2003 (5) TMI 49 - HC - Income Tax

Assessee a Development Officer in the Life Insurance Corporation - assessee claimed deduction on account of conveyance allowance for a sum of Rs. 9, 600 additional conveyance allowance for an amount of Rs. 36, 940 and 40 per cent. of the incentive bonus quantified at Rs. 50, 175. - (a) Whether the conveyance allowance/additional conveyance allowance received by the Development Officer of the Life Insurance Corporation are exempt under section 10(14) of the Act? - (b) Whether the Development Officer of the Life Insurance Corporation are entitled to 40 per cent. deduction of the incentive bonus received by them as an expenditure incurred for earning incentive bonus?

Issues Involved:
1. Whether the conveyance allowance/additional conveyance allowance received by the Development Officer of the Life Insurance Corporation is exempt under section 10(14) of the Income-tax Act, 1961.
2. Whether the Development Officer of the Life Insurance Corporation is entitled to a 40% deduction of the incentive bonus received by them as an expenditure incurred for earning incentive bonus.

Detailed Analysis:

1. Exemption of Conveyance Allowance/Additional Conveyance Allowance under Section 10(14):

The primary issue was whether the conveyance allowance and additional conveyance allowance received by the Development Officer of the Life Insurance Corporation (LIC) are exempt under section 10(14) of the Income-tax Act, 1961. According to Section 10(14), any special allowance or benefit specifically granted to meet expenses wholly, necessarily, and exclusively incurred in the performance of duties of an office or employment is exempt, provided the expenses are actually incurred for that purpose. The Tribunal found that the Development Officers, who are full-time employees of LIC, incur significant travel expenses in the performance of their duties. The Government of India's Notification No. 606 dated June 9, 1989, specified that conveyance allowance for the performance of duties is exempt. Based on this, the Tribunal concluded that the conveyance allowance/additional conveyance allowance received by the Development Officers is exempt under section 10(14). The High Court upheld this view, affirming that the Tribunal's order on this score is impeccable.

2. Deduction on Incentive Bonus:

The second issue concerned the entitlement of a 40% deduction on the incentive bonus received by the Development Officers. The Tribunal had allowed this deduction, treating the incentive bonus as profit in addition to the salary under section 17(1)(iv) of the Act. However, the Revenue argued that incentive bonus should be assessed under the head "Salary" and no separate deduction should be allowed beyond the standard deduction under section 16. The Tribunal's decision was based on the Gujarat High Court's judgment in CIT v. Kiranbhai H. Shelat, which allowed deductions for expenses incurred in earning the incentive bonus. However, several other High Courts, including Bombay, Madras, Karnataka, Kerala, Orissa, and Punjab and Haryana, have held that incentive bonus forms part of the salary, and no additional deduction is permissible beyond the standard deduction under section 16.

The High Court analyzed various judgments and concluded that incentive bonus is inseparably connected with employment and should be treated as part of the salary. The Court noted that the majority view among High Courts is that no separate deduction for expenses incurred in earning the incentive bonus is allowable. The Court disagreed with the Gujarat High Court's view and the circular issued by the Central Board of Direct Taxes, which suggested that part of the incentive bonus could be treated as reimbursement of expenses. The Court emphasized that a taxing statute must be construed strictly, and pragmatic or expedient interpretations are not permissible.

Conclusion:

The High Court concluded that:
1. The conveyance allowance/additional conveyance allowance received by the Development Officers of LIC is exempt under section 10(14) of the Income-tax Act, 1961.
2. The Development Officers are not entitled to any deduction beyond the standard deduction under section 16 for the incentive bonus received by them. The incentive bonus forms part of the salary, and no additional deduction for expenses incurred in earning it is permissible.

The appeals were allowed in part, with no order as to costs.

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