2003 (1) TMI 80 - HC - Income Tax

Whether the additional conveyance allowance paid by the Life Insurance Corporation of India (in short, the LIC ) to its Development Officers in terms of the norms of the business fetched by them as per circular dated March 3, 1987, issued by the Life Insurance Corporation is exempt under section 10(14) of the Income-tax Act, 1961, hereinafter referred to as the Act of 1961 , as special allowance or not? - Therefore, the Life Insurance Corporation cannot be insisted for deduction of tax to be deducted at source to the extent such conveyance allowance/additional conveyance allowance is exempt under rule 2BB and further such minimum limit is set from time to time. The ultimate liability of claiming exemption and proving the same is on the employee-assessees, i.e., the Development Officers. - we allow these special appeals. We direct the Department not to insist upon the Life Insurance Corporation of India to deduct the income-tax at source in respect of conveyance and additional conveyance allowance, paid by it to its Development Officers. The assessment order is quashed and set aside.

Issues Involved:
1. Whether the additional conveyance allowance paid by the Life Insurance Corporation of India to its Development Officers is exempt under section 10(14) of the Income-tax Act, 1961.
2. Whether the incentive bonus received by the Development Officers is considered part of the salary and thus taxable.
3. Whether the Life Insurance Corporation is required to deduct tax at source on the additional conveyance allowance paid to Development Officers.

Detailed Analysis:

Issue 1: Exemption of Additional Conveyance Allowance under Section 10(14)
The primary issue is whether the additional conveyance allowance paid to Development Officers by the Life Insurance Corporation (LIC) is exempt under section 10(14) of the Income-tax Act, 1961. The court examined the correspondence between LIC and the Central Board of Direct Taxes (CBDT), which indicated that the additional conveyance allowance is exempt if a certificate is appended with the return of income filed by the Development Officers, certifying that the allowance was actually incurred for the performance of duties.

The court noted that the Development Officers receive conveyance and additional conveyance allowances as reimbursements for actual expenditures incurred in performing their duties, such as meeting people to develop insurance business and recruit new agents. The court emphasized that these allowances have a direct nexus with the performance of duties.

The court referred to the circular issued by the CBDT, which stated that the additional conveyance allowance would be treated as exempt if a certificate was issued by LIC confirming that the allowance was granted to meet expenses wholly, necessarily, and exclusively for the performance of duties.

Issue 2: Incentive Bonus as Part of Salary
The court addressed whether the incentive bonus received by the Development Officers forms part of their salary and is thus taxable. The Division Bench had previously held that the incentive bonus paid to a Development Officer is part of the salary and, therefore, taxable, allowing only the standard deduction permissible under section 16 of the Act.

The court referred to the earlier judgment in CIT v. Shiv Raj Bhatia, where it was held that the incentive bonus is part of the salary and not exempt under section 10(14). The court clarified that this judgment pertains to incentive bonuses and not to conveyance or additional conveyance allowances.

Issue 3: Requirement to Deduct Tax at Source
The court considered whether LIC is required to deduct tax at source on the additional conveyance allowance paid to Development Officers. The court noted that the Income-tax Appellate Tribunal had previously held that the principal officer of LIC was justified in not deducting tax at source from the conveyance and additional conveyance allowances received by Development Officers, as the CBDT had not insisted on the production of evidence for actual expenditure incurred.

The court emphasized that the additional conveyance allowance is different from the conveyance allowance and is given as a special allowance for meeting actual expenditures incurred by Development Officers in accordance with the guidelines. The court held that Development Officers are entitled to claim exemption under section 10(14) for the additional conveyance allowance upon satisfying the conditions that such allowances were actually spent for the performance of duties.

Conclusion:
The court concluded that the additional conveyance allowance paid to Development Officers by LIC is exempt under section 10(14) of the Income-tax Act, provided that the conditions specified by the CBDT are met. The court quashed the notices requiring LIC to deduct tax at source on the additional conveyance allowance and set aside the assessment order. The court directed the Department not to insist on LIC deducting tax at source for these allowances and instructed the assessing authority to pass a fresh order in accordance with the law laid down in the judgment.

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