KEY-MAN INSURANCE TO PARTNERSHIP FIRM

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KEY-MAN INSURANCE TO PARTNERSHIP FIRM
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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 years audited copies of
balance sheet and Profit Loss Accounts are to
be submitted.
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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)
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EXAMPLE
Total capital of partnership firm Rs. 100
lac Name of the Key-man partner Mr.
X Key-man Mr.Xs share capital Rs. 35 lac
(35) Last 3 years NET PROFIT Rs. 50
lac (Goodwill)
Maximum S.A allowable to
Share capital proportionate. Key-man
amount of
goodwilI
Rs.35 lacs
(35
of goodwill)
Rs. 35 lac Rs. 17. 50 lac

Rs.52.50 lac


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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
Policy- 14.1 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
employees 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 .
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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-
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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.
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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.
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RELEVANT SECTIONS FROM INCOME-TAX ACT
1961 SECTION 2 IN THIS ACT UNLESS THE CONTEXT
OTHERWISE REQUIRES (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- F
OR THE PURPOSES OF THIS CLAUSE,THE EXPRESSION
KEY-MAN INSURANCE POLICY THE MEANING ASSIGNED
TO IT IN THE EXPLANATION TO (10D) OF SECTION 10.
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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- -
10(d). 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. EXPLANATIONFor 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.
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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.
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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 Key-man insurance Policy shall have
the meaning assigned to it in clause (10D) of
section 10.
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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 income-tax under
the head Income from other sources namely
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Section 56(2) iv) Income referred to in
sub-clause (xi) of clause (24) of
section 2, if such income is not chargeable to
income- tax under the head Profit and
gains of business profession under the
head SALARIES
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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. EXPLANATION
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.
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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.
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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
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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.
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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.
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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.
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I 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.
III) Certified true copy of Board Resolution
passed in the meeting of Board of Directors
containing following information-
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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).
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KEYMAN INSURANCE MADE EASY
Qn 1)Can there be more than one Key-man
in a company ? Ans There can be a
number of KMs in a company
depending upon their marketing
/technical knowledge, experience etc.
in the context of their contribution
to the success of the company.

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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 companys 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.

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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-

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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.
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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 key- man,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.

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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-
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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.
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POTENTIAL AREAS
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(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.
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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.
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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.

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Partnership Insurance
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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 widows 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 deceaseds widow.
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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 obtained- I) 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
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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.
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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 RefActl/1683/4 DT.7.7.1999 (Please
refer to KEY-MAN INSURANCE TO PARTNERSHIP FIRMS
for example.)
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Tax Implications
40
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 policys claim
amount will be treated as income of the firm.
However, proposer firm should consult their tax
advisers .
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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 Income-Tax 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.
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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.
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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.