Commissioner Of Income-Tax v. E.A Rajendran.

The Judgment of the Court was delivered by

K.A Thanikkachalam, C.J:— At the instance of the Department, the Tribunal referred the following questions for the opinion of this court under section 256(1) of the Income-tax Act, 1961:

“Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the entire ‘amount of additional conveyance allowance and 40 per cent, of incentive bonus’ received by the assessee as an employee of the Life Insurance Corporation of India is exempt?”

2. The assessee is a Development Officer in the Life Insurance Corporation of India (for short “LIC”), and has received incentive bonus and also additional conveyance allowance to cover the expenses incurred by him on account of conveyance. The Assessing Officer rejected the claim of the assessee that the additional conveyance and incentive bonus have to be exempted from tax. On appeal, the Deputy Commissioner of Income-tax (Appeals) allowed 40 per cent, of the incentive bonus as deduction and also deleted the addition made by the Assessing Officer with regard to the additional conveyance allowance, following the decision of the Tribunal in ITA Nos. 1691 and 1692.Mad of 1988 in the case of T.S Sivaram. In the Revenue's appeal, the Tribunal upheld the finding of the first appellate authority. The point for consideration is, whether the entire amount of additional conveyance allowance and 40 per cent, of the incentive bonus received by the assessee as an employee of the LIC, are admissible deductions.

3. Mr. S.V Subramaniam, learned senior standing counsel, submitted as under:

The circular dated November 28, 1986, issued by the Central Board of Direct Taxes will not be applicable after the amendment brought about to section 10(14) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), by the Taxation Laws (Amendment) Act (Act 4 of 1988), which came into effect from April 1, 1989. After the coming into force of the amendment, as per section 10(14)(i) of the Act, any special allowance or benefit, not being in the nature of a perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, as the Central Government may, by notification in the Official Gazette, specify to the extent to which such expenses are actually incurred for that purpose (sic). According to learned senior standirg counsel, the notification as contemplated under section 10(14)(i) is not yet issued and, therefore, the additional conveyance allowance cannot be allowed as a deduction while computing the income under the head “Salary”. In order to support this contention, reliance was placed upon the decision in CIT v. B. Chinnaiah, [1995] 214 ITR 368 (AP). According to senior standing counsel, if deduction is claimed under section 16 of the Act as salary, standard deduction as contemplated under the provisions contained in section 16 alone can be asked for and no further deduction is possible and, therefore, the additional conveyance allowance granted to the assessee by the LIC can neither be allowed as a deduction under section 10(14)(i) of the Act nor under section 16 of the Act. It was further submitted that a notification was issued specifying special allowances under sub-clause (i) of clause (14) of section 10 of the Act, wherein neither the additional conveyance allowance nor the incentive bonus was mentioned to be treated as special allowance. According to learned senior standing counsel, the notification issued under section 10(14)(i) of the Act in Notification No. GSR. No. 606(E), dated June 9, 1989 (see [1989] 178 ITR (St.) 43), would apply only where there is reimbursement of the expenditure on conveyance allowance given to meet such expenditure actually incurred and in the present case, no deduction was claimed with regard to the allowance granted to meet the expenditure incurred on conveyance in the performance of duties of office or employment. Therefore, the said notification will not be applicable to the facts of the present case. According to senior standing counsel, even the LIC treated the payment of incentive bonus as salary and therefore, deduction can be given only under section 16 of the Act. It was ultimately contended that in view of the various decisions of this court, it is not possible for the assessee to claim deduction of the additional conveyance allowance as well as the incentive bonus received by the assessee and that, therefore, the Tribunal was not correct in granting deduction with regard to additional conveyance allowance as well as 40 per cent, of the incentive bonus.

4. On the other hand, Mr. T.C.A Ramanujam, learned counsel appearing for the assessee, submitted as under: Section 17(1) of the Act defines the expression, “salary” for the purpose of sections 15, 16 and 17 of the Act, by way of an inclusive definition. Section 17(2) defines “perquisites” and section 17(3) defines “profits in lieu of salary”. All the three definitions are inclusive and not exhaustive. Section 17 has nothing to do either with deductions or with exemptions. It is merely a provision defining the term “salary” and the quantum of salary has to be determined on a proper interpretation of the agreement between the employer and the employee in that regard. There was controversy with regard to bonus, especially in the context of the definition of “salary” in rule 2(h) of Part A of Schedule IV to the Act. Section 17(3)(i) defines the term “profits in lieu of salary”. The use of the term “profits” is significant; whether it is section 15, 16, 17, 18, 22, 28 or 57, the very assessment of the various heads of income will depend upon the charging section, which is section 4. Unless a receipt can be brought in as “income” under section 4, it cannot be taxed. This was laid down long ago by the Privy Council in CIT v. Sir S.M Chitnavis, [1932] 2 Comp Cas 464; AIR 1932 PC 178. Sections 28 and 29 provide for the determination of profits and gains of business or profession with reference to the provisions contained in sections 30 to 43C of the Act. It is axiomatic that in arriving at the figure of profits in a commercial sense business expenditure of all types, whether specifically provided for or not, may be deducted even under section 28(i) itself, provided it is an expenditure connected with or arising out of trade or it is a commercial loss. The Madras High Court held in Commissioner Of Income-Tax, Tamil Nadu-V v. Sitalakshmi Mills Ltd., [1983] 141 ITR 415, that when there is no specific statutory provision for deduction in the computation of taxable business profits, it does not mean that the item goes without any deduction at all, but the question will have to be resolved on the basis of commercial accounting principles. Profits represent plus income and losses represent minus income. “Expenditure” is negative profit. These principles applicable to section 28 will equally be applicable to the determination of “profits in lieu of salary” under section 17 of the Act. Reliance was placed upon the decision in CIT v. Harprasad and Co. (P.) Ltd., [1975] 99 ITR 118 (SC). Standard deduction was brought in only to simplify salary assessment and not to penalise salary earners. Refusal to allow deduction will mean taxing expenditure which is against the canons of equity. The very employment under the LIC is saddled with a liability to procure certain amount of business and this entails expenditure. Res judicata has no application to income-tax proceedings and the decisions given in an assessment year are not binding either on the assessee or the Department in a subsequent year. If fresh facts come to light, a different conclusion can be reached, (vide M.A Namazie Endowment v. Commissioner Of Income-Tax, [1988] 174 ITR 58 (Mad).

5. We have heard learned senior standing counsel for the Department as well as learned counsel for the assessee. As already pointed out, the Tribunal allowed additional conveyance allowance and 40 per cent, of the incentive bonus as deductions, treating them as salary. The question, whether the incentive bonus received by the Development Officers of the LIC, whether treated as part of the salary or perquisite, is taxable under the head “Salary” and the permissible deductions under the said head are as specified under section 16 of the Act, came up for consideration in B. Chinnaiah's case, [1995] 214 ITR 368, before the Andhra Pradesh High Court. Following the earlier decision in K.A Choudary v. CJT, [1990] 183 ITR 29, the Andhra Pradesh High Court held that the incentive bonus received by the Development Officers of the LIC constitutes salary and to enable the assessee to take advantage of section 10(14) of the Act, there must be a notification by the Central Government specifying the extent to which the expenses are allowable. In the present case, there is no such notification. Hence, the deduction under section 10(14) cannot be claimed in respect of incentive bonus. An argument was advanced to the effect that Development Officers incurred a lot of expenditure in holding seminars, in extensive travelling and in providing refreshments to the LIC agents and others and therefore 40 per cent, of the incentive bonus should, in any event, be allowed as deduction. While answering such an argument, it is found out that section 15 specifies the income as chargeable to income-tax under the head “Salary”. The words “salary”, “perquisite” and “profits in lieu of salary” are defined in section 17, for the purpose of sections 15 and 16. Section 16 of the Act enumerates deductions, which are deductible in computing the income chargeable under the head “Salary”. From a reading of the above provisions, it follows that incentive bonus, whether treated as part of the salary or perquisite, is taxable under the head “Salary” and the permissible deductions under the said head are as specified under section 16 of the Act. It was further contended before the Andhra Pradesh High Court that the said expenditure would be allowable under section 10(14) of the Act and the court pointed out that to enable the assessee to take advantage of section 10(14) of the Act, there must be a notification by the Central Government specifying the extent to which the expenses are allowable. Till now, no such notification was issued by the Central Government and therefore, deduction under section 10(14) of the Act cannot be claimed.

6. In M. Krishna Murthy v. CIT, [1985] 152 ITR 163 (AP), it was held that incentive bonus would fall within the meaning of “perquisite”. In B. Chinnaiah's case, [1995] 214 ITR 368, the Andhra Pradesh High Court followed its own earlier decision in the case of K.A Choudary's case, [1990] 183 ITR 29, in order to come to the conclusion that incentive bonus is nothing but salary.

7. Notification No. S.O 143(E), dated February 21, 1989 [published in [1989] 176 ITR (St.) 132], is as follows:

“In exercise of the powers conferred by sub-clause (i) of clause (14) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby specifies the following special allowances, specifically granted to meet expenses, wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, for the purposes of the said sub-clause, namely:—

(a) any allowance (by whatever name called) granted to meet the cost of travel on tour or on transfer.”

8. In the said notification, additional conveyance allowance and incentive bonus did not find place. Therefore, the fact remains that as contemplated under section 10(14)(i) of the Act, no notification was issued by the Central Government with regard to the said two items. The assessee claimed deduction of the abovesaid two items by considering the same as “profits in lieu of salary” as defined in section 17 for the purpose of deduction under sections 15, 16, etc. Even “profits in lieu of salary” would come under the purview of “salary” and any deduction claimed under the head of income would have to satisfy section 16. Under section 16, only standard deduction is allowable and no other deduction claimed under any head in the name of expenditure incurred can be allowed.

9. The contention of learned counsel for the assessee was that the incentive bonus and the additional conveyance allowance would come neither under the head “Salary” nor can it be said that only standard deduction alone is permissible, treating the abovesaid two items as salary. According to learned counsel the net income after deducting the expenditure and the loss should be arrived at and the net income alone is taxable and the LIC itself had granted incentive bonus as well as additional conveyance allowance, treating the same under the head “Salary”. Even in the return filed, the assessee claimed exemption under section 10(14) of the Act. It was ultimately held in the abovesaid decisions that the additional conveyance allowance and 40 per cent, of the incentive bonus, even if they come under the head “Profits in lieu of salary”, can be treated as salary income. It is pertinent to note that the Rajasthan High Court in CIT v. Sheo Raj Bhatia, [1999] 235 ITR 523 (App.) (infra), while considering the question of deduction of incentive bonus held that incentive bonus paid by the LIC to the Development Officers is an emolument of office which is paid by the LIC to its employee, i.e, the Development Officer and the same is, therefore, part of salary only eligible for deductions permissible under section 16 of the Act, and that the Central Board of Direct Taxes Circular No. 14/9/65-IT(Al), dated September 22, 1965, allowing deductions from commission applies only to LIC agents and not to Development Officers.

10. According to learned counsel for the assessee, the benevolent circular is binding on the authorities below and such circulars cannot be ignored. In order to support this contention, reliance was placed upon the various decisions of various High Courts. There is no doubt about the fact that any benevolent circular issued by the Central Government is binding on the authorities below and the same cannot be ignored.

11. Learned counsel for the assessee relying upon the letter dated November 28, 1986, from the Dy. Secretary to the Government of India addressed to Shri R. Narayanan, Managing Director, LIC, contended that the incentive bonus and the additional conveyance allowance can be allowed as deduction under section 10(14) on the basis of the certificate appended to the salary certificate. But, in the said letter, it is stated as under:

“Necessary instructions are being issued to the field officers in respect of exemption under section 10(14) of the Income-tax Act, 1961, of the additional conveyance allowance on the basis of a certificate appended to the salary certificate.

As regards the exemption of incentive bonus, the Board regrets its inability to accede to your request. However, you are advised to formulate a scheme of special allowance with reference to the expenditure incurred in the course of official duties and inform the Board so that the matter may be considered further”.

12. It is to be noticed that this circular was issued prior to the amendment to section 10(14) of the Act.

13. Reliance was also placed upon the letter written by CBDT to one N.M Goverdhan, Chairman, LIC, Mumbai, wherein it is stated as follows:

“Your request for notifying ‘incentive bonus’ under sub-clause (i) of clause (14) of section 10 of the Income-tax Act cannot be acceded to. It may, however, be added that the portion of the allowance certified as having been actually incurred in the performance of duties shall be exempt under the above provision”.

14. Reliance was also placed upon another letter dated April 10, 1997, issued by the Central Board of Direct Taxes to the Chief Commissioner of Income-tax, wherein it is stated:

“It has come to the notice of the Board that in some charges, reliance is being placed by the Development Officers of the LIC before the appellate authorities on an incorrect appreciation of an earlier letter of the Board and thereby a part of the incentive bonus is being claimed as exempt under section 10(14)(i) of the Income-tax Act. However, the correct position regarding the claim of the exemption is discussed in the enclosed letter. This may please be brought to the notice of all concerned in your region”.

15. In F. No. 149/25 of 1996—TPL issued by the Central Board of Direct Taxes, dated March 12, 1997, addressed to the Chairman, LIC, Mumbai, it is stated as under:

“Your Circular No. SKTG (2D) 4 of 1997, dated February 18, 1997, enclosed with your letter has been examined but the advice contained therein does not appear to be in accordance with the provisions of the Income-tax Act. Unless an allowance is notified under section 10(14)(i), no portion of it can qualify for tax exemption.

On the other hand, the Ministry of Law have advised that it is not possible to notify the ‘incentive bonus’ under the said provision.

However, such portion of the ‘incentive bonus’ which is actually spent by the Development Officers for duties of office can still be exempted from tax if the LIC 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 taxable ‘incentive bonus’ will appear in their salary certificates.

In view of the above, you may kindly issue appropriate instructions for modifying the aforesaid circular of the LIC.”

16. Even according to this notification, unless the allowance is notified under section 10(14)(i) of the Act, no portion of it can qualify for tax exemption. It is further stated that such portion of the incentive bonus which is actually spent by the Development Officers for duties of office can still be exempted from tax, if the LIC makes the payment against the expenses incurred by the Development Officers by way of reimbursement of expenses and such reimbursement will not form a part of the salary of the Development Officers. In the present case, there is no reimbursement of the expenditure incurred by the Development Officers and, therefore, the expenditure incurred by the Development Officers by themselves cannot qualify for exemption under section 10(14)(i) of the Act. Reliance was also placed upon the Notification GSR No. 606(E), dated June 9, 1989 (see [1989] 178 ITR (St) 43), wherein it is stated that any allowance granted to meet the expenditure incurred on conveyance in the performance of the duties of an office or employment of profit shall qualify for deduction under section 10(14)(i) of the Act. Only when there is reimbursement of the expenditure incurred, deduction under section 10(14) can be claimed. When the Development Officer himself incurred the expenditure, for those expenses he cannot claim exemption under section 10(14)(i) of the Act. Though in the earlier letters and circulars issued by the Central Board of Direct Taxes, some concessions were given, those circulars really pertain to the period prior to the amendment brought about to section 10(14) of the Act. The circular issued by the Central Board of Direct Taxes after the amendment to section 10(14) of the Act clearly states that if the expenditure is reimbursed by the LIC that would qualify for deduction under section 10(14) of the Act. But, if the expenditure was incurred by the Development Officer himself, he cannot claim deduction under section 10(14)(i) of the Act.

17. Learned counsel for the assessee relied upon a Division Bench decision of the Andhra Pradesh High Court dated August 13, 1986, in I.T Cases Nos. 160 and 196 of 1985 (CIT v. Muralidhar Rao). In the said cases, while dealing with petitions under section 256(2) of the Act, the following questions were sought to be referred:

“(a) The Tribunal is not justified in upholding the appellate authority's decision in allowing 40 per cent, of the incentive bonus as allowable expenditure while assessing income under the head “Salaries”; and

(b) The Tribunal failed to note that the assessee a salaried employee in LIC is not eligible for any deduction towards expenses on the amount received from his employer in the absence of any provision for such deduction?”

18. It was held therein that no case has been made out for compelling the Tribunal to draw up a case and refer the questions to the court under section 256(2) of the Income-tax Act, 1961. Rejecting the petitions filed under section 256(2) of the Act will not render the decision of another Division Bench in B. Chinnaiah's case, [1995] 214 ITR 368 (AP), negated. In the said decision, the matter in question was dealt with in detail in accordance with the law on the subject. So also, the contention put forward by learned counsel for the assessee that the judgment rendered in Choudary's case, [1990] 183 ITR 29 (AP), is per incuriam, also holds no water.

19. Thus, considering the facts arising in this case, in the light of the relevant provisions contained in the Act and the judicial pronouncements of various High Courts, we are of the opinion that the Tribunal was not correct in allowing the deductions claimed under the head “Additional conveyance allowance” and 40 per cent, of the incentive bonus. In that view of the matter, we answer the question referred to us in the negative and in favour of the Department. There will be no order as to costs.