In a recent circular, the Central Board of Direct Taxes (CBDT) clarified that the premium paid by the firm on the keyman insurance policy of a partner is an admissible expenditure under section 37 of the Income Tax Act, 1961.
As per the CBDT Circular 18.02.1998, the premium paid on the keyman insurance policy is allowable as expenditure under the Act. However, there was a debate on the premium paid by the firm on the keyman insurance policy of a partner. The Officers frequently disallowed the same by observing that the same is not incurred for the purpose of business.
However, various High Courts, in their decisions, held that the same is allowable as business expenditure. Recently, the Punjab & Hariyana High Court,in the case of M/s Ramesh Steels, has clarified the same.
It is in the light of the High Court decisions, the CBDT has now confirmed that the premium paid by the firm on the keyman insurance policy of a partner is deductible from the total income of the Firm.
The circular states, “it is a settled position that in case of a Firm, premium paid by the Firm on the Keyman Insurance Policy of a partner, to safeguard the Firm against a disruption of the business, is an admissible expenditure under section 37 of the Income Tax Act.”
Read the full text of the circular below.
