Income Tax Appellate Tribunal - Hyderabad
Assistant Commissioner Of Income Tax vs M. Srinivasulu on 20 December, 1996
Equivalent citations: [1997]62ITD159(HYD), [1999]235ITR33(HYD)
ORDER
A. Venku Reddy, J.M.
1. The following question referred to the Special Bench of the Tribunal for decision arises out of the Revenue's appeal against the order dt. 12th January, 1994, of the CIT-III, Hyderabad, for the asst. yr. 1992-93 :
"Whether, on the facts and in the circumstances of the case, the claim made by the assessee for deduction of 40 per cent out of incentive bonus received by the Development Officer of LIC of India could be disallowed by way of 'prima facie' adjustment within the meaning of cl. (iii) of the first proviso to s. 143(1)(a) of the IT Act, 1961."
2. The facts that led to the reference of the aforementioned question to the Special Bench for its decision are as follows :
(a) The assessee is working as a Development Officer in the Life Insurance Corporation of India (hereinafter referred to as LIC in brief) at Anantpur. During the previous year relevant to the asst. yr. 1992-93, the assessee, in addition to salary, received incentive bonus of Rs. 3,58,971. He filed his return of income for the asst. yr. 1992-93 on 6th July, 1992. He claimed deduction of Rs. 1,43,588 being 40 per cent of the incentive bonus towards expenses for earning the incentive bonus. The AO processed the said return under s. 143(1)(a) of the IT Act and made an adjustment by disallowing the claim of deduction of Rs. 1,43,588 and issued an intimation dt. 18th November, 1992, levying additional tax of Rs. 16,170 under s. 143(1A). The reason given in the intimation dt. 18th November, 1992, by the AO for making the said adjustment is as follows :
"Expenses claimed out of incentive bonus is disallowed in view of Andhra Pradesh High Court's decision in the case of K. A. Chowdary (Infra) 1,43,588."
(b) Aggrieved by it, the assessee filed an application under s. 154 requesting the AO to rectify the intimation by deleting the disallowance/adjustment made in respect of the 40 per cent of incentive bonus being expenses for earning the incentive bonus. The assessee contended before the AO that his claim is bona fide and similar claims made by him for earlier years were allowed by the appellate authorities and that the impugned adjustment does not fall under the purview of "prima facie adjustments" contemplated under cl. (iii) of the first proviso to s. 143(1)(a) of the IT Act. The AO rejected the application of the assessee by his order dt. 21st April, 1993, made under s. 154 stating that the incentive bonus forms part of salary in view of the decision of the Andhra Pradesh High Court in the case of K. A. Chowdary vs. CIT (1990) 183 ITR 29 (AP), that the incentive bonus does not fall under s. 10(14) also for exemption, it being not an allowance notified by the Central Government in the Official Gazette and that the disallowance is quite in order. Still aggrieved by it, the assessee carried the matter in appeal.
(c) The assessee contended before the learned CIT(A) that the impugned adjustment does not fall within the category of prima facie adjustments contemplated under s. 143(1)(a), that the disallowance of the expenditure claimed by the assessee at the stage of the intimation itself is not sustainable and that the impugned addition may be deleted. The learned CIT(A) agreed with the submissions made on behalf of the assessee and cancelled the adjustment holding as follows :
"In my opinion the issue involved is highly debatable and would not fall within the purview of s. 154. The scope of s. 143(1)(a) is co-extensive with that of s. 154. Hence, I hold that AO was not justified in making such prima facie adjustment. Hence I hold that appellant is entitled to a deduction and the AO erred in making the adjustment under s. 143(1)(a)."
Aggrieved by it, the Revenue came up with this appeal before the Tribunal.
(d) When this appeal first came up for hearing before it, the Division Bench tribunal Hyderabad Bench 'A' noticed conflict of decisions rendered on the issue in question by different Benches of the Tribunal at Hyderabad. The Tribunal Hyderabad Bench 'A', in its order dt. 21st April, 1995, rendered in the case of ITO vs. N. Bhaskara Rao (ITA No. 1152/Hyd/1992 for asst. yr. 1989-90), took the view that the allowability or otherwise of the deduction of 40 per cent of incentive bonus towards expenses claimed by a Development Officer of LIC being a highly debatable issue, it cannot be adjudicated upon and disallowed by way of prima facie adjustment at the intimation stage itself under s. 143(1)(a). Another combination of the Tribunal, Hyderabad Bench 'A', in its order dt. 26th December, 1995, rendered in the case of K. Gangadhar vs. ITO (ITA No. 274/Hyd/1994 for asst. yr. 1990-91) and batch, took a contrary view that the claim of deduction of 40 per cent of incentive bonus towards expenses by Development Officers of LIC is prima facie inadmissible in view of the Andhra Pradesh High Court's decision in the case of K. A. Chowdary (supra) and the decision in the case of CIT vs. B. Chinnaiah & Ors. (1995) 214 ITR 368 (AP), and, therefore, the AO was justified in making the prima facie adjustment under s. 143(1)(a) and disallowing the deduction claimed. Noticing that conflict, the Division Bench felt that this appeal is fit to be heard and decided by a Special Bench. Accordingly, the President of the Tribunal was pleased to constitute this Special Bench for deciding the question mentioned supra.
3. The learned Departmental Representative, Sri C. P. Rama Swamy, elaborately argued for the appellant-Revenue while Sri S. Rama Rao, Advocate, who appeared for the Intervenors, vehemently supported the impugned order of the first appellate authority. The submissions of the learned Departmental Representative are briefly as follows :
Admittedly, Development Officer of LIC is a whole-time salaried employee. There is the relationship of employer and employee between LIC and the Development Officer. For achieving a social objective and to make its profits and funds available to the nation for developmental work, Government nationalised the life insurance business. It was not intended for profit making. What is earned by a Development Officer out of his contract of employment from his employer LIC by way of salary, allowance, incentive bonus, etc., all form part and parcel of salary falling under s. 17 of the IT Act, as has been held by the jurisdictional High Court as long back as on 10th December, 1987, in the case of K. A. Chowdary (supra) and reiterated by the jurisdictional High Court in its decision dt. 8th March, 1995, in the case of B. Chinnaiah & Ors. (supra). When once the character of the incentive bonus is determined as part of salary, then the deductibility is decided under s. 16(i) of the IT Act. In view of the aforementioned decisions of the jurisdictional High Court, it is no more open to the assessee to contend that incentive bonus does not form part of salary for the purposes of ss. 15, 16 and 17 of the IT Act. When once it is held to be salary, then no other deduction except the one specified in s. 16(i) is permissible out of incentive bonus. Therefore, no estimated expenditure can be allowed out of incentive bonus. When the law is clear on that aspect, there can be no debate on the issue whether the estimated expenditure claimed for earning incentive bonus is prima facie inadmissible or not. When the assessee himself had shown the incentive bonus as part of salary in his return, the question of allowing any deduction out of it towards expenses except standard deduction under s. 16(i) does not arise. In view of the amendment to s. 10(14) which came into force w.e.f. 1st April, 1989, incentive bonus not being an allowance notified in the Official Gazette by the Central Government, no part of incentive bonus can be exempted under s. 10(14). Hence, the decision of the Special Bench of the Tribunal in the case of P. Dayakar vs. ITO (1995) 53 ITD 25 (Hyd) (SB) rendered on 23rd March, 1989, relating to asst. yrs. 1981-82 and 1982-83, can have no relevance subsequent to 1st April, 1989, in view of the amendment to s. 10(14) of the IT Act. When the deduction claimed is totally opposed to law, it is prima facie inadmissible and, therefore, it can be disallowed by way of adjustment under cl. (iii) of the first proviso to s. 143(1)(a). The issue is no more debatable after the decision of the jurisdictional High Court in the case of K. A. Chowdary (supra). In that view of the matter, the view taken by the learned CIT(A) is erroneous and is liable to be set aside.
4. The learned counsel, Sri S. Rama Rao, while supporting the impugned order, contended as follows :
A Development Officer of LIC cannot be treated as any other employee of State Government or Central Government. He has special duties to perform in addition to his regular duties. He gets regular salary for the duties he renders in connection with his contract of employment and gets incentive bonus for extra business he secures based on a particular formula. To continue his employment as Development Officer, it is enough if he secures minimum business to the LIC through his agents. By way of incentive or reward for hard work and for securing more new business to the LIC and for maintaining the existing business, the Development Officer is paid incentive bonus under a special scheme on the basis of certain formula evolved by the LIC. The incentive bonus was linked as a percentage of business secured by the Development Officer in excess of certain stipulated premiums. As has been held by the Special Bench of the Tribunal in the case of P. Dayakar vs. ITO (supra), incentive bonus is a reward for procuring extra new business to the LIC. Development Officer, who is in charge of a group of agents, has to train new agents, motivate all agents for canvassing new business and has to see that the business already obtained is maintained without the policies getting lapsed and that he should also attend to the grievances of policy-holders. He acts like a link between the agents and the policy-holders and between the agents and the LIC. For that purpose, he maintains some establishment and incurs substantial expenditure. The said expenditure is directly related to procuring new business to the LIC and the incentive bonus is related to such new business. Though the Andhra Pradesh High Court held in the case of K. A. Chowdary (supra) that incentive bonus formed part of salary, it had no occasion to go into the issue whether the net amount of incentive bonus alone should be included in salary or the entire gross amount of incentive bonus should be included as salary. Even after the jurisdictional High Court rendered its judgment in the case of K. A. Chowdary (supra) in October, 1987, various Benches of the Tribunal took the view that it is only the net amount of incentive bonus that could be treated as salary and not the gross amount and that the deduction should be allowed at the threshold itself under s. 15 and not under s. 10(14) or under s. 16(i). Incentive bonus may technically form part of salary under the extended definition of "salary" under s. 17. It has no nexus to salary. If it is treated as perquisite, the value of perquisite has to be determined after deducting the expenses. Likewise, if it is treated as profit in lieu of salary, the profit is to be determined after excluding expenses. Seen in any view of the matter, it is only the net amount of incentive bonus that could be considered as salary and not the gross amount. The Tribunal, Delhi Bench (SMC), in the case of I. D. Gupta vs. ITO (1991) 36 ITD 445, Tribunal Pune Bench (SMC), in the case of Jitendra V. Mohan vs. ITO (1992) 43 TTJ (Pune) 115 : (1992) 40 ITD 452 (Pune) (SMC) and Tribunal, Ahmedabad Bench, in the case of Kironbhai H. Shelath vs. ITO, took the view that the deduction should be allowed at the first instance itself under s. 15 and the net amount alone should be considered as salary applying the "real income" theory enunciated by the Supreme Court in the case of Badridas Daga vs. CIT (1958) 34 ITR 10 (SC). Even after the judgment in the case of K. A. Chowdary (supra) rendered on 10th December, 1987, till 8th March, 1995, when the judgment in the case of B. Chinnaiah & Ors. was delivered by the High Court, the Tribunal, Hyderabad Benches, consistently took the view that 40 per cent of incentive bonus is allowable towards expenses since the net amount alone should be considered as salary. Between 10th December, 1987, and 8th March, 1995, Tribunal, Hyderabad Benches, decided hundreds of appeals relating to Development Officers of LIC and in almost all those appeals, the Tribunal accepted the claim of the Development Officers for deduction of 40 per cent of incentive bonus. Based on those decisions of the Tribunal only, the Development Officer have been claiming deduction of 40 per cent of incentive bonus. It was only on 8th March, 1995, the Andhra Pradesh High Court held in the case of B. Chinnaiah & Ors. (supra) that incentive bonus being part of salary, no deduction whatsoever out of it is permissible except those specified in s. 16(i). The plea that only the net amount should be treated as salary and not the gross amount, though raised before the High Court in B. Chinnaiah's case (supra), was not considered and decided by the High Court. The Special Leave Petition filed against the judgment of the High Court in the case of B. Chinnaiah & Ors. has been admitted by the Supreme Court, thereby indicating that the issue involves a substantial question of law. In that way, the debate on this controversial issue still continues. At any rate, whatever might be the position after 8th March, 1995, i.e., after the judgment in the case B. Chinnaiah & Ors. (supra) the issue whether any deduction could be allowed out of incentive bonus towards expenses continued to be a highly debatable issue at least till 8th March, 1995, even after the judgment in the case of K. A. Chowdary (supra). Hence, the impugned adjustment in respect of a highly debatable claim is wholly without jurisdiction. Therefore, the order of the learned CIT(A) requires to be upheld.
5. We have duly considered the rival submissions and the material available on record. Sitting at Hyderabad, this Bench cannot entertain any plea that incentive bonus earned by a Development Officer of the LIC does not form part of salary within the meaning of "salary" contained in s. 17(1)(iv) of the IT Act in view of the two binding decisions of the jurisdictional High Court rendered in the cases of K. A. Chowdary (supra) and B. Chinnaiah (supra) staring at our face, in addition to the decision of the Orissa High Court in the case of CIT vs. Govind Chandrapani (1995) 213 ITR 783 (Ori). Tribunal Hyderabad Bench 'B' (SB), in the case of P. Dayakar vs. ITO (supra), as long back as on 23rd March, 1989, following the decision in the case of K. A. Chowdary (supra), held that incentive bonus forms part of salary. Hence, there can be no more be controversy on the issue that incentive bonus forms part of salary within the meaning of "salary" contained in s. 17(1)(iv) of the IT Act. However, controversy started on the issue whether the gross incentive bonus amount forms part of salary or the net amount (gross minus expenses) could alone be considered as salary and whether the deduction for expenses should be allowed at the starting point itself under s. 15.
6. In the case of K. A. Chowdary (supra), one Development Officer of the LIC filed a writ petition in the High Court to direct the IT authorities to treat the incentive bonus received by him as income from profession and not as income under the head "salary" and allow the expenses incurred for earning the said professional income as deduction. The Andhra Pradesh High Court, applying the ratio of the decision of the Supreme Court in the case of Gestetner Duplicators (P) Ltd. vs. CIT (1979) 117 ITR 1 (SC) and the decision of the Allahabad High Court in the case of CIT vs. Hind Lamps Ltd. (1980) 122 ITR 451 (All), and the decision of the Andhra Pradesh High Court in the case of M. Krishnamurthy & Ors. vs. CIT (1985) 152 ITR 163 (AP), has held that incentive bonus received by a Development Officer of the LIC forms part of salary and that it cannot be considered as income from profession. Holding so, the writ petition was dismissed by the High Court. However, the issue whether the net amount of incentive bonus alone should be treated as salary and whether the expenses claimed by way of deduction should be allowed at the starting point itself under s. 15 while determining the quantum of salary taxable did not arise for consideration before the High Court in that case. Hence, that aspect was not considered. That gap gave scope for another line of thinking that though incentive bonus falls under the head "salary", it is only the net amount that could be considered as salary and not the gross amount and that the deduction should be allowed at the threshold under s. 15 itself. Another line of thinking is that the ruling in the case of K. A. Chowdary (supra) had drawn the curtain once for all on the controversy regarding the head under which the entire incentive bonus should be assessed and that it being part of salary, no deduction for expenses could be allowed out of it. Thus, even after the judgment in the case of K. A. Chowdary (supra) rendered on 10th December, 1987, the view that though incentive bonus forms part of salary, still the net amount of incentive bonus alone could be considered as salary and deduction for expenses should be allowed at the starting point itself under s. 15 gained currency. Different Benches of the Tribunal held that view.
7. The Tribunal Hyderabad Bench 'B' (SB), in the case of P. Dayakar vs. ITO (supra), though following the decision in the case of K. A. Chowdary (supra) held that incentive bonus forms part of salary, still held that it is the net amount of incentive bonus that could be considered as salary for taxation purposes. In that case, the Special Bench took note of the duties that have to be rendered by a Development Officer and came to the conclusion that the Development Officer has necessarily to incur certain expenditure for securing new business to the LIC and for earning incentive bonus and that, therefore, the said expenditure should be allowed as a deduction. No doubt, incidentally it observed that the said expenditure could be allowed under s. 10(14) of the IT Act. In that connection, the Special Bench, while considering the nature of the duties of Development Officer, observed as follows :
"8. Coming to the incentive bonus, while additional conveyance allowance was provided to neutralise the expenditure incurred by the Development Officers in procuring new business, the incentive bonus is a reward for such services and the question is whether any expenditure has to be allowed out of it as having been expended for earning such reward or income. It cannot be said that conveyance expenditure is the only expenditure that has to be incurred by a Development Officer for canvassing business. It is very difficult to convince the public of the necessity to go in for insurance. A lot of persuasion is required. A Development Officer is in charge of a group of agents, sometimes covering even more than 100. Broadly put, he has to train new agents, motivate all agents for canvassing new business, see to it that the business already obtained is maintained without policies lapsing, and where there are grievances from particular policy-holders which the agents cannot tackle, he has to see that such grievances are tackle and rectified. In a manner, he acts as a link between the agents and the policy-holders and between the agents and the LIC. For this purpose, some establishment is necessary. There are cases where accounts are maintained of such expenditure, and there are cases where accounts are not maintained. In cases where accounts are maintained by way of evidence, the entire expenditure incurred to the extent proved has to be allowed under s. 10(14), because that expenditure is directly related to procuring the new business and because the incentive bonus is related to new business."
Thus, the aforementioned decision was rendered by the Special Bench after considering the decision of the High Court in the case of K. A. Chowdary (supra).
8. In the case of K. Rami Reddy vs. ITO (1984) 8 ITD 633 (Hyd), the Tribunal, Hyderabad Bench 'B', in its order dt. 17th February, 1984, while considering the issue whether any deduction for expenses could be allowed out of incentive bonus earned by a Development Officer of the LIC, observed as follows :
"Concept of real income has been applied to business and there is no reason why it should not apply to other heads of income. Even salary that is contemplated cannot always mean gross salary even if the salary that goes into the pocket of the assessee is only a small part of it."
9. The Tribunal, Delhi Bench (SMC), in the case of I. D. Gupta vs. ITO (supra), while following the decision of the Andhra Pradesh High Court in the case of K. A. Chowdary (supra) and holding that incentive bonus forms part of salary, still held that the deduction in respect of the claim of expenses must be admitted at the point of taxation of salary itself, i.e., the income by way of salary for the purpose of s. 15 is that part of the receipt excluding the amount of such expenditure. In that case also, the Tribunal, following the decision of the Supreme Court in the case of Badridas Daga vs. CIT (supra), extended the principle of real income to salary income. The Tribunal held that by extending that principle to salary income, it is possible to hold that deduction is admissible under s. 15 itself.
10. The Tribunal Ahmedabad Bench 'B', in the case of Kironbhai H. Shelath vs. ITO (supra), following Third Member decision of the Tribunal, Bombay Bench, in the case of ITO vs. Narendra V. Patel (1985) 21 TTJ (Bom) 60 (TM) held that the expenditure incurred for earning the incentive bonus was liable to be deducted at the starting point itself under s. 15 while determining the amount of incentive bonus which was chargeable to tax. In that case, the Tribunal referred to the decision of the Andhra Pradesh High Court in the case of K. A. Chowdary (supra) and explained it by saying that the High Court did not consider the question whether the expenses incurred for earning the incentive bonus were allowable as deduction at the starting point itself in view of the fact the incentive bonus does not represent salary in the ordinary sense but it represents salary because of the technical definition given in s. 17. The Ahmedabad Bench also applied the real income theory based on the principle laid down by the Supreme Court in the case of Badridas Daga (supra) to salary income also. Ultimately, the Tribunal held in that case that the expenses incurred for earning the incentive bonus by a Development Officer are allowable as deduction and that the net incentive bonus alone is includible in the computation of income under the head "salary". A similar view was also taken by the Tribunal, Pune Bench, in the case of Jitendra V. Mohan vs. ITO (supra).
11. The aforementioned decisions of the Tribunal have been consistently followed by different Benches of the Tribunal at Hyderabad in several cases.
12. The Tribunal Hyderabad Bench 'B', in the case of P. Mohana Rao vs. ITO (ITA Nos. 1848/Hyd/1992 and 1960/Hyd/1990 relating to the asst. yrs. 1989-90 and 1990-91), followed the decision of the Tribunal, Ahmedabad Bench 'B', in the case of Kironbhai H. Shelath (supra) and held that the expenditure for earning incentive bonus is liable to be deducted at the starting point itself under s. 15 while determining the amount of incentive bonus chargeable to tax under the head "salary". The said decision of the Tribunal was rendered on 23rd August, 1993. The Tribunal Hyderabad Bench 'A' (SMC) in the case of ITO vs. K. Raju (ITA No. 1790/Hyd/1990 for the asst. yr. 1989-90), after considering the decision of the Andhra Pradesh High Court in the case of K. A. Chowdary (supra) and the decision of the Tribunal Special Bench, in the case of P. Dayakar (supra), held that what is includible under the extended technical definition of "salary" is only the net incentive bonus and the essential expenditure to earn incentive bonus is liable to be deducted at the starting point itself under s. 15 of the IT Act even without taking the aid of the provisions of s. 10(14). That decision was rendered on 29th July, 1993. In that case also, Hyderabad Bench 'A' followed the decision of Ahmedabad Bench 'B' in the case of Kironbhai H. Shelath (supra) and held that the net incentive bonus only is liable to be included as salary and that the expenses essential to earn the incentive bonus are liable to be deducted at the starting point itself under s. 15 while determining the quantum of incentive chargeable to tax under the head "salary".
13. As we have already stated, following the aforesaid decisions, Hyderabad Benches 'A' and 'B' of the Tribunal have disposed of hundreds of appeals allowing deduction at 40 per cent of incentive bonus towards expenses without exception all these years. Some of the CITs(A) also followed those decisions and allowed relief at their stage itself. However, the Department continuously took the stand that in view of the decision in the case of K. A. Chowdary (supra) that incentive bonus forms part of salary, no deduction for expenses could be allowed. Thus, while the Benches of the Tribunal at Hyderabad and elsewhere consistently took the view that the net amount of incentive bonus only could be considered as salary and the deduction should be allowed at the starting point itself under s. 15, the Department took the contrary stand. This controversy went on till 8th March, 1995, when the Andhra Pradesh High Court once again, in the case of CIT vs. B. Chinnaiah & Ors. (supra), reaffirmed its earlier view that incentive bonus is nothing but salary.
14. In Chinnaiah's case (supra), following are the contentions raised by the assessee before the High Court :
(1) Incentive bonus should be treated as income from other sources and expenses should be allowed and the net income alone should be taxed.
(2) Even if incentive bonus is treated as salary, the expression "salary" should be so construed as to bring in its net, salary after excluding expenses incurred in earning the salary and that would be the real income.
(3) What is taxable is only the net income and not the gross receipts and, therefore, to arrive at the correct income, the expenditure incurred for earning such income should be deducted.
The High Court, following its earlier decision in the case of K. A. Chowdary (supra), held that :
(1) Incentive bonus, whether treated as part of the salary or perquisite, is taxable under the head "salary".
(2) The permissible deductions under the head "salary" are as specified in s. 16.
(3) 40 per cent of incentive bonus claimed as deduction does not fall under any of the clauses of s. 16 and, therefore, it is expenditure which is not permissible as deduction under s. 16 and any expenditure which does not fall within the meaning of s. 16 cannot be allowed.
(4) Incentive bonus is not an exempted allowance notified by the Central Government in Official Gazette under s. 10(14).
So holding, the High Court on 8th March, 1995, upheld the Revenue's plea that no portion of incentive bonus, much less 40 per cent of incentive bonus, could be allowed as a deduction towards expenses. Having held so, the High Court felt it unnecessary to consider the other contentions of the assessee, viz., only net income (incentive bonus) and not gross income should be considered as salary. Thus, in a way, the High Court impliedly rejected the contention that net incentive bonus alone could be considered as salary for taxation and not the gross incentive bonus receipt. No doubt, the SLP filed against that judgment has been admitted by the Supreme Court. However, that does not affect the efficacy of the said ruling unless it is unsettled by the Supreme Court. Till then, it holds the field. Hence, it can be said that Chinnaiah's case (supra), has drawn the curtain and closed the controversy of net and gross incentive bonus theory.
15. However, the question is as to what was the position prior to 8th March, 1995. Could it be said that the issue whether only the net incentive bonus should be considered as salary and deduction should be allowed at the starting point itself, was a debatable issue till 8th March, 1995, when the judgment of the jurisdictional High Court was rendered in Chinnaiah's case (supra) ? In this appeal, we are not called upon to decide the question whether the deduction could be allowed under s. 15 itself. The sole issue that arises for consideration in this appeal is whether the assessee's claim of deduction of expenses out of incentive bonus could be disallowed at the stage of intimation itself under cl. (iii) of the first proviso to s. 143(1) (a) by way of prima facie adjustment.
16. As we have already stated, even after the Andhra Pradesh High Court's decision in the case of K. A. Chowdary (supra), various Benches of the Tribunal considered the said decision and still held that it is only the net incentive bonus that could be considered as salary for the purposes of taxation and not the gross incentive bonus. As we have already referred to, in the following cases the Tribunal, extending the principle of real income propounded by the Supreme Court in the case of Badridas Daga (supra) to salary income also, consistently held that reasonable expenses have to be deducted from the gross incentive bonus and the net amount alone should be considered as salary for the purposes of taxation :
(1) I. D. Gupta vs. ITO (supra);
(2) Jitendra vs. Mohan V. ITO, (supra);
(3) Kironbhai H. Shelath vs. ITO (supra);
(4) P. Mohana Rao vs. ITO ITA (supra);
(5) ITO vs. K. Raju ITA No. 1790/Hyd/1990 (Hyd), and (6) P. Dayakar vs. ITO (supra).
Thus, in a series of decisions rendered by various Benches of the Tribunal, the view that has been expressed was that it is only the net incentive bonus that could be considered as salary for taxation purposes and not the gross incentive bonus received by a Development Officer of the LIC. In the aforementioned cases, the Andhra Pradesh High Court's decision in the case of K. A. Chowdary (supra) was referred to and considered.
17. The Tribunal continued to hold the view that the expenses incurred for earning incentive bonus should be deducted at the starting point itself under s. 15, at least till 8th March, 1995, when the Andhra Pradesh High Court rendered its judgment in the case of B. Chinnaiah & Ors. (supra). Now we have to see as to what was the position prior to 8th March, 1995. The very fact that different Benches of the Tribunal consistently held the view that it is the net amount of incentive bonus and not the gross amount that should be treated as salary, all these years even after the decision in the case of K. A. Chowdary (supra) till 8th March, 1995, when the judgment in the case of B. Chinnaiah & Ors. (supra) was delivered, itself indicates that the claim of deduction of expenses out of incentive bonus is not such a patently inadmissible claim on the face of it which could have been rejected outright without a second thought or discussion. It could at least be said that it was a highly debatable issue on which there could reasonably be more than one opinion. The issue involved a substantial point of law whether the principle of real income could be extended to salary income and whether the actual bona fide expenditure incurred by a Development Officer could be deducted at the starting point itself under s. 15 while determining the correct quantum of salary income for taxation. At least those points were agitating the mind of various Benches of the Tribunal, as could be seen from the decisions rendered by various Benches of the Tribunal mentioned supra, at least till 8th March, 1995. By no stretch of imagination can it be said that the issue whether the net incentive bonus alone should be considered as salary was not a debatable one till 8th March, 1995. Now, it has to be seen whether such a debatable and controversial issue could be decided at the stage of intimation under s. 143(1)(a).
18. The relevant portion of s. 143(1)(a) runs as follows :
"143(1)(a). Where a return has been made under s. 139, or in response to a notice under sub-s. (1) of s. 142 :
(i) if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance-tax paid and any amount paid otherwise by way of tax or interest, then, without prejudice to the provisions of sub-s. (2), an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under s. 156 and all the provisions of this Act shall apply accordingly; and
(ii) if any refund is due on the basis of such return, it shall be granted to the assessee :
Provided that in computing the tax or interest payable by, or refundable to, the assessee, the following adjustments shall be made in the income or loss declared in the return, namely :
(i) any arithmetical errors in the return, accounts or documents accompanying it shall be rectified;
(ii) any loss carried forward, deduction, allowance or relief, which, on the basis of the information available in such return, accounts or documents, is prima facie admissible but which is not claimed in the return, shall be allowed;
(iii) any loss carried forward, deduction, allowance or relief claimed in the return, which, on the basis of the information available in such return, accounts or documents, is prima facie inadmissible, shall be disallowed :"
On a plain reading of s. 143(1)(a), it is clear that if on the basis of the return, if filed by an assessee, any tax or interest is found due after adjustments as set out in that section, an intimation shall be sent to the assessee specifying the sum so payable. Sec. 143(1)(a) envisages that on the basis of the return filed, if any tax or interest is payable by the assessee and if any refund is due to the assessee, the AO shall send to the assessee an intimation specifying the sum so payable and such intimation shall be deemed to be a notice of demand under s. 156 of the Act. The proviso to s. 143(1)(a) empowers the AO to make certain adjustments, popularly known as "prima facie adjustments" as enumerated in cls. (i), (ii) and (iii) of the said proviso, while computing the tax or interest payable by or refundable to the assessee. The first proviso provides for three types of adjustments. We are concerned with the adjustments contemplated under cl. (iii) of the first proviso. Under the said clause, adjustment is permissible only when the deduction or relief or allowance claimed is found to be prima facie inadmissible.
19. In the case of Khatau Jhankar Ltd. & Anr. vs. K. S. Pathania (1992) 196 ITR 55 (Bom), the Bombay High Court observed that the scope of the power to make prima facie adjustments under s. 143(1)(a) is somewhat coterminous with the power to rectify a mistake apparent from the record under s. 154. The Bombay High Court, while referring to the expression "prima facie inadmissible" appearing in cl. (iii) of the first proviso to s. 143(1)(a), held as follows :
In its literal sense, 'prima facie' means on the face of it. Hence, on the face of the return and the documents and accounts accompanying it, the deduction claimed must be inadmissible. Only then, can it be disallowed under the proviso to s. 143(1)(a)."
Thus, for disallowing a deduction claimed by making an adjustment under cl. (iii) of the proviso, it must be inadmissible on the face of it. Ex facie, the deduction claimed must be untenable under law. In the aforementioned case, the Bombay High Court, after referring to Circular No. 581, dt. 28th September, issued by the CBDT, observed that the jurisdiction of the AO to make adjustments under s. 143(1)(a) is somewhat coterminous with the power to rectify a mistake apparent from the record. The Supreme Court in the case of T. S. Balaram, ITO vs. Volkart Bros. (1971) 82 ITR 50 (SC), while explaining the scope of s. 154 of the IT Act, held that a mistake apparent from the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions. Thus, when the matter is not free from argument or debate, exercise of jurisdiction under s. 143(1)(a) in respect of that debatable issue falls outside the jurisdiction of the assessing authority.
20. In the case of Modern Fibotex India Ltd. vs. Dy. CIT (1995) 212 ITR 496 (Cal), the Calcutta High Court, while considering the scope of s. 143(1)(a), held as follows :
"The jurisdiction of the AO under s. 143(1)(a) of the IT Act, 1961, to make an adjustment and to issue an intimation is limited not only to the obvious but also to that which is deducible from the return as filed, without doubt or debate. This is clear from the language of the section and is supported by authority as well as the circulars issued by the CBDT in this connection."
The Calcutta High Court followed the views expressed by the Bombay High Court in the case of Khatau Jhankar Ltd. (supra) and the Delhi High Court in the case of S. R. F. Charitable Trust vs. Union of India (1992) 193 ITR 95 (Del), and observed that the scope of the powers to make prima facie adjustments under s. 143(1)(a) is somewhat coterminous with the power to rectify a mistake apparent from the record under s. 154.
Further, the Calcutta High Court observed as follows :
"The exercise of power under s. 143(1)(a) is, therefore, required to be scrutinised carefully and kept strictly within the bounds of the statute, any dispute being resolved in favour of the assessee."
21. In the case of Kamal Textiles vs. ITO (1991) 189 ITR 339 (MP), the Madhya Pradesh High Court held that permissible adjustments under s. 143(1)(a) are, inter alia, only of those claims which are on the basis of the information available in the return prima facie inadmissible and that the AO is not permitted under the guise of making adjustment to adjudicate upon any debatable issue. The Delhi High Court in the case of S. R. F. Charitable Trust vs. Union of India (supra) also took the same view. The Karnataka High Court in the case of God Granites vs. Under Secretary, CBDT (1996) 218 ITR 298 (Kar), following the view taken by the Bombay High Court in the case of Khatau Jhankar Ltd. (supra), held that under the guise of effecting an adjustment under s. 143(1)(a), the AO cannot decide debatable issues and that the inadmissibility of a deduction must be evident and obvious on the face of it from the return and its annexures for making the adjustment under the proviso to s. 143(1)(a). Further, the Karnataka High Court observed that the fact that on ultimate analysis the assessee may not be entitled for the deduction claimed from the total income does not mean that recourse can be had to disallowance under s. 143(1)(a) dispensing with hearing and denying opportunity to the assessee to challenge the assessment and that under the guise of effecting an adjustment under s. 143(1)(a), the AO shall not decide debatable issues. Various Benches of the Tribunal also took the same view, that debatable issues cannot be decided at the stage of intimation itself.
22. The Jaipur Bench of the Tribunal, in the case of Badhar Khan vs. Dy. CIT (1992) 44 TTJ (Jp) 140 : (1992) 42 ITD 589 (Jp), held that where there is a substantial point of dispute, it ceases to be a prima facie adjustment. In the case of Eicher Motors Ltd. vs. Dy. CIT (1992) 40 ITD 595 (Indore), Tribunal, Indore Bench, held that if the allowability or disallowability of a claim is debatable, no prima facie adjustment. In respect thereof could be made. In the case of Amber Electrical Conductors (P) Ltd. vs. Dy. CIT (1992) 43 ITD 313 (Mad), Tribunal, Madras Bench, held that where a particular matter requires an enquiry for coming to a decision, the said adjustment cannot be termed as a prima facie adjustment. In the case of Mekins Agro Products (P) Ltd. vs. Asstt. CIT (1995) 52 TTJ (Hyd) 190 : (1995) 53 ITD 99 (Hyd), Tribunal Hyderabad Bench 'A', while considering the scope of s. 143(1)(a), held as follows :
"The use of the phrase 'prima facie inadmissible' in cl. (iii) of the first proviso to s. 143(1)(a), in its literal sense, means 'on the face of it'. Therefore, on the face of the return and accounts and documents accompanying it, the deduction must be inadmissible. Only then could it be disallowed under the proviso to s. 143(1)(a). ... ... The use of the phrase 'prima facie', thus, indicates that there is no possibility of an alternative consideration of the nature of loss, deduction, allowance, or relief claimed, for it is, on the face of it, inadmissible."
A similar view was expressed by the Hyderabad 'B' Bench of the Tribunal in the case of Anam Machine Fabricators Ltd. vs. ITO (1994) 49 TTJ (Hyd) 375 : (1994) 49 ITD 617 (Hyd).
23. Thus, it is clear from the decisions of various High Courts and various Benches of the Tribunal mentioned supra that when the deduction claimed is somewhat a controversial or debatable one, it cannot be treated as prima facie inadmissible and disallowed under cl. (iii) of the first proviso to s. 143(1)(a). We are of the considered opinion that the deduction claimed by the assessee herein, being a debatable one, could not have been the subject-matter of prima facie adjustment under s. 143(1)(a). The AO should have issued a notice under s. 143(2) and given an opportunity of being heard to the assessee on the deduction claimed by him and then completed the assessment in a regular way. Whatever might be the position subsequent to 8th March, 1995, we are clearly of the opinion that the claim made by the assessee being a highly debatable one, the AO should not have resorted to the provisions contained in s. 143(1)(a). The jurisdiction of the AO to make an adjustment should be considered with reference to the date of the filing of the return, or at least to the date when the adjustment was made. By the date when the return was filed by the assessee herein, and even by the date when the adjustment was made by the AO, the deduction claimed by the assessee cannot be said to be a prima facie inadmissible one free from debate or argument. The very fact that various Benches of the Tribunal consistently took the view that such a deduction is allowable even at the starting point itself under s. 15, indicates that the claim made by the assessee is not an absurd or inadmissible one which could be rejected at the intimation stage itself.
24. The Tribunal, Hyderabad 'A' Bench, in the case of ITO vs. N. Bhaskara Rao (supra) relating to asst. yr. 1989-90, considered the issue whether the claim of deduction of expenses out of incentive bonus could be disallowed at the intimation stage itself under s. 143(1)(a) and additional tax could be levied. The Tribunal, in its order dt. 21st April, 1995, held that if the allowability or disallowability of any claim is debatable, no adjustment in respect thereof could validly be made and that if the deduction claimed involves a highly debatable issue, it cannot be the subject-matter of prima facie adjustment under s. 143(1)(a). A similar view was taken by Tribunal, Hyderabad 'B' Bench, in its order dt. 24th April, 1995, rendered in the case of C. V. Ramana Rao vs. ITO (ITA No. 275/Hyd/1992 relating to asst. yr. 1990-91). It was held by the Tribunal in that case that where a matter is debatable, it goes out of the purview of the provisions contained in s. 143(1)(a). No doubt, Tribunal, Hyderabad 'A' Bench, in the case of K. Gangadhar vs. ITO (supra) and connected batch, in its order dt. 26th December, 1995, took a contra view to the effect that the issue in question ceased to be debatable, subsequent to the rendering of the decision in the case of K. A. Chowdary (supra) by the Andhra Pradesh High Court. We have already mentioned earlier the various decisions of the Tribunal which considered the judgment in the case of K. A. Chowdary and still held that the actual expenses incurred for earning the incentive bonus require to be deducted at the starting point itself under s. 15 and the net amount alone should be considered as salary for the purposes of taxation. In this appeal, we are not concerned with the question whether the said view is correct or not. The fact remains that reasonably more views than one were possible on the issue whether the net amount alone should be considered as salary or not. We are unable to agree with the view expressed by the Tribunal, Hyderabad 'A' Bench, in the case of K. Gangadhar vs. ITO (supra) that the issue in question was not a debatable one. We are of the considered view that the said issue, to say the least, was a highly debatable one till 8th March, 1995, when the Andhra Pradesh High Court rendered its judgment in the case of B. Chinnaiah & Ors. (supra). Applying the ratio of the decision of the Bombay High Court in the case of Khatau Jhankar Ltd. (supra), the decision of the Calcutta High Court in the case of Modern Fibotex India Ltd. (supra) and the decision of the Karnataka High Court in the case of God Granites (supra) to the facts on hand, we are inclined to hold that the claim of deduction of expenses out of the incentive bonus, being a highly debatable issue involving substantial points of law, could not be a subject-matter of prima facie adjustment under cl. (iii) of the first proviso to s. 143(1)(a). In that view of the matter, the AO exceeded his limited jurisdiction under s. 143(1)(a) in disallowing the claim by way of prima facie adjustment under s. 143(1)(a) at the intimation stage itself and making the impugned addition and levying additional tax under s. 143(1A). When the assessee moved a petition under s. 154 of the IT Act for rectification of the intimation, the AO should have realised his mistake at least then and rectified the mistake by deleting the impugned addition. He did not do so, in his order dt. 21st April, 1993. The learned CIT(A), in our considered opinion, very rightly deleted the impugned addition observing that the issue is a highly debatable one and would not fall within the purview of s. 143(1)(a). For the reasons given supra, we are in entire agreement with the view taken by the learned CIT(A) on this issue.
25. In the result, this appeal is dismissed.