1998 (10) TMI 72 - HC - Income Tax

Summary

Issues Involved:
1. Whether the incentive bonus received by the assessee, a Development Officer of the Life Insurance Corporation of India (LIC), is taxable under the head "Salary".
2. Whether any deduction against the incentive bonus is admissible under the section relating to the taxing of salary income.

Summary:

Issue 1: Taxability of Incentive Bonus under the Head "Salary"
The primary issue was whether the incentive bonus received by the assessee, a Development Officer of LIC, should be taxed under the head "Salary" or "Profits and gains of business or profession". The court held that the Development Officers are whole-time employees of LIC and their primary duty is to promote and develop life insurance business. The incentive bonus is paid for achieving higher business targets and is linked to the volume of business procured. The Supreme Court's observation in *Gestetner Duplicators Pvt. Ltd. v. CIT* was cited, where it was held that remuneration determined at a fixed percentage of turnover achieved by an employee partakes the character of salary. The court concluded that the incentive bonus is in the nature of commission for higher output and better results and thus, it falls under the definition of "salary" as per section 17(1)(iv) of the Act. Therefore, the incentive bonus received by the assessee is taxable under the head "Salary".

Issue 2: Admissibility of Deduction Against Incentive Bonus
The assessee argued that the incentive bonus should be treated as professional income, allowing for the deduction of expenses incurred in earning it. However, the court noted that deductions under the head "Salaries" are governed by section 16 of the Act, which allows only standard deductions and specific deductions for entertainment allowance and tax on employment. The court emphasized that the incentive bonus is not a special allowance granted to meet expenses wholly, necessarily, and exclusively incurred in the performance of duties as per section 10(14) of the Act. The incentive bonus scheme of 1978 does not mention any component of reimbursement of expenses. Hence, no separate deduction on account of expenditure is permissible beyond what is specified in section 16(i) of the Act.

Conclusion:
The court held that the incentive bonus received by the assessee is assessable under the head "Salaries" and not under "Profits and gains of business or profession". Additionally, only the standard deduction under section 16(i) is admissible, and no separate deduction for expenses incurred in earning the incentive bonus is allowed. The question was answered in favor of the Revenue and against the assessee.