KEY-MAN INSURANCE TO
PARTNERSHIP FIRM
KEY-MAN INSURANCE TO
PARTNERSHIP FIRM
“ Key-man insurance to partnership firm was not being
allowed because the partnership business is owned by
different partners only. Active partners are the source of
profits to the firm. In the absence of such partners, there
will be significant loss to the firm. Therefore, it is decided
to allow key-man insurance on the lives of active partner
provided the following requirements are complied with-
a) The average turn over of the firm for preceding 3 years
must be more than 3 crores. For this purpose the last 3
year’s audited copies of balance sheet and Profit & Loss
Accounts are to be submitted.
B) Since the firm cannot give certified copy of Board
resolution, supplementary partnership deed furnishing
the name of the key-man and the person authorised to
complete the insurance proposals should also be
submitted.
C) Maximum S.A will be limited to share capital of
the key-man plus proportionate amount of goodwill as
being done in case of partnership insurance. Total
goodwill of the firm will be total of last 3 years net
profits.”
-(C.O Circular Ref: Actl/1729/4 dt.24-7-2000)
EXAMPLE
Total capital of partnership firm
Rs. 100 lac
Name of the Key-man partner
Mr. X
Key-man Mr.X’s share capital
Rs. 35 lac (35%)
Last 3 year’s NET PROFIT
Rs. 50 lac (Goodwill)
Maximum S.A allowable to
Key-man
Share capital + proportionate.
amount of goodwilI
= Rs.35 lacs +
(35% of goodwill)
= Rs. 35 lac + Rs. 17. 50 lac
= Rs.52.50 lac
TAXATION ASPECTS
C.B.D.T Circular No. 762,date of issue 18-2-1998
“ Introduction : The Finance (NO.2) Act,1996,as passed by the
Parliament, received the assent of the President on the 28th day of
September,1996 & has been enacted as Act No.33 of 1996. This
circular explains the substance of the provisions of the Act relating
to direct taxes . . . .
Taxation of a sum received under the Key-man Insurance Policy14.1 A key-man Insurance Policy,of the L.IC OF India,etc provides
for an insurance policy taken by a business organisation or a
professional organisation on the life of an employee,in order to
protect the business against the financial loss, which may occur
from the employee’s premature death. The ‘keyman’ is an
employee or a director,whose services are preceived to have a
significant effect on the profitability of the business .
14.2 There were some doubts on the taxability of the income
including bonus,etc. from such policy and also regarding the
treatment of the premium paid- whether it should be allowed as
a capital expenditure or as a revenue expenditure. The
Act,therefore , lays down the tax treatment of the KEYMAN
INSURANCE POLICY.
14.3 Clause (10D) of section 10 of Income-tax Act,exempts
certain income from tax. The Act,amends clause (10D) of section
10 to exclude any sum received under a Key-man Insurance
Policy including the sum allocated by way of bonus on such
policy for this purpose.
14.4 The Act also lays down that the sums received by the said
organisation on such policies,be taxed as business profit, the
surrender value of the policy,endorsed in favour of the employee
(key-man),or the sum received by him at the time of retirement
be taken as ‘profits in lieu of salary’ for tax purposes,and in case
of other persons having no employer-employee relationship-
14.4 The surrender value of policy or the sum received under the
policy be taken as income from other sources and taxed
accordingly.The premium paid on the Key-man Insurance Policy is
allowed as business expenditure.
14.5 The amendments take effect from the 1st day of October 1996”
---------------------------------------------------------------------------------SUMMARY
I) Premium paid under Key-man Insurance Policy is treated as
expenditure under section 37(1) of I.T Act.
II) In case of assignment of policy in favour of the life assured,
surrender value available under the policy on the date of
assignment,will be treated as ‘profits in lieu of salary’,however if
there is no employer-employee relationship between the employer
and the assignee at the time of assignment of the policy,the
surrender value will be treated as ‘income from other sources’.
III) After assignment,the policy will be covered under
section 10(10)(d).
IV) Any amount (including death claim) received under the
policy by the employer will be taxable under section
28(vi) as profits and gains from business or profession.
V) The company can show interest payment on policy loan
as expenditure in its books of accounts.
RELEVANT SECTIONS FROM
INCOME-TAX ACT 1961
SECTION 2:
IN THIS ACT UNLESS THE CONTEXT
REQUIRES
OTHERWISE
(24) “INCOME” INCLUDES
(xi) ANY SUM RECEIVED UNDER A KEY-MAN INSURANCE
POLICY INCLUDING THE SUM ALLOCATED BY WAY OF
BONUS ON SUCH POLICY.
EXPLANATION-
FOR THE PURPOSES OF THIS CLAUSE,THE EXPRESSION
“KEY-MAN
INSURANCE
POLICY”
THE
MEANING
ASSIGNED TO IT IN THE EXPLANATION TO (10D) OF
SECTION 10.
INCOME NOT INCLUDED IN TOTAL INCOME
SECTION 10 : In computing the total income of
a previous year of any person, any income falling
within any of the following clauses will not be
included- Any sum received under a life insurance
policy,including the sum allocated by way of
bonus on such policy other than any sum received
under sub-section (3) of section 80DDA or under a
key-man insurance policy.
10(d).
EXPLANATION:For the purpose of this clause,Key-man
insurance policy means a life insurance policy taken by a
person on the life of another person who is or was the
employee of the first mentioned person or is or was
connected in any manner whatsoever with the business of
the first mentioned person.
SECTION 17(3) :
(ii) “Profits” in lieu of salary includes- …… or any sum
received under a KEYMAN INSURANCE POLICY
including the sum allocated by way bonus on such
policy.
Section 28 :Profits and gains of business or profession,
The following income shall be chargeable to income-tax
under the head “Profits and gains of business or
profession” - (vi) Any sum under a key-man insurance policy
including the sum by way of bonus on such policy.
Explanation: For the purposes of this clause,the “Keyman insurance Policy” shall have the meaning assigned
to it in clause (10D) of section 10.
INCOME FROM OTHER SOURCES
SECTION 56:
i) Income of every kind which is not to be
excluded from the total income under this Act
shall be chargeable to income-tax under the head
“Income from other sources”,if it is not chargeable
to income-tax under any of the heads specified in
section 14,items A to E.
ii) In particular and without prejudice to the
generality of the provisions of sub-section (1),the
following incomes,shall be chargeable to incometax under the head “Income from other sources”
namely:
Section 56:(2)
iv) Income referred to in sub-clause (xi) of clause (24) of
section 2, if such income is not chargeable to incometax under the head “Profit and gains of business
profession” under the head “SALARIES”
GENERAL:
SECTION 37- Any expenditure (not being expenditure of
the nature described in sections 30 to 36 and not being in
the nature of capital expenditure or personal expenses of
the assessee), laid our or expended wholly and exclusively
for the purpose of the business or profession shall be
allowed in computing the income chargeable under the
head “Profits and gains of business or profession.”
: For the removal of doubts, it is hereby
declared that an expenditure incurred by an assessee for
any purpose which is an offence or which is prohibited by
law shall not be deemed to have been incurred for the
purpose of business or profession and no deduction or
allowance shall be made in respect of such expenditure.
EXPLANATION
OTHER IMPORTANT POINTS
I) Transfer of Key-man Insurance Policy :- In case the
key-man leaves and joins another employer, the
KEYMAN policy taken by the ex-employer can be
assigned to the new employer subject to agreement
between the two and also subject to fulfillment of
financial underwriting requirements by the new
employer.
II) “It is now decided to extend the maximum age at
entry upto 65 years and maximum maturity age upto 75
years for proposals under Key-man Insurance under
Jeevan Shree Plan. However, this will be allowed where
satisfactory documentary evidence of retirement age of
the Key-man is submitted alongwith the proposal and
age at maturity is not beyond the retirement age.”
OTHER IMPORTANT POINTS
II) The premium quotations in the above cases may be
obtained from the Acturial Departments Of Zonal Offices.
-C.O Circular Ref: Actl/1638/4 DT.9-3-98
III) “ All the mandatory medical requirements and
financial requirements should be obtained as if it is an
individual insurance on the life of Key-man taking into
account the present practice.. Under no circumstances
should a Key-man proposal be decided at Branch level
even when the sum proposed is within Branch limit.”-C.O Circular Ref. Actl/153/4 DT.2-9-95
It is always desirable “ that the policy ” must mature not
later than the date of retirement of the Key-man.
- C.O Circular Ref: 1035/4 DT. 5-2-74
OTHER IMPORTANT POINTS
“A certified true copy of the Board Resolution passed in
the meeting of Board Of Directors stating therein the
name of the Key-man, the quantum of insurance,plan and
term and the name of the authorised person signing the
proposal form and allied papers” must be obtained before
we register the proposal.
-C.O Circular Ref: Actl/1563/4 DT.2-9-95.
IV) “KMI proposals can also be considered under Table 47
( Endowment without profit plan) with minimum sum
assured of Rs. 5.00 lakhs. No supplementary benefits
such ass Double Accident Benefit and extended
permanent disability Benefit are to be allowed while
considering Table 47 under KMI. All other terms and
conditions for the KMI remain unaltered.”
-C.O Circular Ref: Actl/1754/4 DT.17-7-2001.
OTHER IMPORTANT POINTS
v) Key-man Insurance is not allowed to
proprietory firms.
vi) In case the firm has obtained sizable
amount of loan from a reputed financial
institutions like IDBI,ICICI etc., Key-man
Insurance on the life of directors can be
considered on that basis also.
The Various Requirements For key-man Insurance Proposal
I) Copy of Memorandum & Article of Association
II) Copies of Audited Balance Sheets and
Profit & Loss A/Cs for preceding 3 yrs.
I
III) Certified true copy of Board Resolution passed in
the meeting of Board of Directors containing following
information-
B) Plan / Term ( Tables 14,48 and 151 as well as all without
profit plans are allowed; policy should
mature on or before the date of retirement of
key-man. )
C) Name & Signature of the person who is authorised to
complete proposal papers.
D) The use of seal of the Company.
The Various Requirements For key-man Insurance Proposal
IV)Key-man Questionnaire is to be completed in
the prescribed format and the same is signed
by the authorised person under the seal of the
company
V) Copies of I.T Returns of the company
for preceding 3 years.
VI)Consent for the endorsement to be placed on policy.
Henceforth revised Key-man Questionnaire annexed will be
used (Annexure ‘A’).
KEYMAN INSURANCE MADE EASY
Qn 1):Can there be more than one Key-man
in a company ?
Ans
:There can be a number of KM’s in a
company depending upon their
marketing /technical knowledge,
experience etc. in the context of their
contribution to the success of the
company.
KEYMAN INSURANCE MADE EASY
Q 2):Who is the proposer under KMI ?
Ans :The business firm or the professional
organisation is the proposer .
Q 3) : What is the maximum Insurance cover allowed
under KMI ?
Ans : There is no limit as such. It all depends on the
company’s turnover, assets ,profile and basically
profitability during the last 3 financial years.
The maximum keyman insurance to the company
on the lives of its keyman will be limited to
maximum S.A. available as per the
criteria of its profits in the past 3 years, as
discussed earlier.
KEYMAN INSURANCE MADE EASY
Qn 4): Is there any restrictive clause put
on the policy document ?
Ans
: The policy is issued with special
endorsement as under. “It is hereby
agreed & declared that in the event of
the employee Life Assured leaving the
employment of the Employer the
within mentioned policy shall be either
surrendered to the Corporation for-
KEYMAN INSURANCE MADE EASY
Ans
: cash value,or assigned absolutely in
favour of the employee life assured. It
is further agreed and declared that the
within policy shall not be allowed to be
assigned to any one except the Life
Assured himself absolutely or to the
Corporation as a security towards the
loan on the within policy”.
KEYMAN INSURANCE MADE EASY
Qn
5) : Is any approval required from IT
authorities or Company Law Board ?
Ans
: NO.
Qn 6) : If Key-man Insurance is assigned
before retirement in favour of keyman,what will be the tax implications ?
Ans
: The surrender value available as on
the date of assignment will be treated
as perquisite in the hands of employee.
KEYMAN INSURANCE MADE EASY
Qn 7) : Can the Company raise loan under
Key-man Insurance Policy ?
Ans
: Yes, the Company can take Policy loan.
Qn 8) : Can the KMI policy be transferred
to another Company Keyman ?
Ans
: Yes, the policy can be transferred to
the new employer of the Keyman on
mutually agreed terms between the
ex-employer and the new employer in-
KEYMAN INSURANCE MADE EASY
Ans- in which case the new employer starts
paying the premium. This transfer,
however,will be subject to new employer
fulfilling our financial underwriting
requirements.
POTENTIAL AREAS
(i) Private Limited Companies subject to
proper share holding pattern.
(ii) Large Partnership Firms.
(iii) Public Limited Companies.
There is a huge potential in this segment
because hardly any KMI policy is sold in this
segment . This may be owing to lack of
availability of database of companies.
Since “without profit” policies are allowed
for KMI, KMI can be sold for(i) Protection for profits in case of death of
KEYMAN / KEYMEN.
(ii) Retention of KEYMAN / KEYMEN for
longer period by way of offering (by the
company) to the concerned KEYMAN
that if he stays with the company for
longer than usual period, the policy can
be assigned to him. Term as well as
premium paying term will have to be
selected accordingly.
FOR EXAMPLE
If the age of the KEYMAN is 40 years and
usual period of retention in the company is 7
years, a policy of TREM 20 years and
premium paying term of 10 years can be
chosen, so that the KEYMAN has incentive
for staying with the company for 10 years
(instead of usual 7 years period ), as after 10
years, the policy will be free from liability of
premium payment on assignment of the
policy to KEYMAN.
Partnership Insurance
Partnership Insurance
“ A partnership is a business jointly owned by several
parties, but which is not itself a corporate entity. The
partnership is generally run in a fairly personal way by
the partners. This can create problems if one partner dies
as his widow may not wish to take upon his role in the
business or may withdraw his stake in the business. On the
other hand, the co-partner may not have sufficient funds
to buy out the widow’s share. This may result in selling her
share to an outsider. The value of the share might have
grown many fold after the partnership came into existence.
The remaining partners may not like to have outside
interference and instead of selling share to outsider, the
remaining partners would like to buy out the share of the
deceased’s widow.
On these principles, we allow partnership insurance on the
lives of partners and as far as possible all the partners
must be covered under Partnership Insurance.
For considering partnership insurance , following
requirements are to be obtainedI) Proposal Form in F.No. 340
II) Copy of Deed of Partnership duly attested by the
partner authorised to sign insurance proposal.
III) Copies of Audited Balance Sheet and Profit and Loss
Account for the last 3 years
IV) Copies of ITRs of the firm for preceding 3 years duly
attested by the authorised partner.
V) The copy of audited Balance Sheet containing schedule
of partners’ capital accounts.
VI) Letter of Authority in favour of a partner signing the
proposal.
S.A under Partnership Insurance :
Normally S.A is allowed equivalent to share capital of
partners at the year end of last financial year. However
goodwill comes for addition to this level of S.A. depending
upon the size, nature and age of business, relationship
between profits and capital. Such addition may be lower
of two times.”
C.O Circular Ref:Actl/1683/4 DT.7.7.1999
(Please refer to “KEY-MAN INSURANCE TO
PARTNERSHIP FIRMS” for example.)
Tax Implications
As per sec. 37 (1) of the I.T. Act, 1961, any
expenditure laid out or expeded wholly and
exclusively and necessarily for the purpose of the
business or profession, the same is permissible as
expenses and could be claimed as a deduction from
the income of the partnership firm. It is thus felt
that the premiums paid on insurance against loss of
profits due to withdrawal of capital on the death of
a partner should be allowed as a business expenses,
in the assessment of the partnership firm. In such
situations when insurance premiums are allowed as
expense, the proceeds of the policy’s claim amount
will be treated as income of the firm. However,
proposer firm should consult their tax advisers .
The issue regarding deductibility of premia
paid by a firm of Chartered Accountants in
respect of life insurance policies taken by it on the
lives of its partners, under Section 37 (1) of IncomeTax Act, 1961, came up for consideration before the
Bombay Bench ‘B’ of the Income-Tax Appellate
Tribunal. The judgement of the Bench in ITA No.
1747 (Del) / 1981 was delivered on
23-09-1983
in favour of the assessee firm.
On behalf, of the assessee firm arguments
were advanced by the learned counsel
Sri N.A.Palkhivala.
On an appraisal of the entire material on
record and after consideration of the rival
submissions, the Tribunal came to the conclusion
that the Commissioner of Income Tax (Appeals)
was right in allowing the expenditure under Section
37 (1). The Tribunal felt that the expenditure in
question enabled the firm to conduct and carry on
its profession more efficiently and more profitably.
As the firm and its partners are separate and
distinct entities for the purpose of Income-tax
Act, the expenditure in question could not be
treated as an expenditure of personal nature of
the partners.
The Tribunal agreed with the contention
advanced on behalf of the firm that the expenditure
did not result in any advantage in the capital field
and that it was not covered by the scope of Section
40 (b). The fact that the amount on account of
premium was paid by the assessee firm to the Life
Insurance Corporation and not to the partners was
also stressed by the Tribunal.
In this view of the matter the Tribunal came to
the conclusion that the expenditure in question was
incurred by the assessee firm in the interests of and
for the promotion of the profession and was,
therefore, allowable.