Income Tax Appellate Tribunal - Hyderabad
P. Dayakar vs Income-Tax Officer on 23 March, 1989
Equivalent citations: [1995]53ITD25(HYD)
ORDER
G. Krishnamurthy, President
1. The points for consideration in the present appeals relating to the assessment years 1981-82 and 1982-83 which emanate out of the orders passed by the Commissioner of Income-tax under Section 263, are the following :
(a) Whether, in the case of the assessee, who is a Development Officer, an amount paid by the Life Insurance Corporation as additional conveyance allowance can be included in the total income, and
(b) Whether the amount paid by the Life Insurance Corporation as incentive bonus is fully taxable or whether any deduction could be allowed there out under the provisions of Section 10(14) of the Income-tax Act, 1961.
2. As far as the aforesaid two points are concerned, the Division Bench was of the view that there was, to some extent, a conflict between the decisions of the Calcutta Bench of the Tribunal in the case of ITO v. L.N. Goswami [1984] 8 ITD 661 and the decision of the Hyderabad Bench in the case of K. Rami Reddy v. ITO [1984] 8 ITD 633. The matter was, therefore, referred to the President for constituting a Special Bench and in pursuance thereof the appeals have come up for hearing before this Bench.
3. It was urged on behalf of the assessee that the emoluments received by a Development Officer cannot be classified as salary income under the Income-tax Act, because the relationship of Development Officers qua the LIC is not fully that of employer-employee because though they may not shed their relationship as LIC employees, they also render professional service to the LIC for which they are separately rewarded. This argument is not available to the assessee in Andhra Pradesh in view of the decision of the Andhra Pradesh High Court in K.A. Chowdary v. CIT [W.P. No. 7216 of 1983 decided on 10-12-1987]. This decision was rendered by the Andhra Pradesh High Court following its earlier decision on the same point in the case of M. Krishna Murthy v. CIT [1985] 152 ITR 163. Since all emoluments received by a Development Officer from the LIC have to be considered for assessment purposes under the head "Salary", additional conveyance allowance received as well as incentive bonus received form part of salary and the contention urged in this behalf of the Department, i.e., that all such emoluments form part of salary is accepted.
4. The first point that arises is whether additional conveyance allowance received by the assessee of (Rs. 10,132 in the assessment year 1981-82 and Rs. 6,760 in the assessment year 1982-83) will fall to be excluded from the total income by virtue of the provisions of Section 10(14) of the Income-tax Act. The provisions of Section 10(14) read :
any special allowance or benefit, not being in the nature of an entertainment allowance or other 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, to the extent to which such expenses are actually incurred for that purpose.
Explanation : For the removal of doubts, it is hereby declared that any allowance granted to the assessee to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at the place where he ordinarily resides shall not be regarded, for the purposes of this Clause, as a special allowance granted to meet expenses wholly, necessarily and exclusively incurred in the performance of such duties.
A basic conveyance allowance is granted to Development Officers by the LIC. It is agreed on all sides that this basic conveyance allowance does not form part of the total income. As far as additional conveyance allowance is concerned, it is paid based on a formula evolved by the LIC which has a direct relation to the volume of premium collected. The argument of the revenue is that since this is linked with the quantum of premium collected or volume of business done, it has no nexus with the actual amount expended by way of conveyance expenditure. Reliance was placed in this regard on the decision of the Calcutta Bench of the Tribunal in the case of L.N. Goswami (supra). The contention on behalf of the assessee is that a general formula had necessarily to be devised by an organisation like the LIC keeping in mind that there should not be any misuse of the amount paid as conveyance allowance. Therefore, such formula for payment had to be linked with the parameters of business transacted to have an effective check on exaggerated claims. Since the LIC has taken into consideration the possibility of expenditure being incurred by use of additional conveyance and laid a ceiling by linking it to the premium collected, it is submitted it has to be presumed that the entire amount had been spent only for the purpose of service rendered. In fact, that was also the view taken by several Benches of the Tribunal at Hyderabad and the note struck by the Calcutta Bench in the case of L.N. Goswaml (supra), it was stated, was the only discordant one.
5. Yet another contention put forth on behalf of the revenue was that since a standard deduction is permitted under Section 16(1) of the Act, that was supposed to cover conveyance expenditure and, therefore, no further allowance under the head "Conveyance" is permissible. On behalf of the assessee, this contention was sought to be counted by submitting that the standard deduction was allowed to cover various types of expenditure that a salaried employee might have to incur in the course of his duties and there was no warrant for reading into the provision any prohibition for considering as an exclusion from the total income, conveyance allowance received by an assessee, as long as it fell within the purview of Section 10(14) of the Income-tax Act, 1961.
6. We have considered the rival submissions. Adverting first to the contentions put forth on behalf of the Revenue that when a standard deduction was permissible under the Act in terms of the provisions of Section 16, no further allowance could be made for expenditure on conveyance under the provisions of Section 10(14), in our view, the proposition is not acceptable. In this very case it is not even disputed by the revenue that basic conveyance allowance paid by the LIC is to be excluded from total income. The dispute centres only around the excludibility of additional conveyance allowance. Therefore, the contention in general terms that because a standard deduction is allowed under Section 16, the consideration of exclusion of conveyance allowance falls outside the purview of Section 10(14) loses force. That apart, the provisions of Section 16(1) of the Act of 1961 correspond to the provisions of Section 7(2) of the 1922 Act and instead of the various deductions that were permissible, a standard deduction came to be prescribed and the quantum thereof has been varied from time to time. Whatever may be the object of allowing an amount as standard deduction under Section 16(1), it cannot be said that it fully covers all expenditure incurred on conveyance though it may take within its purview such expenditure also. It, therefore, follows that examination of the admissibility of additional conveyance allowance as an exclusion from the total income independently, with reference to the provisions of Section 10(14) does not stand ruled out.
7. We have already set out the provisions of Section 10(14) of the Income-tax Act, 1961. The additional conveyance allowance in the instant case is not in the nature of entertainment allowance nor is it a perquisite within the definition of Section 17(2) since it does not fall under any of the Clauses of Section 17(2). It is specifically granted to meet expenses and in the case of a Development Officer who is to sell life insurance policies, such expenses on conveyance are wholly, necessarily and exclusively incurred for the performance of the duties. The Life Insurance Corporation is a statutory body and on the basis of probabilities of expenditure etc., they have worked out the additional conveyance allowance payable having regard to the premium secured etc. In such cases, a pie-to-pie reconciliation is not possible and the requirement of the Act that the exemption should be to the extent to which expenses are actually incurred has to be construed on a practicable and reasonable basis. A statutory corporation having permitted additional conveyance allowance based on its past experience and probabilities, the inference will follow that the expenses were necessary and would have been actually incurred. The Calcutta Bench of the Tribunal took the view that the conveyance allowance paid to Development Officers having touring duties was at a lower rate in some cases and the emphasis was on the performance of the Development Officer and there was no connection or nexus with the travels undertaken by the Development Officer. A Development Officer having touring duties will be entitled to specific travelling expenses for the tours performed outside his Head Quarters, by using the conveyance. Therefore, in our view, the inference does not follow that the additional conveyance allowance paid has no nexus with the travels undertaken by the Development Officer. We are inclined to take the view that the payment of a conveyance allowance has necessarily to be linked with the parameters of business transacted to provide an effective check against exaggerated claims. This is all that has been done by the LIC in devising a general formula having reference to the parameters of business also and we, therefore, come to the conclusion that the additional conveyance allowance has been specifically granted to meet expenses and in the case of a Development Officer who is to sell and process LIC policies and has to train agents, such expenses on conveyance are wholly, necessarily and exclusively incurred for the performance of duties. The entire amount is, therefore, exempt from inclusion in the total income under Section 10(14).
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 policyholders which the agents cannot tackle, he has to see that such grievances are tackled 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 Section 10(1 4), because that expenditure is directly related to procuring the new business and because the incentive bonus is related to new business. In cases where no accounts are maintained, since there is no gainsaying of the fact that there was some expenditure incurred, a deduction has to be allowed which necessarily has to be on estimate basis. In Hyderabad, the percentage of deduction allowed in such cases has generally been 40% which was based upon an earlier Circular of the Board dealing with allowance of deduction to LIC agents. It was supposed that the expenditure to be incurred out of incentive bonus would be the same as the expenditure allowed to an agent to earn the commission. One such case was that of Sri J. Muralidhar Rao [Income-tax Appeal No. 218/Hyd/1983 dated 30-9-1983]. There the Tribunal observed as under :
The first appellate authority after considering the relevant facts and circumstances and considering a similar decision of this Tribunal in another case, fixed an amount of 40% of such bonus as probable expenditure incurred in gifts, travelling expenses to meet the agents, their training, conferences, expenditure relating to prospective policy-holders on contract, servicing the policy-holders or their survivors etc. An application for reference was filed against the decision of the Tribunal allowing deduction to the extent of 40% was rejected by the Tribunal. Thereafter, the matter was taken up under Section 256(2) and the following two questions were sought for reference :
1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is justified in upholding the appellate authority's decision in allowing 40% of incentive bonus as allowable expenditure while assessing the income under the head salaries.
2. Whether, on the facts and in the circumstances of the case, the assessee, a salaried employee in LIC, is eligible for any deduction towards expenses on the incentive bonus received from its employer in the absence of any provisions for such deduction.
9. Now, in the second question, the point emphasised was whether the assessee, a Development Officer, would at all be eligible for any deduction towards expenses out of incentive bonus in the absence of a specific provision. The conclusion of the Tribunal in the affirmative was approved by the High Court in ITC Nos. 160 and 196 of 1985 dated 13-8-1986 and it was held to be a question of fact. This settles the issue that the Development Officers are entitled to deduction out of incentive bonus.
Question No. 1 specifically questioned the decision of the Tribunal in allowing 40% of the incentive bonus as allowable expenditure under the head "Salaries". The High Court held that this was a pure question of fact and declined to grant a reference, meaning thereby that the conclusion of the Tribunal in estimating the allowable expenditure at 40% out of incentive bonus was not unreasonable and supported by evidence. This settles the issue that the estimate of expenditure out of incentive bonus could be 40% in cases where accounts are not maintained.
10. A contention put forth was that there was an overlapping of allowances if both additional conveyance allowance was held to be exempt from inclusion in total income and a deduction was allowed out of incentive bonus in addition to the standard deduction. The learned Departmental Representative relied on certain decisions of the Tribunal where on this issue the matter was referred to the ITO for re-examination. We have elucidated how the standard deduction cannot be correlated as covering the items of expenditure aforesaid. We have also clarified how in addition to expenditure on conveyance other expenditure has to be incurred to earn the incentive bonus. Therefore, the aspect of overlapping though might exist does not affect our decision regarding the allowances of expenditure to the extent of 40% out of incentive bonus apart from treating additional conveyance allowance as excludible from the total income as having been spent wholly, exclusively and necessarily in the performance of duties.
11. Hence, in the present case, deductions are permissible of 40% of the incentive bonus which came to Rs. 1,092 for the assessment year 1981-82 and Rs. 932 for the assessment year 1982-83.
12. In view of our aforesaid finding, the orders of the Commissioner of Income-tax under Section 263 would stand set aside and the assessments as made by the ITO would stand restored. The result is the appeals are allowed.
T.V. Rajagopala Rao, Judicial Member
13. Wherever there is overlapping found and the expenditure covered by additional conveyance allowance finds its way into the deduction granted from the incentive bonus, the fact finding authorities on consideration of facts and circumstances of each case may grant any lower percentage subject to a maximum of 40% as deduction from the incentive bonus. With this rider I am in entire agreement with the rest of my learned Brothers' order.