2013 (8) TMI 261 - SC - Income Tax

Incentive bonus - Perquisites - Whether the incentive bonus paid to the Development Officers by the Life Insurance Corporation prior to 01.04.1989 would form part of the salary and thus eligible to income tax - Held that - Perquisite is excluded from the purview of Section 10(14) - what is excluded under Section 10(14) as it stood prior to 01.04.1989 is the expenses incurred in the performance of the duty. It is for the employer to certify the actual expenses incurred in the performance of duty and in which case as clarified by the CBDT to that extent the same shall not be shown as part of salary. The High Court of Gujarat failed to take note of the reply by the CBDT that it was for the LIC of India to reimburse the actual expenditure involved in the performance of the duty by the Development Officers and to that extent the same was not to be shown as salary. Compartmentalization of income under various heads and computation of the taxable portion strictly in accordance with the formula of deductions rebates and allowances are to be done only as per the scheme provided under the Act - The appellant being a salaried person the incentive bonus received by him prior to 01.04.1989 has to be treated as salary and he is entitled only for the permissible deductions under Section 16 of the Act. The expenses incurred in the performance of duty as Development Officer for generating the business so as to make him eligible for the incentive bonus is not a permissible deduction and hence the same is exigible to tax - Decided against assessee.

Summary

Issues:
Whether the incentive bonus paid to Development Officers by LIC prior to 01.04.1989 is part of salary and subject to income tax.

Analysis:
The issue in this case revolves around the treatment of incentive bonuses paid to Development Officers by LIC before 01.04.1989 concerning income tax liability. The appellant, a Development Officer, claimed a deduction of 40% of the incentive bonus in his income tax return, arguing that it was incurred for business canvassing expenses. However, the CBDT clarified that the incentive bonus forms part of the salary unless specifically reimbursed for expenses incurred. The dispute arises from the period before 01.04.1989 when LIC allowed reimbursement of 30% of the incentive bonus, leading to questions about the taxability of the remaining amount.

The legal framework under the Income Tax Act, 1961, defines 'salary' under Section 17(1) comprehensively, encompassing various components like wages, commissions, and perquisites. The Act provides for deductions under Section 16 for salaried individuals, limiting permissible deductions. The courts have consistently held that incentive bonuses are part of an employee's salary and not eligible for additional deductions unless specifically reimbursed for expenses incurred in duty performance.

Various High Courts have ruled in favor of the Revenue, emphasizing that incentive bonuses are part of the salary and not subject to further deductions beyond what is allowed under the Act. The High Court of Gujarat, however, took a different stance, citing Section 10(14) pre-01.04.1989, which allowed exclusions for expenses incurred in duty performance. The Supreme Court rejected this view, stating that the Act provides a self-contained code for income tax assessment, and taxability should be determined based on the Act's definitions and provisions.

The appellant's reliance on a previous court decision regarding a different tax statute was deemed irrelevant, as the context and legal framework differed. The Supreme Court held that the incentive bonus received by the appellant before 01.04.1989 should be treated as salary, with only permissible deductions under Section 16 applicable. Expenses incurred for business development to qualify for the bonus were not considered deductible, making the amount subject to tax. Consequently, the appeal was dismissed, affirming the tax liability on the incentive bonus received by the appellant.