IN THE HIGH COURT OF JUDICATURE AT PATNA
Tax Case No.30 of 1990
============================================
The Commissioner of Income Tax, Bihar-I, Patna...Petitioner
Versus
Motilal Jain, Development Officer, L.I.C. of India, Patna
..................Opposite Party
APPEARANCE
For the Petitioner: Mrs. Archana Sinha, Advocate &
Mr. Harshwardhan Prasad, Advocate
For the Respondent : Mr. Ajay Kumar Rastogi, Advocate &
Mr. Shailendra Kumar, Advocate
CORAM: HONOURABLE THE CHIEF JUSTICE
And
HONOURABLE MR. JUSTICE JYOTI SARAN
ORAL ORDER
(Per: HONOURABLE THE CHIEF JUSTICE)
3. 28/09/2010 This reference under section 256(2) of the
Income Tax Act, 1961 (hereinafter referred to as `the
Act’) arises from the judgment and order dated 31st May
1990 passed by the Income Tax Appellate Tribunal in
R.A. No.50(Patna)/1989, arising out of Income Tax
Appeal No. 267 (Pat)/1987, relating to the Assessment
Year 1983-84.
The respondent-assessee, a Development
Officer in the Life Insurance Corporation of India
(hereinafter referred to as `the Corporation’) had, in the
previous year relevant to the Assessment Year 1983-84,
received incentive bonus of Rs.80,622.20 paise from the
Corporation. Out of the said amount of incentive bonus,
the assessee claimed deduction of 40% as expenses.
2
According to the assessee, the incentive bonus was an
“income from profession” and was not a part of the
“salary”. The Assessing Officer did not accept the claim
of the assessee. Order of the Assessing Officer was set
aside by the Appellate Assistant Commissioner of
Income tax. The Appellate Assistant Commissioner held
that the amount of incentive bonus was an “income from
profession”. The assessee was, therefore, in consonance
with the Board’s circular no. 1774 dated 29th September
1987 entitled to a deduction of 40% claimed by him. The
challenge to the appellate order before the Income Tax
Appellate Tribunal failed. The tribunal held that the
incentive bonus cannot be treated as a part of salary and
that it is a professional income. The tribunal directed the
Assessing Officer to allow 40% deduction from the
incentive bonus.
The present Reference is made at the instance
of the Revenue for resolution of the following questions
of law:-
"1. Whether on the facts and in the
circumstances of the case, the Income-tax
Appellate Tribunal was justified in holding
that the incentive bonus earned by an
assessee was not covered by salary and is in
nature of commission earned by the
Insurance Agent against which expenses to
the extent of 40% were allowable in view of
Board’s Circular no.1774 dated 20.9.1987
communicated vide F.no.200/172/84/IT (A.I.)
3
dated 14.10.1987?
2. Whether on the facts and in the
circumstances of the case the assessee is
entitle to claim 40% as expenses from
incentive bonus?”
Learned Advocate Mrs Archana Sinha has
appeared for the department. She has submitted that the
above-referred questions are no more res integra. This
court (Coram: Chandramauli Kr. Prasad, J, as he then
was, and Jayanandan Singh, J.) has decided the issue in
the matter of the Commissioner of Income Tax, Bihar,
Patna Vs. Ramjee Prasad ( Tax Case No.13 of 1991).
By the judgment and order dated 7th February 2008, this
court has held as under:-
“The incentive bonus given to the assessee was
not granted by the Life Insurance Corporation
of India for the purposes as set out in Section
10(14) of the Act. Once it is held so the
assessee cannot claim deduction at the rate of
40% taking shelter behind Section 10(14) of
the Act. We are of the opinion that no
provision other than Section 10(14) of the Act
exists for allowing deduction towards
expenditure of the nature claimed by the
assessee. Incentive bonus or part thereof is not
reimbursement of expenditure by the employer
to qualify for deduction under Section 10(14)
of the Act. We are of the opinion that
4expenditure under Section 10(14) of the Act
can be allowed only when it is granted to meet
expenses wholly and exclusively in
performance of the duty and that too to the
extent such expenses are actually incurred for
that purpose.”
Learned Advocate Mr Ajay Kumar Rastogi
has appeared for the assessee. At the outset, he has
challenged the maintainability of the present Reference.
He has submitted that the Government of India has taken
a conscious decision under its communication dated 27th
March 2000 not to file appeal before the High Court
unless the tax effect exceeds Rs. 2 lakhs. The said
instruction has since been modified. Under the
communication dated 24th October 2005, the above-
referred monetary limit of Rs. 2 lakhs has been raised to
Rs. 4 lakhs. He has submitted that the aforesaid
instruction would apply not only to the appeals to be filed
thereafter but also to the appeals/references pending on
the date. He has submitted that as in the present case the
tax effect is less than the aforesaid monetary limit, the
case requires to be dismissed. In support, he has relied
upon the judgment of the Bombay High Court in the
matter of Commissioner of Income-Tax Vs. Pithwa
Engg. Works (276 ITR 519).
In the above-referred matter, the Bombay
High Court relied upon the instruction dated 27th March
2000 in an Income Tax Reference filed in the year 1988.
The Bombay High Court held,
5
“The above instructions dated March 27,
2000 reflect the policy decision taken by the
Board not to raise questions of law where the
tax effect is less than the amount prescribed in
the above circular with a view to reduce
litigations before the High Courts and the
Supreme Court. The said circular is binding
on the Revenue though learned counsel tried
to contend that the said circular is not
applicable to the old referred cases. However,
he could not take his submission to a logical
end.
One fails to understand how the Revenue
can contend that so far as new cases are
concerned, the circular issued by the Board is
binding on them and in compliance with the
said instructions, they do not file references if
the tax effect is less than Rs. 2 lakhs. But the
same approach is not adopted with respect to
the old referred cases even if the tax effect is
less than Rs. 2 lakhs. In our view, there is no
logic behind this approach.”
We are unable to agree with the opinion of
the Bombay High Court. The Government of India has
decided that appeals would be filed only in cases where
the tax effect exceeded the revised monetary limit given
thereunder, that necessarily means that those instructions
would apply to the appeals/references which were yet to
be filed or, in other words, the appeals/references filed
6
after 27th March 2000. In our opinion, the High Court
cannot refuse to consider and decide the
appeals/references which are already filed and pending
before the High Court for decision taking shelter under
the above-referred instruction dated 27th March 2000 or
any other instruction of similar nature.
Mr Rastogi has next submitted that the above-
referred judgment in the matter of Ramjee Prasad is per
incuriam the decision of the Gujarat High Court in the
matter of Commissioner of Income-Tax Vs. Kiranbhai
H. Shelat & Anr. (235 ITR 635). He has submitted that
the Gujarat High Court has in no uncertain terms held
that the Development Officers of the Corporation are
entitled to deduct actual expenses incurred by them to the
maximum of 30% from the amount of the incentive
bonus received by them from the Corporation.
In the matter of Ramjee Prasad, identical
question of law was referred to this Court. This Court
followed the judgments of the Full Bench of the
Karnataka High Court in the matter of Commissioner of
Income-Tax Vs. M.D. Patil [1998 (220) ITR 71] and of
the Madhya Pradesh High Court in the cases of
Commissioner of Income-Tax Vs. A.K. Ghosh [(2003)
263 ITR 536] and of Commissioner of Income-Tax Vs.
Gurudeo Singh Jaggi [(2004) 267 ITR 763]. The
aforesaid High Courts have taken a consistent view that
the amount of incentive bonus received by the
Development Officers of the Corporation is not referable
to and is not exempt under Section 10(14) of the Act, but
7
is a `salary’ within the meaning of Section 17(1)(iv) of
the Act. The only deduction admissible will be the
standard deduction available under Section 16 of the Act.
The appeal preferred against the above-referred judgment
of the High Court of Madhya Pradesh was not entertained
by the Hon’ble Supreme Court.
The Gujarat High Court also has the same
view insofar as Section 10(14) of the Act is concerned. It
has been held that the incentive bonus is a salary within
the meaning of Section 17(1)(iv) of the Act. It further
held, “the Development Officer can still demonstrate
that he was required to incur the expenditure as a
part of his duty to enable himself to realize the
proceeds of the Incentive bonus. Thus, for working
out the amount of profit in addition to salary, there
would be deduction from the gross Incentive bonus,
expenses properly incurred in realizing 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.”
In view of the aforesaid discussion, it was
decided that the Development Officer of the Corporation
was entitled to deduction of the actual expenses incurred
by him up to a maximum limit of 30% of the amount and
that the net amount after such deduction is the salary
income.
We may first note that the judgment of the
Gujarat High Court is not a binding precedent. The
8
judgment in the matter of Ramjee Prasad (supra) cannot
be said to be per incuriam as submitted by Mr Rastogi.
Further the reliance placed on the Board’s circular no.
1774 dated 29th September 1987 was also uncalled for.
The said circular no. 1774 is placed before us. It is
apparent that it contains a clarification of its earlier
circular no. 1546 dated 6th January 1984. It only clarifies
that the earlier instruction was issued in respect of the
commission earned by the insurance agents and that it
did not apply to the Development Officers of the
Corporation, who are full time employees of the
Corporation and are in receipt of regular salary. It has
been reiterated that “the payment received by the
Development Officers as incentive bonus or bonus
commission (or by any other name) is for the work
done for the employer. It is in lieu of or in addition to
salary and forms part of salary by virtue of Section
17(1)(iv) of the Act.” In our opinion, the tribunal and the
appellate authority below both were wrong in holding
that the incentive bonus received by the Development
Officer is an “income from profession” and that the
assessee was entitled to 40% deduction as expenses.
In view of the above binding precedent, we
answer Question nos. 1 & 2 in favour of the Revenue and
against the assessee. We hold that the incentive bonus
earned by the assessee was the salary within the meaning
of Section 17(1)(iv) of the Act. The assessee was,
therefore, not entitled to 40% deduction as expenses
from the amount of incentive bonus as claimed by him.
9
In the present case, we are not called upon to
consider whether or not the assessee was entitled to
deduction of actual amount of expenses incurred by him
to a maximum of 30% as the assessee has not claimed
any deduction as expenses actually incurred by him to
earn incentive bonus.
The reference is answered in the above terms.
The parties will bear their own cost.
( R. M. Doshit, CJ.)
( Jyoti Saran, J.)
AFR/-
Dilip
