TMI Blog1998 (4) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income-tax was not justified in directing the Assessing Officer to withdraw the deduction allowed by him at 40 per cent. of the gross receipts?" ITR Nos. 121 of 1996, 15 of 1997 and 19 of 1997 (at the instance of the assessee for the assessment years 1987-88 to 1989-90) : "Whether the Income-tax Appellate Tribunal is right in law in holding that no deduction is available to the assessee as expenses out of the incentive bonus commission received by him as a Development Officer of the Life Insurance Corporation of India?" ITR No. 132 of 1996 (at the instance of the assessee for the assessment years 1986-87 to 1988-89) : "Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that incentive bonus earned by the assessee as Development Officer of the Life Insurance Corporation was part of salary within the ambit of section 17 of the Act and no deduction on account of expenses was permissible?" ITR No. 49 of 1997 : (at the instance of the assessee for the assessment years 1987-88 to 1990-91) : "Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the incentive bonus was part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to tax and observed that this view was based on the principle laid down by the Supreme Court in the cases of Badridas Daga v. CIT [1958] 34 ITR 10 and Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521. It was observed that the decision of the Bombay Tribunal in ITO v. Narendra V. Patel [1983] 21 Taxman 45 (Trib.) was followed by all the Benches of the Tribunal. In respect of the decision of the Andhra Pradesh High Court in K A. Choudary v. CIT [1990] 183 ITR 29, on which reliance was placed on behalf of the Department, the Tribunal observed that in that case the court did not consider the question whether the expenses incurred for earning the incentive bonus were liable as deduction at the starting point itself in view of the fact that incentive bonus did not represent salary in the ordinary sense but it represented salary in view of the definition given in section 17 of the Act. It was held that that aspect was considered by the Bombay Tribunal in ITO v. Narendra V. Patel [1983] 21 Taxman 45 (Trib.), in which it was held that per se it was not possible to draw an inference that the Legislature had intended to take into account cases of incentive bonus without reducing it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his return for the assessment years 1986-87 to 1988-89 that the incentive bonus received from the Life Insurance Corporation should be excluded from salary and be assessed under the head "Professional income". He claimed that the deduction at the rate of 50 per cent. of such incentive bonus on account of expenses incurred for earning such bonus should be allowed. This claim was rejected by the Assessing Officer on the ground that the incentive bonus was a part of his salary and the assessee was entitled only to standard deduction under section 16(i) of the Act. In appeal, the Deputy Commissioner of Income-tax (Appeals) accepted the assessee's claim and held that 40 per cent. of the incentive bonus was to be allowed as deduction to the assessee. Following the decisions of the Andhra Pradesh High Court in K. A. Choudary v. CIT [1990] 183 ITR 29 and the Orissa High Court in the case of CIT v. Govind Chandra Pani [1995] 213 ITR 783, the Tribunal allowed the appeal of the Revenue on this count and reversed the order of the appellate authority. In ITR No. 49 of 1997 which is made at the instance of the assessee-Development Officer in respect of the assessment years 1987-88 to 1990-91, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to work in a manner that would produce results or face disincentives, which feature unfortunately is not adopted in other services. We now come to rule 17 of the above Rules, which provides for incentive bonus. It lays down that incentive bonus under any scheme approved by the Corporation may be allowed to a Development Officer for any preceding year, if his cost ratio with reference to his annual remuneration in that year does not exceed twenty per cent. of the eligible premium of that year. There was an incentive bonus scheme for Development Officers accordingly framed in the year 1978, which is also taken on record at the instance of both the sides in a common paper book filed in these matters. The said scheme was known as "Scheme of Incentive Bonus to Development Officers of the LIC---1978". It came into force on April 30, 1976, and, initially, was to remain in force till December 31, 1980. Admittedly, the scheme continued to operate even thereafter. Under clause 4 of that scheme, it was provided that incentive bonus in accordance with the scheme could be given to a Development Officer whose cost ratio (i.e., ratio of his annual remuneration in an appraisal year to the eligi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lared in competition amongst his agents, (iii) conveyance facilities to his agents, and (iv) office expenses such as rent, secretarial assistance, printing and stationery, postage, trunk calls and telephone charges, etc. The quantum of incentive bonus is decided taking into account, factors such as the number of policies procured by a Development Officer, his agency organisation, the nature of territory operated by him, i.e., whether rural or urban, etc., These very same factors also influence the size of his expenditure. We do not at present allow reimbursement or special allowance as such towards these items, it being understood that a Development Officer is required to spend a part of the incentive bonus on this account. It is, therefore, proposed to certify, under section 10(14), an amount up to 30 per cent. 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve Bonus Scheme, 1997, and the Reimbursement Scheme of Expenses, 1997, for Development Officers of the Corporation. At the instance and by the consent of both the sides, the order along with the Incentive and Reimbursement Schemes are also placed on record, as admitted documents. This is relied upon, on behalf of the assessee, to show that there was in fact a reimbursement component in the Incentive Bonus Scheme right from the beginning as is reflected from the earlier correspondence, which now came to be split up by framing a separate scheme in respect of that reimbursement component of the incentive bonus. It was demonstrated from these two schemes that the reimbursement was connected with the performance of a Development Officer and both these schemes were inter-linked and further that the Development Officer was required to incur expenses for reaching the performance norms to become eligible for incentive bonus and reimbursement, for development and building of clientele contacts, for recruitment of assistants and agents, for agents' training and for conducting prize competition among agents, etc. It will be noted that even in the communication dated September 29, 1986, which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure component as declared by the LIC, the expenditure actually incurred by the Development Officer was required to be exempted under section 10(14) straightaway at least up to the assessment year 1988-89 because the requirement of notifying such allowances intended to meet expenses, came only from April 1, 1989, and prior to that all such expenses could straightaway be exempted. Learned counsel also referred to the decisions of various Tribunals and adopting their reasoning as a part of their arguments contending that as held by these Tribunals in their decisions (Bombay Bench, Hyderabad Bench, Chandigarh Bench, Pune Bench and Ahmedabad Bench), which are compiled in the paperbook, the expenses incurred by the Development Officers out of the incentive bonus received by them were not income or salary and, therefore, they were required to be deducted at the threshold itself. It was contended that in any event such income could be taxed as income from profession or business or other sources since it was not relatable to the discharge of duties by the assessees as Development Officers for which separate remuneration was provided and in which such incentive bonus was express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenses from the total incentive bonus received by the assessees. Mr. Joshi further contended that there was no bifurcation of the incentive bonus granted under the old scheme, which was relevant for the assessment years in question. It was argued that even if a portion of the incentive bonus was treated as special allowance, it would still be income and would be profit in lieu of or in addition to salary within the meaning of section 17(1)(iv) of the Act and therefore, was chargeable to tax under the head "Salaries" in view of the provisions of section 15 of the Act. It was argued by him that incentive bonus was the real income of the assessee and not just a notional income. The fact that some amount was spent by way of expenses from such income would not change its nature and it would remain a taxable income. It was contended that income is no less real because part of the total covers outlays for getting it. Mr. Joshi further argued that even though while reimbursement of expenses would not be income, reimbursement of expenses stated to be incurred for earning the income, cannot be described as reimbursement simpliciter. He, however, with his usual candour, did not dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LIC that they could derive an additional reward by showing superlative performance above the standard norms. In Wicks v. Firth (Inspector of Taxes) [1982] 2 All ER 9, the Court of Appeal, in a different context, observed that section 61 of the Finance Act, 1976, under which assessment could be made on the basis that a person employed in higher-paid employment, had by reason of his employment been provided for him or members of his family a benefit, applied to benefits which an employee would not have received unless he had been an employee, the fact of employment being one of the causes of the benefit being provided although it did not need to have been the sole or even the dominant cause. We, therefore, reject the contention that the Development Officer received the incentive bonus in some different capacity on the basis that he was working in a dual role. Now, coming to the main controversy involved, we may first refer to the relevant part of the definition of "income" in section 2(24)(iiia) which clause was inserted by the Amendment Act of 1989, retrospectively with effect from April 1, 1962. It is provided therein that "income" includes any special allowance or benefit, other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o April 1, 1989, under section 10(14) the special allowances or benefits specifically granted to meet expenses incurred in the performance of the duties of an office or employment of profit were exempted to the extent to which they were actually incurred for the purpose. Thereafter, in order to qualify for exemption such allowances or benefits had to be notified, and, later they were to be as prescribed under the Rules. It will be noted that the definition under section 2 of the Act would apply unless the context otherwise requires: The definition of "income" in section 2(24), though inclusive, includes also the receipts which would be income in their normal sense and it is not a mere catalogue of receipts which otherwise would not be income, for example "profits and gains" at sub-clause (i). The income-tax will be chargeable in respect of the total income of a person of a previous year as provided by section 4. Such total income would be the total amount of income referred to in section 5, computed in the manner laid down in the Act. It includes all income from whatever source derived by a person which is received or is deemed to be received or accrues or arises or is deemed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The type of such "incurred" allowances are benefits granted to the assessee if not exempted under section 10(14) would not thereby automatically become his salary. The receipt has to fall under the head "Salaries" in order to become chargeable to tax and there comes the need to ascertain as to what part of it could be described as profits in addition to salary, which alone would be salary in its extended sense under section 17(1)(iv) of the Act. The provision of section 10(14) as it originally stood, exempted the expenses actually incurred for the purpose for which the special allowances or benefit were specifically granted. However, as noted above, by the Income-tax Amendment Act, 1987, this clause was substituted with effect from April 1, 1989, and in place of exemption of all such expenses actually incurred out of any special allowance or benefit granted to the employee to meet the expenses, it came to be confined to expenses actually incurred from the special allowances or benefits notified in the Official Gazette by the Central Government or prescribed as per the later amendment. The effect of this amendment would be that for the assessment in respect of the earlier previo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pended for the purpose for which it was granted and therefore has not resulted in any profit, can fall under the head "Salaries" even if it does not fall in the exemption granted by section 10(14) of the Act. This result is in consonance with the concept of income which is to be distinguished from mere receipts or gross revenue. The tax is upon income and not on gross receipts as is borne out from the decisions of the Supreme Court in Badridas Daga v. CIT [1958] 34 ITR 10 ; Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521 and of the Bombay High Court in Mehboob Productions Private Ltd. v. CIT [1977] 106 ITR 758 and also in CIT v. Bachubhai Nagindas Shah [1976] 104 ITR 551 (Guj). The concept of income is something more than that which simply comes in any economic activity as a receipt. From the economist's viewpoint, income would be the money value of the net accretion in one's economic power between two points of time, the true increase in the amount of wealth which comes to a person during a stated period of time. Income would therefore be an advantage having monetary value that a person derives from property, business or investment or by rendering services or labour or d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which was a distinct matter altogether. This is borne out from paragraphs 20 and 21 of the memo explaining the provisions of the Finance Bill, 1974. It will be noted that section 2(24) of the Act speaks of benefits and allowances granted to the assessee to meet the expenses for the performance of duty and not the expenses incurred in the performance of duty. This is done with a view to see that under the guise of payment of special allowances/benefits granted to meet expenses for performance of duty, there is no evasion of income-tax where it results in salary as defined, i.e., in the present context, profits in lieu of or in addition to the salary or wages. The resort to this fiction created by the extended meaning of income under section 2(24) was necessary to deal with the device to avoid legitimate taxation and not to treat the genuine expenses incurred for the purpose for which the special allowances/benefits were granted as taxable, notwithstanding that no profit at all resulted therefrom to the employee. The extension of the meaning of income under section 2(24) is therefore, not for the purpose of treating all reimbursements as taxable income, but to treat the receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as procured for the LIC. The incentive bonus contained remuneration for such extra results which component would admittedly come under the head "Salary", being extra remuneration for the extra work that had resulted in more business to the LIC. If the entire incentive bonus was to be treated as remuneration, it would all be profit or gain to the employee. However, the facts proved clearly indicate that a part thereof was granted to the employee with a view to meet the expenses that might have to be incurred by him as Development Officer for the discharge of his duty. Therefore, when the expenses are actually incurred by the Development Officer, from that component which may fall under section 2(24) and be treated as income, in cases where such income does not fall in the exemption category under section 10(14), it is the profit element alone which remains with the assessee that can be treated as salary, being profit in addition to salary or wages. As can be seen from the communication dated March 12, 1993, of the Government of India, Ministry of Finance, Department of Revenue, Central Board of Direct Taxes, to the LIC, even if no portion of the allowance qualified for exemption unl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government Notification (later changed to "as may be prescribed"), was superimposed, all the expenses designated for the purpose and actually incurred stood exempted and could not be included in the total income of such assessee. Since only 30 per cent. of the incentive bonus earned was intended to meet such expenses, no higher amount could be claimed by such assessees as expenditure incurred out of the special allowance given for that purpose. That exemption applied only to the extent the expenses were actually incurred for the purpose for which they were granted. If any amount was not so expended out of the amount of 30 per cent. incentive bonus earned, and as a result, it ended as profit to the assessee-Development Officer, that would be "profits in addition to his salary" under section 17(1)(iv) and, therefore, will fall in the head of income under the head "Salaries". Even in cases falling after April 1, 1989, when section 10(14) came to be amended and the exemption was confined only to notified allowances (later amended with effect from April 1, 1989, as prescribed allowances), wherein the income covered by section 2(24) in the nature of 30 per cent. of the incentive bonus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out which cannot be done unless the expenditure which is necessary and was properly incurred for the purpose of earning the income, is deducted therefrom. The Development Officer can still demonstrate that he was required to incur the expenditure as a part of his duty to enable himself to realise the proceeds of the incentive bonus. Thus, for working out the amount of profit in addition to salary, there would be deducted from the gross incentive bonus, expenses properly incurred in realising it. This deduction would be warranted to reach the profit element cannot be denied to the assessee-employee on the ground that the statutory deductions are already provided in section 16. After all, the tax under the Act is on income as a thing and not on the person who receives it. There is a fallacy in equating deductions necessary to work out the profit or gain element of the receipt and the statutory deductions provided in the Act. Exemptions of income from tax and statutory deductions allowed (which also are in the nature of exemptions in their effect) are privileges nor matters of right but are allowed only as a matter of legislative grace. The subtractions made from the receipts to asc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Acts and the expression "emoluments" shall include all salaries, fees, wages, perquisites and profits whatsoever. Rule 7 of the Rules applicable to Schedule "E" in Schedule 9 to the Income Tax Act, 1952, in substance, provided that if the holder of an office or employment of profit was necessarily obliged to incur and defray out of the emoluments thereof the expenses of travelling in performance of the duties of the office or employment... or otherwise, to expend money wholly, exclusively and necessarily in the performance of the said duties, there may be deducted from the emoluments to be assessed, the expenses so necessarily incurred and defrayed. In the context of these provisions Lord Guest observed that if the proper test of "emolument" is that the sum is a reward for service, then the travelling allowances paid to Dr. Owen were not emoluments and to say that Dr. Owen was to that extent "better off" was not to the point. It was held by Lord Guest that the allowances were used to fill a hole in his emoluments by his expenditure on travel and in his Lordship's view, the travelling allowances were, therefore, not emoluments. It was held that if the allowances were not emolume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over what Dr. Owen received in reimbursement as an allowable expense from his salary (over which Lord Pearce did not express himself), Lord Donovan held that no deduction under rule 7 of Schedule "E" could be allowed because the expenses were not "necessarily" incurred and that to qualify for deduction the expenses must be such as any holder of the employment would be bound to incur and further that it was not enough that they are incurred simply because the employee happens or chooses to live at some distance from his work. Thus, three of the five law Lords held that reimbursement of the travelling expenses that Dr. Owen incurred for the performance of duties were not emoluments as they did not amount to any reward for service and were not "salaries, fees, wages, perquisites or profits". Lord Wilberforce while finding it difficult to see how reimbursement of a non-deductible expense was something other than an emolument, decided in the assessee's favour by agreeing with the judgment of Lord Denning M. R. that the Commissioners had directed themselves quite properly in finding that "his (Dr. Owen's) travelling expenses to and from the hospital or to and from an emergency were wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign law which are not entirely similar to ours. The speeches in the said decisions show the way in which judges look at cases and in that sense are useful and suggestive but in the last resort each case must be brought back to the test of the statutory provisions. For the reasons that we have given hereinabove, we find it difficult to subscribe to the opposite view reflected in the decisions of the Andhra Pradesh, Orissa, Rajasthan and Karnataka High Courts, which were fully read before us. It is not necessary for us to analyse these decisions and we feel that the reasoning that we have adopted is sufficient to indicate the justification for the view that we are taking. We, therefore, answer the aforesaid references as follows: 1. I. T. R. No. 54 of 1993 : We hold that the Appellate Tribunal was right in directing the appellate authority to allow the incentive bonus as deduction, but only to the extent of reimbursement of expenses actually incurred up to the maximum limit of thirty per cent, of the incentive bonus earned by the assessee and that it was right in including the net amount after such deduction in the salary income. The question is accordingly answered in the af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive bonus earned by the assessee as Development Officer of the Life Insurance Corporation of India was part of salary within the ambit of section 17 of the Act and no deduction on account of expenses were permissible and further hold that the assessee was entitled to claim such deduction but only to the extent of reimbursement of expenses actually incurred up to the maximum limit of thirty per cent. of the incentive bonus earned by the assessee. The question is accordingly answered in the negative, against the Revenue and in favour of the assessee. 7. I. T. R. No. 49 of 1997: We hold that the Tribunal committed an error in holding that the entire incentive bonus earned by the assessee as Development Officer of the Life Insurance Corporation of India was part of salary within the ambit of section 17(1)(iv) of the Act and the only deduction admissible is under section 16(i) of the Act and further hold that the assessee was entitled to claim such deduction but only to the extent of reimbursement of expenses actually incurred up to the maximum limit of thirty per cent. of the incentive bonus earned by the assessee. The question is accordingly answered in the negative, against the R ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
