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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: KIRANBHAI H. SHELAT and another
Court Name: Gujarat High Court Judge(s): R. K. Abichandani, Kundan Singh Title: COMMISSIONER OF INCOME-TAX vs KIRANBHAI H. SHELAT and another Case No.:I.T.Rs. Nos.54, 272 of 1993I.T.R. No.49 of 1997Income-tax References No.54
JUDGMENT
Reported As: 2000 PTD 3014 Result: References disposed Judgment JUDGMENT R.K. ABICHANDANI, J.---This group of matters alongwith similar other matters was argued together and at the instance of both the sides, is being disposed of by this common judgment. The questions, which have been referred to this Court by the Income-tax Appellate Tribunal under section 256(1) of the Income Tax Act, 1961, in these references are as under: I.T.R. No.54 of 1993 (at the instance of the Revenue for the assessment years 1984-85 to 1987-88): "Whether, the Appellate Tribunal is right in law and on facts in directing the Income-tax Officer to allow 40 per cent. Of the incentive bonus as deduction and include the not amount after such deduction in the salary income?" I.T.R. No.272 of 1993: (at the instance of the Revenue for the assessment years 1983-84 to 1987- 88): "Whether the Appellate Tribunal is right in law in holding that the Commissioner of Income-tax was not justified in directing the Assessing Officer to withdraw the deduction allowed by him at 40 per cent. Of the gross receipts?" I.T.Rs. Nos.121, of 1996, 15 of 1997 and 19 of 1997 (at the instance of the assessee for the assessment Sears 1987-88 to 1989-90): "Whether the Income-tax Appellate Tribunal is right in law in holding that no deduction is available to the assessee as expenses out of the incentive bonus commission received by him as a Development Officer of the Life Insurance Corporation of India?" LT.R. No.132 .Of 1996 (at the instance of the assessee for the assessment years 1986-87 to 1988- 89):
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"Whether, on the facts and circumstances of the case, the. Tribunal was justified in holding-that incentive bonus earned by the assessee as Development Officer of the Life Insurance Corporation was part of salary within the ambit of section 17 of the Act and no deduction on account of expenses was permissible?" I. T. R. No.49 of 1997: (at the instance of the assessee for the assessment years 1987 ---88 to 1990- 91): "Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the incentive bonus was part of the salary by virtue of section 17(1)(iv) and the only deduction admissible is under section 16(i) of the Income-tax Act?" I.T.R. No.54 of 1993 relates to the assessment years 1984-85 to 1987-88. The assessee was working as a Development Officer in the Life Insurance Corporation of India and in addition to the salary and perquisites, he was also given "incentive new business bonus" from the Life Insurance Corporation. The assessee claimed deduction of expenses incurred for earning the incentive bonus to the tune of 50 per cent of the incentive bonus. The claim was allowed by the Income-tax Officer in the original assessm ent years, but later the Commissioner by his common order, dated January 31, 1989, passed under section 263 of the Act, directed the Income --tax Officer to withdraw the deduction of expenses on the ground that incentive bonus was part of "salary" and as such all that the assessee was entitled to, were standard deduction admissible under section 16(i) of the Act and that the expenses incurred in earning the incentive bonus were not allowable. The assessee appealed before the Tribunal against the common appealed order, dated January 31, 1989, by which the Commissioner had directed the income-tax Officer to withdraw the expenses allowed from incentive bonus commission for these years. The Tribunal took note of the fact that the Development Officer was an employee of the Life Insurance Corporation, who was not paid incentive bonus by way of remuneration because it was expressly excluded from the definition of annual remuneration contained in Rule 2(c) of the LIC Development Officers' Service Rules, 1989. It was found that the incentive bonus was not akin to the ordinary bonus given under the Payment of Bonus Act. The Tribunal held that the incentive bonus represents additional profits, which could be classified and charged as income under the head "Salaries" because of the wide definition of the term "salary" under section 17, which included "Profits in lieu of or in addition to any salary or wages". The Tribunal followed the decision of the Bombay Tribunal in the case of ITO v. Narendra V. Patel (1983) 21 Taxman 45 (Trib.), in which it was laid down that the expenditure incurred for earning the incentive bonus was liable to be deducted at the starting point itself under section 15 of the Act while determining the amount of incentive bonus, which was chargeable to tax and observed that this view was based on the principle laid down by the Supreme Court in the cases of Badridas Daga v. CIT (1958) 34 ITR 10 and Poona Electric Supply Co. Ltd. v. CIT (1965) 57 ITR 521. It was observed that the decision of the Bombay Tribunal in ITO v. Narendra V. Patel (1983) 12 Taxman 45 (Trib.) was followed by all the Benches of the Tribunal. In respect of the decision of the Andhra Pradesh High Court in K.A. Choudary v. CIT (1990) 183 ITR 29, on which reliance was placed on behalf of the Department, the Tribunal observed that in that case the Court did not consider, the question whether the expenses incurred for earning the incentive bonus were liable as deduction at the starting point itself in view of the fact that incentive bonus did not represent salary in the ordinary sense but it represented salary in view of the definition given in section 17 of the Act. It was held that aspect was considered by the Bombay Tribunal in ITO v. Narendra V. Patel (1983) 21 Taxman 45 (Trib.), in which it was held that per se it was not possible to draw an inference that the Legislature had intended to take into account cases of incentive bonus without reducing it by the expenditure incurred for earning it and that the expenditure incurred by the assessee for the purpose of earning incentive, bonus should be 'reduced therefrom at the starting point itself, i.e., at the point when it is treated under the income chargeable under the head "Salary". The Tribunal accordingly held that
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the expenses incurred for earning the incentive bonus by the Development Officers were allowable as deduction and that the not incentive -bonus alone was includible in the c6mputation of income under the head "Salary", The Tribunal found on the facts of the case that there was no justification for riot allowing 40 per cent. Of the incentive bonus as had been allowed in several case; cited before it. The Tribunal found that there was, however, no reason to allow a higher deduction at 50 per cent. As was done by the Income-tax Officer. I.T.R. Nos.121 of 1996 and 15 of 1997 are filed by the same assessee who was also a Development Officer and had claimed deduction of 50 per cent from the incentive bonus as expenditure for earning the same, during the previous years relevant to the assessment years 1987-88 and 1989- 90, respectively. I.T.R. No. 19 of 1997 is also by an assessee who was a Development Officer and had claimed 50 per cent of the incentive bonus as expenditure for earning the same. In these cases, the Tribunal, however, took an opposite view on the identical contentions and came to a finding on the basis of the decisions of the Orissa High Court in the case of CIT v. Govind Chandra Pani (1995) 213 ITR 783 and CIT v. Bijay Kishore Kapoor (1993) 202 ITR 129; and the Andhra Pradesh High Court in K.A. Choudary v. CIT (1990) 183 ITR 29 and CIT v. B. Chinnaiah (1995) 214 ITR 368, that the amount of incentive bonus received by the Development Officer was part of his salary and no deduction was to be allowed except the standard deduction under section 16 of the Act. We first deal with certain admitted aspects of the matter. The terms and conditions of service of the Development Officers are governed by the Life Insurance Corporation of India, Development Officers (Revision of Certain Terms and Conditions of Service) Rules, 1989. A copy of these rules arid certain other admitted correspondence between the Central Board of Direct Taxes (the CBDT) and the Life Insurance Corporation of India, are placed on record at the instance of both of sides and their genuineness is admitted. "Development Officer" is defined in Rule 2(h) of these Rules, which were framed in exercise of the powers vested in the Central Government under section 48 of the Life Insurance Corporation of India Act, 1956, and it means a whole-time salaried employee of the Corporation belonging to Class II appointed as Development Officer and includes any person who became an employee of the Corporation on September 1, 1956, and is working as a Development Officer. It is clear from this definition that the Development Officer is a whole-time employee of the LIC. As provided by the rule, the Development Officer, subject to the provisions made in these Rules, shall hold office by the same tenure and in the same manner as any other class of employee in the Corporation. Then there is a provision in Rule 8, which indicates that if the Development Officer does not conform to certain norms of expense limit (as defined in Rule 2(k)), his service would be liable to be terminated. There are also provisions for imposing disincentives on a Development Officer, if he does not measure up to certain standards of performance. The whole scheme appears to be result-oriented and expects the Development Officer to work in a manner that would produce results or face disincentives, which feature unfortunately is not adopted in other services. We now come to Rule 17 of the above Rules, which provides for incentive bonus. It lays down that incentive bonus under any scheme approved by the Corporation may be allowed to a Development Officer for any preceding year, if his cost ratio with reference to his annual remuneration in that year does not exceed twenty per cent of the eligible premium of that year. There was an incentive bonus scheme for Development Officers accordingly framed in the year 1978, which is also taken on record at the instance of both the sides in a common paper book filed in these matters. The said scheme was known as "Scheme of Incentive Bonus to Development Officers of the LIC-1978". It came into force on April 30, 1976, and, initially, was to remain in-force till December 31, 1980. Admittedly, the scheme continued to operate even thereafter. Under clause 4 of that scheme, it was provided that incentive bonus in accordance with the scheme could be given to a Development Officer whose cost ratio (i.e., ratio of his annual remuneration in an appraisal year to the eligible premium in that year) did not exceed 20 per cent in an appraisal year. The
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formula for determining basic incentive bonus was provided in clause (5) of the scheme, with a rider that the quantum of basic incentive bonus determined as per the formula prescribed under clause (5) could be increased or decreased in accordance with the provisions of sub-clauses (i) to (iv). These sub-clauses provided for increase or decrease in the actual performance from the standard norms of performance; agency organisation for excess or deficit of the standard number of points specified in clause (8); recruitment of agents less than the number of agents specified in clause (9), etc. As provided in clause (10), the matters relating to the "not eligible premium", "lapsed premium", "standard norms of performance" and the like in respect of a Development Officer in the first, second or third year of service and any other connected matters were to be regulated by the administrative instructions issued by the Chairman from time to time. On the subject of income-tax payable by the Development Officers on their earnings by way of additional conveyance and incentive bonus paid to them by the LTC, there was correspondence between the LTC and the CBDT, which is taken on record at the instance of and by consent of both the sides as admittedly genuine correspondence. In the letter from the LTC, dated September 29, 1986, the I-IC had written to the CBDT as regards the incentive bonus as under: "As regards incentive bonus, we have taken note of your clarification in the matter. We are at present designing a new Incentive Bonus Scheme for our Development Officers where it might be possible to provide for a separate allowance or for a distinct/separate element of payment in the nature of reimbursement of expenses which, we know, are necessarily to be incurred in the process or earning that incentive bonus. As this would take some more time, we would request you to allow some relief, in the meanwhile, to our Development Officers on this account. As you know, incentive bonus is a production-oriented income, inasmuch as, higher bonus becomes payable to a Development Officer on achieving higher production.' When his actual performance is beyond the normal Levels of performance expected of him, he has to incur expenditure in respect of items, such as (i) entertainment to agents/clients, (ii) prizes declared in competition amongst his agents, (iii) conveyance facilities to his agents, and (iv) office expenses such as rent, secretarial assistance, printing and stationery, postage, trunk calls and telephone charges, etc. The quantum of incentive bonus is decided taking into account factors such as the number of policies procured by a Development Officer, his agency organisation, the nature of territory, operated by him, i.e., whether rural or urban, etc. These very same factors also influence the size of his expenditure. We do not at present allow reimbursement or special allowance w such towards these items, it being understood that a Development Officer is required to spend a part of the incentive bonus on this account. It is, therefore, proposed to certify under section 10(14), an amount up to 3.0 per cent of the incentive bonus earned as necessary expenses that would have to be incurred and tire internal system devised by us lays down guide lines to the operating offices regarding the percentage to be certified in each case having regard to factors referred to earlier. We would be grateful if you could kindly. Examine the points clarified in this letter and issue suitable guidelines to dour offices to accept the certification given by the LTC offices both with reference to additional conveyance allowance anti incentive bonus, as above. " On November 28, 1986,, the Central Board of Direct Taxes stated that necessary -instructions 'were issued in respect of exemption .Under section 10(14) of the Act for the additional conveyance allowance given to the Development Officers on the basis of a certificate appended to the salary certificate. As regards the exemption, of incentive bonus the Board regretted its inability to accede to its request. However, the LTC was requested to formulate a scheme of special allowance with reference to the expenditure incurred in the course of official duties and inform the Board, so that the matter may be considered further.
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"3. However, such portion of the 'incentive bonus which is actually spent by the Development Officer for duties of office can still be exempted from tax. If the LTC makes the payment against the expenses incurred by the Development Officers by way of reimbursement of expenses. In that case, such reimbursement will not form a part of the 'salary' of the Development Officers and only the 'incentive bonus--- will appear in their salary certificates. It appears that, thereafter, the Chairman of the LIC, in exercise of powers conferred by Regulation 4 of the LIC of India (Staff) Regulations, 1960; issued instructions to give effect to the provisions of the Incentive Bonus Scheme, 1997, and the Reimbursement Scheme of Expenses, 1997, for 'Development Officers of the Corporation. At the instance and by the -consent of both the sides, the order along with the Incentive and Reimbursement Schemes are also placed on record, as admitted documents. This is, relied upon, on behalf of the assessee, to show that there was in fact a reimbursement component in the Incentive Bonus Scheme right from the beginning as is, reflected from the earlier correspondence which now came to be split up by framing a separate 'scheme in respect of that reimbursement component of the incentive bonus. It was demonstrated from these two schemes that the reimbursement was connected with the, performance of a Development Officer and both these schemes were inter-linked and further that the Development Officer was required to incur expenses for reaching the performance norms to become eligible for incentive bonus and reimbursement, for development and building of clientele contacts, for recruitment of assistants and agents, for agents' training and for conducting prize competition among agents, etc. It will be noted that even in the communicate, dated September 29, 1986 which was relatable to the earlier Incentive Bonus Scheme of 1978 (which would be relevant for the purpose of all these references), admittedly, there was a clear mention of the fact that the quantum of incentive bonus which was given to the Development Officers was fixed keeping in view the factors, namely, (i) entertainment to agents/clients, (ii) prizes declared in competition amongst agents, (iii) conveyance facilities to its agents, and (iv) office expenses such as rent, secretarial assistance, printing and stationery, postage, trunk calls and telephone charges, etc., which the Development Officer was required to incur as expenditure in his performance beyond the normal level of performance expected of him. Learned counsel, Mr. Divetia, while adopting the contention of learned counsel Mr. Mukesh Patel, further argued that the incentive bonus to the extent it was expended out of the portion which was intended to meet the expenses was not salary. It was submitted, that there was no real profit involved from such amount and, therefore, it did not fall within the meaning of the expression "profits" in lieu of or in addition to any salary or wages under clause (iv) of section 17(1) of the Act. Learned counsel read the decisions of Kartikeya V. Sarabhai v. CIT (1985) 156 ITR 509 (SC) and A. Nanda Kumar v. ITO (1988) 41 Taxman 73 (Hyd.) in support of his contentions. Learned counsel, Mr. S.N. Soparkar, also contended that only receipts as reduced by the outgoings which were spent for earning the receipts could be treated as profits. He argued that what is to be taxed is income and not receipts and read the decision of the Supreme Court in CIT v. S.C. Kothari (1971) 82 ITR 794, in support of his contentions. All learned counsel argued that the Bombay High Court in CIT v. M.C. Shah (1991) 189 ITR 180 had not disturbed the decision of the Bombay Bench of the ITAT in Narendra V Patel's case (1985) 11 ITD 587, a copy of which is contained in the paper book and, therefore, we should hold that the incentive bonus or commission received by the Development Officers assessee was not salary income, but income from business or profession. As can be seen from the order of the Bombay High Court, the High Court held that the finding of the 'Tribunal was a finding of fact raising no question of law. Learned counsel, Mr. Pranav Desat and Mr. Mihir Joshi, who appeared for the Revenue, placed strong reliance on the decisions of the Andhra Pradesh, High Court in K.A. Choudary v. CIT (1990) 183 ITR 29, CIT v. B. Chinnaiah (1995) 214 ITR 368, the Orissa High Court in Govind Chandra Pani's case
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(1995) 213 ITR 783 and Bijay Kishore Kapoor's case (1993) 202 ITR 129, the Rajasthan High Court in CIT v. Sheo Raj Bhatia (1999) 235 ITR 523 and the Karnataka High Court in CIT v. M.D. Patil (1998) 229 ITR 71 (FB), in support of their contention that no part of incentive bonus could go out of the concept of salary and, therefore, the only deductions to which the assessee were entitled, could be deductions under section 16 and no amount could be deducted by way of reimbursement of expenses from the total incentive bonus received by the assessee. Mr. Joshi further contended that there was 'no bifurcation of the incentive bonus granted under the old scheme, which was relevant for the assessm ent years in question. It was argued that even if a portion of the incentive bonus was treated as special allowance, it would still be income and would be profit in lieu of or in addition to salary within the meaning of section 17(1)(iv) of the Act and, therefore, was chargeable to tax under the head "Salaries" in view of the provisions of section 15 of the Act. It was argued by him that incentive bonus was the real income of the assessee and not just a notional income. The fact that some amount was spent by way of expenses from such income would not change its nature and it would remain a taxable income. It was contended that income is no less real because part of the total covers outlays for getting it. Mr. Joshi further argued that even though while reimbursement of expenses would not be income, reimbursement of expenses stated to be incurred for earning the income, cannot be described as reimbursement simpliciter. He, however, with his usual candour, did not dispute the proposition that reimbursement of expenses which do not result in personal profit or gain would not be income while arguing that any other reimbursement should be. Treated as income, which would be subject to statutory deductions and exemptions alone. He finally contended that the Development Officer was not obliged to expend any portion of the incentive bonus and it was open for him to pocket the entire amount and if in such background, expenditure is allowed to be deducted, it would result to different yardsticks for Development Officers because they may or may not spend any of the amounts from the incentive bonus earned by them. Learned counsel, Mr. Desai argued that all receipts are income. He contended that the Income-tax Act contained provisions which would cover all possible receipts and incentive bonus was clearly a receipt which was income of the Development Officer. He relied upon the decisions in the cases of Mehboob Productions (Pvt.) Ltd. v. CIT (1977) 106 ITR 758 (Bom.); Father Epharam v. CIT (1989) 176 ITR 78 (Ker.); Elel Hotels and Investments Ltd. v. Union of India (1989) 178 ITR 140 (SC) and CIT v. E.A. Rajendran (1999) 235 ITR 514; 142 CTR 244 in support of his contention that the entire incentive bonus should be treated as salary of the Development Officer. We first deal with the contention of the assessee that the Development Officer should be taken to be acting in a dual capacity and that when he earns incentive bonus, he should be treated as not acting as an employee of the LIC, but in a capacity as an agent or an independent person doing work for the LIC, in which event he would be entitled to deduct the expenses incurred for earning the incentive bonus. We find it difficult to subscribe to the proposition that the Development Officer acts in a dual capacity. As noted above, he is a whole-time employee of the LIC and in his functioning just as there are disincentives, there is also an incentive provided under the scheme for enabling him to earn additional amounts over and above his regular remuneration as Development Officer, from which such incentive bonus was expressly excluded. The test would be, was it a benefit, which the Development Officer could have received only while continuing as an employee and the answer is clearly "yes". It is because the assessee were working as Development Officers as full time employees of the LIC that they could derive an additional reward by showing superlative performance above the standard norms. In Wicks v. Firth (Inspector of Taxes), (1982) 2 All ER 9, the Court of Appeal, in a different context, observed that section 61 of the Finance Act, 1976, under which assessm ent could be made on the basis that a person employed in higher-paid employment, had by reason of his employment been provided for him or member's of his family a benefit, applied to benefits which an employee would not have received unless he had been an
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employee, the fact of employment being one of the causes of the benefit being provided although it did not need to have been the sole or even the dominant cause. We, therefore, reject the contention that the Development Officer received the incentive bonus in some different capacity on the basis that he was working in a dual role. Now, coming to the main controversy involved, we may first refer to the relevant part of the definition of "income" in section 2(24)(iiia) which clause was inserted by the Amendment Act of 1989, retrospectively with effect from April 1, 1962. It is provided therein…
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