JUDGMENT
C.N. Ramachandran Nair, J.
1. The short question arising in all these income tax cases is the “head of income”
under which “incentive bonus” received by the assessees who are development officers
employed by the Life Insurance Corporation of India is assessable under the Income
Tax Act and the extent of deduction, if any, allowable in the computation of taxable
income. While issuing notice in I.T.A. No. 31 of 2001, this Court framed the following
three questions of law.
1. Whether, on the facts and in the circumstances of the case, and also in the light of
the decision of the Supreme Court in 243 ITR 143, the Tribunal is right in law in allowing
any deduction separately from incentive bonus?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in
holding:
(i) 30% of the incentive bonus is to be excluded from the definition of ’emoluments under
Section 17′.
(ii) 30% of the incentive bonus should be excluded from the computation at the inception
itself?
3. Whether, on the facts and in the circumstances of the case (and the incentive bonus
being salary) the assessee is entitled to any deduction in excess/different from
standard deduction allowable/permissible under Section 16(1) of the Income Tax?
2. The assessees are admittedly regular employees of the L.I.C. of India and are
assessed under the head “salary” in respect of the income earned by them from their
employer in the form of salary and perquisites. Having regard to the nature of
relationship between the L.I.C. of India and the assessees, as one of the employer and
employee, there is no serious dispute under the head of income under which “incentive
bonus” also is a assessable. The definition of “salary” under Section 15 of the Income Tax
Act is so wide and is only an inclusive one taking in all receipts from the employer in
the form of wages, commission, bonus, profit in lieu of or in addition to salary, etc. It
is obvious that the legislature did not attach much importance to the euphemism used
to describe the payment. Therefore any payment by the employer to the employee
towards consideration for service rendered in the course of employment comes within
the description of “salary” which included perquisites as well. Probably this is why
the assessees also have not raised any dispute against the assessment of “incentive
bonus” received by them from their employer, namely L.I.C. of India under the head
“salary”. However, the assessees have raised a serious dispute with regard to the
nature and content of incentive bonus received by them from the L.I.C. of India,
which is directly related to the business canvased by them and is a percentage of
premium received by L.I.C. of India and which is paid over and above the normal
salary and perquisites, to which they are entitled. According to the assessees, sizable
amount is spent by them to earn the incentive bonus, and therefore irrespective of the
head of income under which the same is assessable, they are entitled to deduction of
the expenditure, or in other words, only the net income is assessable. On the other
hand, the assessments have been completed treating the incentive bonus as part of the
salary and deduction from salary was limited to standard deduction admissible under
Section 16 of the Income Tax Act. A separate deduction claimed from out of incentive
bonus by the assessees was ruled out by the Income Tax Department. When the
matter went in second appeal to the Tribunal, the Tribunal elaborately discussed the
nature of the scheme under which incentive bonus is paid by the L.I.C. of India and
relying on a letter issued by the L.I.C. of India to the Central Board of Direct Taxes
estimating the expenditure incurred by the development officers at 30% of the incentive
bonus accepted the contention of the assessees and allowed deduction at 30% of
incentive bonus towards expenditure, or in other words, sustained assessments only at
70% of the incentive bonus received by the assessees. In doing so, the Tribunal
heavily relied on the decision of the Gujarat High Court in C.I.T. v. Kiranbhai H. Shelet,
235 ITR 635.
3. We have heard a batch of cases filed by the department together, wherein the
assessees are represented by various counsel, led by Sri C.K. Nair, and on the
department’s side, senior standing counsel Sri. P.K.R. Menon appeared.
4. As the issue arises in the case of assessees all over India, we have the
advantage of several decisions of various High Courts. We will first refer to a Full
Bench decision of the Karnataka High Court in C.I.T. v. M.D. Patil, 229 ITR 71
(Kar.). The Full Bench took the view that incentive bonus earned by the development
officers of the LIC of India is nothing but salary and no deduction over and above the
standard deduction provided under Section 16 of the Income Tax Act is permissible under
the Income Tax Act. Accordingly, the claim of expenditure or net income theory put
forward by the development officers was turned down by the Karnataka High Court.
Similar is the view taken by various High Courts including the Andhra Pradesh High
Court in K.A. Chowdhary v. C.I.T., 183 ITR 29(AP), the Madras High Court in
C.I.T. v. E.A. Rajendran, 235 ITR 514 and in C.I.T. v. P. Arangaswamy, 242 ITR
563 (Mad.) that of the Orissa High Court in the decision in C.I.T. v. Anil Singh, 215
ITR 224; that of the Bombay High Court in C.I.T. v. Gopalakrishna Suri, 248 ITR
819, and that of the Calcutta High Court in C.I.T. v. Ramlala Agarwala, 250 ITR
828. However, the assessees have heavily relied on the decision of the Gujarat High
Court in C.I.T. v. Kiranbhai H. Shelet, 235 ITR 635 which is relied on by the Tribunal
while allowing 30% deduction or otherwise sustaining the assessments at only 70% of
the incentive bonus received by the assessees.
5. The Tribunal in its order analysed the nature of incentive bonus with illustration,
which is extracted hereunder for convenience:
ILLUSTRATION Premium collected Rs. 6,00,000/- Lapsed Rs. 1,00,000/- Net eligible premium Rs. 5,00,000/- 20% of Net Rs. 1,00,000/- Annual Remuneration Rs. 5,000/- x 12 = Rs. 60,000/-
Therefore he is eligible to get incentive bonus because the annual remuneration does not exceed
20% of the net premium. If his annual remuneration is above 20% net premium (Rs. 1 lakh) then
he will not get incentive. So it is given more as a remuneration and also to increase that basic
remuneration. Hence it is in addition to salary.
If he is eligible the calculation of the amount to be given is Gross premium Rs. 6,00,000/- Lapsed Rs. 1,00,000/- Net eligible premium Rs. 5,00,000/- Remuneration Rs. 5,000/- x 12 = Rs. 60,000/- Incentive bonus Rs. 5,00,000 less 5 x 60,000=30,0000=200000 x 6% = 12000 Rs. 5,00,000 less 7 x 60,000=42,0000=80000 x 4% = 3200 Rs. 5,00,000 less 9 x 60,000=54,0000=2% Nil Total Rs. 15,200/-
From the above, it is clear that the incentive bonus is a percentage of the premium
received by the L.I.C. of India for the business canvassed through the development
officers. It is not the reimbursement of any expenditure and is not even linked to
expenditure, if any, incurred by the development officers. Further, under the Scheme,
in cases where the remuneration otherwise received by the development officers is
in excess of 20% of the net premium, then the development officer is not entitled to
any incentive bonus. There is no explanation from the assessees as to how the
expenditure incurred by them even in such cases can be allowed when no incentive
bonus is received, eventhough business is canvassed, which according to them, involves
expenditure. Though the assessees have vehemently contended that they have sizable
expenditure to earn the incentive bonus and the employer, namely, the L.I.C. of India
has certified such expenditure having been incurred by them and has even estimated
such expenditure at 30%, we have not seen a single case where any assessee has
come forward before the department claiming any item of expenditure or furnished
details of any such expenditure if at all incurred by him. Therefore, apart from the tall
claim made by them, and the help rendered to them by the L.I.C. of India, by writing
a letter, there is nothing on record to show that expenditure, if any, has been incurred
by any of the assessees in the course of earning the incentive bonus. Anyhow, we are
not influenced by the want of particulars of expenditure, if at all incurred by the
assessees, because such details are required only if any such expenditure is allowable.
6. The question whether any expenditure is allowable in the computation of
income or any receipt has to be added to income only after providing for the expenditure
is a matter to be found in the statute, that is the Income Tax Act. The scheme of the
Act is compartmentalisation of income under various heads and computation of the
taxable portion strictly in accordance with the formula of deductions, rebates, and
allowances, provided therein. The first step in this regard to identify the head under
which the income is assessable. Deductions and allowances are specific for each
head of income. We have already noticed that the assessees are regular employees
of the L.I.C. of India and in view of that the incentive bonus received by them from
the L.I.C. of India is assessable only under the head “salary”. Sri. C.K. Nair, leading
the arguments on behalf of the assessees, has pointed out that the incentive bonus if at
all assessable as salary has to be treated as profit in lieu of salary or in addition to
salary as contemplated under Section 17(1)(iv) of the Income Tax Act. He further contended
that ‘profit’ in the normal connotation is the net saving after providing for expenditure.
According to him, only the net amount that is the incentive bonus after deducting the
expenditure has to be taken as income from salary. He heavily relied on the decision
of the Gujarat High Court referred to above, which has approved the adoption of the
net income after providing for expenses. The assessees contend that in the absence
of proper accounts estimation of expenditure is the only alternative and in view of the
certificate issued by the L.I.C. of India, the expenditure claimed at 30% of the incentive
bonus is an acceptable. The department’s counsel on the other hand argued that
so long as the incentive bonus comes under the head of “salary”, the statute does not
authorise a deduction towards expenditure claimed by the assesses, whether they
have incurred it or not. According to him, such expenditure is only an application of
income, and there is no provision for deduction of the same except the standard
deduction provided under Section 16(i) of the Act.
7. The assessees have invited our attention to the letter written by the L.I.C. of
India to the Central Board of Direct Taxes. We find the details in the decision of the
Gujarat High Court referred to above, and also in the impugned order of the Tribunal.
The L.I.C. of India has addressed a letter to the Central Board of Direct Taxes in the
following lines:
As regards incentive bonus, we have taken note of your clarification in the matter. We are
at present designing a new Incentive Bonus Scheme for our Development Officers where it might
be possible to provide for a separate allowance or for a distinct/separate element of payment in
the nature of reimbursement of expenses which, we know, are necessarily to be incurred in the
process of earning that incentive bonus. As this would take some more time, we would request
you to allow some relief, in the meanwhile, to our Development Officers on this account.
As you know, incentive bonus is a production-oriented income, inasmuch as higher bonus
becomes payable to a Development Officer on achieving higher production. When his actual
performance is beyond the normal levels of performance expected of him, he has to incur
expenditure in respect of items such as (i) entertainment to agents/clients; (ii) prizes declared in
competition among 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, ie., 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 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 officers to accept the certification given by the L.I.C. offices both
with reference to additional conveyance allowance and incentive bonus, as above.
The Central Board of Direct Taxes did not accept the request of the LIC of India and
sent their reply in the following lines:
3. However such portion of the incentive bonus which is actually spent by the development
officer for duties of office can still be exempted from tax if the L.I.C. makes the payment against
the expenses incurred by the Development Officers by way of reimbursement of expenses in that
case, such reimbursement will not form a part of the “salary” of the Development Officers and
only the incentive bonus will appear in their salary certificates.
L.I.C. has not certified that a part of the incentive bonus is against the expenses incurred
by the Development Officers by way of reimbursement of expenses. If such a part is certified
and that part will not form part of the salary and that part of the incentive bonus which is not
certified will appear in the salary certificate. Hence no deduction is contemplated from the
incentive bonus, which finds a place in the salary certificates. The finding of the Gujarat High
Court page 655 that “however, the facts proved clearly indicate that a part thereof was granted
to the employees with a view to meet the expenses that might have to be incurred by him as
Development Officer for the discharge of his duty” is, far from being inconsistent with the
contents of the letter of the Board, also against law and facts.
Therefore it is obvious that the L.I.C. of India could not convince the Central Board of
Direct Taxes that any part of incentive bonus is a reimbursement of expenses. We
are told that the L.I.C. of India has now changed their pattern of payment of incentive
bonus which is now split into two parts, 70% representing income and 30% towards
reimbursement of the expenditure. Since the cases before us do not pertain to any
assessment after the introduction of the separate payment by the L.I.C. of India, we
are not going into the eligibility of the claim for deduction of 30% now separately given
by the LIC of India.
8. We are unable to accept the finding of the Tribunal that 30% of the incentive
bonus represents the expenditure at the hands of the assessees. The Tribunal has
stated that assessees should have expended 30% on account of their activities which
are in the nature of training agents, maintaining establishment for the same, etc. We
do not find any material to support this finding of the Tribunal. The Tribunal has not
gone into the nature of duties of the development officers, for which they are paid
usual salary. We requested counsel for the assessees to clarify the nature of duties of
the development officers and from the nature of duties explained by him, we feel what
was stated by the Tribunal was part of the normal duties of the development officers
for which they are paid salary. It is not out of place to refer to the details furnished in
the decision of the Karnataka High Court, wherein the High Court has referred to
Schedule III of the Regulation which provides for payment of travelling allowances
and reimbursement of other expenses incurred by the development officers in the
normal discharge of their duties. Therefore we find that the incentive bonus which is
a share of premium on extra business canvassed is an additional payment whether it
can be called as “commission”, as was done by the Bombay High Court, or profit in
lieu of salary or in addition to salary, as claimed by the assessees and is nothing but
salary coming within the meaning of the term contained in Section 15 of the Income Tax
Act. We do not find any provision in the Income Tax Act, except Section 10(14), for
allowing deduction towards expenditure of this nature claimed by the assessees. There
is no material to hold that incentive bonus or any part of it is in the nature of
reimbursement of expenditure by the employer to the assessees to qualify for deduction
under Section 10(14) can be
allowed only if it is granted specifically to meet expenses wholly, necessarily and
exclusively incurred in the performance of the duties to the extent such expenses are
actually incurred for that purpose. Therefore Section 10(14) does not also apply to the
cases at hand for relevant assessment years.
9. Therefore following the decisions of the High Courts referred to above
particularly that of the Full Bench decision of the Karnataka High Court in C.I.T. v.
M.D. Patil, 229 ITR 71 (Kar.) and disagreeing with the view of the Gujarat High
Court, we are of the view that incentive bonus is only a part of the salary of the
assessees and assessees are not entitled to any deduction over and above the standard
deduction. We are unable to accept the logic adopted by the Gujarat High Court in
dissenting the word “profit” occurring in the definition of “salary” and allowing the
estimated expenditure portion based on opinion given by the L.I.C. of India without
any statutory provision authorising it, in their decision referred to above. The proposition
canvassed by the assessees that incentive bonus is “profit” and the profit in the hands
of employees has to be computed after deducting expenditure is against the principle
laid down in the decision of the Supreme Court in Karamchari’s case, reported in 243
ITR 143. Accordingly in the appeals we answer the three substantial questions of law
set out in paragraph 1 above in the negative, in favour of the revenue and against the
assessee, set aside the order of the Income Tax Appellate Tribunal and that of the
Commissioner of Income Tax (Appeals) and restore the assessments on this issue.
10. The reference cases are disposed by answering the questions referred in favour
of the revenue and against the assessees.