1992 (9) TMI 175 - AT - Income Tax

Summary

Issues Involved:
1. Classification of incentive bonus or commission as part of salary.
2. Eligibility for deduction of expenses incurred to earn incentive bonus or commission.
3. Contradictory decisions by various High Courts and Tribunals on the treatment of incentive bonus.

Detailed Analysis:

1. Classification of Incentive Bonus or Commission as Part of Salary:

The primary issue revolves around whether the incentive bonus or commission received by the Development Officer of the LIC should be considered part of the salary. The C.I.T. held that since the Development Officer is a full-time employee of LIC, the incentive bonus or commission should be treated as part of the salary. This classification implies that only standard deductions under section 16 of the Income-tax Act, 1961, should be allowed, and no additional deductions for expenses incurred to earn this incentive bonus or commission should be permitted.

2. Eligibility for Deduction of Expenses Incurred to Earn Incentive Bonus or Commission:

The C.I.T. further argued that expenses incurred to earn the incentive bonus or commission do not fall under any provisions of section 16 and cannot be deducted. The Tribunal, however, has previously held in several cases that incentive bonuses or commissions are integral parts of the salary. Despite this, the Tribunal also acknowledged that Development Officers incur expenses to procure more business, which should be considered for deductions. This raises the question of whether such expenses should be allowed as deductions over and above the standard deduction under section 16(i).

3. Contradictory Decisions by Various High Courts and Tribunals:

The learned Departmental Representative cited the Orissa High Court's decision in CIT v. Sarat Ch. Sahu [1992] 195 ITR 364, which observed that treating incentive bonuses as part of the salary while allowing deductions for expenses incurred to earn them is contradictory. The Orissa High Court remanded the matter to the Tribunal to clarify whether the incentive bonus is part of the salary or income from business. Similarly, the Andhra Pradesh High Court in K.A. Choudary v. CIT [1990] 183 ITR 29 held that incentive bonuses received from employers are part of the salary, and only standard deductions should be allowed.

Tribunal's Consideration and Decision:

The Tribunal considered the arguments and decisions from various High Courts and previous Tribunal decisions. It noted that incentive bonuses or commissions are paid for extra efforts and field duties performed by Development Officers beyond their official hours. The Tribunal also referred to the rules and notifications by the LIC, which distinguish incentive bonuses from regular salaries.

The Tribunal cited the decision of the Bombay Bench 'B' (Third Member) in Sixth ITO v. Narendra V. Patel [1985] 11 ITD 587, which allowed deductions for expenses incurred to earn incentive bonuses, treating only the net incentive bonus as part of the salary. Similarly, the Pune Bench of the Tribunal in Jitendra v. Mohan v. ITO [1992] 40 ITD 452 (SMC) held that a portion of the incentive bonus should be deductible as it is incurred for promoting business.

Final Judgment:

The Tribunal concluded that incentive bonuses earned by Development Officers should be treated as income from other sources rather than part of the salary. Consequently, it allowed a deduction of 25% of the incentive bonus for expenses incurred to earn it, under section 57(iii) of the Income-tax Act, 1961, which permits deductions for expenses wholly and exclusively laid out for earning such income. The balance 75% of the incentive bonus would be charged to tax.

Outcome:

The appeals were allowed, and the assessee succeeded in getting a deduction for expenses incurred to earn the incentive bonus, treating it as income from other sources rather than part of the salary.