High Court Of Bombay
CIT vs. Gopal Krishna Suri & Ors.
Sections 16(i), 17(1)(iv)
S.H. Kapadia & V.C. Daga, JJ.
IT Ref. Nos. 52, 53 ,64 & 66 of 1993; 137 & 238 of 1994; 15, 29, 30, 36, 37, 50, 71, 197, 212, 216, 263, 316, 459 & 481 of 1995 and 171 of 1996
13th October, 2000
R.V. Desai with P.S. Jetly, for the Applicant : S.N. Inamdar with A.K. Jasani & P.V. Vaidya, for the Respondent in IT Ref. No. 53/1993 : Atul Jasani i/b K.B. Bhujle, for the Respondent in IT Ref. No. 66/1993 : A.P. Sathe, , for the Respondent in IT Ref. No. 171/1996
S.H. KAPADIA, J. :
The question referred to this Court by the Tribunal under s. 256(1) of the IT Act, 1961, is as under : Question quoted from IT Ref. No. 52 of 1993 “Whether, on the facts and circumstances of the case, the Tribunal is justified in holding that 25 per cent deduction is admissible at the threshold from the incentive bonus received by the assessee, a Development Officer of LIC of India which is assessable under the head “income from salaries.” The facts giving rise to the above references are as follows. For the sake of brevity, we have taken the facts from IT Ref. No. 52 of 1993. Since common question of fact and law arises in the above group of references, they are disposed of by this common judgment. The assessee is a Development Officer of LIC. He received an incentive bonus of Rs. 79,216 from LIC. As a Development Officer, he was required to maintain an organization, to recruit and train agents. For that purpose, he incurred certain expenses. He claimed a percentage of incentive bonus as deduction since he was required to meet the expenses to run the said organization. He claimed that he was working beyond duty hours. He claimed the above deduction in view of the structure of employment as evidenced by the rules framed by LIC as applicable to Development Officers. He urged before the AO that, as aDevelopment Officer, he was required to employ and control agents who are not the employees of LIC. The said agents were appointed on contract basis for which commission was paid for procuring business for LIC. That, theDevelopment Officer had to look after the agents. That, they were required to be guided to procure more business. For doing this extra work, the Development Officer was paid incentive bonus over and above the salary paid to him to do his duties during the office hours. Accordingly, he claimed deduction of such expenses from the incentive bonus. He urged before the AO that the incentive bonus was a reward. That, he acted as a link between the agents and the policy-holders. He accordingly claimed deduction of the expenses at the rate of 40 per cent. It was contended before the AO that the employee of Development Officer with the LIC entitled him to receive only his basic pay, special pay, personal pay, D.A., ex gratia bonus and other allowances and perquisites.
That, the incentive bonus was payable only in cases where the organization of the Development Officer contributed to the business generated for LIC. That, the payment in respect of incentive bonus did not result from his employment. That, if the Development Officer did not bring in business or if the Development Officer did not conform to the expense limits then he was not entitled to incentive bonus. Therefore, the maintenance of his organization was foreign to the contract of employment. Accordingly, the Development Officer-assessee claimed the above deduction at the rate of 40 per cent. The AO rejected the above contentions of the Development Officer. The matter was carried in appeal to the CIT(A). It was contended before the First Appellate Authority that incentive bonus had no connection with the contract of employment. In the alternative, it was contended that the expenditure incurred for earning the incentive bonus should be excluded at the starting point itself. The above arguments were rejected by the First Appellate Authority which came to the conclusion that there was a clear-cut employer-employee relationship between the LIC and the Development Officer. That, the incentive bonus cannot be divorced from the contract of employment. That, the assessee was not an insurance agent. That, he was an officer of LIC. That, the entire incentive bonus scheme was applicable because he is an officer of LIC. That, the bonus was part of the salary. That, once it is found that the income received by the assessee falls under the head “Salaries”, the deduction to be allowed in the computation of his income would be covered by s. 16 of the IT Act and since there is no provision for deduction of the expenditure incurred for earning the bonus except by way of standard deduction, the expenditure incurred by the assessee for earning incentive bonus did not fall under s. 16 and, therefore, s. 10(14) also cannot be imported in computation. Accordingly, the appeal was dismissed. Being aggrieved, assessee went in appeal before the Tribunal which came to the conclusion that incentive bonus can only be assessed as salary. However, relying upon its earlier decision, the Tribunal, on examination of the rules, came to the conclusion that the Development Officers of LIC incurred expenditure over the agents for the purposes of promoting the business of LIC. That, the payment of incentive bonus was conditional. That, it was not fixed. That, it was not automatic. That, it did not accrue to the Development Officer as a routine. That, it did not accrue as a part of a salary. Hence, the Tribunal allowed deduction of 25 per cent on incentive bonus. It further directed, consequentially, that only the net incentive bonus could be assessed as part of salary. Being aggrieved, the Department has come by way of these references under s. 256(1) of the IT Act.
4. Mr. Desai, learned senior counsel appearing for the Department contended that Development Officers were employees of LIC. That, incentive bonus paid to the Development Officers was part of salary. That, it was not business income. That, it was not the special allowance given to meet office expenses. That, such allowances were not exempted under s. 10(14). He contended that such bonus was not granted by LIC for the purposes set out in s. 10(14) and, therefore, the assessees cannot claim 40 per cent deduction under the said section. He contended that under s. 17(1)(iv) any fee, commission, perquisites or profit has been included in the definition of salary. That, incentive bonus was paid for doing extra business for the employer. It was, therefore, in the nature of commission. Therefore, incentive bonus came within s. 17(1)(iv). He relied upon the judgment of the Punjab & Haryana High Court in the case of B.M. Parmar vs. CIT (1998) 150 CTR (P&H) 548 : (1999) 235 ITR 679 (P&H) : TC S58.448, CIT vs. P. Arangasamy & Ors. (1999) 155 CTR (Mad) 88 : (2000) 242 ITR 563 (Mad), CIT vs. M.D. Patil (1998) 144 CTR (Kar) (FB) 150 : (1998) 229 ITR 71 (Kar) (FB) : TC S58.4479. He pointed out that the judgments of the Bombay High Court in CIT vs. M.C. Shah (1991) 189 ITR 180 (Bom) : TC 54R.901 and CIT vs. A.A. Baniyan (1992) 106 CTR (Bom) 276 : (1992) 197 ITR 717 (Bom) : TC 55R.186 have no relevancy as they have not decided the points in issue. On the other hand, learned counsel appearing on behalf of the assessee contended that under s. 15 of the IT Act, certain incomes are chargeable to income-tax under the head “salaries”. It was urged that the word “income” in s. 15 denotes net of expenses to earn that income. It was contended that expenditure incurred by the assessee, therefore, for earning the incentive bonus had to be excluded at the threshold. It was contended that there are two possible views. It was contended that the legalistic view was that which has been argued by the Department whereas the more pragmatic view is to take the meaning of the word “income” in 15 to mean net of expenses to earn that income. In this connection, reliance was placed on the judgment of the Gujarat High Court in the case of CIT vs. Kiranbhai H. Shelat (1998) 147 CTR (Guj) 143 : (1999) 235 ITR 635 (Guj) : TC S58.4483. It was further contended that one has to look to the scheme of employment of Development Officers in LIC. That, they were strictly not employees. That, their duties required them to maintain, at their own expenses, their own organization to recruit and train LIC agents. That, in order to run such organization, these Development Officers incurred various expenses. That, the amount of incentive bonus was part of the salary but the question that the Court was required to decide in this case was whether the entire amount of incentive bonus received by Development Officers was required to be taken into account as income from salary or whether the net amount, after allowing deduction from expenses incurred, should be taken into account. He contended that incentive bonus depended on personal efforts and volume of business procured by Development Officers for LIC. He invited our attention to the scheme framed by LIC in respect of incentive bonus. He also invited our attention to various decisions of the Tribunal in which it has been held that Development Officers were entitled todeduction at 40 per cent of the incentive bonus by way of estimated expenses for earning the income for which the incentive bonus is paid. He contended that it was not possible for Development Officers to procure the business for LIC without incurring expenditure to earn such business. He contended that the amount of incentive bonus depended on the total expenditure incurred during the year and the amount of premium collected by him during that year. That, if in the first year, the premium earned by Development Officer was in excess of five times the totalexpenses incurred on him by LIC then incentive bonus was payable at a certain percentage of such income. Similarly, the rate of incentive bonus differ depending upon the amount of premium earned by Development Officer in a given year. It was, therefore, contended that incentive bonus was determinable with reference to the volume of insurance business done by the Development Officer. Therefore, the expenditure incurred for that purpose was allowable as a deduction. Therefore, it was contended that having regard to the structure of employment of Development Officers, the assessees were required to maintain their own organizational set-up for which they were required to spend out of the incentive bonus paid by LIC and, therefore, to the extent of such expenditure, the incentive bonus did not constitute salary income and, therefore, to that extent, it should be excluded from salary. Reliance is also placed by the learned counsel for the assessee on the scheme of incentive bonus. In that scheme, the expression “annual remuneration” has been defined to exclude incentive bonus. It was, therefore, contended that incentive bonus had no relationship with the contract of employment. That, incentive bonus was paid under a scheme which was separate and it is for this reason that annual remuneration did not include incentive bonus. Similarly, our attention was invited to orders passed by the Central Government under s. 11 of the LIC Act.
The expression “eligible premium” has been defined to mean such proportion as may be specified by the corporation from time to time of the first yearâs premium received by the corporation in respect of business secured by the agents in the organization of a Development Officer. Similarly, the expression “gross salary” excludes incentive bonus under the statutory orders. Accordingly, it was contended that all the above features show that the relationship between LIC and the Development Officer is not merely that of employer andemployee. That, it was more in the nature of a contract of agency. That, if a Development Officer did not bring in business of if he did not conform to the expense limits and the cost ratio, he would not be entitled to incentive bonus although he continues to be in the employment of LIC. On the other hand, a dynamic Development Officer who drives his organization and his agents to bring in more policies and hire first premium, would be entitled to incentive bonus. In the circumstances, it was urged that the view of Gujarat High Court was more pragmatic and, with respect, it was the correct view particularly in view of s. 15 of the IT Act.
5. We find merit in the case of the Department. There is unanimity among the High Courts on the status of Development Officers as full-time employees of LIC. A perusal of the service rules shows that the main task of these officers is to develop the business of life insurance. Such development is measured by the amount of premium secured in the first year on the new policies by reason of efforts put in by the Development Officers. The efficiency of Development Officers is judged with reference to the amount of first yearâs premium that he obtains and if the amount of premium is at least five times the yearly expenses incurred by LIC on the Development Officers then their performance is regarded as satisfactory. With a view to encourage such officers to rise above the minimum standard, they are given incentives. Similarly, if their performance falls below the minimumstandard then they are penalised by way of disincentives. The scheme is applicable only to the employees of LIC. As a full time employee, a Development Officer receives salary and that salary is liable to decrease if his efficiency falls below a standard which is measured by the cost ratio. The remuneration payable to such officers under the rules cannot exceed certain percentage of the net eligible premium collected on the policies secured by theDevelopment Officers. The instruction also states that incentive bonus shall be payable only to those officers whose cost ratio is less than a stipulated percentage. Under the circumstances, the amount paid as incentive, the amount paid as remuneration as also the amounts paid after deducting the disincentives constitutes salary in the hands of the employees. Such payments do not have any other legal character. Secs. 16 and 17 of the IT Act are wide enough to take within their ambit all the above payments which are made only by virtue of Development Officer being an employee of the LIC. These payments are in the nature of commission which is calculated at a percentage of the premium generated. Hence, they are exigible to tax as part of salary income. Once these payments are exigible to tax as salary income then such employees cannot claim any deduction other than standard deduction under s. 16. Similarly, in the absence of any notification under s. 10(14) granting exemption, the incentive bonus is liable to be assessed to tax as salary. Even before this Court, learned counsel for the assessee conceded that the payments received on account of incentive bonus was salary. However, the contention was that a Development Officer was required to spend a part of the incentive bonus to maintain and regulate a separate organization of his own to recruit agents for LIC and, therefore, it was contended that an amount upto a specified percentage of the incentive bonus earned should be admissible for deduction as it represented necessary expenses that would have to be incurred by the Development Officer. It was contended that the deductions contemplated under s. 16 of the Act were to be made while computing the income chargeable under the head “salaries”. However, these are statutory deductions which are quite distinct from expenses incurred for the purposes of working out the profits in lieu of or profits in addition to the salary under s. 17(1)(iv). It was contended that the meaning of the word “income” in s. 15 can only mean income which is not of expenses to earn that income. This was on the footing that under the IT Act, tax is chargeable on real income. It was urged that there was no provision under the Act which prevents the Court from taking the more pregmatic view viz. that the word “income” in s. 15 refers to income which is net of expenses incurred to earn that income. In this connection, reliance was placed on the judgment of Gujarat High Court in the case of CIT vs. Kiranbhai Shelat (supra). In that matter, the Tribunal took the view that expenses incurred for earning the incentive bonus were allowable as deduction and that the net incentive bonus alone was includible in the computation of income under the head “salary”. Accordingly. 40 per cent of the incentive bonus was allowed. This view of the Tribunal was affirmed by the Gujarat High Court in the above judgment. It may also be mentioned that, on this point, some Tribunals have allowed 40 per cent of the incentive bonus; some others have allowed 25 per cent and others have allowed 30 per cent. With respect, we do not agree with the view expressed by the Gujarat High Court in the above judgment. As held by us hereinabove, Development Officers are employees of LIC. We have discussed the scheme of payment of incentive bonus hereinabove which shows that incentive bonus forms part of salary.
The said payment is includible in the computation of income under the head “salary”. Once a receipt forms part of income under the head “salary” then s. 16 squarely applies. Under s. 16, a standard deduction is prescribed. We, therefore, do not see any reason for coming to the conclusion that net incentive bonus alone was includible in the computation of income under the head “salary”. The word “salary” under s. 17(1)(iv) is very wide. The word “salary” under s. 17(1) is an inclusive definition. It includes any fees, commission, perquisites or profits in lieu of salary or profits in addition to any salary or wages. Under the circumstances, we do not find any merit in the contention advanced on behalf of the assessee that only net incentive bonus was includible in the computation of income under the head “salary”. There is no provision to that effect in s. 16 of the IT Act. Once we hold that incentive bonus is includible in the computation of income under the head “salary” and once we hold that the word “salary” includes fees, commission, perquisites or profits in lieu of or in addition to salary then the intent of the legislature is very clear viz. to tax the entire incentive bonus as income under the head “salary”. In the case of Karmachari Union vs. Union of India (2000) 159 CTR (SC) 148 : (2000) 243 ITR 143 (SC) the Supreme Court has laid down that the word “salary” in s. 17(1) is an exhaustive definition. That, the inclusive definition of the word “salary” in s. 17 provides that apart from actual salary received by the employee, it also includes wages, annuity, pension, gratuity commission, perquisites or profits in lieu of salary or profits in addition to salary. As stated above, the amounts received as incentive bonus are in the nature of commission. They form part of salary. In the circumstances, equitable considerations do not come into picture. It has been held in the above judgment of the Supreme Court that equity cannot be taken into account while interpreting legal provisions. Moreover, the scheme of incentive bonus is applicable only to the employees of LIC. We have examined the scheme. The payments under the scheme do not have any other legal character except that of salary to which ss. 16 and 17 of the Act apply. We respectfully agree with the judgment of the Madras High Court in CIT vs. P. Arangasany & Ors. (supra), judgment of the Punjab and Haryana High Court in B.M. Parmar vs. CIT (supra) and judgment of Karnataka High Court in CIT vs. M.D. Patil (supra). Two judgments of the Bombay High Court CIT vs. M.C. Shah (supra) and CIT vs. A.A. Baniyan (supra) do not touch the issue involved in the matter. We respectfully disagree with the view taken by the Gujarat High Court in the case of CIT vs. Kiranbhai H. Shelat & Anr. (supra). Similarly, the judgment of this Court in CIT vs. L.A. Rosemann (2000) 111 Taxman 507 (Bom) :has no application to the present case. In that matter, on facts, it was found by this Court that there was no employer- employee relationship. It was found by this Court, on facts, that the reimbursement was not a salary. In the circumstances, the judgment has no application to the present case. Mr. Jasani, learned counsel for one of the assessees, tried to contend before us that contract in question was a contract of agency between LIC and the Development Officers. This point has not been raised before the lower Court. Hence, we did not permit the assessee to raise the said contention. Before concluding, we may mention that the above question which has been referred to this Court in IT Ref. No. 52 of 1993 has also been raised in the conjoint income-tax references which are disposed of by this judgment. It is the main question. Accordingly, the said question is answered in the negative i.e., in favour of the Department and against the assessee.
8. Accordingly, the above references stand disposed of with no order as to costs.
[Citation : 248 ITR 819]