COMMISSIONER OF INCOME TAX Vs. KIRANBHAI H SHELAT

JUDGEMENT

(1.) THIS group of matters along with similar other matters was argued together and at the instance of both the sides, is being disposed of by this common judgment. The questions which have been referred to this Court by the Tribunal under S. 256(1) of the IT Act, 1961, in these references are as under : IT Ref. No. 54/93 : (At the instance of the Revenue for the asst. yrs. 1984 -85 to 1987 -88)

(2.) IT Ref. No. 54/93 relates to the asst. yrs. 1984 -85 to 1987 -88. The assessee was working as a Development officer in the LIC of India and in addition to the salary and perquisites, he was also given "incentive new business bonus" from the LIC. The assessee claimed deduction of expenses incurred for earning the incentive bonus to the tune of 50 per cent of the incentive bonus. The claim was allowed by the ITO in the original assessment years, but later the CIT by his common order dt. 31st Jan., 1989 passed under S. 263 of the Act, directed the ITO to withdraw the deduction of expenses on the ground that incentive bonus was part of 'salary' and as such what all the assessee was entitled to, was standard deductions admissible under S. 16(i) of the Act and that the expenses incurred in earning the incentive bonus were not allowable. The assessee appealed before the Tribunal against the common order dt. 31st Jan., 1989, by which the CIT had directed the ITO to withdraw the expenses allowed from incentive bonus commission for these years. The Tribunal took note of the fact that the Development officer was an employee of the LIC, who was not paid incentive bonus by way of remuneration because it was expressly excluded from the definition of annual remuneration contained in r. 2(c) of the LIC Development officers' Service Rules, 1989. It was found that the incentive bonus was not akin to the ordinary bonus given under the Payment of Bonus Act. The Tribunal held that the incentive bonus represent additional profits, which could be classified and charged as income under the head 'Salaries' because of the wide definition of the term "salary" under S. 17, which included 'profits in lieu of or in addition to any salary or wages'. The Tribunal followed the decision of the Bombay Tribunal in the case of ITO vs. Narendra V. Patel (1985) 21 TTJ (Bom) 60 : (1983) 21 Taxman 45 (Trib), in which it was laid down that the expenditure incurred for earning the incentive bonus was liable to be deducted at the starting point itself under S. 15 of the Act while "determining the amount of incentive bonus, which was chargeable to tax and observed that this view was based on the principle laid down by the Hon'ble Supreme Court in the case of Badridas Daga vs. CIT (1958) 34 ITR 10 (SC) : TC 14R.202 and Poona Electric Supply Co. Ltd. vs. CIT (1965) 57 ITR 521 (SC) : TC 13R.287. It was observed that the decision of the Bombay Tribunal in ITO vs. Narendra V. Patel (supra) was followed by all the Benches of the Tribunal. In respect of the decision of the Andhra Pradesh High Court in K.A. Choudary vs. CIT (1990) 183 ITR 29 (AP) : TC 58R.253, on which reliance was placed on behalf of the Department, the Tribunal observed that in that case the Court did not consider the question whether the expenses incurred for earning the incentive bonus were liable as deduction at the starting point itself in view of the fact that incentive bonus did not represent salary in the ordinary sense but it represented salary in view of the definition given in S. 17 of the Act. It was held that, that aspect was considered by the Bombay Tribunal in ITO vs. Narendra V. Patel (supra), in which it was held that per se it was not possible to draw an inference that the legislature had intended to take into account cases of incentive bonus without reducing it by the expenditure incurred for earning it and that the expenditure incurred by the assessee for the purpose of earning incentive bonus should be reduced therefrom at the starting point itself, i.e., at the point when it is treated under the income chargeable under the head "salary". The Tribunal accordingly held that the expenses incurred for earning the incentive bonus by the development officers were allowable as deduction and that net incentive bonus alone was includible in the computation of income under the head salary. The Tribunal found on the facts of the case that there was no justification for not allowing 40 per cent of the incentive bonus as had been allowed in several cases cited before it. The Tribunal found that there was, however, no reason to allow a higher deduction at 50 per cent, as was done by the ITO.

(3.) IN IT Ref. No. 272/93, which relates to the asst. yrs. 1983 -84 to 1987 -88, similar view was taken by the Tribunal by its order dt. 7th Aug., 1992, in which the Tribunal dealing with a similar claim of the assessee -development officer, held that the CIT was not justified in directing the AO to withdraw the deduction allowed by him at 40 per cent of the gross receipts.