ORDER
JORDAN KACHCHAP, J. M. :
The assessee has filed this appeal challenging the order dt. 3rd March, 1994 of the CIT, Rajkot, passed under s. 263 of the IT Act, 1961. The matter relates to asst. yr. 1991-92.
2. In course of examination of the assessment record the CIT noted that the assessee was an agent of Life Insurance Corporation of India (LIC). During the previous year relevant to the asst. yr. 1991-92 the assessee received first years commission of Rs. 1,64,294 and renewal commission of Rs. 1,47,165. AO allowed deduction of Rs. 65,718 at the rate of 40 per cent on first years commission and of Rs. 22,075 at the rate of 15 per cent on renewal commission (in aggregate Rs. 87,793). The learned CIT in view of the Boards Circular noted that assessee was entitled to deduction of Rs. 10,000 only as he was not maintaining books of accounts though his total receipts were more than Rs. 60,000. According to the CIT, the assessment order was erroneous and prejudicial to the interest of Revenue and so he initiated proceedings under s. 263 of the IT Act and served a notice calling upon the assessee to furnish explanation. The assessee in compliance to notice dt. 17th Jan., 1994 issued under s. 263 of the IT Act filed show cause reply dt. 16th Feb., 1994. The learned CIT having gone through the written reply of the assessee and the CBDT Circular besides the order of the Tribunal, Ahmedabad Bench in the case of ITO vs. Nathalal P. Thanki in ITA No. 3236/Ahd/1988, dt. 14th May, 1992 [reported at (1992) 44 TTJ (Ahd) 390] did not accept the explanation of the assessee. According to him, the AO ought not to have allowed the deduction of more than Rs. 10,000 from the gross receipt. The assessment order according to him was erroneous and prejudicial to the interest of Revenue. The CIT, therefore, set aside the assessment order and directed the AO to pass fresh order allowing maximum deduction of Rs. 10,000 only. Against the said order of the CIT, the assessee is in appeal.
3. Shri J. P. Shah, the learned counsel of the assessee, vehemently objected to the order of the learned CIT. According to him, the order of the AO was neither erroneous nor prejudicial. Rather, the AO in view of the Boards Circular rightly allowed deduction of Rs. 65,780 at the rate of 40 per cent on the first years commission and Rs. 22,075 at the rate of 15% on renewal commission. The learned counsel emphasised that the learned CIT failed to comprehend the guidelines of the CBDT Circular being Circular No. F. 14/9/65-IT(AI) dt. 22nd Sept., 1965, and further Circular No. 1546 dt. 6th Jan., 1984. The learned counsel also submitted that the learned CIT ought to have considered the reply dt. 15th Feb., 1994 in the right perspective and should have dealt with each and every point raised in reply. According to him, the learned CIT passed an evasive order. He urged for reversal of the impugned order.
4. On the other hand, Shri M. P. Lohia, the learned Departmental Representative of course relied on the order of the CIT.
5. We have heard the rival submissions and have gone through the appeal record besides various papers compiled in the paper book including the two circulars as referred to above. In order to appreciate the matter in controversy in right perspective the relevant circulars are required to be gone through. The first Circular was issued in 1965 vide F. No. 14/9/65-IT(AI) dt. 22nd Sept., 1965 which when reproduced reads as follows :
Commission earned by Insurance agents of the LIC -Allowance of expenditure.
1. Where detailed accounts regarding expenses incurred are not maintained, the deduction may be allowed as follows :
(i) An ad hoc deduction for expenses @ 40% of the first years commission and 15% of the renewal commission, where separate figures with regard to the first years commission and the renewal commission are available.
(ii) Where such separate figures are not available, an ad hoc deduction of 25% of the total commission may be allowed.
In both the above two types of cases, however, the amount of total expenditure allowed should not exceed Rs. 6,000 per annum where the gross insurance commission does not exceed Rs. 20,000 for the year.
2. Where the gross insurance commission exceeds Rs. 20,000, if in any particular case there are special circumstances to justify deduction beyond the aforesaid ceiling, the ITO may grant a larger allowance but not exceeding Rs. 10,000. For this purpose, the ITO may take into account such factors as whether the agents insurance activity is on a part-time basis or professional basis, whether a regular establishment is maintained, whether the business is new or established, etc.
3. If an agent has to incur expenditure in excess of the above limits and desires allowance thereof, he should be able to maintain regular accounts of his receipts and expenses and claim the expenditure on the basis of the said accounts.
Similarly, in cases where the agents maintain complete and reliable accounts the assessment would of course be made on the basis of the accounts and the above ad-hoc deductions would not apply in their cases. F. No. 14/9/65-IT(AL), dt. 22nd Sept., 1965.”
Subsequently, in 1984 the said circular was modified vide F. No. 168/9/93-IT(AI) Instruction No. 1546 dt. 6th Jan., 1984 which when reproduced reads as follows :
F. No. 168/9/93-IT(AI)
Government of India
Central Board of Direct Taxes
Instruction No. 1546
New Delhi,
Dt. 6th Jan., 1984
From
V. B. Srinivasan,
Director, Central Board of Direct Taxes.
To
All Commissioners of Income-tax.
Sir,
Subject : Commission earned by insurance agents of the Life Insurance Corporation – Taxation of allowance of expenditure.
Attention is invited to Board Circular dt. 14th Sept., 1965 issued from F. No. 14-9-65-IT(A&I) on the subject. It has been mentioned in that Instruction, inter alia, that where detailed accounts regarding expenses incurred by the insurance agents are not maintained an ad hoc deduction for expenses at the rate of 40% of the first years commission should be allowed. A ceiling of Rs. 6,000 in respect of such expenditure where the gross insurance commission do not exceed Rs. 20,000, this laid down and the discretion to grant a larger allowance not exceeding Rs. 10,000 in special circumstances was explained in detail.
2. The Board has been receiving representations that the rate of deduction should be raised from 40% having regard to increase in costs. The Board has considered these representations and has decided that expenditure may be allowed @ 50% of the years commission where the gross commission is less than Rs. 60,000. The above instructions of 22nd Sept., 1965 are modified to this extent. It may be clarified that these instructions will also apply to commission earned by authorised agents on the deposits secured by them under the Public Provident Fund Scheme.
3. These instructions may be brought to the notice of all Officers in your charge.
Yours faithfully,
Sd/ –
V. B. Srinivasan,
Director, Central Board of Direct Taxes”
6. Reading in between the lines of the first circular it is to be noted that in the case where the agent of LIC does not maintain any detailed account relating to the expenses incurred for earning commission an ad-hoc deduction of 40% from the first years commission and at the rate of 15% of the renewal commission was allowed. In case where separate figures with regard to the first years commission and renewal commission were not available in that case a consolidated ad hoc deduction at the rate of 25% of the total commission was allowable. However, in either of the events the maximum allowable deduction was not to exceed Rs. 6,000 per year where the gross commission did not exceed Rs. 20,000. However, in case where the gross insurance commission exceeded Rs. 20,000 in any particular year the AO might allow deduction of more than Rs. 6,000 if there were special circumstances to justify the deduction of more than the aforesaid amount of Rs. 6,000 but in no case that should have exceeded Rs. 10,000. However, the insurance agent was entitled to claim more deduction than the limit prescribed above if he maintained complete and reliable accounts. Speaking otherwise if the accounts were complete and reliable ad hoc deduction was not to be allowed but the actual expenditure. However, it is to be noted that in 1984 a modification was brought in the original circular by Instruction No. 1546 dt. 6th Jan., 1984 considering the difficulties of the agent in view of the price escalation in expenditure the Board allowed the ad hoc deduction at the rate of 50 per cent of the (sic – first) years commission where the gross commission is less than Rs. 60,000. Here in the instant case, the assessee in the previous year relevant to the assessment year under consideration received first years commission of Rs. 1,64,294 and renewal commission of Rs. 1,47,165. Since the assessee has not maintained complete and reliable books of accounts the AO allowed ad hoc deduction of Rs. 65,718 @ 40% on the first years commission and Rs. 22,075 @ 15% on renewal commission. On close reading of the two circulars the action of the AO appears to be justified. As per the first circular the assessee was entitled at the rate of 40% on the first years commission and @ 15% on the renewal commission. That situation continued even after the introduction of Instruction No. 1546 dt. 6th Jan., 1984 with certain modifications. The deduction @ 50% of the first years commission, however, is allowable in case where the gross commission is less than Rs. 60,000. In the present appeal, the first years commission itself is Rs. 1,64,294. So as stated above the provision as contained in the first circular still holds good in the present case. In fact the learned CIT has misconstrued the paragraph 2 of the first circular dt. 22nd Sept., 1965. This paragraph is necessarily to be read with the first paragraph. In para 1 it has been laid down that in the first years commission the deduction towards expenses is to be allowed @ 40% and similarly @ 15% for the renewal commission. The CBDT has never intended or meant that even in the event of gross insurance commission exceeding Rs. 20,000 the maximum deduction for expenses is to be given at Rs. 10,000 only. If the manner in which the learned CIT has interpreted or construed the circular in that case it will be seen that there are contradictory provisions which according to us and as has been said above has never been the intention of the CBDT. Besides above, it is to be pointed out that if the maximum deduction towards expenses allowable @ Rs. 10,000 only as per para 2 of the circular of 1965 in that case it will be highly prejudicial and unjustified to allow deduction of Rs. 10,000 only even if there are higher earnings of insurance commission. Speaking otherwise, for earning more commission, naturally, the agent has to spend more expenditure but even then to allow the maximum deduction of only Rs. 10,000 has never been the intention of the CBDT. In fact, Instruction No. 1546 dt. 6th Jan., 1984, has been brought about only to overcome the hardship of the agent and that is why the above deduction for expenses @ 50% for the years commission was allowed where the insurance commission is not more than Rs. 60,000.
7. In fact, in an identical matter in the case of Smt. Ramaben C. Patel, the CIT, Rajkot, vide his order under s. 263 of the Act dt. 11th Feb., 1987, in view of the two circulars as referred to above has held that the assessee is entitled to deduction towards expenses @ 40% and not @ 50% on the gross commission being Rs. 61,115. It is to be noted that in that case the AO erroneously had allowed deduction amounting to Rs. 30,000 being 50% of the gross commission of Rs. 61,115 instead of Rs. 24,446 being 40% of the said amount. The learned counsel of the assessee has referred to the aforesaid decision of the CIT, Rajkot, in order to show that actually in the present case the assessee is entitled to deduction @ 40% in the first years commission and @ 15% on renewal commission which the AO has rightly allowed and the assessment is not erroneous and prejudicial to the interest of the Revenue. No doubt, the Revenue have also filed certain decisions of the Tribunal, Ahmedabad Bench viz. ITO vs. Nathalal P. Thanki (supra) Mugutlal Ratilal Shah vs. ITO in ITA No. 1722/Ahd/1985 and ITO vs. P. V. Ashar in ITA No. 582/Ahd/1984 but we find that they are not on the subject matter of appeal before us.
8. One other point which is to be noted is that in compliance with the show cause notice dt. 7th Jan., 1994, the assessee filed reply dt. 15th Feb., 1994. In the said reply, the assessee has raised a number of objections but the learned CIT in his order has simply recorded that he has gone through the written submissions made by the assessee and has not dealt with each and every objection contained in the reply. For, without considering the merits of the objections it cannot be said that his order holding that the assessment order is erroneous and prejudicial to the interest of Revenue is correct. Relating to this proposition we may derive support from the decision of Honble Allahabad High Court in the case of J. P. Srivastava & Sons, Kanpur Ltd. vs. CIT (1978) 111 ITR 326 (All). So when we set together all the facts and circumstances of the case and the material available in the appeal record we find no merit in the impugned order of the CIT. In fact, he has misconstrued the two circulars of the CBDT viz. Circular No. 14/9/65-IT(AI) dt. 22nd Sept., 1965 and Instruction No. 1546 dt. 6th Jan., 1984. The AO has rightly allowed ad hoc deduction towards expenditure @ 40% on the first years commission and @ 15% on renewal commission respectively on Rs. 1,64,294 and on Rs. 1,47,165 aggregating to Rs. 87,793. The assessment order is neither erroneous nor prejudicial to the interest of Revenue. We reverse the impugned order and restore the order of the AO.
9. In the result, the appeal is allowed.