ORDER
T.V.K. Natarajachandran, Accountant Member
1. This appeal by the assessee is directed against the order of the Dy. CIT (Appeals), Pune, dated 24-9-1990 wherein he upheld the order of the ITO.
2. The assessee is a Development Officer of the LIC. The issue involved in this appeal is whether the assessee is entitled to deduction of 40% of the incentive bonus received by him, or not. The assessee received incentive bonus of Rs. 47,652 from the employer M/s. LIC. He claimed 40% of such bonus as expenditure having been incurred for earning such income. The ITO briefly described the functions of the Development Officer. Treating the assessee as an employee of the LIC and the incentive bonus as part of the salary, the Assessing Officer allowed only standard deduction under Section 16(i) and taxed the entire incentive bonus as income. Accordingly, deduction of 40% claimed from the incentive bonus was not allowed by the ITO.
3. On appeal, the Dy. CIT (Appeals) following the judgment of the Andhra Pradesh High Court in the case of K.A. Choudary v. CIT [1990] 183 ITR 29 and the Circular No. 138 dated 17-6-1974 containing explanatory note to the provision of Finance Act, 1974 especially the standard deduction admissible under Section 16(i), confirmed the order of the ITO.
4. At the time of hearing, the learned counsel for the assessee relied on the decision of the Tribunal in the case of Sixth ITO v. Narendra V. Patel [1985] 11 ITD 587 (Bom.) (TM) and urged that the deduction claimed by the assessee was to be allowed from the point of view of real income. However, he did not dispute the fact that the judgment of Andhra Pradesh High Court in the case of K.A. Choudary (supra) confirmed definition of salary as inclusive of incentive bonus paid to the Development Officer. Nonetheless his contention was that the assessee had incurred expenses for earning such incentive bonus and, therefore, only the net incentive bonus should be considered or the expenses incurred for earning such incentive bonus should be allowed as a deduction.
5. The learned Departmental Representative on the other hand, strongly relied on the judgment of the Andhra Pradesh High Court in the case of K.A. Choudary (supra) and supported the order of the ITO.
6. I have duly considered the submissions of the parties. Though the incentive bonus is received from the LIC and the assessee is an employee of the LIC and, therefore, partakes the nature and character of salary, yet the incentive bonus has been given by the LIC over and above the salary based on the business actually procured by the Development Officer. This is clear from the assessment order itself wherein the ITO has described the role played by the Development Officer. According to the ITO, “the main duty of the Development Officer is to assist the LIC (employer) in its business of insuring human lives”. For this purpose, LIC advises the Development Officer to recruit agents to work in the field. The Development Officer is required to guide, the agents working under him to promote the insurance business of LIC, A certain percentage of the premiums collected on behalf of the LIC is paid as commission to the agents while the Development Officers are allowed conveyance allowance and incentive bonus in addition to the salary. The amount of conveyance allowance and incentive bonus is determined by the LIC after a detailed analysis of work done taking into consideration the number of lives insured, possible running around by the Development Officer, premium actually collected, policy lapsed etc. The analysis of the work done by the Development Officer is known as “Appraisal report” (vide para 5 of the assessment order).
7. From the description of the modus operandi of promoting the LIC business, it could be reasonably inferred that the Development Officer should in turn provide incentive to the agents whom he is bound to guide and enthuse in the promotional activity. Therefore, the Development Officer incurs certain expenditure over the agents which is incidental to the promotion of the business and which is in the commercial expediency of the business. The claim of deduction is to be treated at par with the expenditure incurred by a trader or a businessman while promoting his business. This is a reality of the situation which one could not ignore nor dispense with. Even the agents who deal with the public cannot normally procure the business just by approaching them but lot of pursuation is required to secure the business. They may also have to incur some expenditure incidentally in this connection. Even in their cases certain deductions are allowed both in respect of premium secured in the first year and renewal premiums. The same analogy could also apply in the case of the Development Officers also. The word ‘incentive’ is of significance. It cannot be considered at par with bonus paid to any other government employee as a part of salary. The word “incentive” pre-supposes the performance or output on the basis of which the quantum is fixed. In other words, it is a reward for putting forth extra effort to secure more business and if there is no extra business there could as well be no incentive bonus. The ITO has pointed out that the LIC pays incentive bonus to Development Officer only on the basis of “appraisal report” which contains the actual work turned out by the Development Officer. Therefore, the grant of incentive bonus is dependant on the actual performance and varies with the business secured. Therefore, the payment of incentive bonus is conditional in nature and is not fixed or automatic and it docs not accrue to the Development Officer as a matter of routine as a part of salary by virtue of being an employee of the LIC. In this connection, the ITO has rightly observed in para 5 of his order that “there is no difference between the Development Officer and Salesman appointed on a fixed monthly salary plus commission at a certain percentage on sales”. The ITO also stated that the sales figure in the case of salesman could be compared to the insurance premium collected by the LIC and the commission of salesman could be compared to the incentive bonus. In fact, the ITO has also observed that “like any other businessman the LIC is also giving incentive or additional benefit to its salesman (Development Officer) to improve and flourish its own business”. This analogy between the salesman and the Development Officer drawn by the ITO is apt. Viewed from this angle a reasonable and fair conclusion that could be drawn is that certain amount of incentive bonus is required to be allowed as a deduction and only the net incentive bonus could be assessed as a part of salary. As the profits and gains of business is computed after allowing the expenses incurred and only the net profits are taken into account, similarly certain amount of incidental expenses incurred in promoting the business is required to be allowed as deduction at the beginning itself before arriving at the actual incentive bonus resulting in a commercial sense to the Development Officer. In this view of the matter, therefore, the Third Member of the Tribunal, Bombay Bench ‘B’ in the case of Narendra V. Patel (supra) held that the expenditure incurred for earning the incentive bonus should be reduced from the bonus at the starting point itself before it is included as salary under Section 17 of the Income-tax Act, 1961. There is no dispute about the fact that the incentive bonus is also a part of salary under Section 17 of the Act but on practical consideration and finer appreciation of the merits of the case, only the net incentive bonus could form part of salary. In this view of the matter, therefore, following the precedent contained in the orders of the Tribunal, Pune Bench, only 25% of the incentive bonus would be admissible as deduction for promoting the business and the balance 75% of the incentive bonus is assessable as part of salary. Accordingly the order of the Dy. CIT (Appeals) is modified and the ITO is directed to allow 25% of the incentive bonus as a deduction while computing the income under the head salary.
8. The appeal is partly allowed.