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TMI Blog1996 (7) TMI 194X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the LIC incentive bonus has been included as a part of salary. The case was processed under section 143(1)(A) treating the claim as income from other sources. Assessee filed an application under section 154 and the same was rejected. The learned CIT (Appeals) in further appeal against the order passed under section 154 allowed the claim of the assessee vide his order dated 27-1-1993 for 1990-91 and 1991-92. 3. The case was selected for scrutiny under section 143(2) and a notice was issued to the assessee. In response to the above notice, assessee filed a written statement on 18-2-1993 and contended that ITAT, Nagpur Bench, having dismissed departmental appeal for assessment year 1983-84 against the order of the learned CIT(Appeals) allowing the claim of the assessee, there is no case for the department. Assessee further relied upon the decision of the ITAT, Pune Bench as well as the decision of the Bombay High Court in the case of CIT v. A.A. Baniyan [1991] 197 ITR 717. Assessee further contended that in view of the decision of the Bombay High Court in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 1TR 589, the decision of the Bombay High Court in the case of A.A. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and allowed 40% of the incentive bonus as expenses. Assessee further pointed out before the first Appellate Authority that while deciding the issue in favour of the assessee holding that 40% of the incentive bonus is allowable as expenses as claimed by the assessee for the year under consideration also both authorities had decided the issue in favour of the assessee in view of the decision of the jurisdictional High Court in the case of A.A. Baniyan. The learned counsel further contended before the first Appellate Authority that for the very assessment year assessee's appeal under section 154 had been allowed on the very same issue and, therefore, the relief cannot be denied to the assessee against the very same assessee. The learned first Appellate Authority decided the issue against the assessee vide para 3 of its order. For the reasons stated in para 3 of his order, para 3 of order is reproduced herein below: - "3. I have considered the facts of the case and the above submissions of the learned counsel. The appeal against the Assessing Officer's order under section 154 for this year decided earlier was on the specific issue as to whether the claim could be disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded as good law in view of the Osrissa High Court's decision mentioned above. I am, therefore of the view, the ITO's action in not allowing deduction for expenses from incentive bonus in this case is in accordance with law and the same is confirmed." It is against this order of the CIT(A), assessee is in appeal before the Tribunal. 5. The learned counsel for the assessee Mr. Dewani invited our attention to the Scheme of Incentive Bonus to Development Officers dated 7-2-1978. He submitted that it is not true to say that all the Development Officers are entitled to get incentive bonus by virtue of their mere appointment in the post. The first criteria or the eligibility to get the incentive bonus is that the officer's cost ratio (ratio of his annual remuneration in an appraisal year of the eligible premium in that year) did not exceed 20% in an appraisal year shall only become eligible for grant of incentive bonus in respect of that appraisal year in accordance with the scheme. The formula for determining basic incentive bonus is given in clause 5 of the Scheme. It is as under: - 5. Formula for determining Basic Incentive Bonus: Basic Incentive Bonus shall be determined as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rform such other duties as may be entrusted or assigned to officer from time to time. The learned counsel invited our attention to norms for Development Officers dated 1st December, 1969, under clause 19. "III. Special Need for Norms and Incentives in the case of Development Officers: 19. While it is true that the Development Officers are regular employees of the Corporation, it must be clearly recognised that, owing to the nature of their duties and conditions of work, even after the grant of automatic increments, there are bound to be essential variations in the operation of the salary grade in relation to Class II employees and other categories of employees. This has been clarified in the Government decision dated February 16, 1969 on the joint reference made by the L.I.C. and the Federation of Class II Federation: 'The duties of this class (Development Officers) differ fundamentally from those of others. In fact, they have no parallel either in government or in the public sector. While Development Officers may not be salesmen in the sense insurance agents are, promoting sale of insurance, policies is not only the most important part of their duties but the real justific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of their duties and also the real justification of their employment. They have neither an office nor regular hours of work. Distinguishing the nature of the work rendered by the Development Officer that entitles him to receive the incentive bonus from that of any ordinary employment, the learned counsel submitted that the expenses incurred by a regular employee while discharging his official duties are reimbursed by the employer whereas in the case of a Development Officer he is not reimbursed. 6. The learned counsel for the assessee brought our attention to paper book page 58, a letter dated 29th September, 1986, issued by the Managing Director clarifying the nature of additional conveyance allowance and incentive bonus is paid to the Development Officer. With regard to the rationale behind additional conveyance allowance the clarification given by the Managing Director is as under: - "As already mentioned in our earlier letters to you, Additional Conveyance Allowance, as an addition to Conveyance Allowance at flat rates in force from time to time, was granted to Development Officers specifically to meet the expenses wholly, necessarily and exclusively for the purpose of new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is required to spend a part of the Incentive Bonus on this account. It is, therefore, proposed to certify, under section 10(74), an amount upto 30% of the Incentive Bonus earned as necessary expenses that would have to be incurred and the internal system devised by us lays down guidelines to the operating offices regarding the percentage to be certified in each case having regard to factors referred to earlier. We would be grateful if you could kindly examine the points clarified in this letter and issue suitable guidelines to your offices to accept the certification given by the LIC offices both with reference to Additional Conveyance Allowance and Incentive Bonus, as above." Since there is no reimbursement of the expenses incurred, the services rendered by the LIC Officer which entitles him to earn incentive bonus, the learned counsel submitted, necessarily is a service rendered as an agent. Relying upon the decision of the Hon'ble Supreme Court in the case of Nalinikant Ambalal Mody v. S.A.L. Narayan Row, CIT [1966] 61 ITR 428, the learned counsel submitted that whether an income falls under one head or another has to be decided according to the common notion of a practical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning of salary has been extended for the purposes of sections 15 and 16 only. It is not possible to draw an inference from the deletion of section 16(v) that the Legislature had intended to take into account the cases of incentive bonus/commission without reducing it by the expenditure incurred for earning it, because, as stated in the memorandum explaining the provision of the Finance Bill, 1974, this amendment was brought only to simplify the assessment procedure of salaried tax-payers. Accordingly, the expenditure incurred by the assessee for earning the incentive bonus/commission should be reduced from the bonus/commission at the starting point itself, i.e., at the point it was treated as the income chargeable under the head 'Salaries'." The learned counsel submitted that the letter of the Managing Director reproduced hereinabove in para 5 if considered in the light of the decision of the Tribunal cited supra will make it clear that the claim of the assessee that 40% of the incentive bonus received by the assessee is to be allowed as expenses, is sound. In view of section 10(14)(i) the learned counsel submitted that the actual expenses incurred by a Development Officer to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Development Officers was not considered by several High Courts which have taken a contrary view to the effect that the incentive bonus received by a Development Officer is salary. The Hon'ble Andhra Pradesh High Court in the case of K.A. Choudary has also not considered the scheme while deciding the issue in favour of the revenue holding that incentive bonus received from the employer is a part of salary. In this case the assessee who was an employee of LIC of India received a sum of Rs. 9536 as incentive bonus and claimed deduction of expenses in earning the bonus. The ITO declined to give the deduction. CIT (Appeals) and Tribunal confirmed the order of the ITO. The above decision was challenged in Writ Petition No. 7216 of 1983 and the order of the Tribunal was confirmed by the Hon'ble High Court. 8. In the case of CIT v. Ram Krishna Banik [1995] 2l5 ITR 901/81 Taxman 288 the Hon'ble Gauhati High Court and in the case of CIT v. M.C. Shah [1991] 189 ITR 180 the Hon'ble Bombay High Court have taken a view in favour of the assessee on the basis of the facts before the Hon'ble High Courts. The learned counsel brought our attention to the decision of ITAT (Special Bench) decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration if there was an alternative efficacious remedy available to the assessee. Since the decision of the Hon'ble Andhra Pradesh High Court in the case of K.A. Choudary was rendered in a writ petition, the judgment cannot be referred in any case against the decision of the Bombay High Court in the case of M.C. Shah and Hon'ble Gauhati High Court decision in the case of Ram Krishna Banik which was rendered on a question specifically referred on the point to the Hon'ble High Court. Further relying upon the decision of the Hon'ble Supreme Court in the case of CIT v. MadhoPd. Jatia [1976] 105 ITR 179, the learned counsel contended that one view favourable to the assessee should be followed. In this case the Hon'ble Supreme Court held as under: - "Held, affirming the decision of the High Court, that item 38 placed a limit in respect of the deduction which was permissible in an assessment for one year. Where, however, the amount of irrecoverable rent exceeded the amount of rent payable for a year the right of the assessee to claim the benefit of the exemption under item 38 did not get exhausted by his having claimed exemption in one year; the assessee could claim deduction in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an contended that even if it is held that the Development Officer of LIC is an employee of the company, there is no bar in his acting in dual capacity as an employee and also an agent. For this proposition he relied upon the decision of the Hon'ble Supreme Court in the case of Ram Pros had v. CIT [1972] 86 ITR 122. In this case the issue before their Lordships was whether an amount received by the Managing Director by way of commission could be assessed under section 7 of the 1922 Act as salary in his hands or as a business income under section 10, in which case there was further question as to whether it was not to be included in his income because it had to be deducted as expenses. In this case their Lordships held that a person who is engaged to manage a business may be a servant or an agent according to the nature of his service and the authority of his employment. Their Lordships further held as under: - "A managing director may have a dual capacity. He may both be a director as well as an employee. In the capacity of a managing director he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee, or an agent depending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nned way as far as may be practicable within the area that may be allotted to the officer or in which the officer is allowed to work from time to time, through the agents placed under supervision by the Corporation and in consonance with corporate objectives of the Corporation; (ii) To guide, supervise and direct the activities of the agents placed under officers supervision by the Corporation. (iii) To introduce suitable persons to the Corporation for appointment as new agents. It further states that after the agent recruited at the instance of an officer has continuously worked for the Corporation for a period of 5 years or more and the Branch Manager is satisfied that the agent is no longer in need of help and guidance of any Development Officer, such an agent may be treated as a Direct Agent at the sole discretion of the Corporation. Thus the learned Departmental Representative submitted that since the Development Officer being a full time employee whatever he receives is as a consequence of the employment. He submitted that the officer discharges his duty through the medium of agents. He further submitted that the agents are paid by the LIC to the tune of 40 per cent w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, both being a recompense for work done or services rendered, though ordinarily the former expression is used in connection with services of non-manual type while the latter is used in connection with manual service. The expression "wages" does not imply that the compensation is to be determined solely upon the basis of time spent in service; it may be determined by the work done; it could be estimated in either way. If conceptually salary and wages mean one and the same thing then salary could take the form of payment by reference to the time factor or by the job done. In fact, in the case of salary, the recompense could be determined wholly on the basis of time spent on service or wholly by the work done or partly by the time spent in service and partly by the work done. In other words, whatever be the basis on which such recompense is determined it would all be salary. If under the terms of the contract of employment remuneration or recompense for the services rendered by the employee is determined at a fixed percentage of turnover achieved by him, then such remuneration or recompense will partake of the character of salary, the percentage basis being the measure of the sala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in the case of CIT v. Goodlass Nerolac Paints Ltd. [1991] 188 ITR 1, the Senior D.R. contended that this Bench is bound to follow earlier decision of the Tribunal, Nagpur Bench, in the case of Rajkumar B. Dudhwani v. ITO [IT Appeal No. 309 (Nag.) of 1994 dated 12-12-1995]. In this case Tribunal held that there was no justification in allowing 40% deduction to the Development Officer. 14. From the above argument, the following issues arise in our decision in this case: 1. Was the decision of the Bombay High Court in A.A. Baniyan's case decided on merit? 2. Is it possible to work for a full time employee in dual capacity.....as an employee as well as a professional? 3. What are the terms of appointment of LIC Development Officers? 4. Did the conflicting decisions of the High Courts consider the issue in the light of the terms of appointment of the Development Officers in any of the cases either decided in favour of the assessee or against the assessee?. 5. The changes in incentive bonus indicate what..,...it is salary or receipt for the services rendered. 6. Can a notional income (which is not actually received) be taxed even if it is a part of salary? 15. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e inapplicable to the facts of the present case." Their Lordships further observed that the recognition was given to the provident fund as far back as 1937 by the CIT and such recognition was granted after true nature of the commission payable by the assessee to its salesmen under the contract of the employment had been brought to the notice of the Commissioner and that the said recognition was continued and remained in operation during the relevant assessment year in question. It was under these circumstances, their Lordships held that until the assessee contravened any of the conditions required to be satisfied for the recognition of the provident fund and until the Commissioner acting under the powers reserved to him withdraws such recognition the taxing authority must proceed on the basis that the provident fund has satisfied all the requisite conditions for its recognition for that year. It was under these circumstances their Lordships held that conceptually there is no difference between salary and wages, both being a recompense for work done or services rendered, though ordinarily the former expression is used in connection with services of non-manual type while the latter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. However, at that time neither the Departmental Representative nor the assessee did bring to our notice the decision of the Hyderabad Special Bench of the Tribunal in the case of P. Dayakar [IT Appeal Nos. 1318 and 1319 (Hyd.) of 1986 dated 23-3-1989]. One of the arguments advanced by the learned counsel Mr. Dewani on behalf of the assessee was that the Development Officers are working in dual capacity-as an employee and also as an agent. Incen tive bonus receipt flows from the services rendered by the LIC Development Officers in their capacity as agents. We have reproduced the relevant portions of the norms of Development Officers issued by Life Insurance Corporation of India dated 1st December, 1969. Clause 19 of the above norms states that though the Development Officers are regular employees of the Corporation, owing to the nature of their duties and conditions of work, even after the grant of automatic increments, they have no parallel either in Government or in public sector and their duties differ fundamentally from those of others. It further states that the Development Officers may not be salesmen in the sense insurance agents are, promoting sale of insurance pol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Ram Prasad their Lordships of the Supreme Court held that- "A managing director may have a dual capacity. He may both be a director as well as an employee. In the capacity of a managing director he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee, or an agent depending upon the nature of his work and the terms of his employment. Where he is so employed, the relationship between him as the managing director and the company may be similar to a person who is employed as a servant or an agent, for the term 'employed' is facile enough to cover any of these relationships. The nature of his employment may be determined by the articles of association of a company and/or the agreement, if any, under which a contractual relationship between the director and the company has been brought about, whereunder the director is constituted an employee of the company, if such be the case, his remuneration will be assessable as salary under section 7. In other words, whether or not a managing director is a servant of the company apart from his being a director can only be determined by the articles of association and the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arangal, Tribunal held vide para 6 of its order that the provisions of section 16(1) of the Income-tax Act, 1961 being in response to the provisions of section 7(2) of the 1922 Act, instead of various deductions that were permissible under 1922 Act, a standard deduction came to be prescribed and the quantum thereof has been varied from time to time. Tribunal further held that whatever may be the objection of allowing of an amount as standard deduction under section 16(1), it cannot be said that it fully covers all the expenditure incurred on conveyance allowance though it may take within the purview such expenditure also. Tribunal further held that the additional conveyance allowance in the case of a Development Officer is not an entertainment allowance nor is it a perquisite within the definition of section 17(2). We have seen that this expenditure is granted to meet expenses to Development Officers to sell life insurance policies and such expenses are wholly, necessarily and exclusively incurred for the purpose of their duties. Thus it follows that additional conveyance allowance is provided to neutralise the expenditure by the Development Officer in procuring new business. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent Officers receive certain sum from the Life Insurance Corporation of India the expenditure that is required for earning that bonus or sum is built in the same. Shri Ramkrishnan invited our attention to the concept of real income. He submitted that the Development Officers are expected to incur certain expenses which are not reimbursed by the Life Insurance Corporation of India. They are expected to incur that expenditure from the commission or bonus or sum that is received by them. The expenditure is inherent in that bonus or sum. It is submitted that under the Income-tax Act unless there is a specific provision for not allowing a particular type of deduction to a person, such a deduction claimed by the person has to be allowed if without incurring that expenditure the person cannot earn the bonus or commission or such income. It was submitted that in case the Development Officer maintains an account of such expenses then the same has to be allowed in accordance with the account maintained by them. Otherwise any amount which is considered to be reasonable by revenue may be allowed. It is submitted that such expenses had to be reduced from the income received by them. We are of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in specific items which are to be treated as assessable under the head "Income from business or profession". The income from profits and gains of business or profession had to be computed in accordance with the provisions contained in sections 30 to 43D. If we make a study of the different sections from 30 to 43D, we find that the expenses incurred by an assessee on account of purchases made for making sales is not provided in any one of the sections. The reason is obvious that the same is considered as an outgoing under section 20 itself. We are, therefore, of the opinion that merely because a particular item of receipt is treated as taxable under the head 'Salary' an assessee cannot be denied a charge against such a salary if it is in-built in the receipt itself. Their Lordships of the Supreme Court in the case of Ram Prasad, have clearly distinguished the dual capacity of a Managing Director. Therefore, it is possible for an assessee deriving an income from a particular master to receive a certain incentive which can be received by him only if he incurs a particular expenditure. In such a given case the expenditure which is built in such a receipt has to be deducted before the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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