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Commissioner Of Income Tax, Jodhpur v. Shive Raj Bhatia

Rajasthan High Court

May 1, 1996

Judgment

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References

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Summary of the Opinion — Income-tax Appellate Reference (Assessment Year 1985–86)

Factual and Procedural Background

The assessee was employed as a Development Officer by the Life Insurance Corporation of India (LIC) at Sirohi. For the assessment year 1985–86, apart from salary and allowances, he received an incentive bonus of Rs. 50,152 from LIC. The assessee claimed a deduction of Rs. 20,000 (40% of the incentive bonus) as expenses incurred in procuring the incentive bonus.

The Income-tax Officer (ITO), Sirohi, relying on a prior judgment of the Income-tax Appellate Tribunal in ITO v. K.M. Baheti (ITA No. 469.JP/84), treated the incentive bonus as part of salary and disallowed the additional deduction claimed (allowing only the standard deduction). The assessee appealed to the Appellate Assistant Commissioner (AAC), Udaipur Range, who, by order dated September 14, 1987, confirmed the disallowance on this ground.

The assessee then appealed to the Income-tax Appellate Tribunal (ITAT), Jaipur Bench. The ITAT, by its order dated June 23, 1989, reversed the AAC and allowed the claim, relying upon its earlier decision in R.K. Kliuteta v. ITO (ITA Nos. 334 & 335.JP/87) and applying a Board circular to permit a 50% deduction of the incentive bonus. The Revenue filed an application under section 256(1) of the Income-tax Act, 1961, for a question of law to be referred to the High Court. The ITAT referred the question for the High Court's opinion.

Legal Issues Presented

Whether the ITAT was justified in directing the Income-tax Officer to allow a 50% deduction of the incentive bonus received by the assessee from LIC by relying on Board's Circular No. 14/9/65-IT(A-I) dated September 22, 1965, when that circular is applicable to LIC agents and not to Development Officers?
Whether the incentive bonus received by a Development Officer of LIC falls within the meaning of the words "salary", "perquisites" or "profits in lieu of salary" (and thus taxable under the head "Salary"), or whether it constitutes income from business or profession allowing deductions for expenses incurred to procure such income?

Arguments of the Parties

Assessee's Arguments

The assessee claimed that a portion of the incentive bonus represented amounts spent to procure that income and therefore sought an allowance (he claimed Rs. 20,000, i.e., 40% of the bonus) as expenses incurred in procuring the incentive bonus.
The ITAT ultimately allowed a deduction at 50% on the incentive bonus relying upon the Board's circular (as applied by the Tribunal).

Revenue's Arguments

The ITO treated the incentive bonus as part of the assessee's salary (relying on an earlier ITAT decision in ITO v. K.M. Baheti) and disallowed the additional deduction, permitting only the statutory standard deduction under section 16 of the Income-tax Act.
The Appellate Assistant Commissioner confirmed that treatment and disallowed the assessee's claim for additional deduction.
On appeal to the High Court under section 256(1), the Revenue contended that the ITAT's direction to allow 50% deduction by reference to the Board's circular was incorrect because the circular applies to LIC agents, not Development Officers, and the incentive bonus paid to Development Officers is remuneration for employment and thus part of salary.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
ITO v. K.M. Baheti (ITA No. 469.JP/84)	Used by the assessing authority to treat the incentive bonus as part of salary and disallow additional deductions.	The ITO relied on this decision to treat the incentive bonus as salary and to permit only standard deduction; the AAC confirmed that approach.
R.K. Kliuteta v. ITO (ITA Nos. 334 & 335.JP/87)	Used by the ITAT in support of allowing the assessee's claim (as part of the Tribunal's reasoning to reverse the AAC).	The ITAT relied on this earlier Tribunal judgment to reverse the AAC and to allow the deduction (and then applied the Board's circular to allow 50%).
Commissioner of Income-Tax v. Sheo Raj Bhatia (D.B. Income-tax Reference No. 8 of 1992)	Noted as having material facts similar to the present case; used as a comparable reference.	The court observed similarity of material facts between this reference and the present case and treated the controversy as akin to that in the Sheo Raj Bhatia reference.
CIT v. Shiv Raja Bhatia, [1997] 227 ITR 7 (Raj)	Held that incentive bonus paid to a Development Officer is remuneration for services as an employee and therefore forms part of "salary"; also held that Board's Circular No. 14/9/65-IT(A-I) applies only to LIC agents and not Development Officers.	The High Court followed and applied this decision: it answered the referred question in the same negative manner (in favour of the Revenue), holding the incentive bonus to be salary and rejecting applicability of the agents' circular to Development Officers.

Court's Reasoning and Analysis

The High Court analysed the referral under section 256(1) in light of the factual matrix: the assessee, a Development Officer, received the incentive bonus and claimed a deduction as expenditure incurred to procure that bonus. The ITO and AAC had treated the amount as salary, disallowing the extra deduction, while the ITAT had reversed and allowed a deduction by relying upon a Board circular applicable to LIC agents and on earlier Tribunal authority.

The court observed that the material facts in the present reference were similar to those in the Sheo Raj Bhatia reference and considered the controversy addressed in the contemporaneous decision in CIT v. Shiv Raja Bhatia, [1997] 227 ITR 7 (Raj). In that decision the court held, as a matter of law, that:

The incentive bonus paid to a Development Officer is not a personal gift but is paid as remuneration for services as an employee and therefore forms part of "salary".
Because the incentive bonus is part of salary and taxable under the head "Salary", the assessee is entitled only to the standard deduction permissible under section 16 of the Income-tax Act and not to broader deductions as business/professional expenses.
The Board's Circular No. 14/9/65-IT(A-I) dated September 22, 1965, which relates to LIC agents, is not applicable to Development Officers; instead, the case of Development Officers is governed by Board's Instruction No. 1774 (as indicated by the court).

Applying these conclusions to the present facts, the court found the referred question to be identical to that decided in Shiv Raja Bhatia and answered it in the same way: the ITAT was not justified in directing a 50% deduction by reference to the agents' circular because that circular does not apply to Development Officers and because the incentive bonus is salary.

Holding and Implications

REFERENCE ANSWERED IN THE NEGATIVE — IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE.

Direct effect on the parties:

The High Court held that the Income-tax Appellate Tribunal, Jaipur Bench, was not justified in directing that 50% of the incentive bonus be allowed as a deduction by relying on Board's Circular No. 14/9/65-IT(A-I), since that circular applies only to LIC agents and not to Development Officers.
The incentive bonus paid to the Development Officer is held to be remuneration for services (part of "salary"); accordingly, the assessee is entitled only to the standard deduction under section 16 of the Income-tax Act and not to the additional deduction that was allowed by the ITAT.
The court noted that the case of Development Officers is governed by Board's Instruction No. 1774 rather than the agents' circular relied upon by the Tribunal.

The opinion answers the referred question against the assessee and in favour of the Revenue; it follows the reasoning stated in CIT v. Shiv Raja Bhatia, [1997] 227 ITR 7 (Raj) as applied to the facts before the court.

Show all summary ...

B.R Arora, C.J:— The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, for the assessment year 1985–86, in the case of the assessee, referred the following question of law, under section 256(1) of the Income-tax Act, 1961, for the opinion of this court:

“Whether, on the facts and in the circumstances of the case, the learned members of the Income-tax Appellate Tribunal were justified in directing the Income-tax Officer to allow 50 per cent, deduction of incentive bonus received by the assessee from the Life Insurance Corporation of India relying on Board's Circular No. 14/9/65-IT (AI) dated September 22, 1965, which, in fact, is applicable to the Life Insurance Corporation agents and not for Development Officers?”

2. The assessee was working as Development Officer in the office of the Life Insurance Corporation of India at Sirohi. During the assessment year 1985–86, the assessee, apart from the salary and other allowance, received an amount of Rs. 50,152 from the Life Insurance Corporation as incentive bonus. He claimed a deduction of Rs. 20,000, i.e, 40 per cent, of the incentive bonus as the expenses incurred by him to procure the incentive bonus. The assessing authority, i.e, the Income-tax Officer, Sirohi, relying upon the judgment of the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, in the case of ITO v. K.M Baheti, (ITA No. 469.JP/84) held that the incentive bonus is to be treated as part of the salary and, therefore, only the standard deduction is allowable and the claim of the assessee for deduction on account of additional expenses to the tune of Rs. 20,000 cannot be allowed.

3. Dissatisfied with the order dated January 27, 1986, passed by the Income-tax Officer, Sirohi, the assessee preferred an appeal before the Appellate Assistant Commissioner, Udaipur Range, Udaipur, who, by his order dated September 14, 1987, confirmed the disallowance made by the Income-tax Officer and dismissed the appeal filed by the assessee on this ground but partly allowed the appeal on other grounds.

4. Dissatisfied with the order passed by the Appellate Assistant Commissioner, the assessee preferred an appeal before the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur. The Tribunal, by its order dated June 23, 1989, relying upon its earlier judgment given in the case of R.K Kliuteta v. ITO (ITA Nos. 334 and 335.JP/87) reversed the order passed by the Appellate Assistant Commissioner and allowed, the claim of the assessee. Dissatisfied with the order dated June 23, 1989, the Revenue moved an application under section 256(1) of the Act to refer the questions of law mentioned in the application for the opinion of the High Court and the Tribunal, by its order dated March 26, 1990, referred the question of law mentioned in paragraph No. 1 above (page 524) for the opinion of this court.

5. The Tribunal allowed the deduction at 50 per cent, on the amount of incentive bonus relying upon the Board's circular.

6. The material facts, on which the question mentioned in paragraph 1 (page 524) above has to be decided are similar to those in D.B Income-tax Reference No. 8 of 1992 (Commissioner Of Income-Tax v. Sheo Raj Bhatia., [1997] 227 ITR 7 (Raj)). The controversy involved in the present case as well as in the case of Shiv Raj Bhatia, [1997] 227 ITR 7 (Raj) is that the incentive bonus received by the Development Officer of the Life Insurance Corporation, whether can fall within the meaning of the words “salary”, “perquisites” or “profits in lieu of salary” and as such is taxable under the head “Salary” or it is an income from business or profession on which the assessee is entitled to deduction in respect of the amount which he spent for procuring the business to earn the incentive bonus and whether the Board's circular No. 14/9/65-IT(A-I) dated September 22, 1965, which, in fact, is applicable to LIC agents, is applicable to Development Officers or not. It has been held in CIT v. Shiv Raja Bhatia, [1997] 227 ITR 7 decided by us today, that the incentive bonus paid to the Development Officer is not a personal gift but is paid as remuneration for his services as employee and, therefore, it forms part of the “salary”. As the incentive bonus is part of the “salary” of the assessee and is exigible to tax, the assessee is entitled only to standard deduction permissible under section 16 of the Act only. It has further been held in Shiv Raj Bhatia's case, [1997] 227 ITR 7 (Raj), that the Board's Circular No. 14/9/65-IT(A-I) dated September 22, 1965, which relates to the agents of the Life Insurance Corporation only is not applicable in the case of the Development Officers.

7. The question of law referred for the opinion of this court, mentioned in paragraph 1 (page 524) above, is identical to that which was referred for the opinion of this court in Shiv Raj Bhatia's case, [1997] 227 ITR 7 and this court, in Shiv Raj Bhatia's case, [1997] 227 ITR 7 answered the question in the negative, i.e, in favour of the Revenue and against the assessee. For the same reasons, the above quoted question No. 1 is answered in favour of the Revenue and against the assessee in the same manner.

8. Consequently, the reference is answered in the negative, i.e, in favour of the Revenue and against the assessee, and it is held that the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, was not justified in directing to allow 50 per cent, deduction of the incentive bonus received by the assessee from the Life Insurance Corporation of India, relying on the Board's circular which is applicable only to the Life Insurance Corporation of India's agents and not to the Development Officers and the case of Development Officers is governed by the Board's Instruction No. 1774.