Insurance premium paid from loan funds is allowed as deduction

Question : Whether the Insurance premium paid from loan funds is allowed as deduction u/s 80 C /

Life insurance premiums, even if paid out of loan funds and not out of income chargeable to tax, are eligible for deduction under section 80C

IN THE ITAT COCHIN BENCH

Goutham Reddy

v.

Income-tax Officer, Ward -2, Kottayam

APRIL  5, 2013

FACTS

■           The assessee, receiving salary income from M/s ‘S’, claimed deduction under section 80C for making payments towards LIC premium in his return. The Assessing Officer observed that the premium amounts were paid by assessee’s grandfather who was the proprietor of M/s ‘V’. Therefore, he disallowed the deduction on ground that assessee was not in receipt of any gift or loan from his grandfather for paying premiums and benefit of deduction was available only to the person who actually made the payment.

■           On appeal, the assessee claimed that the premium amounts had been duly debited to the account of the assessee in the books of the proprietary concern of his grandfather and since the assessee did not maintain books of account, he could not pass a corresponding credit entry. However, the Commissioner (Appeals) upheld the order of the Assessing Officer.

■           On second appeal:

HELD

■           Admittedly the assessee did not maintain any books of account. Admittedly, the payments of LIC premiums were reflected in the books of account of M/s. ‘V’, the proprietary concern of the grandfather of the assessee. The Assessing Officer stated that the payments relating to LIC premiums were made by M/s. ‘V’ to M/s ‘S’, where the assessee was working, meaning thereby that the grandfather of the assessee only provided the funds for making payment of LIC premiums. Hence, it cannot be said that the LIC premiums were paid directly by the grandfather of the assessee. Accordingly, under these set of facts, it can be said that the assessee has availed loan from his grandfather for making LIC premium payments. [Para 9]

■           The question that arises is whether the LIC premium amounts paid out of loan funds are eligible for deduction under section 80C. The department placed reliance on the decision of the jurisdictional High Court in the case of CIT v. Abraham George [2000] 242 ITR 171, in which the decision was rendered in the context of old provisions of section 80C which prescribed the condition that the eligible payments should have been made out of income chargeable to tax. There is no dispute that the present provisions of section 80C do not contain the words ‘out of income chargeable to tax’. [Para 10]

■           The next question that arises is whether the presence or absence of the words ‘out of income chargeable to tax’ make any difference. In the case of S. Inder Singh Gill v. CIT [1963] 47 ITR 284, it was held by the Bombay High Court that the absence of the words ‘out of income chargeable to tax’ do not make any difference. The Bombay High Court considered the words ‘tax shall not be payable’ and held that the said language signify that sources of making payment of LIC premiums should be liable to tax and in that case only the tax shall not be payable if the same is used for making LIC premium payments. [Para 11]

■           Thus, the old provisions of section 80C clearly specified the condition that the payments listed out in that section should be paid out of income chargeable to tax. [Para 12]

■           However the provisions of section 80C, as applicable to the year under consideration, do not specify the condition that the LIC premium payments should be paid out of income chargeable to tax. Further, section 80C is included in Part-B of Chapter VI-A, which provides for deduction in respect of certain payments. Only Part-C of Chapter VI-A provides for deduction in respect of certain incomes. A plain reading of the above said provisions show that the deduction under section 80C shall be made if the sums specified in sub-section (2) is paid or deposited in the previous year. It does not place any condition about the source for making the payments or deposit. Further the deduction is given while computing the total income, i.e., out of gross total income. This is in total contrast to the provisions of section 15 of the 1922 Act, which used the language that that ‘tax shall not be payable’. [Para 13]

■           Within the sections included in Part-B of Chapter VI-A, the Parliament has prescribed the condition that the payments should have been made out of income chargeable to tax only in certain sections, meaning thereby, that the Parliament has consciously omitted the above said condition in certain sections. No such condition is prescribed in section 80C. It is a well settled proposition of law that one cannot supplement or add words to a section, which are not intended to be included by the Parliament. [Para 14]

■           In view of the foregoing discussions, the payment of LIC premiums made during the previous year out of loan funds are also eligible for deduction under section 80C. Accordingly, the order of the Commissioner (Appeals) is set aside and the Assessing Officer is directed to allow the deduction under section 80C claimed by the assessee. [Para 15]