2002 (8) TMI 865 - HC - Income Tax

Summary

Issues Involved:
1. Whether the incentive bonus given to the Development Officers of the Life Insurance Corporation of India is to be counted for the purposes of deduction of tax.
2. Whether at least that much portion of the incentive which has been incurred by the Development Officer for procuring business for the Corporation is exempt.
3. Whether the circular issued by the Central Board of Direct Taxes has any force of law and effect over and above the provisions contained in the Income-tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Incentive Bonus:
The primary issue is whether the incentive bonus given to Development Officers of the Life Insurance Corporation of India (LIC) should be included in the total taxable income. The respondents cited precedents from the Punjab and Haryana High Court and the Madras High Court, which held that Development Officers are whole-time employees whose primary duty is to secure more business for the LIC. Consequently, any incentive received in the course of these duties is considered part of their salary and is taxable. The relevant observation from the Punjab and Haryana High Court states: "Development Officers of the Life Insurance Corporation of India are whole-time employees... Whatever income is received by the Development Officers from the Life Insurance Corporation of India, is by way of salary and is to be assessed under the same head."

2. Exemption of Incurred Expenses:
The second issue is whether the portion of the incentive bonus actually spent by a Development Officer for procuring business should be exempt from taxation. The Gujarat High Court in CIT v. Kiranbhai H. Shelat held that only the profit element of the incentive bonus, after deducting the expenses incurred in the performance of duties, should be taxable. The court observed: "It is the profit element alone which remains with the assessee that can be treated as salary, being profit in addition to salary or wages." This view aligns with the circular issued by the Central Board of Direct Taxes (CBDT), which allows exemption for the portion of the allowance certified as having been actually incurred in the performance of duties.

3. Legal Force of CBDT Circular:
The third issue concerns the legal standing of the CBDT circular. The Kerala High Court in CIT v. Punalur Paper Mills Ltd. and the Supreme Court in UCO Bank v. CIT held that CBDT circulars have the force of law and are binding on the department. The Kerala High Court stated: "It is not open to the Department to contend, even in cases where the circular goes beyond the terms of the section, that the circular has no legal effect or should not be given effect to." The Jammu and Kashmir High Court also referenced its own precedent in CIT v. Abdul Ahad Najar, affirming that circulars issued under section 119 of the Income-tax Act are binding and effective.

Conclusion:
The Jammu and Kashmir High Court concluded that the circular issued by the CBDT is binding and has the force of law. Therefore, the portion of the incentive bonus actually spent by the Development Officer in the performance of duties should be exempt from taxation. The court preferred the view expressed by the Gujarat High Court, which takes into account the CBDT circular, over the views of the Punjab and Haryana High Court and the Madras High Court, which did not consider the circular.

Disposition:
The appeal was allowed, and the matter was remanded to the Income Tax Officer to determine the amount of incentive bonus actually spent by the concerned officer for procuring extra business. Only after establishing this factual foundation would the assessee be eligible for the exemption and the benefit of the CBDT circular. The case was disposed of accordingly.