Orissa High Court
National Federation Of Insurance Field ... vs Union Of India (Uoi) And Ors. on 3 April, 2008
Equivalent citations: 106(2008)CLT118
Author: Chief Justice
Bench: Chief Justice
JUDGMENT A.K. Ganguly, C.J.
1. This Writ Petition has been filed by National Federation of Insurance Field Workers of India (Cuttack Divisional Association) an all India Association of the Development Officers. The officers' are working in the Office of the Life Insurance Corporation of India (hereinafter called 'LICI') and they challenge through their association inter alia, the action of LICI in making deduction of tax at source from the amount of payment made to Development Officers of LICI on account of Conveyance Allowance (hereinafter referred to as 'CA') and Additional Conveyance Allowance (hereinafter referred to as 'ACA'). The prayer is to quash Annexures 4, 5 & 6 of the Writ Petition.
2. In this matter, when the Writ Petition was filed, a Division Bench of this Court, by an interim Order Dated 15.01.2004, directed that there shall be no deduction in respect of CA and ACA paid to the Development Officers (hereinafter referred to as 'DOs') of LICI and as a result of the said order, deduction has been stopped by the LICI. But a subsequent order No. 10 dated 30.1.2006 passed in Misc. Case No. 915 of 2006 the stay order was vacated.
3. The Writ Petition is pending in this Court for all these years. Now Misc. Case No. 14518/2006 has been filed by LICI on 05.12.2006 praying for leave to deduct the income tax at source on CA & ACA paid to DOs. In this regard, Learned Counsel for the LICI submitted that LICI has been prevented from making deduction in view of the aforesaid interim Order Dated 15.01.2004 whereas the Income Tax Department by treating the LICI as an assessee in default issued show cause notice under Section 226(2) of the Income Tax Act, 1961.
4. Virtually, on the said prayer of the LICI the matter was taken up for final hearing and was heard.
5. The case of the Petitioner as made out in the Writ Petition, appears to be that the DOs of LICI are its full time employees and they are Class-II officers of LICI. According to the Petitioner, these DOs Jo not have a desk job, and for the purpose of promoting the business of LICI they are required to travel extensively to discharge their responsibilities. Therefore, they are paid CA and ACA to meet the expenses incurred by them wholly, necessarily and exclusively in the performance of their official duties. The further case of the Petitioners' is that LICI at no point of time had made any income tax deduction at source under Section 192 of the Income Tax Act, 1961 (herein after called 'the said Act') on the amount of CA and ACA paid to DOs and the assessing officers of Income Tax Department of the concerned area use to accept the CA and ACA paid to the them as exempted under Section 10(14) of the said Act which is set out here under.
10(14)(i) any such special allowance or benefit, not being in the nature of a perquisite within the meaning of Clause (2) of Section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as may be prescribed, to the extent to which such expenses are actually incurred for that purpose....;
6. In paragraph 9 of the Writ Petition it has been stated that by the Finance Act, 1995 which came into effect on 01.07.1995 the words 'as may be prescribed' stated in Section 10(14) of the said Act has been amended. Consequent upon such amendment, a Rule was also made by Income Tax (eighth Amendment) Rules, 1995 vide Notification No. S.O. 617 (E) dated 07.07.1995. Rule 2BB has been inserted in the Income Tax Rules, 1962 (hereinafter referred to as 'the said Rules'). The amended version of Section 10(14) of the said Act has been set out above and the Rule 2BB of the said Rules is set out herein below:
Rule 2BB. Prescribed allowances for the purposes of Clause (14) of Section 10-(1) For the purposes of Sub-clause(i) of Clause (14) of Section 10, prescribed allowances, by whatever name called, shall be the following, namely:
x x x x
(c) any allowance granted to meet the expenditure incurred on conveyance in performance of duties of an office, or employment of profit:
Provided that free conveyance is not provided by the employer;
7. It has also been stated in paragraph 12 that after the aforesaid amendment the Central Government issued a Circular No. 701 dated 23.03.1995 stating therein, inter alia, that consequent upon the amendment of Section 10(14) of the said Act by the Direct Tax Law (Amendment) Act, 1987 with effect from 01.04.1989, all circulars, instruction and clarifications issued by the Board regarding Section 10(14) up to 31.03.1999 ceased to have effect from the assessment year 1989-90. Copy of the said circular dated 23.03.1995 has been annexed as Annexure-3 to the Writ Petition. The said circular has also some relevance to the facts and circumstances of the present case.
Thereafter Central Board of Direct Taxes, New Delhi (hereinafter referred to as 'CBDT') issued a circular dated 04.01.2001 addressed to the Executive Director (Mktg.), LIC of India, Central Officer. (OP No. 5). The said Circular states about income tax payable by the DOs on their income by way of ACA and CA has already been clarified by the Board vide its Circular No. 701 dated 23.03.1995. It was also made clear that consequent upon the amendment of Section 10(14) of the said Act by the Direct Tax Law (Amendment) Act, 1987 with effect from 01.04.1989, all circulars, instructions and clarifications issued by the Board regarding Section 10(14) up to 31.03.1989 ceased to have effect from the assessment year 1989-90. The case of the Petitioner is that after the said amendment was brought into existence, the LICI is insisting on deduction of income tax from the CA and ACA paid to its DOs. The Petitioners' Association has made representations but those have not produced the desired result. Hence, the Petitioners have come before this Court challenging the deductions by LICI and the action of the Income Tax Authorities.
8. In this matter, a counter affidavit has been filed by the Income Tax Department and in the said counter affidavit, it has been stated that apart from the CBDT Circular dated 4th January, 2001 to which we shall make a reference hereinafter, another direction was given by the CBDT, vide letter dated 01.02.2001 directing the Field Officers to take necessary steps to ensure the deduction of income tax at source, i.e., on CA and ACA paid by the LICI to its DOs. In the said counter affidavit, some Judgments passed by different High Courts have been referred to wherein it has been clearly stated that both CA and ACA are not exempted under Section 10(14) of the said Act read with Rule 2BB of the said Rules unless the criteria mentioned in the aforesaid Section/rule is fully met to the entire satisfaction of the Assessing Officer.
9. In this matter, LICI has also filed an affidavit. In the said affidavit, it is stated that CA is the amount paid to the DOs to meet the expenses wholly, necessarily and exclusively by way of conveyance to perform their duties and it must be shown that they have been actually and wholly incurred for that purposes. ACA is payable as per the actual performance of DOs, i.e., the scheduled first year premium income, which is brought in by an Officer within a stipulated period. It has also been stated that in terms of Section 192 of the said Act there is an obligation on the LICI to deduct income tax at source from the salary leaving it to the individual assessee to claim exemption or refund on establishing the conditions required under Section 10(14) of the said Act read with Rule 2BB of the said Rules. It is further stated therein that exemption from taxation in respect of those two allowances would depend upon the facts to be established by the individual assessee supported by the necessary evidence at the time of assessment and the exemption will be on the basis of actual expenditure incurred by him as provided under Section 10(14) which has already been quoted hereinabove.
10. From a perusal of the said provision, it appears to this Court that any such special allowance or benefit, not being in the nature of perquisite within the meaning of Section 17(2) is specifically granted to meet the expenses incurred wholly, necessarily and exclusively in performance of deities of an office or employment of profit. The exemption can be claimed only by establishing that such expenses have been actually incurred for that purpose. Therefore, the requirement of assessing the expenses which has been actually incurred for that purpose clearly flows from the said definition. It is only the expenses which are actually incurred are exempted. The entire amount of CA and ACA are not exempted unless they are actually incurred, as stated above, and this is proved to the satisfaction of the assessing officer.
11. A reading of the aforesaid provision shows that in order to enjoy exemption from tax the person who is claiming such exemption must establish his case before the assessing authority. Therefore, it cannot be said that LICI will not make any tax deduction at source. As an employer, under Section 192 of the said Act, LICI is under an obligation to make a deduction. After the said deduction is made, the person who is claiming exemption has to prove his case before the assessing authority in terms of the provisions under Sub-Section (14) of Section 10 of the said Act. The relevant Rule 2BB has also been made for that purpose. The allowances referred to in Sub-Section (14) of Section 10 and in Rule 2BB(c), make it very clear that both the CA and ACA are coming under the Sub-clause (c) as money paid to meet 'expenses incurred' which has been granted to meet the expenditure wholly, necessarily and inclusive of the performance and duties of an office or employment of profit. In the Rule also the same expression has been issued, namely, expenses incurred".
12. Therefore, on a conjoint reading of Section 10(14) read with Rule 2BB(c) of the relevant Rules it is clear that the person(s) claiming exemption has to prove the requirement of Section 10(14) before the assessing authority. To put the matter beyond any doubt a Circular has been issued by CBDT on 4th January, 2001. The said circular is set out herein below:
...I am directed to refer to your letter No. Mktg./DO/163/1 dated 3/2/2000 on the above mentioned subject and to say that it has been already clarified by the Board vide its Circular No. 701 dated 23.3.1995 that consequent to the amendment of Section 10(14) by the Direct Tax Laws (Amendment) Act, 1987 (With effect from 1/4/1989), all circulars, instructions and clarifications issued by the Board regarding Section 10(14) up to 31-3-1989 ceased to have effect from the assessment year 1989-90 and onwards.
In view of it, Conveyance Allowance and the Additional Conveyance Allowance paid to the Officers of the Life Insurance Corporation of India are not exempt under Section 10(14) of the Income-tax Act 1961 read with Rule 2BB of the Income tax Rules, 1962, unless the criteria laid down in the aforesaid Section/rule is fully met to the entire satisfaction of the assessing officer....
It is made very clear in the 2nd paragraph of the said Circular that CA and ACA paid to the officers of LICI are not exempted under Section 10(14) of the said Act read with Rule 2BB of the said Rules.
13. The further circular which has been issued by the CBDT on 1st February, 2001 is in continuance of provisions of the earlier circular dated 4th January, 2001 and paragraph 2 of the later circular is set out herein below:
...2. In view of this, all such allowances being taxable, are liable for deduction of tax at source. I am therefore, directed to request you to take necessary steps to ensure proper deduction of tax at source on the conveyance allowance/additional conveyance allowance and similar allowances being paid by the employers in your region....
In paragraph 2 of the said circular it is made clear that all allowances being taxable are liable for deduction of tax at source. Therefore, request was made to the Chief Commissioner of Income Tax by the CBDT to take appropriate step to ensure proper deduction of tax at source on the CA and ACA and similar allowances being paid by the employer in the region in question. The subsequent circular dated 1st February, 2001 has not been changed by the Petitioner. On the other hand, the first circular dated 4th January, 2001 has been challenged but sufficient ground has not been disclosed assailing the said Circular. The said challenge has no basis. It is well known that under provision of 119 of the said Act such circulars issued by the CBDT have the force of law.
14. In this connection, reference is made to the contents of Circular dated 29th March, 1995. The said circular was issued consequent upon the aforesaid amendment of Section 10(14) of the said Act and in respect of the Sub-clause (14) of Section 10 of the said Act. In the said circular dated 23rd March, 1995 following clarification has been made which is set out herein below:
...Clause (14) of Section 10 provides for exemption of the following allowances: (a) any special allowance or benefit granted to an employee to meet the expenses incurred in the performance of his duties, which the Central Government may specify by notification in the Official Gazette to the extent to which such expenses are actually incurred for that purpose;....
The words 'actually incurred' have been used in that Circular. In the penultimate line of the said Circular, it is said that the said Circular dated 23rd March, 1995 superseded all other previous Circulars of the Board after 31st March, 1989. Therefore, the said circular dated 23rd March, 1995 is holding the field after amendment of Section 10(14) of the said Act.
15. Learned Counsel for the Petitioner has relied on certain Judgments in support of his contentions that the CA and ACA are exempted from payment of income tax.
16. We are unable to accept the said contention. From the Judgment of the Rajasthan High Court in the case of LIC of India v. The Union of India and Ors. it appears that Rajasthan High Court was considering impact of the circular of the Ministry of Finance, Government of India issued through the Central Board of Direct Taxes dated 28th November, 1986. From the said circular it appears that Government accepted the position that the additional conveyance allowance will be treated as exempt under Section 10(14) of the Act, provided a certificate is issued by the Life Insurance Corporation to the effect that the additional conveyance allowance was granted to the Concerned Development Officer to meet the expenses wholly, necessarily and exclusively for the performance of the duties. It appears that in view of the said Circular of the Government of India, the Central Office of the LICI issued a circular dated 3rd March, 1987. The circular of the LICI is to the following effect:
1. The full amount of fixed conveyance allowance paid to Development Officers will be treated as exempt from tax and no tax need be deducted at source from monthly payments.
17. The Learned Division Bench of Rajasthan High Court considered the impact of the aforesaid circulars in its Judgment. Though the subsequent amendment of Section 10(14) and Rule 2BB was noted in the Judgment, but its implications were not properly appreciated by the Division Bench of the Rajasthan High Court in L.I.C. of India (supra). The Circular of Government of India, Ministry of Finance dated 4th January, 2001, which has been referred to above, was not at all considered by the Division Bench of the Rajasthan High Court as the same was not placed before it. Moreover, the subsequent circular issued by the Government of India, Ministry of Finance dated 1st February, 2001 was also never placed before the Division Bench of the Rajasthan High Court and was not considered. Therefore, in the absence of a proper consideration of the relevant circular, the said Judgment was delivered. This Court is therefore unable to follow the ratio of the said Judgment to the facts of this case.
18. The Division Bench Judgment of the Bombay High Court in the case of Life Insurance Corporation Class-I Officers (Bombay) Association v. Life Insurance Corporation of India and Anr. does not support the case of the Petitioner at all. On the other hand, in the said Judgment it has been held that conveyance allowance granted to LICI Officers would not be exempted under Section 10(14) of the said Act read with Rule 2BB(1)(c) of the said Rules.
19. The Judgment of the Madras High Court in the case of Commissioner of Income Tax v. E.A. Rajendran , was rendered in a Reference Proceeding. In reference application, the question which came up before the Court under Section 256(1) of the said Act was as follows:
Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the entire 'amount of additional conveyance allowance and 40 per cent of incentive bonus' received by the assessee as an employee of the Life Insurance Corporation of India is exempt?
The said question was answered by the Madras High Court by holding that the Tribunal was not correct in allowing the deduction claimed under the head of ACA. The question was answered in favour of the Revenue.
20. The Learned Counsel for the Petitioner also relied on an interim order passed by a Learned single Judge of Calcutta High Court. Since the same is an interim order, that cannot be cited as a precedent. Reliance was also placed on the Judgment of the Hon'ble Supreme Court on the SLP filed from the Judgment of the Rajasthan High Court in the aforementioned case. The SLP was dismissed, inter alia, on the ground that the dispute pertained to the assessment year 1990-91 and as per the Circular of CBDT dated 9th October 1968, the amount paid towards conveyance is exempted from tax. The Hon'ble Supreme Court held that the Income Tax Authorities are bound by the circular of CBDT and as such dismissed the SLP.
21. But here, as pointed out above in the context of amendment to Section 10(14) and also the amendment of Rules after 1987 the position has fundamentally altered and in the altered position the Petitioner cannot claim that those two allowance, i.e., CA and ACA are exempted from payment of income tax.
22. For the reasons aforesaid, this Court does not find any merit in the Writ Petition and hence the same is dismissed. All the interim orders stand vacated. We however make no order as to cost.
B.N. Mahapatra, J.
23. I agree.