{"id":165459,"date":"2001-11-02T00:00:00","date_gmt":"2001-11-01T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-ginarajan-on-2-november-2001"},"modified":"2016-04-02T19:28:46","modified_gmt":"2016-04-02T13:58:46","slug":"commissioner-of-income-tax-vs-ginarajan-on-2-november-2001","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-ginarajan-on-2-november-2001","title":{"rendered":"Commissioner Of Income Tax vs Ginarajan on 2 November, 2001"},"content":{"rendered":"
Kerala High Court<\/div>\n
Commissioner Of Income Tax vs Ginarajan on 2 November, 2001<\/div>\n
Author: C R Nair<\/div>\n
Bench: P Balasubramanyan, C R Nair<\/div>\n<\/p>\n
<\/pre>\n
JUDGMENT<\/p>\n
C.N. Ramachandran Nair, J. <\/p>\n
1. The short question arising in all these income tax cases is the “head of income”
\nunder which “incentive bonus” received by the assessees who are development officers
\nemployed by the Life Insurance Corporation of India is assessable under the Income
\nTax Act and the extent of deduction, if any, allowable in the computation of taxable
\nincome. While issuing notice in I.T.A. No. 31 of 2001, this Court framed the following
\nthree questions of law.\n<\/p>\n
1. Whether, on the facts and in the circumstances of the case, and also in the light of
\nthe decision of the Supreme Court in 243 ITR 143, the Tribunal is right in law in allowing
\nany deduction separately from incentive bonus?\n<\/p>\n
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in
\nholding:\n<\/p>\n
(i) 30% of the incentive bonus is to be excluded from the definition of ’emoluments under
\nSection 17′.\n<\/p>\n
(ii) 30% of the incentive bonus should be excluded from the computation at the inception
\nitself?\n<\/p>\n
3. Whether, on the facts and in the circumstances of the case (and the incentive bonus
\nbeing salary) the assessee is entitled to any deduction in excess\/different from
\nstandard deduction allowable\/permissible under Section 16(1) of the Income Tax?\n<\/p>\n
2. The assessees are admittedly regular employees of the L.I.C. of India and are
\nassessed under the head “salary” in respect of the income earned by them from their
\nemployer in the form of salary and perquisites. Having regard to the nature of
\nrelationship between the L.I.C. of India and the assessees, as one of the employer and
\nemployee, there is no serious dispute under the head of income under which “incentive
\nbonus” also is a assessable. The definition of “salary” under Section 15 of the Income Tax
\nAct is so wide and is only an inclusive one taking in all receipts from the employer in
\nthe form of wages, commission, bonus, profit in lieu of or in addition to salary, etc. It
\nis obvious that the legislature did not attach much importance to the euphemism used
\nto describe the payment. Therefore any payment by the employer to the employee
\ntowards consideration for service rendered in the course of employment comes within
\nthe description of “salary” which included perquisites as well. Probably this is why
\nthe assessees also have not raised any dispute against the assessment of “incentive
\nbonus” received by them from their employer, namely L.I.C. of India under the head
\n“salary”. However, the assessees have raised a serious dispute with regard to the
\nnature and content of incentive bonus received by them from the L.I.C. of India,
\nwhich is directly related to the business canvased by them and is a percentage of
\npremium received by L.I.C. of India and which is paid over and above the normal
\nsalary and perquisites, to which they are entitled. According to the assessees, sizable
\namount is spent by them to earn the incentive bonus, and therefore irrespective of the
\nhead of income under which the same is assessable, they are entitled to deduction of
\nthe expenditure, or in other words, only the net income is assessable. On the other
\nhand, the assessments have been completed treating the incentive bonus as part of the
\nsalary and deduction from salary was limited to standard deduction admissible under
\nSection 16 of the Income Tax Act. A separate deduction claimed from out of incentive
\nbonus by the assessees was ruled out by the Income Tax Department. When the
\nmatter went in second appeal to the Tribunal, the Tribunal elaborately discussed the
\nnature of the scheme under which incentive bonus is paid by the L.I.C. of India and
\nrelying on a letter issued by the L.I.C. of India to the Central Board of Direct Taxes
\nestimating the expenditure incurred by the development officers at 30% of the incentive
\nbonus accepted the contention of the assessees and allowed deduction at 30% of
\nincentive bonus towards expenditure, or in other words, sustained assessments only at
\n70% of the incentive bonus received by the assessees. In doing so, the Tribunal
\nheavily relied on the decision of the Gujarat High Court in C.I.T. v. Kiranbhai H. Shelet,
\n235 ITR 635.\n<\/p>\n
3. We have heard a batch of cases filed by the department together, wherein the
\nassessees are represented by various counsel, led by Sri C.K. Nair, and on the
\ndepartment’s side, senior standing counsel Sri. P.K.R. Menon appeared.\n<\/p>\n
4. As the issue arises in the case of assessees all over India, we have the
\nadvantage of several decisions of various High Courts. We will first refer to a Full
\nBench decision of the Karnataka High Court in C.I.T. v. M.D. Patil, 229 ITR 71
\n(Kar.). The Full Bench took the view that incentive bonus earned by the development
\nofficers of the LIC of India is nothing but salary and no deduction over and above the
\nstandard deduction provided under Section 16 of the Income Tax Act is permissible under
\nthe Income Tax Act. Accordingly, the claim of expenditure or net income theory put
\nforward by the development officers was turned down by the Karnataka High Court.
\nSimilar is the view taken by various High Courts including the Andhra Pradesh High
\nCourt in K.A. Chowdhary v. C.I.T., 183 ITR 29(AP), the Madras High Court in
\nC.I.T. v. E.A. Rajendran, 235 ITR 514 and in C.I.T. v. P. Arangaswamy, 242 ITR
\n563 (Mad.) that of the Orissa High Court in the decision in C.I.T. v. Anil Singh, 215
\nITR 224; that of the Bombay High Court in C.I.T. v. Gopalakrishna Suri, 248 ITR
\n819, and that of the Calcutta High Court in C.I.T. v. Ramlala Agarwala, 250 ITR\n<\/p>\n
828. However, the assessees have heavily relied on the decision of the Gujarat High
\nCourt in C.I.T. v. Kiranbhai H. Shelet, 235 ITR 635 which is relied on by the Tribunal
\nwhile allowing 30% deduction or otherwise sustaining the assessments at only 70% of
\nthe incentive bonus received by the assessees.\n<\/p>\n
5. The Tribunal in its order analysed the nature of incentive bonus with illustration,
\nwhich is extracted hereunder for convenience:<\/p>\n
\n  \n\n ILLUSTRATION\n Premium collected \t\t Rs. 6,00,000\/-\nLapsed \t\t\t \t Rs. 1,00,000\/-\nNet eligible premium \t\t Rs. 5,00,000\/-\n20% of Net \t\t \t Rs. 1,00,000\/-\nAnnual Remuneration \t \t Rs. 5,000\/- x 12 = Rs. 60,000\/- \n \n\n<\/pre>\n
Therefore he is eligible to get incentive bonus because the annual remuneration does not exceed
\n20% of the net premium. If his annual remuneration is above 20% net premium (Rs. 1 lakh) then
\nhe will not get incentive. So it is given more as a remuneration and also to increase that basic
\nremuneration. Hence it is in addition to salary.<\/p>\n
\n \n\nIf he is eligible the calculation of the amount to be given is\n  Gross premium \t\t\t Rs. 6,00,000\/-\nLapsed \t\t\t\t Rs. 1,00,000\/-\nNet eligible premium \t\t Rs. 5,00,000\/-\nRemuneration \t \t\t Rs. 5,000\/- x 12 = Rs. 60,000\/-\n \n\nIncentive bonus\n \n\nRs. 5,00,000 less 5 x 60,000=30,0000=200000 x 6% = 12000  \n \n\n Rs. 5,00,000 less 7 x 60,000=42,0000=80000 x 4% = 3200  \n \n\n Rs. 5,00,000 less 9 x 60,000=54,0000=2% Nil\n \n\n Total Rs. 15,200\/-\n \n\n<\/pre>\n
From the above, it is clear that the incentive bonus is a percentage of the premium
\nreceived by the L.I.C. of India for the business canvassed through the development
\nofficers. It is not the reimbursement of any expenditure and is not even linked to
\nexpenditure, if any, incurred by the development officers. Further, under the Scheme,
\nin cases where the remuneration otherwise received by the development officers is
\nin excess of 20% of the net premium, then the development officer is not entitled to
\nany incentive bonus. There is no explanation from the assessees as to how the
\nexpenditure incurred by them even in such cases can be allowed when no incentive
\nbonus is received, eventhough business is canvassed, which according to them, involves
\nexpenditure. Though the assessees have vehemently contended that they have sizable
\nexpenditure to earn the incentive bonus and the employer, namely, the L.I.C. of India
\nhas certified such expenditure having been incurred by them and has even estimated
\nsuch expenditure at 30%, we have not seen a single case where any assessee has
\ncome forward before the department claiming any item of expenditure or furnished
\ndetails of any such expenditure if at all incurred by him. Therefore, apart from the tall
\nclaim made by them, and the help rendered to them by the L.I.C. of India, by writing
\na letter, there is nothing on record to show that expenditure, if any, has been incurred
\nby any of the assessees in the course of earning the incentive bonus. Anyhow, we are
\nnot influenced by the want of particulars of expenditure, if at all incurred by the
\nassessees, because such details are required only if any such expenditure is allowable.\n<\/p>\n
6. The question whether any expenditure is allowable in the computation of
\nincome or any receipt has to be added to income only after providing for the expenditure
\nis a matter to be found in the statute, that is the Income Tax Act. The scheme of the
\nAct is compartmentalisation of income under various heads and computation of the
\ntaxable portion strictly in accordance with the formula of deductions, rebates, and
\nallowances, provided therein. The first step in this regard to identify the head under
\nwhich the income is assessable. Deductions and allowances are specific for each
\nhead of income. We have already noticed that the assessees are regular employees
\nof the L.I.C. of India and in view of that the incentive bonus received by them from
\nthe L.I.C. of India is assessable only under the head “salary”. Sri. C.K. Nair, leading
\nthe arguments on behalf of the assessees, has pointed out that the incentive bonus if at
\nall assessable as salary has to be treated as profit in lieu of salary or in addition to
\nsalary as contemplated under Section 17(1)(iv) of the Income Tax Act. He further contended
\nthat ‘profit’ in the normal connotation is the net saving after providing for expenditure.
\nAccording to him, only the net amount that is the incentive bonus after deducting the
\nexpenditure has to be taken as income from salary. He heavily relied on the decision
\nof the Gujarat High Court referred to above, which has approved the adoption of the
\nnet income after providing for expenses. The assessees contend that in the absence
\nof proper accounts estimation of expenditure is the only alternative and in view of the
\ncertificate issued by the L.I.C. of India, the expenditure claimed at 30% of the incentive
\nbonus is an acceptable. The department’s counsel on the other hand argued that
\nso long as the incentive bonus comes under the head of “salary”, the statute does not
\nauthorise a deduction towards expenditure claimed by the assesses, whether they
\nhave incurred it or not. According to him, such expenditure is only an application of
\nincome, and there is no provision for deduction of the same except the standard
\ndeduction provided under Section 16(i) of the Act.\n<\/p>\n
7. The assessees have invited our attention to the letter written by the L.I.C. of
\nIndia to the Central Board of Direct Taxes. We find the details in the decision of the
\nGujarat High Court referred to above, and also in the impugned order of the Tribunal.
\nThe L.I.C. of India has addressed a letter to the Central Board of Direct Taxes in the
\nfollowing lines:\n<\/p>\n
As regards incentive bonus, we have taken note of your clarification in the matter. We are
\nat present designing a new Incentive Bonus Scheme for our Development Officers where it might
\nbe possible to provide for a separate allowance or for a distinct\/separate element of payment in
\nthe nature of reimbursement of expenses which, we know, are necessarily to be incurred in the
\nprocess of earning that incentive bonus. As this would take some more time, we would request
\nyou to allow some relief, in the meanwhile, to our Development Officers on this account.\n<\/p>\n
As you know, incentive bonus is a production-oriented income, inasmuch as higher bonus
\nbecomes payable to a Development Officer on achieving higher production. When his actual
\nperformance is beyond the normal levels of performance expected of him, he has to incur
\nexpenditure in respect of items such as (i) entertainment to agents\/clients; (ii) prizes declared in
\ncompetition among his agents; (iii) conveyance facilities to his agents; and, (iv) office expenses
\nsuch as rent, secretarial assistance, printing and stationery, postage, trunk calls and telephone
\ncharges, etc. The quantum of incentive bonus is decided taking into account factors such as
\nthe number of policies procured by a Development Officer, his agency organisation, the nature
\nof territory operated by him, ie., whether rural or urban, etc. These very same factors also
\ninfluence the size of his expenditure.\n<\/p>\n
We do not at present allow reimbursement or special allowance as such towards these items,
\nit being understood that a Development Officer is required to spend a part of the incentive bonus
\non this account. It is therefore, proposed to certify, under Section 10(14) an amount upto 30% of the
\nincentive bonus earned as necessary expenses that would have to be incurred and the internal
\nsystem devised by us lays down guidelines to the operating offices regarding the percentage
\nto be certified in each case having regard to factors referred to earlier.\n<\/p>\n
We would be grateful if you could kindly examine the points clarified in this letter and issue
\nsuitable guidelines to your officers to accept the certification given by the L.I.C. offices both
\nwith reference to additional conveyance allowance and incentive bonus, as above.\n<\/p>\n
The Central Board of Direct Taxes did not accept the request of the LIC of India and
\nsent their reply in the following lines:\n<\/p>\n
3. However such portion of the incentive bonus which is actually spent by the development
\nofficer for duties of office can still be exempted from tax if the L.I.C. makes the payment against
\nthe expenses incurred by the Development Officers by way of reimbursement of expenses in that
\ncase, such reimbursement will not form a part of the “salary” of the Development Officers and
\nonly the incentive bonus will appear in their salary certificates.\n<\/p>\n
L.I.C. has not certified that a part of the incentive bonus is against the expenses incurred
\nby the Development Officers by way of reimbursement of expenses. If such a part is certified
\nand that part will not form part of the salary and that part of the incentive bonus which is not
\ncertified will appear in the salary certificate. Hence no deduction is contemplated from the
\nincentive bonus, which finds a place in the salary certificates. The finding of the Gujarat High
\nCourt page 655 that “however, the facts proved clearly indicate that a part thereof was granted
\nto the employees with a view to meet the expenses that might have to be incurred by him as
\nDevelopment Officer for the discharge of his duty” is, far from being inconsistent with the
\ncontents of the letter of the Board, also against law and facts.\n<\/p>\n
Therefore it is obvious that the L.I.C. of India could not convince the Central Board of
\nDirect Taxes that any part of incentive bonus is a reimbursement of expenses. We
\nare told that the L.I.C. of India has now changed their pattern of payment of incentive
\nbonus which is now split into two parts, 70% representing income and 30% towards
\nreimbursement of the expenditure. Since the cases before us do not pertain to any
\nassessment after the introduction of the separate payment by the L.I.C. of India, we
\nare not going into the eligibility of the claim for deduction of 30% now separately given
\nby the LIC of India.\n<\/p>\n
8. We are unable to accept the finding of the Tribunal that 30% of the incentive
\nbonus represents the expenditure at the hands of the assessees. The Tribunal has
\nstated that assessees should have expended 30% on account of their activities which
\nare in the nature of training agents, maintaining establishment for the same, etc. We
\ndo not find any material to support this finding of the Tribunal. The Tribunal has not
\ngone into the nature of duties of the development officers, for which they are paid
\nusual salary. We requested counsel for the assessees to clarify the nature of duties of
\nthe development officers and from the nature of duties explained by him, we feel what
\nwas stated by the Tribunal was part of the normal duties of the development officers
\nfor which they are paid salary. It is not out of place to refer to the details furnished in
\nthe decision of the Karnataka High Court, wherein the High Court has referred to
\nSchedule III of the Regulation which provides for payment of travelling allowances
\nand reimbursement of other expenses incurred by the development officers in the
\nnormal discharge of their duties. Therefore we find that the incentive bonus which is
\na share of premium on extra business canvassed is an additional payment whether it
\ncan be called as “commission”, as was done by the Bombay High Court, or profit in
\nlieu of salary or in addition to salary, as claimed by the assessees and is nothing but
\nsalary coming within the meaning of the term contained in Section 15 of the Income Tax
\nAct. We do not find any provision in the Income Tax Act, except Section 10(14), for
\nallowing deduction towards expenditure of this nature claimed by the assessees. There
\nis no material to hold that incentive bonus or any part of it is in the nature of
\nreimbursement of expenditure by the employer to the assessees to qualify for deduction
\nunder Section 10(14) can be
\nallowed only if it is granted specifically to meet expenses wholly, necessarily and
\nexclusively incurred in the performance of the duties to the extent such expenses are
\nactually incurred for that purpose. Therefore Section 10(14) does not also apply to the
\ncases at hand for relevant assessment years.\n<\/p>\n
9. Therefore following the decisions of the High Courts referred to above
\nparticularly that of the Full Bench decision of the Karnataka High Court in C.I.T. v.
\nM.D. Patil, 229 ITR 71 (Kar.) and disagreeing with the view of the Gujarat High
\nCourt, we are of the view that incentive bonus is only a part of the salary of the
\nassessees and assessees are not entitled to any deduction over and above the standard
\ndeduction. We are unable to accept the logic adopted by the Gujarat High Court in
\ndissenting the word “profit” occurring in the definition of “salary” and allowing the
\nestimated expenditure portion based on opinion given by the L.I.C. of India without
\nany statutory provision authorising it, in their decision referred to above. The proposition
\ncanvassed by the assessees that incentive bonus is “profit” and the profit in the hands
\nof employees has to be computed after deducting expenditure is against the principle
\nlaid down in the decision of the Supreme Court in Karamchari’s case, reported in 243
\nITR 143. Accordingly in the appeals we answer the three substantial questions of law
\nset out in paragraph 1 above in the negative, in favour of the revenue and against the
\nassessee, set aside the order of the Income Tax Appellate Tribunal and that of the
\nCommissioner of Income Tax (Appeals) and restore the assessments on this issue.\n<\/p>\n
10. The reference cases are disposed by answering the questions referred in favour
\nof the revenue and against the assessees.<\/p>\n","protected":false},"excerpt":{"rendered":"
Kerala High Court Commissioner Of Income Tax vs Ginarajan on 2 November, 2001 Author: C R Nair Bench: P Balasubramanyan, C R Nair 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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[8,21],"tags":[],"class_list":["post-165459","post","type-post","status-publish","format-standard","hentry","category-high-court","category-kerala-high-court"],"yoast_head":"\nCommissioner Of Income Tax vs Ginarajan on 2 November, 2001 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/commissioner-of-income-tax-vs-ginarajan-on-2-november-2001\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Commissioner Of Income Tax vs Ginarajan on 2 November, 2001 - 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