TMI Blog1996 (12) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to as LIC in brief) at Anantapur. During the previous year relevant to the assessment year 1992-93, the assessee, in addition to salary, received incentive bonus of Rs.3,58,971. He filed his return of income for the assessment year 1992-93 on 6-7-1992. He claimed deduction of Rs.1,43,588 being 40% of the incentive bonus towards expenses for earning the incentive bonus. The Assessing Officer processed the said return under section 143(1)(a) of the Income-tax Act and made an adjustment by disallowing the claim of deduction of Rs.1,43,588 and issued an intimation dated 18-11-1992 levying additional tax of Rs.16,170 under section 143(1A). The reason given in the intimation dated 18-11-12 by the Assessing Officer for making the said adjustment is as follows: "Expenses claimed out of incentive bonus is disallowed in view of A.P. High Court's decision in the case of K.A. Choudary 1,43,588." (b) Aggrieved by it, the assessee filed an application under section 154 requesting the Assessing Officer to rectify the intimation by deleting the disallowance/adjustment made in respect of the 40% of incentive bonus being expenses for earning the incentive bonus. The assessee contended before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses claimed by a Development Officer of LIC being a highly debatable issue, it cannot be adjudicated upon and disallowed by way of prima facie adjustment at the intimation stage itself under section 143(1)(a). Another combination of the ITAT, Hyderabad Bench 'A', in its order rendered in the case of K. Gangadhar v. ITO [IT Appeal No. 274 (Hyd.) of 1994 dated 26-12-1995 for assessment year 1990-91] and batch, took a contrary view that the claim of deduction of 40% of incentive bonus towards expenses by Development Officers of LIC is prima facie inadmissible in view of the Andhra Pradesh High Court's decision in the case of K.A. Choudary and the decision in the case of CIT v. B. Chinnaiah [1995] 214 ITR 368, and, therefore, the Assessing Officer was justified in making the prima facie adjustment under section 143(1)(a) and disallowing the deduction claimed. Noticing that conflict, the Division Bench felt that this appeal is fit to be heard and decided by a Special Bench. Accordingly, the President of the Income-tax Appellate Tribunal was pleased to constitute this Special Bench for deciding the question mentioned supra. 3. The learned departmental representative, Sri C.P. Rama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of the Tribunal in the case of P. Dayakar v. ITO [1995] 53 ITD 25 (Hyd.) rendered on 23-3-1989, relating to assessment years 1981-82 and 1982-83 can have no relevance subsequent to 1-4-1989 in view of the amendment to section 10(14) of the Income-tax Act. When the deduction claimed is totally opposed to law, it is prima facie inadmissible and, therefore, it can be disallowed by way of adjustment under clause (iii) of the first proviso to section 143(1)(a). The issue is no more debatable after the decision of the jurisdictional High Court in the case of K.A. Choudary. In that view of the matter, the view taken by the learned CIT(Appeals) is erroneous and is liable to be set aside. 4. The learned counsel, Sri S. Rama Rao, while supporting the impugned order, contended as follows: A Development Officer of LIC cannot be treated as any other employee of State Government or Central Government. He has special duties to perform in addition to his regular duties. He gets regular salary for the duties he renders in connection with his contract of employment and gets incentive bonus for extra business he secures based on a particular formula. To continue his employment as Development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered as salary and not the gross amount. ITAT, Delhi Bench (SMC), in the case of I.D. Gupta v. ITO [1991] 36 ITD 445, ITAT Pune Bench (SMC), in the case of Jitendra V. Mohan v. ITO [1992] 40 ITD 452 and ITAT, Ahmedabad Bench, in the case of Kiranbhai H. Sheelath v. ITO [1993] 112 CTR (Ahd.) (Trib.) 140, took the view that the deduction should be allowed at the first instance itself under section 15 and the net amount alone should be considered as salary applying the "real income" theory enunciated by the Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10. Even after the judgment in the case of K.A. Choudary rendered on 10-12-1987 till 8-3-1995 when the judgment in the case of B. Chinnaiah was delivered by the High Court, the ITAT, Hyderabad Benches, consistently took the view that 40% of incentive bonus is allowable towards expenses since the net amount alone should be considered as salary. Between 10-12-1987 and 8-3-1995, ITAT, Hyderabad Benches, decided hundreds of appeals relating to Development Officers of LIC and in almost all those appeals, the Tribunal accepted the claim of the Development Officers for deduction of 40% of incentive bonus. Based on those dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lone be considered as salary and whether the deduction for expenses should be allowed at the starting point itself under section 15. 6. In the case of K.A. Choudary, one Development Officer of the LIC filed a writ petition in the High Court to direct the Income-tax authorities to treat the incentive bonus received by him as income from profession and not as income under the head "salary" and allow the expenses incurred for earning the said professional income as deduction. The Andhra Pradesh High Court, applying the ratio of the decision of the Supreme Court in the case of Gestetner Duplicators (P.) Ltd v. CIT [1979] 117 ITR 1/1 Taxman 1 and the decision of the Allahabad High Court in the case of CITv. Hind Lamps Ltd [1980] 122 ITR 451/3 Taxman 278 and the decision of the Andhra Pradesh High Court in the case of M. Krishna Murthy v. CIT [1985] 152 ITR 163/23 Taxman 126 has held that incentive bonus received by a Development Officer of the LIC forms part of salary and that it cannot be considered as income from profession. Holding so, the writ petition was dismissed by the High Court. However, the issue whether the net amount of incentive bonus alone should be treated as salary an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as having been expended for earning such reward or income. It cannot be said that conveyance expenditure is the only expenditure that has to be incurred by a Development Officer for canvassing business. It is very difficult to convince the public of the necessity to go in for insurance. A lot of persuasion is required. A Development Officer is in charge of a group of Agents, sometimes covering even more than 100. Broadly put, he has to train new agents, motivate all agents for canvassing new business, see to it that the business already obtained is maintained without policies lapsing, and where there are grievances from particular policy holders which the agents cannot tackle, he has to see that such grievances are tackled and rectified. In a manner, he acts as a link between the agents and the policy-holders and between the agents and the LIC. For this purpose, some establishment is necessary. There are cases where accounts are maintained of such expenditure, and there are cases where accounts are not maintained. In cases where accounts are maintained by way of evidence, the entire expenditure incurred to the extent proved has to be allowed under section 10(14), because that exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent salary in the ordinary sense but it represents salary because of the technical difinition given in section 17. The Ahmedabad Bench also applied the real income theory based on the principle laid down by the Supreme Court in the case of Badridas Daga to salary income also. Ultimately, the Tribunal held in that case that the expenses incurred for earning the incentive bonus by a Development Officer are allowable as deduction and that the net incentive bonus alone is includible in the computation of income under the head "salary". A similar view was also taken by the ITAT, Pune Bench, in the case of Jitendra V. Mohan. 11. The aforementioned decisions of the Tribunal have been consistently followed by different Benches of the Tribunal at Hyderabad in several cases. 12. The ITAT, Hyderabad Bench 'B', in the case of P. Mohana Rao v. ITO [IT Appeal Nos. 1848 (Hyd.) of 1992 and 1960 (Hyd.) of 1990 relating to the assessment years 1989-90 and 1990-91], followed the dicision of the ITAT, Ahmedabad Bench 'B', in the case of Kiranbhai H. Sheelath and held that the expenditure for earning incentive bonus is liable to the deducted at the starting point itself under section 15 while dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s should be treated as income from other sources and expenses should be allowed and the net income alone should be taxed. (2) Even if incentive bonus is treated as salary, the expression "salary" should be so construed as to bring in its net, salary after excluding expenses incurred in earning the salary and that would be the real income. (3) What is taxable is only the net income and not the gross receipts and, therefore, to arrive at the correct income, the expenditure incurred for earning such income should be deducted. The High Court, following its earlier decision in the case of K.A. Choudary held that-- (1) Incentive bonus, whether treated as part of the salary or perquisite, is taxable under the head "salary". (2) The permissible deductions under the head "salary" are as specified in section 16. (3) 40% of incentive bonus claimed as deduction does not fall under any of the clauses of section 16 and, therefore, it is expenditure which is not permissible as deduction under section 16 and any expenditure which does not fall within the meaning of section 16 cannot be allowed. (4) Incentive bonus is not an exempted allowance notified by the Central Government in Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alary for the purposes of taxation:-- (1) I.D. Gupta's case -- dated 14-12-1990; (2) Jitendra V. Mohan's case -- dated 17-12-1991; (3) Kiranbhai H. Sheelath's case -- dated 5-6-1992; (4) P. Mohana Rao's case -- dated 23-8-1993; (5) K. Raju's case -- dated 29-7-1993; (6) P. Dayakar's case -- dated 23-3-1989. Thus, in a series of decisions rendered by various Benches of the Tribunal, the view that has been expressed was that it is only the net incentive bonus that could be considered as salary for taxation purposes and not the gross incentive bonus received by a Development Officer of the LIC. In the aforementioned cases, the Andhra Pradesh High Court's decision in the case of K.A. Choudary was referred to and considered. 17. The Tribunal continued to hold the view that the expenses incurred for earning incentive bonus should be deducted at the starting point itself under section 15, at least till 8-3-1995 when the Andhra Pradesh High Court rendered its judgment in the case of B. Chinnaiah. Now we have to see as to what was the position prior to 8-3-1995. The very fact that different Benches of the ITAT consistently held the view that it is the net amount of incentive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts or documents accompanying it shall be rectified; (ii) any loss carried forward, deduction, allowance or relief, which, on the basis of the information available in such return, accounts or documents, is prima facie admissible but which is not claimed in the return, shall be allowed; (iii) any loss carried forward, deduction, allowance or relief claimed in the return, which, on the basis of the information available in such return, accounts or documents, is prima facie inadmissible, shall be disallowed:" On a plain reading of section 143(1)(a), it is clear that if on the basis of the return, if filed by an assessee, any tax or interest is found due after adjustments as set out in that section, an intimation shall be sent to the assessee specifying the sum so payable. Section 143(1)(a) envisages that on the basis of the return filed, if any tax or interest is payable by the assessee and if any refund is due to the assessee, the Assessing Officer shall send to the assessee an intimation specifying the sum so payable and such intimation shall be deemed to be a notice of demand under section 156 of the Act. The proviso to section 143(1)(a) empowers the Assessing Officer to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tex India Ltd v. Dy. CIT [1995] 212 ITR 496, the Calcutta High Court, while considering the scope of section 143(1)(a), held as follows:-- "The jurisdiction of the Assessing Officer under section 143(1)(a) of the Income-tax Act, 1961, to make an adjustment and to issue an intimation is limited not only to the obvious but also to that which is deducible from the return as filed, without doubt or debate. This is clear from the language of the section and is supported by authority as well as the circulars issued by the Central Board of Direct Taxes in this connection." The Calcutta High Court followed the views expressed by the Bombay High Court in the case of Khatau Junkar Ltd and the Delhi High Court in the case of S.R.E Charitable Trust v. Union of India [1992] 193 ITR 95, and observed that the scope of the powers to make prima facie adjustments under section 143(1)(a) is somewhat coterminous with the power to rectify a mistake apparent from the record under section 154. Further, the Calcutta High Court observed as follows:-- "The exercise of power under section 143(1)(a) is, therefore, required to be scrutinised carefully and kept strictly within the bounds of the statute, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 ITD 99, ITAT, Hyderabad Bench 'A', while considering the scope of section 143(1)(a), held as follows:-- "The use of the phrase 'prima facie inadmissible' in clause (iii) of the first proviso to section 143(1)(a), in its literal sense, means 'on the face of it'. Therefore, on the face of the return and accounts and documents accompanying it, the deduction must be inadmissible. Only then could it be disallowed under the proviso to section 143(1)(a) ....... The use of the phrase 'prima facie', thus, indicates that there is no possibility of an alternative consideration of the nature of loss, deduction, allowance, or relief claimed, for it is, on the face of it, inadmissible." A similar view was expressed by the Hyderabad Bench 'B' of the Tribunal in the case of Anam Machinery Fabricators Ltd. v. ITO [1994] 49 ITD 617. 23. Thus, it is clear from the decisions of various High Courts and various Benches of the ITAT mentioned supra that when the deduction claimed is somewhat a controversial or debatable one, it cannot be treated as prima facie inadmissible and disallowed under clause (iii) of the first proviso to section 143(1)(a). We are of the considered opinion that the deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e effect that the issue in question ceased to be debatable subsequent to the rendering of the decision in the case of K.A. Choudary by the Andhra Pradesh High Court. We have already mentioned earlier the various decisions of the Tribunal which considered the judgment in the case of K.A. Choudary and still held that the actual expenses incurred for earning the incentive bonus require to be deducted at the starting point itself under section 15 and the net amount alone should be considered as salary for the purposes of taxation. In this appeal, we are not concerned with the question whether the said view is correct or not. The fact remains that reasonably more views than one were possible on the issue whether the net amount alone should be considered as salary or not. We are unable to agree with the view expressed by the ITAT, Hyderabad Bench 'A', in the case of K.A. Gangadhar, that the issue in question was not a debatable one. We are of the considered view that the said issue, to say the least, was a highly debatable one till 8-3-1995 when the Andhra Pradesh High Court rendered its judgment in the case of B. Chinnaiah. Applying the ratio of the decision of the Bombay High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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