1996 (5) TMI 104 - AT - Income Tax

Summary

Issues Involved:
1. Allowance of expenses of Rs. 42,151 from the total incentive commission of Rs. 1,05,378.
2. Addition of Rs. 5,000 for inadequate withdrawals for household expenses.
3. Cancellation of penalty imposed under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Allowance of Expenses from Incentive Commission:

The primary issue revolves around whether Rs. 42,151 out of the total incentive commission of Rs. 1,05,378 earned by the assessee could be considered deductible. The assessee, employed with M/s Modi Zerox Ltd., claimed this amount as deductible, drawing a parallel with LIC development officers who were allowed a 40% deduction from their incentive bonuses. The ITO disallowed this claim, considering the incentive bonus as part of the salary, which only allowed for standard deduction under Section 16.

Upon appeal, the Dy. CIT(A) accepted the assessee's arguments, emphasizing the extra efforts required to achieve sales targets, such as extensive field activities, entertaining potential clients, and organizing demonstrations and seminars at personal cost. The Dy. CIT(A) allowed the deduction of Rs. 42,151, which the Department contested.

The Tribunal examined various precedents, including decisions from the Orissa High Court and Andhra Pradesh High Court, which treated incentive bonuses as part of the salary and thus subject to deductions under Section 16 only. However, the Tribunal noted that these precedents were context-specific to LIC officers and did not necessarily apply to the assessee's case. The Tribunal found that the nature of the incentive commission in this case was not part of the salary but income from other sources, given the aggressive selling and personal expenses involved in earning the commission. Consequently, the Tribunal upheld the Dy. CIT(A)'s decision to allow the deduction of Rs. 42,151.

2. Addition for Inadequate Withdrawals for Household Expenses:

The second issue concerned the ITO's addition of Rs. 5,000 for inadequate withdrawals for household expenses. The ITO added this amount due to the non-production of bank accounts and monthwise withdrawals by the assessee. Upon appeal, the Dy. CIT(A) set aside this addition, considering the fresh evidence provided by the assessee, which the Department argued was in contravention of Rule 46A of the IT Rules.

The Tribunal disagreed with the Department's contention, noting that the assessee was given inadequate time to produce the required evidence initially. The Tribunal found that the assessee's explanation for staying with his brother in government accommodation and the financial contributions from his mother were reasonable. The Tribunal concluded that the withdrawals of Rs. 51,925.65 were adequate for personal and household expenses, thus dismissing the Department's appeal on this ground.

3. Cancellation of Penalty under Section 271(1)(c):

The third issue involved the cancellation of a penalty imposed under Section 271(1)(c) for allegedly furnishing inaccurate particulars of income. The penalty was initially imposed because the assessee's returned income was significantly lower than the assessed income, primarily due to the disallowed deduction and the addition for inadequate withdrawals.

Upon appeal, the Dy. CIT(A) cancelled the penalty, aligning with the decision to allow the deduction of Rs. 42,151 and set aside the Rs. 5,000 addition. The Tribunal, having dismissed the Department's appeal on both grounds in the quantum appeal, found no basis for the penalty. Consequently, the Tribunal upheld the Dy. CIT(A)'s decision to cancel the penalty.

Conclusion:

The Tribunal dismissed the Department's appeal on all grounds, affirming the Dy. CIT(A)'s decisions to allow the deduction of Rs. 42,151 from the incentive commission, set aside the Rs. 5,000 addition for inadequate withdrawals, and cancel the penalty under Section 271(1)(c).