Punjab & Haryana H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was correct in disallowing deduction under s. 80C of the IT Act, 1961, on life insurance premia paid of Rs. 6,304 ?

Counsel Appeared

Sanjay Bansal, for the Assessee : L.K. Sood, for the Revenue

D.V. SEHGAL, J.:

This judgment shall dispose of IT Ref. Nos. 72 and 73 of 1978 as identical questions of law in both of them have been referred for the opinion of this Court and the facts which give rise to them are also similar.

The question of law which has been referred by the Income-tax Appellate Tribunal, Amritsar Bench (for short “the Tribunal”), is to the following effect :

“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in disallowing deduction under s. 80C of the IT Act, 1961, on life insurance premia paid of Rs. 6,304 ?”

2. It would suffice to make a brief reference to the facts of IT Ref. No. 72 of 1978. The status of the assessee is HUF. Return of income for the asst. yr. 1973-74 pertaining to the accounting years ending 31st March, 1972, and 31st March, 1973, was furnished by the assessee. The business income shown therein is to the following effect : Profit 34,083 . Interest 22,400 . . 56,483 56,483 . . 1,07,488

3. The assessee had paid a sum of Rs. 10,513 out of its income chargeable to tax to keep in force insurance policies falling within the scope of s. 80C(2)(b)(i)(1) of the IT Act, 1961 (for short “the Act”). The ITO, however, allowed deduction of Rs. 4,209 only under s. 80C(1) of the Act and disallowed the deduction respecting the remaining amount of Rs. 6,304 recording the following reasons: “The life insurance premia has been paid at Rs. 10,513 out of which deduction is allowable only at Rs. 4,209 in respect of the amounts which have been withdrawn from the account books of M/s Lal Woollen and Silk Mills, Amritsar, in which he was a partner during the year under assessment. These withdrawals are for a period of 12 months. The balance amounts were got paid from M/s Lal Woollen & Silk Mills (P) Ltd. but as the life insurance premia claim is to be allowed for 12 months with reference to the accounting period of the firm as in the past, the deduction of the balance amount is not admissible.”

An appeal filed by the assessee against disallowance of the deduction of Rs. 6,304 was dismissed by the AAC, Range “B”, Amritsar, vide order dt. 25th Jan., 1977 (Annex “B”). His appeal before the Tribunal also failed and was dismissed vide order dt. 16th March, 1978.

4. It is not in dispute that the firm, M/s Lal Woollen and Silk Mills, Amritsar, from which the assessee derived income of Rs. 56,483 mentioned at (ii) above with the year ending 30th June, 1972, was converted into a private limited company w.e.f. 1st July, 1972. The company took over all the assets and liabilities of the said firm. The amount which stood to the credit of the assessee in its personal account maintained with the said firm also became the liability of the company and stood to the credit of the assessee in the books of account of the company. It is further not in dispute that the amount of the life insurance premia of Rs. 6,304 was paid by the assessee by withdrawing it from his account with the said private limited company. The learned Tribunal, inter alia, recorded the following reasons while dismissing the appeal of the assessee : “It is undisputed that the assessee derived no income taxable in this assessment year from that company. The assessee was a partner in the firm, M/s Lal Woollen and Silk Mills, and part of the credit balance in the books of the firm was taken over by the limited company and it is from that account that the payment of Rs. 6,304 was made.” It has further observed thus : “On a consideration of the relevant provisions, we feel that the view taken by the AAC is correct. Sec. 80C(1) refers to the computation of total income of an assessee and the total income is defined in s. 2(45). As per that definition, the total income means, the total amount of income referred to in s. 5 computed in the manner laid down in this Act and s. 5 refers to the computation of total income of any previous year of a person. It follows, therefore, that s. 80C(1) which is relevant for reading s. 80C(2) deals with the computation of total income of the assessee of a previous year and while computing such an income, deduction provided in s. 80C(1) will be given and s. 80C(2) refers to the nature of sums which would qualify for deduction provided in s. 80C(1). Reading in this context, it is clear that there is a clear nexus between the income chargeable to tax and the amount of life insurance premia paid by an assessee and, in order to qualify for the relief provided in s. 80C(1), the amount of life insurance premia must come out of the income chargeable to tax.”

5. The above view of the learned Tribunal is clearly misconceived. The income of the assessee as HUF was the subject-matter of assessment. Its total income from the two firms mentioned above pertaining to the relevant accounting years was Rs. 1,07,488. The fact that the payment of life insurance premia was made by the assessee out of the amount lying to its credit in the personal account with the company which was formed on 1st July, 1972, is not at all a relevant factor and ought not to have weighed with the Revenue for disallowing the deduction under s. 80C(1). By making payment of the life insurance premia by withdrawing the amount from its personal account with the said company, the credit balance of the assessee in the said account was correspondingly reduced. This in clear terms means that the income of the assessee after giving deduction of life insurance premia under s. 80C(1) would also be correspondingly reduced. The reasons advanced by the learned Tribunal that since the amount of Rs. 6,304 had come out of the assessee’s account with the company from which no taxable income was derived, deduction of this amount cannot be allowed under s. 80C(1) is not correct. An assessee may make payment of the life insurance premia out of his savings account with a bank where the balance to his credit is available before the commencement of the accounting year. This would in no case mean that the payment of premia so made is not to be deducted out of the total income of the assessee in the relevant accounting year and the corresponding assessment year. Such a construction on s. 80C would not be proper nor is it intended by the provisions of s. 80C(1) of the Act. The reliance placed by the tribunal on the judgment of the final Court in Chandulal Harjiwandas vs. CIT (1967) 63 ITR 627 (SC) : TC26R.309, is misplaced. In that case, the Revenue had disallowed the claim for deduction of life insurance premia on a strict interpretation of the contract of insurance. The final Court held that the claim of the assessee was admissible. It was observed that the object of enacting s. 15(1) of the Indian IT Act, 1922, which corresponds to s. 80C of the Act, is the encouragement of thrift and the section should hence be interpreted in such a manner as not to nullify that object. The interpretation sought to be placed on the said provision by the Tribunal would in fact nullify its object and thus cannot be sustained. Consequently, we answer the above question in the negative, i.e., against the Revenue and in favour of the assessee.

There shall, however, be no order as to costs.

[Citation : 172 ITR 108]