ARYA ELECTRONICS AND CONTROL (P) LTD,PUNE vs. DCIT, CIRCLE 1(1), PUNE, PMT BUILDING SWARGATE

On the facts and Circumstances of the case and in law the LD AO has erred in assessing the total income at Rs.1,07,38,877 as against the returned income of Rs.86,38,877. Disallowance of Insurance Premium on Employer Long Term Reward Policy for following:

On the facts and in the circumstances of the case and in law the Ld. Commissioner of Income Tax (Appeals) - NFAC, Delhi has erred in upholding the disallowance made by the LD Assessing Officer of the expenditure of Rs. 21 lakhs claimed by the assessee towards Employer Long Term Reward Policy

On the facts and in the circumstances of the case and in law the Ld. Commissioner of Income Tax (Appeals) - NFAC, Delhi has not considered the fact that the expenditure incurred was towards employee benefits and within the ambit of Employer Long Term Reward Program for Employee which is incurred for furtherance of business.

On the facts and in the circumstances of the case and in law the Ld. Commissioner of Income Tax (Appeals) -NFAC, Delhi is not justified in opining that the assessee has not included no other employees of the assessee in the scheme, hence, it is exclusively for Directors and therefore, not an admissible expenditure u/s 37 of the Income Tax Act, 1961. 5. On the facts and in the circumstances of the case and in law the Ld. Commissioner of Income Tax (Appeals) - NFAC, Delhi is not justified in concluding that as the assessee has not considered the insurance premium as perquisites in the hands of the concerned Directors, no deduction can be granted for insurance premiums paid by the assessee.

The LD AO and Ld CIT (A) have disregarded all the settled legal principles for allowability of business expenditure incurred for welfare of employees. Validity of Notice

On the facts and in the circumstances of the case and in law the notice u/s 148 of the Act is not accompanied with an approval u/s 151 of the Income Tax Act, 1961. In view of this, the notice may kindly be held as bad in law and resultantly whole reassessment proceedings may kindly be held as invalid and bad in law.

On the facts and in the circumstances of the case and in law in view of the Ground No. 7 the material on record is absent to ascertain the validity of the approval. Initiation of penalty proceedings u/s 271(1)(c)

On the facts and in the circumstances of the case and in law the Ld. AO has erred in initiating the penalty proceedings u/s 271(1)(c) of the Income Tax Act. 1961 for furnishing inaccurate particulars of income. Levy of consequential interest

On the facts and in the circumstances of the case and in law the Ld. AO has erred in levying interest u/s 234A, 2348 & 23C of the Income Tax Act, 1961. The assessee prays to add, amend, alter, withdraw or delete the grounds of appeal raised above during the appellate proceedings in the interest of natural justice.

1 Assessee has also raised additional grounds of appeal which reads as under :

On the facts and circumstances of the case and in law the proceeding U/s 147 is bad in law vis-à-vis the disallowance of claim of insurance premium of Rs. 21,00,000 on "Employee Long-Term Reward Policy". The claim was allowed in the first year ie. AY 2012- 13 in scrutiny assessment after examining the claim. There being no change in the facts and law the Ld. AO erred in disallowing the claim which amounts to change of opinion. The reopening may kindly be held as bad in law following the judicial precedents.”

The assessee has stated that the action invoked of reopening of the assessments under section 147 for A.Y. 2013-14, 2014-15 and 2015-16 is a result of "change of opinion" which is not permissible in law based on the fact that no such issue was raised in the assessment proceedings for the AY 2012-13. However, it is well settled that the principle of res judicata or estoppel by record, which applies to decisions of Civil Courts, has no application to decisions of IT Authorities. As a general rule, the principle of res judicata is not applicable to decisions of IT Authorities and it is for this reason that an assessment for a particular year is final and conclusive between the parties only in relation to that year. Decisions given in assessment for an earlier year are not binding either on the assessee or the Department in a subsequent year.

Further, the judicial pronouncements cited by the assessee are not applicable to the extant case since the facts of the cases are different. In CIT v. Associated Electrical Industries (India) (Pvt) Ltd. (1986) 157 ITR 72 (SC), the assessee had treated the payment as part of the salary and had also deducted TDS. However, in the present case, the assessee has stated that the payment of insurance premia could not be called perquisites taxable under S. 1/(2) and any of its clauses as the scheme benefits cannot be called free of cost or any profit in lieu of salary. The decisions in Hon'ble CIT v. Chandulal Keshavlci (1960) 38 ITR 601 (SC) and CIT v. Royal Calcutta Turf Club (1961) 41 ITR 414 (SC) are also not applicable since the benefit to the third party is not incidental in this case. The Arya Electronics & Control (Pvt.) Ltd.

It is also to be noted here that policies have been taken out by the company only for the three directors and no other employee. Thus, it is clear that the intention was to provide undue benefits to only the directors who are the decision makers in the company and no such benefit was provided to any other employee. Thus, the assessee's argument that the sole intention of the scheme was to promote wellbeing of the employees and to promote loyalty is not justified.

From the careful perusal of the Insurance policy documents under consideration, submitted by the assessee company with regard to the Long Term Reward (Insurance) of Rs. 21,00,000/- premium claimed to be paid by the company, in the case of Mrs Pratibha Prasad Bhagwat and Mrs Manjiri Shirish Puntambekar, following has been seen: POLICY TAKEN IN THE NAME OF PRATIBHA PRASAD BHAGWAT

As per Insurance policy document i.e. confirmation of assignment letter dated 19.04.2012 of HDFC (HDFC SL ProGrowth Flexi), pages policy document, even after the confirmation of assignment, the LIFE ASSURED is Mrs Pratibha Prasad Bhagwat and NOMINEE is Mr Prasad Mahadeo Bhagwat ie, the assessee company is not a beneficiary at all. The ultimate beneficiary in the case of any mis- happening to the Policy Holder is the Nominee Shri Prasad Mahadeo Bhagwat only. Hence, keeping this fact under consideration, it is proved that the policy is purchased by Mrs Pratibha Prasad Bhagwat in her individual capacity and not by the assessee company with undisputed nominee/beneficiary Mr Prasad Mahadeo Bhagwat and not the assessee company and hence certainly not a "Keyman Insurance Policy" taken by the assessee company for the benefit of keyman.

From the careful perusal of the policy Proposal form duly filled in & signed by Smt Pratibha Prasad Bhagwat following is observed: i. On the face of proposal form, the policy is mentioned as "UNIT LINKED PROPOSAL FORM" at pages policy document, which proved that the policy is not a Life Insurance policy. ii. In the column (appears on policy document pages proposal form), the nominee is Prasad Mahadeo Bhagwat (Husband of Life assured Smt Pratibha Prasad Bhagwat). Further, on pages policy document, the signature is done by Smt Pratibha Prasad Bhagwat in the column of "signature/Thumb impression of the life to be assured and the column "signature/Thumb Impression of proposed policyholder (only if different from the life to be assured)" is kept blank. Hence, keeping this fact under consideration, it is proved that neither the proposer nor the ultimate beneficiary of the Arya Electronics & Control (Pvt.) Ltd.

Aggrieved assessee filed appeal before ld.CIT(A) but failed to succeed. Now the assessee has approached the Tribunal assailing the impugned order passed by ld.CIT(A).

Ld. Counsel for the assessee vehemently argued drawing the attention of the Bench to the written submissions which reads as follows :

In the above refereed matters, the issue is only allowability of insurance premium u/s 37 on the insurance policy issued by HDFC Standard Life Insurance Company called as "Employer Employee Long Term Reward Program for employees" (for herein after referred as insurance policy). Filing of documents on various dates

In the preceding hearings the appellant has filed common factual paper book for all the above three appeals containing pages from 1- 611 filed on 14.10.2025. The appellant has filed legal paper book from page no. 612-653, fact sheet from page no. 654-666 and consolidated appeal chart. Then the appellant has filed additional grounds of appeal on 09.12.2025. Arya Electronics & Control (Pvt.) Ltd.

The Ld. DR has also submitted his return submission vide his note dated 11.12.2025 for the hearing which was scheduled on 08.01.2026. Proceeding on 08.01.2026

On 08.01.2026 the Hon'ble Bench has noted that the appeal for AY 2016-17, during the course of which the issue was first time raised by the department for the impugned disallowance of insurance premium on the insurance policy and based on that the assessment for AY 203-14 to AY 2015-16 was reopened, the matter is still pending before the Ld. CIT(A) and therefore, the matter was adjourned to 30.03.2026. Submission of the appellant through this supplementary note

At the outset the appellant submits that additional ground no. 12 is to be taken up first for the adjudication.

As per this additional ground it is submitted that the disputed premium of Rs. 21,00,000 was paid for the first time in the AY 2012-

Your Honour's attention is invited to the audited accounts of AY 2012-13 on page no. 247-248 of the paper book where under schedule no. 9 giving the particulars of "Employee Benefits Expenses" the company has debited Rs. 21,00,000 as expenses. During the scrutiny assessment of AY 2012-13, the issue of deductibility of said expenses was raised by Ld. AO. The appellant has submitted reply to the question raised by Ld. AO which can be referred at page no. 244 of the factual paper book. Vide this submission dated 29.10.2014, the appellant has submitted justification for allowability of the said claim. The Ld. AO has accepted the claim and passed assessment order u/s 143(3) dated 13.02.2015 which is enclosed in the factual paper book at page no. 235-243. From the assessment order it can be seen that the Ld. AO has made the disallowance only u/s 14A and has not made any disallowance on the impugned claim which is disputed in the present appeal.

It is submitted that if in the preceding year in the same set of facts the claim was allowed in the scrutiny assessment then in AY 2013-14 to AY 2015-16 disallowance by resorting to section 147 amounts to change of opinion and the reassessment is unjustified. If this ground is adjudicated in favor of the assesse then all other issues in the impugned appeals will be academic.

The Ld. AO in the assessment order for AY 2013-14 to AY 2015- 16 while recording the reasons for reopening is only referring to claim of Rs. 21,00,000 starting from AY 2013-14. While the material on record indicates that the department has scrutinized the claim in AY 2012-13. Therefore, the reasons recorded ignored that similar deduction was claimed, questioned and then allowed in AY 2012-

In subsequent year AY 2013-14 to AY 2015-16 the succeeding Ld. AO was of the view that this deduction is not allowable. This fact shows there was a difference of opinion among the two officers while deciding assesses eligibility to claim a particular deduction when the facts and law remained unchanged. From this aspect, it will be appreciated that the difference of opinion among the Ld. AO's cannot be causa-causance for assuming juri iction by issuing notice u/s 148. 9. Without prejudice to the above the following contentions may kindly be considered on merits of the case. 10.The Ld. AO has held that for the following reasons the claim is not allowable:

The principal of res-judicata/estoppel by record is not applicable to the decisions of IT authorities.

The decisions referred by the assessee are not applicable as the benefit to the third party is not incidental in this case.

The assessee has not considered the said payment of insurance premium as a perquisites u/s 17(2) or profits in lieu of salary.

The intention was to provide benefit to the directors only and no other employees are covered under the scheme.

The said policy is not the Keyman Insurance Policy.

The company is neither the proposer of the policy nor the beneficiary.

The policy will be reassigned to the employee if the minimum lock in period is served.

The policy will be reassigned in case of termination of employment other then death as a terminal benefits and it will be at the sole discretion of the company.

In case of the death during the minimum lock in period the maturity proceeds will be paid to the legal heirs of the employee directors.

During the minimum lock in period claim arising due to critical illness the proceeds will be paid to the employee directors.

During the lock in period the policy cannot be surrendered or pledged or withdrawn.

The Ld. AO has concluded that in view of the various conditions and explanations and the manner in which the policy is framed will not going to benefit to the assessee company under any circumstances and therefore, the Ld. AO has disallowed the claim.

Absence of Accrual or Vested Right: In the present context, the benefit of the policy becomes 'due' or 'allowed to the employee only upon the successful completion of a five-year lock-in period of employment. Prior to this event, no benefit accrues to the employee. Furthermore, the premium is not paid to the employee, but rather to the insurance company under a specific corporate policy contract. The taxable event will only crystallize after the employee fulfils the five-year service condition.

The Test of Enforceability: The fundamental principle of taxation is that income must be earned; it cannot be merely presumed. Unless the right to receive an income is firmly established, creating a tax charge is premature. This can be tested through a practical hypothesis: if the concerned employee were to resign today, could they legally enforce payment or claim the benefits of the said policy from the company? Based on the terms of the policy, the answer is clearly 'No'. Because the employee holds no enforceable right over the policy during the lock-in period, the Ld. AO is entirely unjustified in treating the premium as a perquisite under Section 17(2). Revenue has no case if the benefit cannot be legally enforced by the employee. 14.Reliance on Judicial Precedent: In support of the above contentions, the appellant heavily relies on the ratio laid down by the Hon'ble Supreme Court in the landmark case of E.D. Sassoon & Co. Ltd. Vs. CIT [1954] 26 ITR 27 (SC). Your Honour will appreciate the settled legal principle from this judgement: unless the right to receive income is established, the income is not chargeable to tax. As the employee's right to receive the policy benefits has not yet come into existence, the issue must be decided in favor of the assessee." Principal of consistency and res-judicata 15.It is submitted that baring these 3 assessment years and AY 2016-17 which is pending before Hon'ble CIT(A), NFAC, from AY 2017-18 till AY 2025-26 the returned income has been accepted u/s 143(1). The company has continued the impugned policy and has been paying the premium. The claim has been allowed as the returns are accepted u/s 143(1). Following the principal of Arya Electronics & Control (Pvt.) Ltd.

Without prejudice it is submitted that in certain circumstances the company is the beneficiary especially if the lock in period is not served by the employee director. Only in case of serving minimum period, death of employee director or in case of terminal benefits at the discretion of the company, the employee director will be beneficiary. 19.In view of this it is submitted that the claim is deductible u/s 37. Rejoinder to note submitted by Ld. DR on 11.12.2025 for the hearing which was scheduled on 08.01.2026. 20. The Ld. DR after discussing the facts and features of the policy has relied upon following two decisions:

Allu Arvind Babu vs ACIT Circle 20(1) Chennai 122 Taxmann.com 66 (Madras High Court). This decision is not relevant in the facts of the case. In this decision the issue before the Hon'ble high Court of Madras was whether the surrender value of assigned Keyman insurance Policy which was added in the hands of appellant and held as not exempt u/s 10(10D) of the act. Therefore, this issue does not deal with the allowability of expenditure u/s 37. In view of this the reliance placed by the Ld. DR is misplaced and may kindly be rejected.

The second decision relied upon by the Ld. DR is of Hon'ble ITAT of Ahmedabad in case of Mahendra Patel Builders Pvt. Ltd. vs DCIT (2025) 177 Taxmann.com 302 (Ahmedabad). The Tribunal has held as follows: a. That the insurance premium was paid for endowment life insurance policy which was taken in the name of directors and family members. b. The Ld. AO has disallowed expenditure u/s 37(i) as the policies were issued in the personal name of the directors. The Ld. CIT(A) has confirmed disallowance that the policy was not Keyman Insurance Policy and the assesse has failed to establish that the expenditure was incurred wholly and exclusively for the purpose of business. c. The Hon'ble Tribunal has held as under: (i) The authorities cannot reject expenditure solely on the basis of terminology and the form used in the insurance documentation. The weightage has to be given on the substance of the transaction and underlying commercial rational. The purpose of the policy needs to be considered. (ii) The Hon'ble Tribunal has referred to CBDT circular no. 762 dated 18.02.1998, where it was clarified that premium paid on Keyman Insurance Policy is allowable u/s 37(1). (iii) It was undisputed that insured persons were directors and were engaged in core management and affairs of the company. (iv) The policy was taken to safeguard the potential financial loss arising from untimely death of key personal. It was held that just because the policies were issued on the lives of the director purely in their capacity as key persons. In such circumstances it does not render the expenditure as personal expenditure. (v) It was held that there is the employee-employer relationship. For business protection there is no statutory bar to treat the premium paid as deductible as expenses u/s 37(1). (vi) The premium is paid to mitigate the business risk and not to provide any personal benefits. (vii) The type of policy is not a bar to treat it as Keyman Insurance Policy for the purpose of section 37(1). The purpose and structure of policy is important. (viii) The substance over form approach should be adopted. If the company is the proposer, the beneficiary and the policies on the life of person whose services integral to the business the expenditure qualifies for deduction u/s 37(1). (ix) The Ld. AO's objection that the assesse company is 100% owned by directors and their family members and therefore, the insurance premium is for personal purpose and not for business is rejected. It was held that the company is a distinct legal entity separate from shareholders and directors and therefore, the claim cannot be disallowed. (x) The nomenclature in proposal forms are formalistic and technical and cannot override the commercial realities.

Without prejudice to the claim on merits barring this assessment years pending before Hon'ble Tribunal and one year before the Ld. CIT(A), NFAC in all subsequent years the claim has been accepted. Details of intimations u/s 143(1) which are available on Income tax portal are as follows: Sr.No. AY Returned Assessed Date of Income Income Intimation u/s.143(1) u/s.143(1) 1. 2017-18 3,42,040 3,42,040 07/07/2018 2. 2018-19 25,65,550 Note 1 3. 2019-20 59,24,780 59,24,780 27/11/2019 4. 2020-21 48,04,400 Note 2 5. 2021-22 -5,15,820 -5,15,820 14/06/2022 6. 2022-23 4,66,01,430 4,66,01,430 05/11/2023 7. 2023-24 93,29,800 93,29,800 15/11/2023 8. 2024-25 3,18,52,460 3,18,52,460 19/12/2025 9. 2025-26 60,48,510 60,48,510 12/02/2026

Intimation u/s143(1) is unable to download from Income Tax Portal.

Intimation u/s 143(1) is not available/visible on the Income Tax Portal.

In view of this the appeals may kindly be allowed.”

1 Based on the above findings, the AO formed reason to believe and after recording satisfaction and after obtaining necessary sanction from the competent authority i.e. the Pr.CIT, notice u/s 148 of the Act was issued to the appellant. The appellant filed its Arya Electronics & Control (Pvt.) Ltd.

1 The contention of the appellant has lacs. First of all, the policy is not a Keyman Insurance Policy and same has been admitted by the appellant during the assessment proceedings before the AO. The appellant company had taken 3 polices in the name of three directors for an annual premium of Rs.7,00,000/- each totaling to Rs.21,00,000/- and debited the same in the profit & loss account as business expenditure wholly and exclusively incurred for the purpose of business. No other employees of the appellant company has been provided or included in the Employer Employee Reward Policies under Long term Reward Programme. This act itself establishes he intension of the appellant company to provide undue benefits to its directors and no other employees. Further the premium paid is not a business expenditure of the appellant company particularly when the appellant does not consider it as a perquisite in the hands of the concerned director. The AO had thoroughly examined the policy documents and the infirmities noticed/observed by him are discussed in para 7, page 7 to 10 of the assessment order. In my considered view, the AO is justified in disallowing the claim of the appellant of Rs.21,00,000/-. Hence, the grounds of appeal No.1 & 2 are dismissed.

Ground No.3 & 4 relate to initiation of proceedings u/s 147 r.w.s. 148 of the Act. During the appellate proceedings, the appellant has argued that all material facts where fully and truly disclosed by the appellant and hence the initiation of proceedings u/s 147/148 of the Act is without juri iction. In the instance case, no scrutiny assessment was completed u/s 143(3) of the Act prior to initiating the proceedings u/s 147 of the Act. The return filed by the appellant was processed u/s 143(1) of the Act. Therefore, the contention of the appellant that all material facts where fully and truly disclosed by the appellant and hence the initiation of proceedings u/s 147/148 of the Act is without juri iction, is without any merits. The AO had also issued notice u/s 148 of the Act after obtaining necessary approval / sanction from the competent authority i.e Pr.CIT concerned. The appellant also challenged the reopening before the AO during the initiation of proceedings u/s 147 of the Act, which was disposed off by the AO. Therefore, there can be no question of not giving approval/giving approval in a mechanical way. The appellant did not file any evidence to controvert this fact, or to substantiate that the notice was issued prior to the obtaining of approval of the competent authority.

1 It is also observed from the assessment order that in the case at hand after receiving the notice under section 148 of the Act, the compliance was not made to the said notice within the stipulated time but made compliance to the notices issued u/s 142(1) of the Act. It is also important to note that the AO has duly disposed off the objections raised by the appellant on reasons to believe through a detailed order thereby complying with the requirements as stipulated by the judgement of Hon'ble Supreme Court in the case of G.K.N. Drive Shaft (SC). In view of these facts, I find that these grounds do not have any merit and therefore, grounds No. 3 & 4 are dismissed.”

As per the Insurance policy document (only proposal acceptance letter dated 26.09.2012 and Confirmation of assignment letter dated 18.09.2012 submitted out of 24 pages full policy document) of Mrs Manjiri Shishir Puntambekar, the policy posed to be assigned to M/s Arya Electronics & Controls Pvt Ltd. However, on perusal of terms and conditions of HDFC Confirmation of Assignment" letter dated 18.09.2012, it is clearly written that "Any existing nomination stands cancelled as a result of this Assignment except for policies covered under Employer-Employee-Long Term reward program for employees". Hence, In view of this condition incorporated by HDFC Life in its confirmation of assignment letter that "Any existing nomination for employees", even after assignment in favour of assessee company, the ultimate & undisputable beneficiary remains unchanged i.e. either the LIFE ASSURED Mrs Manjiri Shishir Puntambekar or NOMINEE in the case claim arises due to any mis- happening to the Life assured as the policy is taken under "Employer- Employee-Long Term reward program for employees".

The policy is the Unit Linked Insurance plan and not a Term Insurance plan. Hence, the conditions/explanation as per points (i) to (viii) are designed/framed in such a manner that the policy benefits will not going to benefit the assessee company under any circumstances.