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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
O R D E R PER MAHAVIR SINGH, JM:
This appeal by the assessee arising out of the order of the CIT (A)-8, Mumbai in appeal No. CIT (A)-8/Cir.4/190/08-09 dated 25-09-2009. The Assessment was framed by the Addl.CIT Range 4(2), Mumbai for assessment year 2006-07 vide his order dated 22-12-2008 u/s 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The first issue in this appeal of the assessee is against the order of CIT (A) confirming the action of AO in computing disallowance of expenses relatable to exempt income by invoking the provision of Section 14A of the Act r.w. Rule 8D of the Income Tax Rules 1962 (hereinafter ‘the rules’). For this assessee has raised following ground No.1:-
“1) on the facts and in the circumstances of the case as well as in law learned CIT (A) has erred in upholding the action of the AO to compute disallowance U/s 14A r.w. Rule 8d. He has failed to appreciate that the said rule cannot be applied retrospectively for the Assessment Year in question.”
Brief facts leading to the above issue are that the assessee has earned exempted income under the head dividend amounting to Rs. 48,02,736/-. The assessee had debited expenses in the relation to this exempt income at Rs.2,40,137/-. The AO during the course of assessment proceedings made calculation for 8D of the Rules and accordingly, he computed the total disallowance at Rs 1,80,81,444/- and thereby disallowed a sum of Rs. 1,78,41,307/- after deducting the already disallowance made by assessee of Rs.2,40,137/-. Aggrieved, assessee preferred appeal before CIT (A), who also confirmed the action of the AO by observing that Rule 8D of the rules as brought out by Finance Act 2006, w.e.f. 1-04-2007 is mandatory and applies retrospectively. Aggrieved against the findings of CIT (A), assessee preferred second appeal before the Tribunal on this issue.
At the outset, learned Counsel for the assessee stated that the applicability of rule 8 D of the Rule is held to be prospective by the Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. Vs. DCIT (2010) 328 ITR 81(Bom). Accordingly, he pleaded that a reasonable disallowance of 5 % of the exempted income will meet the end of justice in the present case because the AY involved in the appeal is 2006-07 and Tribunal prior to AY 2008-09 consistently disallowing, by making a reasonable estimate, from 2 to 5% of the expenses relatable to the exempted income. On the other hand the learned Senior DR fairly conceded the position.
We have considered the facts in entirety and finds that the applicability of the Rules 8D of the Rules is prospective in view of the decision of Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg Co. Ltd.(supra). We also find that the Tribunal is consistently making a reasonable disallowance varied from 2 to 5% prior to AY 2008-09. In the present case the assessee has earned dividend income of Rs. 48,02,736/- and claimed the same as exempt. As conceded by learned Counsel for the assessee, we direct the AO to restrict the disallowance of expenses relatable to exempted income to the extent of 5% of the exempt income, as disallowed in earlier year. This issue of assessee is partly allowed as indicated above.
The next issue in this appeal of assessee is as regards to the order of CIT (A) confirming the disallowance made by AO on account of Key Man Insurance Premium. For this assessee has raised following ground No. 2:-
“2. On the facts and circumstances of the case as well as in law the Learned CIT (A) has erred in upholding the disallowance of Key man Insurance premium of Rs. 21,17,900/-.”
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the AO has disallowed the expenses claimed by assessee in respect to Key Man Insurance Premium in respect of its directors amounting to Rs. 21,17,900/-. The CIT (A) has also confirmed the action of the AO on the same reasoning that the assessee is following mercantile system of accounting and in the mercantile system of accounting the expenses attributable to current year is to be allowed. Accordingly, he confirmed the action of the AO. Before us assessee filed copy of Key Man Insurance Policy as page No. 14-16 of assessee’s paper book and also filed copy of renewal premium receipt at page 17. We find that this Key Man Insurance was under LIC of India and policy taken by assessee was from LIC of India which was approved institution. Before us learned Counsel for the assessee relied on the decision of Hon’ble Bombay High Court in the case of CIT Vs. Agarwal Enterprises (2015) 374 ITR 240 (Bom), wherein, on the issue of Premium on Key Man Insurance Hon’ble High Court has allowed the claim of assessee as business expenditure u/s 37 of the Act. We find that in the present case the premium on Key Man insurance Policy amounting to Rs. 21,17,900/- was claimed as prepaid expenses in earlier years but the same was disallowed. The assessee in this year has paid this premium and claimed the same as expenses and treated it as an expense in the year of payment and claimed the same. In view of the judicial pronouncements, we are of the view that the assessee is entitled for deduction u/s 37 (1) of the Act and we order accordingly. This issue of assessee appeal is allowed.
In the result, the appeal of the Assessee is partly allowed.
Order pronounced in the open court on 02 -11-2016.