It is common practice for Firms to pay for keyman insurance policy premium for a partner. Whether this expense can be allowed as a business expense has been a matter of much debate.
Usually the assessing officers disallow this expenses. They do not allow this to be claimed as a business expense. Even though several courts have accepted the premium payment as a business expense and have allowed firms to claim the premium.
In a recent case in the High Court of Punjab and Haryana, in case of M/s Ramesh Steels, via judgement dated 02.02.2016 the court has held that “The said policy when obtained to secure the life of a partner to safeguard the firm against a disruption of business is equally for the benefit of the partnership business which may be affected as a result of premature death of a partner. Thus, the premium on keyman insurance policy of a partner of a firm is wholly and exclusively for the purpose of business is allowable as a business expenditure”
To end the confusion and recurrent cases and appeals. the income tax department has accepted this position and has confirmed that
In case of a Firm, Keyman Insurance Policy premium paid for a partner to safeguard the firm against disruption of business, is allowed as a business expense.
Circular of the income tax department Circular 38/2016 dated 22nd November 2016.