed as an expenditure of the firm and allowed by the Department. The policy is also assigned in favour of the firm. The policies were taken in 1992 and during 2006 one of the partners expired and the policy amount of Rs. 2 lakh was received by the firm. From 1992 till the date of death we had paid Rs. 73,986 as premium on his policy. Please advice as to whether the firm is liable to tax on the policy amount of Rs. 2 lakh received or the net amount after adjusting the premium paid which has been allowed as expenditure in the assessment of the firm.

If the firm had taken a keyman insurance policy with the partnership firm being the beneficiary of the proceeds of the policy, there will be deduction available for the premium paid, but the proceeds will be taxable as an exception to the exemption for the proceeds of insurance policies under Sec. 10(10D). Since keyman insurance policy was recognised only from assessment year 1996-97, Sec. 10(10D) will have no application. The reader’s query will have to be answered with reference to the first principle. The beneficiaries of policy were not the partners, who had merely assigned the policy to the firm, which paid the premia, so that it cannot strictly be treated as a normal insurance policy in the light of what is understood as insurance for rebate under Sec. 88(8) and now deduction under Sec. 80C(8) as a policy taken on own life or life of spouse or child or in the case of Hindu joint family on the life of any member. Since deductions of premia paid were claimed and rightly allowed on the basis that the firm is the beneficiary of the policy taken to cover the business risk in losing a partner, the deduction was rightly allowed but the policy amount, when received on death or maturity, should be taxable as for keyman insurance policy. Though the gain for the firm is only the difference between premia paid (Rs. 73,986) and the amount of receipt of Rs. 2 lakh, so that this alone should be taxable, deduction of Rs. 73,986 is already allowed so that the entire amount of Rs. 2 lakh will be taxable, as otherwise Rs. 73,986 would amount to double deduction. If it had not been allowed as a deduction, only the difference would have been taxable.

S. RAJARATNAM