1998 (12) TMI 111 - AT - Income Tax

Exemption Special Allowance Conveyance Allowance Additional Conveyance Allowance Salary Incentive Bonus

Summary

Issues Involved:
1. Exemption of conveyance allowance/additional conveyance allowance under section 10(14) of the Income-tax Act, 1961.
2. Deduction of 40% from the incentive bonus as expenditure incurred for earning the incentive bonus.

Detailed Analysis:

Issue 1: Exemption of Conveyance Allowance/Additional Conveyance Allowance

The primary question is whether the conveyance allowance/additional conveyance allowance received by the Development Officers of LIC is exempt under section 10(14) of the Income-tax Act, 1961.

Arguments by the Departmental Representative:
- The assessees are salaried employees of LIC and received conveyance allowance/additional conveyance allowance from their employer.
- Deduction under section 10(14) is permissible only to the extent specified by the Central Government and actually incurred by the assessees in the performance of their duties.
- Since the Government has not specified these allowances to be exempt under section 10(14), the claims cannot be allowed.
- Alternatively, a Circular dated 18th March 1991, issued by LIC in consultation with CBDT, specifies certain expenditure that can be considered incurred by the Development Officers for their employment purposes. Any deduction allowed should not exceed the limits specified in this Circular.

Arguments by the Assessees' Counsels:
- The Development Officers have dual roles: as salaried employees and as agents/representatives of LIC.
- Their duties involve extensive travel, and the conveyance allowance/additional conveyance allowance is a reimbursement of the expenses incurred in performing their duties.
- The Government of India in Notification No. GSR 606(E) dated 9-6-1989, has notified that expenditure incurred on conveyance in performance of duties of an office shall be exempt under section 10(14).
- The entire conveyance allowance should be exempt under section 10(14).

Tribunal's Findings:
- Section 10(14)(i) allows for exemption if the special allowance or benefit is not a perquisite, is granted to meet expenses wholly, necessarily, and exclusively incurred in the performance of duties, is specified by the Central Government, and the expenses are actually incurred.
- The conveyance allowance/additional conveyance allowance meets these conditions.
- The Government of India has specified conveyance allowance in performance of duties to be exempt under section 10(14) for assessment years 1989-90 and subsequent years.
- The actual expenditure incurred by the Development Officers on conveyance needs to be determined. If sufficient evidence is provided, the actual expenditure should be exempt. In the absence of such particulars, the amount specified in the LIC Circular dated 18th March 1991 should be accepted.

Conclusion:
The Tribunal set aside the orders of the authorities below and remanded the matter back to the Assessing Officer to determine the actual expenditure incurred by the Development Officers for conveyance and to allow exemption accordingly.

Issue 2: Deduction of 40% from Incentive Bonus

The second issue is whether the Development Officers of LIC are entitled to a 40% deduction from the incentive bonus received by them as an expenditure incurred for earning the incentive bonus.

Arguments by the Departmental Representative:
- The Development Officers are full-time employees of LIC, and the only permissible deduction for salaried employees is the Standard Deduction under section 16.
- Development Officers are not required to incur extra expenditure for earning incentive bonuses, as clarified by CBDT in Instruction No. 1774 dated 14th October 1987.
- The incentive bonus should be considered part of the salary, and no other deductions are permissible.

Arguments by the Assessees' Counsels:
- The Development Officers have dual capacities and incur significant expenses to earn the incentive bonus, which is not reimbursed by LIC.
- The incentive bonus should be considered as profit in lieu of salary under section 17(1)(iv) and only the net profit (receipt minus expenditure) should be taxed.
- The incentive bonus is calculated based on the business procured, not as a standard bonus paid to other employees.

Tribunal's Findings:
- The Development Officers are required to incur various expenditures for earning the incentive bonus, which are not fully reimbursed by LIC.
- The incentive bonus should be classified as profit in addition to salary under section 17(1)(iv).
- The expenditure incurred for earning the incentive bonus should be deducted to determine the true profit.
- The Tribunal supports the view that the word "Profit" in section 17(1)(iv) implies receipt minus expenditure.
- The Tribunal referred to the decision of the Gujarat High Court in the case of Chimanbhai H. Patel, which supports the deduction of expenditure incurred for earning incentive bonuses.

Conclusion:
The Tribunal set aside the orders of the authorities below and remanded the matter back to the Assessing Officer to determine the actual expenditure incurred by the Development Officers for earning the incentive bonus and to allow the deduction accordingly.

Final Decision:
All the appeals by the assessees and the Department, as well as the cross objections by the assessees, are deemed to be allowed for statistical purposes.