Income Tax Appellate Tribunal - Pune
Bhaskar B. Patil vs Income-Tax Officer on 29 September, 1992
Equivalent citations: [1993]44ITD65(PUNE)
ORDER
T.A. Bukte, Judicial Member
1. The appellant has filed all these appeals against the consolidated order of the C.I.T. Kolhapur dated 21-3-1989 passed under Section 263 of the Income-tax Act, 1961, holding that the assessments made by the I.T.O. were erroneous and prejudicial to the interest of revenue on the ground that the incentive bonus or commission received by the Development Officer of the LIC was a part and parcel of salary and therefore, no deduction should have been allowed from such incentive bonus or commission on account of procuring or doing more business by the assessee. The assessee being aggrieved by the said orders of directing to withdraw the deduction allowed by the Assessing Officer has preferred these appeals.
2. The C.I.T. held that the assessee's income was to be assessed under the head salary being full time employee of LIC and therefore, it was logical that in the computation of income the standard deduction under Section 16 of the Act should be allowed and there was also no provision for deduction of the expenditure incurred for earning the salary except the standard deduction.
3. The C.I.T. further held that the expenditure incurred by the assessee for earning the income by way of incentive bonus or commission does not fall under any of the provisions of Section 16 and the provisions of Section 10(14) cannot be imported into this computation. According to him, the incentive bonus or commission was according to the scheme operating for a kind of payment between the employer and employee and it cannot be considered de hors the overall relationship of employer and employee between LIC and the assessee as a Development Officer. In this view of the matter, he considered that the assessment orders were erroneous in so far as they were prejudicial to the interest of revenue and enhanced the assessed income by amounts of Rs. 20,830, Rs. 30,000 and Rs. 33,865 for the assessment years 1986-87, 1987-88 and 1988-89 respectively by directing to disallow the expenditure holding that the assessee has wrongly claimed the expenditure by way of deduction and the Assessing Officer has also wrongly allowed the said deduction.
4. At the outset, it would be suffice to say that we have held in several cases that incentive bonus or commission received by the Development Officer of the LIC of India is a part and parcel of salary and same cannot be treated as income from business or from other sources. If the incentive bonus or commission is treated as a part and parcel of the salary received by the Development Officer of the LIC of India, then the question arises whether only the standard deduction as contemplated under Section 16(i) of the Act should alone be allowed as a deduction or anything more than the standard deduction. By putting more efforts and pains the Development Officer procures more business through his agents by spending some part of the incentive bonus or commission for the purposes of procuring more business through his agents and therefore, it should be considered as admissible deduction because by incurring such expenses more business is procured for the LIC. The concept of Development Officer being an employee of the LIC would be looked into in the light of the employer and employee relationship and payment of salary for his official duties. There cannot be any doubts that the Development Officer is entitled to receive the salary for working during the prescribed hours in the office. The employer cannot deny payment of salary to him for such office work done during the office hours. Such remuneration or the salary is the salary of an employee.
5. Over and above salary another payment is contemplated in the case of Development Officer. The Development Officer makes more efforts and takes more pains even out of official hours to procure more business by insuring lives of several persons. The Development Officer alone is not expected to carry out procuring more business for the LIC. For this purpose, the Development Officer has to control certain agents for the purpose of procuring more business. The agents are not the employees of LIC but they work on agreed contract basis for which commission for procuring more business for LIC is paid. After all, the Development Officer is expected to look after the agents assigned to him and to guide them for procuring more business. For doing this extra work the Development Officer is paid an incentive bonus or commission over and above the salary paid to him to do his duties during the office hours. Procurement of more business for LIC is not restricted to the official hours only but this can be done even out of office hours. That is why the conception of incentive bonus or commission has come into existence.
6. We have held in several cases that this type of incentive bonus or commission does not assume any character of income other than the income from salary. We have treated such income as integral part of the salary. Despite Section 16(i) regarding standard deduction, we have held in several cases that the Development Officer who is expected to procure more business for which he is paid an incentive bonus or commission is further expected to incur expenses for procuring such business. For this purpose, we have held that some percentage of the incentive bonus or commission is allowable as deduction. However, in these appeals, an interesting point has been argued and advanced from both sides and therefore, we have to deal with this point again to arrive to a proper conclusion whether certain percentage of incentive bonus or commission is allowable by way of deduction or not.
7. The learned Departmental Representative Shri A.K. Khaladkar has raised a preliminary objection relying on the decision of the Orissa High Court in the case of CIT v. Sarat Ch. Sahu [1992] 195 ITR 364 wherein the Orissa High Court observed that the conclusions of the Tribunal were contradictory. It had held that the incentive bonus was part of the salary but at the same time it had directed allowance of expenditure as if it was treating the same to be income from business. The Orissa High Court remanded the matter to the Tribunal to consider the basic question whether the amount received as incentive bonus had formed part of the salary or was earned from business. Shri A.K. Khaladkar urged that there is a contradiction in the Tribunal's finding in treating the incentive bonus or commission first as a part of the salary and allowing expenditure as if the incentive bonus or commission was earned from business. In our opinion, the incentive bonus had been earned by the performance of field duty having put in extra efforts to earn the same. In earning the salary, the Development Officer need not to perform field duty or to put extra efforts to earn the salary except during office hours. Once having employed as Development Officer he is entitled to get regular salary.
8. Shri Khaladkar also pointed out the decision of the Andhra Pradesh High Court in the case of K.A. Choudary v. CIT [1990] 183 ITR 29. The Andhra Pradesh High Court considered that the incentive bonus received from the employer is a part of salary. The definition of "wages" under the Payment of Wages Act, 1936 also indicates that the bonus included in the said definition. In that case also, the assessee was employed by the LIC of India and received a sum of Rs. 9,536 as incentive bonus and claimed the deduction of expenses incurred in earning the said bonus. The I.T.O. declined to give the deduction claimed on the ground that the incentive bonus was a part of the salary for which standard deduction was allowed. This order was confirmed by the appellate authority as well as the Commissioner in revision. On a writ petition, the Andhra Pradesh High Court held dismissing the writ petition that the petitioner had received the said amount as incentive bonus because he was in the employment of the LIC and it formed part of his salary. The question that arose before the Andhra Pradesh High Court was whether the incentive bonus was a part of salary or not, and it was held that it was a part of salary. According to the Orissa High Court, there is a contradiction in the Tribunal's order, firstly held that the incentive bonus is a part of salary and secondly to allow the deduction of expenditure over and above the standard deduction under Section 16(0. According to the Andhra Pradesh High Court, the Development Officer received incentive bonus being an employee of the LIC and therefore, it was a part of the salary. Thus, there is no conflict between these two decisions of the Orissa High Court and the Andhra Pradesh High Court which are relied upon the department.
9. As against this preliminary objection raised by the learned departmental representative, Mrs Rajani Mehendale the learned representative for the assessee has relied on the decision of Bombay Bench 'B' (Third Member) in the case of Sixth ITO v. Narendra V. Patel [1985] 11 ITD 587, wherein it was held by the Third Member in that case as follows :
It is well established that for arriving at the profits and gains of business, account must necessarily be taken of all losses and expenses incurred, otherwise one cannot arrive at the true profits and gains. In other words, some deductions have to be allowed under Section 28 itself because the starting point of Section 28 is the profits and gains which have to be understood in a commercial sense. The same analogy can be applied in the case of computation of income under the head 'salaries' also. Moreover, the incentive bonus, commission, which is over and above the salary and perks, may not be regarded as salary in the commercial sense. It is treated as income of chargeable to tax under the head "salaries" because of inclusive definition of salary in Section 17. The section, however, makes it clear that the meaning of salary has been extended for the purposes of Section 15 and 16 only.
It is not possible to draw an inference from the deletion of Section 16(v) that the Legislative had intended to take into account the cases of incentive bonus/commission without reducing it by the expenditure incurred for earning it, because, as stated in the memorandum explaining the provisions of the Finance Bill, 1974, this amendment was brought only to simplify the assessment procedure of salaried taxpayers.
Accordingly, the expenditure incurred by the assessee for earning the incentive bonus/commission should be reduced from the bonus/commission at the starting point itself, i.e., at the point it was treated as the income chargeable under the head 'salaries'.
The Tribunal considered that whether gross incentive bonus/commission is to be taken into account at the starting point or only the net incentive bonus/commission i.e., after reducing the amount of incentive bonus/ commission by the expenditure incurred for earning it should be taken. The Tribunal held that reasonable view was to reduce the expenditure from the incentive bonus /commission and to treat the balance as salary, at the starting point itself i.e., at the point it is treated as the income chargeable under the head 'salaries'. The learned representative relied on another decision of Pune Bench of the Tribunal in the case of Jttendra V. Mohan v. ITO [1992] 40 ITD 452 (SMC). The Single Member Bench in that case held as follows :
From the description of the modus operandi of promoting the LIC business, it could be reasonably inferred that the Development Officer should in turn provide incentive to the agents whom he is bound to guide, and to those in the promotional activity. Therefore, the Development Officer incurs certain expenditure over the agents which is identical to the promotion of the business and which is in the commercial expediency of the business.
The word 'incentive' is of significance. It cannot be considered at par with bonus paid to any other Government employee as a part of salary. The word 'incentive' pre-supposes the performance or output on the basis of which the quantum is fixed. The ITO had pointed out that the LIC paid incentive bonus to the Development Officer only on the basis of appraisal report' which contained the actual work turned out by the Development Officer. Therefore, the grant of incentive bonus was dependent on the actual performance and varied with the business secured.
Therefore, the payment of incentive bonus was conditional in nature and was not fixed or automatic and it did not accrue to the Development Officer as a matter of routine as a part of salary by virtue of being an employee of the LIC. Viewed from this angle a reasonable and fair conclusion that could be drawn would be that certain amount of incentive bonus was required to be allowed as a deduction and only the net incentive bonus could be assessed as a part of salary.
In this regard following the precedent contained in the order of the Tribunal in the case of Sixth ITO v. Narendra V. Patel [1985] 11 ITD 587 (Bom) (TM) only 25 per cent of the incentive bonus would be admissible as deduction for promoting the business and the balance 75 per cent of the incentive bonus was assessable as part of the salary.
According to the learned representative both these decisions of the Tribunal render support to her case that certain percentage of deduction from the incentive bonus is allowable in spite of treating it as a salary at the starting point.
10. This dispute further requires to be clarified from the provisions made by the LIC itself regarding the payment of incentive bonus or commission to the Development Officer. There is a copy of Notification of the Government of India, Ministry of Finance (Department of Economic Affairs) regarding insurance dated 26-6-1989. The said Rules are called as 'Life Insurance Corporation of India Development Officers (Revision of Certain Terms and Conditions of Service) Rules, 1989. Rule 2 of the said Rules contains definitions. Rule 2(c) is regarding annual remuneration and its definition. The said rule 2(c) reads as follows :
2(c) 'annual remuneration' means the basic pay, special pay, personal pay, dearness allowance, and all other allowances and non-profit sharing or ex gratia bonus due to, or paid to, a Development Officer during the appraisal year and includes the expenses payable or reimbursed to him or incurred by the corporation during that year in respect of travelling, residential telephone and insurance premium and taxes or motor vehicles, but does not include incentive bonus and additional conveyance allowance paid to him in accordance with Rule 17.
Rule 17 of the said Rules relates to the Incentives. It reads as follows :
17. 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 20 per cent of the eligible premium of that year.
Against this incentive bonus is incorporated in the LIC of India, Bombay Divisional Office, Apparaisal of Development Officers write-up-cum-instructions. Clause (B) of the said appraisal of the Development Officers write-up-cum-instructions reads as follows :
(B) Incentive bonus/commission :
The Schedule F.Y.P.I. brought by the Development Officer during his appraisal period is to be reduced by SFYP of the lapsed business of the said Development Officer as per Lapsation Statement supplied to you by EDP Deptt. to arrive at his Not Scheduled First Year Premium Income.
The basic incentive bonus is arrived at on the basis of 6 per cent of the Net SFYPI in excess of 5 times of the annual Expenses incurred, added by 4 per cent of the net SFYPI in excess of 7 times of the annual expenses and further added by 2 per cent of NET SFYPI in excess of 9 times of the Annual Expenses incurred.
The Basic Incentive Bonus is increased to the extent of 57 per cent of Basic Incentive Bonus (42 per cent for Agency Organisation plus 15 per cent for Number of Lives) but not exceeding Rs. 12,500. And Basic Incentive Bonus is reduced to the extent of 25 per cent of Basic Incentive Bonus (15 per cent maximum for Agency Organisation, 10 per cent maximum for Number of Lives, 10 per cent maximum for failure for recruitment whichever is applicable) or Rs. 5,000 whichever is lower.
11. In the abovementioned clauses, the formulae of paying incentive bonus have been given. Again the definition of annual remuneration, eligible premium, lapsed premium, relevant appraisal year are also given. Rule 11 of Scheme of Incentive Bonus to Development Officers of the LIC of India--1978 also requires to be taken into account. The said Rule 11 reads as follows :
11. Advance against incentive bonus :
The Chairman may by written instructions permit grant of advances against incentive bonus to an eligible Development Officer subject to such rules as he may prescribe and deem fit. The advance against incentive bonus so granted shall be set off against the actual amount of incentive bonus finally payable to him in accordance with the scheme.
12. Several rules regarding recruitment of qualified agents also have been enumerated. A copy of the Employment notice of Goa Divisional Office of LIC of India is also brought to our notice. The recruitment of Apprentice Development Officers for appointment to the cadre of Development Officers (Class II) was published in the Employment Notice. The said Employment Notice reads as follows :
Applications are invited from Indian Nationals to recruit 15 Apprentice Development Officers for appointment to the cadre of Development Officers (Class II) in the Life Insurance Corporation of India in the Union Territory of Goa. It is primarily a sales oriented job and the candidates after successful training will be required to recruit agents to procure Life Insurance business through their agents and to render aftersales service to policyholders. Salary payable is governed by the Staff Regulations, which, among other things, require a specified premium income to be brought in by every Development Officer through his/her agents. Besides salary, the job offers an excellent opportunity to secure attractive conveyance allowance linked with First Year Premium Income.
From the advertisement, it becomes clear that attractive amounts by way of incentive bonus are besides salary paid to the Development Officers. This gives rise to a new point to be considered whether the attractive amounts by way of incentive bonus besides the salary should be treated as a part of salary or not. If it cannot be treated as a part of salary for the reasons that the services rendered by the Development Officer in spite of being in service of the LIC of India is outside the purview of the salary paid for doing prescribed job and incentive bonus paid for doing business of the LIC.
It would be better to mention here that if any doubt arises out of these rules, the matter requires to be referred to the Government of India for clarification. Of course, this matter as to how to treat the incentive bonus has not yet been referred for clarification to the Government of India by any of the parties regarding the dispute and its clarification.
13. From the abovequoted rules, it becomes quite clear that the incentive bonus is besides salary paid to the Development Officer by the LIC of India.
14. The contradiction that arises in this respect is that if the Development Officer is held to be earning incentive bonus by virtue of his being in the employment of the LIC then the receipt of incentive bonus is necessarily to be treated as a part of salary. If it is held that inspite of being in the employment of the LIC of India the Development Officer has to do field work, he has to guide and govern the agents under him and for this purpose the incentive bonus paid does not form part of salary then it should be treated as income from other source or from business. If it is so treated then he is entitled to get the deduction from the income from other sources for earning such income and the only deduction under Section 16(i) of the Act cannot come in the way of an expenditure incurred to earn the incentive bonus. There cannot also be contradiction in the decisions of the Tribunal. Therefore, we are of the opinion now to change our view to treat the incentive bonus as income from other sources and to allow 25 per cent of the incentive bonus as deduction for earning it. Moreover, the incentive bonus is described in the LIC itself that it is besides salary. If the Rules of the LIC to treat the incentive bonus as besides salary then treating it as a part of salary would stand on a wrong footing. For this reason also we need not hesitate to change our view to arrive to a correct finding.
15. We are fortified in holding the receipt of incentive bonus as income from other sources and allowing deduction of expenditure by Section 57(iii) of the Income-tax Act, 1961, which reads as follows :
57(iii) any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income is allowable deduction.
It would be better to elaborate a little more here in order to understand the dispute properly. The Development Officer is paid salary for doing official duties. Over and above it, he is asked to do business through the agents for the LIC. For doing this business through the agents, he is separately paid in the form of incentive bonus which is besides salary.
16. In the result, the incentive bonus earned by the Development Officer is treated as income from other sources and the expenditure incurred wholly and exclusively for earning such incentive bonus reasonably estimated at 25 per cent to be allowed as a deduction from such incentive bonus and the balance is charged to tax. In this view of the matter also, the appeals are required to be allowed for reasons different from the reasons given in other cases.
17. In the result, the assessee succeeds and the appeals are allowed.