Income Tax Appellate Tribunal - Cochin
Thomas Vaidyan vs Income-Tax Officer on 17 January, 1996
Equivalent citations: [1997]63ITD324(COCH)
ORDER
T.A. Bukte, Judicial Member
1. This is an appellant's appeal against the order of the Dy. CIT(Appeals), Trivandrum, dated 22-4-1991 on the only ground that he has erred in not allowing 40 per cent of the incentive bonus claimed towards expenses incurred to earn such income.
2. The arguments advanced by the learned counsel for the appellant, Sri C.K. Nair and the learned departmental representative, Sri. P. Balakrishnan at the time of hearing this appeal are taken into consideration.
3. At the outset it would be proper to mention here as relied upon, the decision of the Tribunal dated 11-8-1995 on the identical point in IT Appeal Nos. 651 and 652 (Coch.) of 1991 for the assessment years 1987-88 and 1988-89 and C.O. Nos. 49 and 50 (Coch.) of 1991 in the case of T.K. Ginarajan, Development Officer of LIC. The Tribunal held that in view of the provisions of the Life Insurance Act, pertaining to the definition of the terms 'salary', 'remuneration', etc., in respect of the terms of employment of the Development Officer of the LIC, incentive bonus as claimed was allowable.
4. The relevant facts pertaining to the dispute in question are that the appellant is a Development Officer of the LIC. The issue involved in this appeal is whether the incentive bonus received by the appellant from his employer is includible in his salary or not and whether any further deduction other than that contemplated in section 16(1) of the Income-tax Act, 1961 is permissible. The Cochin Bench of the Income-tax Appellate Tribunal held in the case mentioned supra that such incentive bonus cannot fall within the definition of 'salary' and that the assessee is entitled to get the deduction of the amount spent in recruiting and training the agents and travel in connection therewith. According to the learned departmental representative, the Tribunal in the case supra did not consider the principles laid down by the Supreme Court in the case of Gestetner Duplicators (P.) Ltd. v. CIT [1979] 117 ITR 1/1 Taxman 1. That was a case where the employee was getting apart from his fixed monthly salary also commission at a fixed percentage of the turnover achieved by the employee. The Supreme Court in the aforesaid case analysed the expression 'salary' as defined in section 17 of the Income-tax Act, 1961 as well as in rule 2(h) of Part A of Fourth Schedule of the Act at pages 9 to 12.
5. The learned departmental representative relied on the observations of the Allahabad High Court in the case of Raja Ram Kumar Bhargava v. CIT [1963] 47 ITR 680 as approved by the Supreme Court which are as follows :
"The word 'commission', in business practice covers various kinds of payments made under different circumstances. There are cases where a servant is employed by a businessman and, as a condition of his employment, it is agreed prior to the services having been rendered that he would be paid for his service at a fixed rate of percentage of the turnover or profits. In such a case, it is clear that the commission payable to the employee will, in fact, represent the salary to be drawn by him for the services. The payment on the percentage basis will only determine the measure of the salary."
The learned departmental representative quoted further observations of the Supreme Court as follows :-
"It is thus clear that if under the terms of the contract of employment remuneration or recompense for the services rendered by the employee is determined at a fixed percentage of turnover achieved by him then such remuneration or recompense will partake of the character of salary, the percentage basis being the measure of the salary and, therefore, such remuneration or recompense must fall within the expression 'salary' as defined in rule 2(h) of Part A of the Fourth Schedule to the Act."
He has further relied on the following observations :-
"The instant case is, therefore, a instance where the remuneration or recompense payable for the services rendered by the salesmen is determined partly by reference to the time spent in the service and partly by reference to the volume of work done. But it is clear that the entire remuneration so determined on both the basis clearly partake of the character of salary. In our view, therefore, the commission paid by the assessee to its salesmen would clearly fall within the expression 'salary' ...."
"The learned departmental representative submitted that in the case of the Development Officer also he is getting incentive bonus in addition to his other emoluments, from the same employer under the head 'Incentive bonus' which was quantified in terms of the insurance business done by LIC through the employee. Therefore, it was submitted that the principles laid down by the Supreme Court may be followed in the present case also.
6. According to the learned departmental representative, another feature of the case is that even as per the terms of employment the assessee is a whole-time employee of the LIC. As such it cannot be said that apart from salary, the assessee is getting some other amount which is not includible in the salary received from the LIC, but includible under the head 'Business or profession' especially when the payer is one and the same, viz., the LIC. His further submission was that the employer himself has treated this incentive bonus as salary only as is borne out by the fact that in the income-tax deduction certificates issued by the employer, the incentive bonus is also included. He contended that if the intention of the employer while making the terms of payment was that incentive bonus will not be part of salary, the employer would not have included this amount in the salary certificates issued by him.
7. Therefore, while referring to the Tribunal's decision in the case of T.K. Ginarajan, Development Officer of LIC (supra), the main reason stated in coming to the conclusion that incentive bonus is not a part of the salary is that as per the definition of 'annual remuneration' given is Schedule III of the Life Insurance Corporation Act, does not include incentive bonus. It was submitted that it is 'annual remuneration' that has been defined in Schedule III of the Life Insurance Corporation Act and not 'salary'. Salary having not been defined in the LIC Act, for the definition of 'salary' one has to look into the definition as given in the Income-tax Act. Moreover, if the intention in defining 'annual remuneration' was to have overriding effect on the provisions of the income-tax, this would have been specifically mentioned in the definition. Therefore, according to him, it follows that the definition of 'annual remuneration' as given is Schedule III of the LIC Act has nothing to do with the definition of 'salary' as given in the Income-tax Act.
8. In support of his contention that incentive bonus is part of the salary the learned departmental representative has relied upon the decision of the Andhra Pradesh High Court in the case of K.A. Choudary v. CIT [1990] 183 ITR 29/[1989] 44 Taxman 472, decision of the Orissa High Court in the case of CIT v. Govind Chandra Pani [1995] 213 ITR 783/83 Taxman 364 and also on another decision of the Andhra Pradesh High Court in the case of CIT v. B. Chinnaiah [1995] 214 ITR 368 and the Appellate Tribunal's decision in the case of ITO v. P.M. Suthar [1995] 214 ITR 12 (Ahd.)(AT). In support of the contention that the provisions of LIC Act cannot override the provisions of the Income-tax Act he has cited section 32 from the Unit Trust of India Act (L11 of 1963) and pointed out that "notwithstanding anything contained in the Wealth-tax Act, 1957, the Income-tax Act, 1961,..." such a situation is not there in the LIC Act or in the Schedule III thereto. He has pointed out that the Andhra Pradesh High Court in the case of B. Chinnaiah (supra) observed that since incentive bonus is not one of the notified items, no exemption under section 10(14) of the Income-tax Act can be given for the incentive bonus. Therefore, the learned departmental representative submitted that the aforesaid decisions may be followed in the assessee's case also. According to him, the decision of the Bombay High Court in CIT v. M.C. Shah [1991] 189 ITR 180 and Gauhati High Court in CIT v. Ram Krishna Banik [1995] 215 ITR 901/81 Taxman 288 did not consider the question whether the amount is assessable under 'salary' or not, but the issue considered was whether deduction of 40 per cent towards expenditure was reasonable or not. He summed up his arguments contending that the incentive bonus paid to the Development Officer of the LIC is not other payment, but part of the salary and in that event, the assessee is entitled only for the standard deduction under section 16(1) of the Income-tax Act. The Cochin Bench of the Tribunal in the case of T.K. Ginarajan, Development Officer of LIC(supra) has already considered these decisions in para 4 of its order. The Tribunal found that in none of those cases, the terms and conditions of the employment of a Development Officer of the LIC have been considered. The definition of 'salary' as given in the Life Insurance Corporation Act has been independently considered but no question of the provisions of the LIC Act overriding the provisions of the Income-tax Act had arisen. The duties and obligations of the Development Officer have been considered in para 5 of the order of the Tribunal in the above case. Every Development Officer is advised to change over from cost norms to low cost norms for a period of three years, failing which they would suffer reduction in their basic pay and also one grade increment as per para 4 of the Annexure. Cost ratio has been defined including several items. But incentive bonus is not included in the cost ratio. Even the definition of 'annual remuneration' as given in Schedule III to the LIC Act does not include incentive bonus and additional conveyance allowance. Clause (j) of Schedule III which defines 'gross yearly salary' specifically says that any incentive bonus or additional conveyance allowance shall not include in the 'gross yearly salary'.
9. There is no doubt that the 'gross yearly salary' is not inclusive of incentive bonus and additional conveyance allowance. It would not be correct to say that either 'annual remuneration' or 'gross yearly salary' includes incentive bonus or incentive bonus is part and parcel of such 'annual remuneration' or 'gross yearly salary'. It would not be correct to say that incentive bonus is a condition of the contract of service. Incentive bonus is paid separately to do certain duties of the LIC Development Officer. There is no doubt that LIC has paid bonus to LIC Development Officers because of their employment with the LIC. But it is not for the regular employment as understood under the terms and conditions of the employment. But for certain extra duty to procure more business by appointing and training agents.
10. The assessee has not claimed the entire payment of incentive bonus as a deduction. What is claimed by him is 40 per cent of the payment of incentive bonus having spent to engage and train agents to procure more business. There is no doubt that this incentive bonus is incidental to the employment of the Development Officer, but, at the same time, it would not be proper to treat incentive bonus as part of the salary or 'annual remuneration' or as 'yearly gross' salary. It is common knowledge that Development Officer tries to work hard and procure more business through the agents working under him to get more and more incentive bonus. If the term of payment of incentive bonus was not there in the present case, the Development Officer would not have made much efforts or tried to procure more business because there was no attraction for him to work more.
11. There is considerable difference between the commission paid to an employee at a particular percentage in the business practice and the incentive bonus paid to the Development Officer of LIC. The incentive bonus cannot be compared with the commission received in the business practice. Receiving commission by a salesman in the business practice presupposes of selling more articles by convincing the customers. The payment of incentive bonus is also in the nature of convincing customers to ensure more lives, but without selling any articles. Therefore, commission cannot be compared with incentive bonus and, hence, the decision of the Supreme Court in the case of Gestetner Duplicators (P.) Ltd. (supra) is distinguishable.
12. Generally, if the item of incentive bonus is shown in the salary certificate, it does not mean that it is a part and parcel of the 'salary' or 'annual remuneration' or 'yearly gross salary'. The activity carried on by the Development Officer of the LIC may be treated as professional activity. The Development Officer is expected to travel extensively with his agents to convince people to ensure their lives. He has to spend on such travel and on agents to carry on the professional activity. He is supposed to incur certain expenses on entertainment, printing and stationery and telephone from the incentive bonus. He has claimed only 40 per cent of the incentive bonus received by him as a deduction on these items. Only allowing a standard deduction under section 16(i) of the Income-tax Act, does not specify the quantum of expenses incurred by the Development Officer of LIC.
13. We have examined the facts. We have also considered the arguments advanced on behalf of both parties. On a totality of the facts, arguments and the legal position, we are of the opinion that it would be incorrect to say that incentive bonus is a part of the salary or annual remuneration or yearly gross salary. In this view of the matter, the appellant has to succeed.
14. In the result, the appellant succeeds and the appeal is allowed.