Premium on keyman insurance policy is deductible even it's a pure life insurance policy

There is no rational basis to confine the allowability of the expenditure incurred on the premium paid towards keyman insurance policy only to a situation where the policy is in respect of the life of an employee. So long as a policy is an insurance policy, whether it involves a capital appreciation or is under any other investment scheme, it meets the tests laid down under section 10(10D). The requirement of pure insurance policy is something which is not laid down by the statute.

• The disputed issue was:

• Whether premium paid on Keyman insurance policy is deductible even if it is not a pure life insurance policy on life of another?

• The ITAT held as under:

(1) The keyman insurance policy is a defined concept and as long as it meets the requirements of this definition, the terminology given by the insurers have no relevance for the purposes of the Income Tax Act.

(2) So long as a policy is an insurance policy, whether it involves a capital appreciation or is under any other investment scheme, it meets the tests laid down under section 10(10D). The requirement of pure insurance policy is something which is not laid down by the statute.

(3) Following observations made, by Hon'ble Delhi High Court in case of CIT v. Rajan Nanda [2012] 18 taxmann.com 98 (Delhi) was relevant in this context:

 • "The object and purpose of a Keyman 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. A Keyman 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 exclusively for the purposes of business."

(4) What can be sold as a 'life insurance policy' taken by a business entity for its employee, former employee or any other person important for business of such an entity is between the insurance regulator and insurance service provider. However, once it has been sold as a life insurance policy on the keyman to the business, as long as it is in the nature of life insurance policy, whether pure life cover or term cover or a growth or guaranteed return policy, it is eligible for coverage of Section 10(10D).

(5) Respectfully following the esteemed views of Hon'ble Delhi High Court, stand of the authorities was to be rejected on this aspect of the matter. Thus, premium paid on keyman insurance policy was deductible
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