Commissioner of Income Tax vs Anil Kumar Hazarika

J.N. SARMA, J.—Following are the two questions referred :

"(i) Whether on the facts and in the circumstances of the case, the Tribunal has not erred in law in allowing 40% deduction from the incentive bonus granted by the employer when the incentive bonus is assessable under the head "Salaries" ?

(ii) Whether on the proper construction of Section 16 of the Income Tax Act, further deduction @ 40% from the incentive bonus is allowable in addition to specific deduction allowable under that section ?"

Heard Mr. G.K. Joshi, Learned Advocate for the revenue, none appears for the assessee.

Earlier a Division Bench of this Court in a case reported in In Re: Rangkala Investments Ltd., held that these are basically question of facts and not question of law. Following this judgment in the case in hand it was held that it is question of tact. As against this judgment, the revenue went up to the Apex Court and filed SLP and in the judgment of that SLP which is reported in 248 ITR page 8 (Commissioner of Income Tax v. Anil K. Hazarika) it has been held as follows ;

"ORDER

The respondent-assessee has been served but has not chosen to put in an appearance.

The High Court, by the order under challenge, declined to call for a reference of the questions of fact and covered by the decision of that court in the case of CIT v. Ram Krishna Banik (1995) 215 ITR 901.

The questions read thus :

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal has not erred in law in allowing 40 per cent deduction, from the incentive bonus granted by the employer when the incentive bonus is assessable under the head "Salaries" ?

(2) Whether on the proper construction of Section 16 of the Income tax Act, further deduction at 40 per cent from the incentive bonus is allowable in addition to specific deduction allowable under that section ?"

The decision in the case of CIT v. Ram Krishna Banik (1995) 215 ITR 901 also holds that identical questions are questions of fact. We are of the view that the questions are questions of fact.

We are of the view that the questions are questions of law and that the High Court should have directed the Tribunal to refer the same to it for its consideration.

Accordingly, the appeal is allowed. The order under challenge is set aside and the Tribunal is directed to refer the questions quoted above to the High Court for its consideration, after drawing up a statement of case.

No order as to costs."

So, the case as referred has to be decided in the light of decisions of different courts.

In Gestetner Duplicators Pvt. Ltd. Vs. Commissioner of Income Tax, West Bengal, the question which arose before the Supreme Court was that whether the salary and commission paid to the salesman in terms of contractual employment is included in salary and whether it is deductible. The Supreme Court in the judgment has held as follows :

"(a) It is thus clear that if under the terms of the contract of employment remuneration or recompense for the services rendered by the employee is determined at a fixed percentage of turnover achieved by him then such remuneration or recompense will partake of the character of salary, the percentage basis being the measure of the salary and, therefore, such remuneration or recompense must fall within the expression "salary".

(b) The instant case is, therefore, an instance where the remuneration or recompense payable for the service rendered by the salesmen is determined partly by reference to the time spent in the service and partly by reference to the volume of work done. But it is clear that the entire remuneration so determined on both the basis clearly partakes of the character of salary."

Following this decision of the Apex Court, the Andhra Pradesh High Court in K.A. Choudary Vs. Commissioner of Income Tax and Others, has decided as follows :

"The contention of the petitioner is that the incentive bonus does not form part of the salary and has to be treated as income from profession for earning which the expenses incurred shall be allowed as a deduction. Before the authorities under the Income Tax Act, a decision of the Income Tax Appellate Tribunal, Chandigarh Bench, was relied upon which was not accepted by them. It is contended by counsel for the Revenue that the incentive bonus paid to the petitioner as an employee is nothing but part of his salary. The definition of "salary" u/s 17 of the Income Tax Act is wide enough to include the incentive bonus paid to an employee. The circumstance that, u/s 36(1), Sub-clause (ii), such a payment is given as a deduction to the employer also will not militate against the fact that the incentive bonus forms part of the salary. The petitioner could not have earned this amount if he were not in the employment of the life Insurance Corporation. In support of this contention, a decision of the Supreme Court in Gestetner Duplicators Pvt. Ltd. Vs. Commissioner of Income Tax, West Bengal, was relied upon. This court also, in the decision in M. Krishna Murthy and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad and Others, has taken a similar view in respect of incentive bonus while considering the applicability of Section 40A of the Income Tax Act. The Allahabad, High Court has also in the decision reported in Commissioner of Income Tax Vs. Hind Lamps Ltd., taken a similar view about incentive bonus being a part of salary. We are unable to say that the incentive bonus received by the petitioner is nothing else but what an employee has received from the employer. The definition of "wages" under the Payment of Wages Act, 1936, also indicates that bonus is included in the said definition.

Having regard to the language of Section 17 of the Income Tax Act and the circumstance that the petitioner has received the said amount as incentive bonus while in employment, we do not consider that the contention of the petitioner has any merits."

Commissioner of Income Tax Vs. B. Chinnaiah and Others, wherein the Andhra Pradesh High Court held as follows :-

"In view of the above judgments, it cannot be held 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 u/s 16 of the Act. It is nobody''s contention that 40 per cent, of the bonus, deducted by the assesses as expenditure and upheld by the Tribunal, falls under any of the items u/s 16. Thus the expenditure is other than permissible deduction u/s 16 of the Act. It has already been observed above that the only permissible deductions under the head "Salary" are those mentioned in Section 16 and if any expenditure does not fall within the meaning of Section 16, it cannot be allowed."

238 IT 170 (Commissioner of Income Tax v. S. L. Singhal. Development Officer) wherein the Division Bench of Punjab and Haryana High Court held as follows :

''The assessee was employed in the Life Insurance Corporation of India as a Development Officer. He derived income from salary. He received certain amount by way of incentive bonus from his employer, namely the Life Insurance Corporation. He sought deduction from the amount of incentive bonus on account of certain expenditures which he claimed to have incurred in the performance of his duties in connection with his efforts for securing more insurance business during the year. The Assessing Officer declined to allow such deduction. However, standard deduction u/s 16(1) of the Act was allowed.

This court has examined a similar question of law in B.M. Parmar Vs. Commissioner of Income Tax, It has been held on October 27, 1998 that incentive bonus is assessable under the head "Salaries" and not under the head "profits and gains of business or profession". It has been further held chat deduction u/s 16(1) of the Act is admissible under the head "Salaries" and no separate deduction on account of expenditure is permissible."

9 Commissioner of Income Tax Vs. Sheo Raj Bhatia, wherein the Division Bench of Rajasthan High Court held as follows :

"It has further been held in Commissioner of Income Tax Vs. Shiv Raj Bhatia, that the Board''s Circular No. 14/9/65-IT(A-1) 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."

Commissioner of Income Tax Vs. M.D. Patil, wherein the Full Bench of the Karnataka High High Court held as follows :-

"Keeping in view the definition of "salary" contained in Section 17 of the Act, it is clear that any commission or profits received by an employee in addition to his salary or wages as per his service conditions, are to be brought to tax under the Act treating said receipt as falling under the head of "income from salaries" and the only deductions admissible therefrom for the purpose of computing Income Tax can be as provided for u/s 16 of the Act and no less and no more."

248 ITR 319 (Commissioner of Income Tax v. Gopal Krishna Suri) wherein the Bombay High Court held as follows :

"With respect, we do not agree with the view expressed by the Gujarat High Court in the above judgment. As held by us hereinabove, the Development Officers are employees of the Life Insurance Corporation We had discussed the scheme of payment of incentive bonus hereinabove which shows that the incentive bonus forms part of salary."

Karamchari Union, Agra Vs. Union of India and Others, This is with regard to the definition of salary and meaning of profit and the Supreme Court pointed out that the amount paid to the employee need not be profit as understood in common parlance. Profit in context of Section 17 means an advantage or gain by receipt of payment by employee and the Supreme Court further pointed out that the equity cannot be taken into account while interpreting legal provisions.

Commissioner of Income Tax Vs. P. Arangasamy and Others, wherein the Madras High Court has adopted the same view.

Commissioner of Income Tax Vs. T.K. Ginarajan, Development Officer, LIC of India, wherein also the Kerala High Court has taken the same view.

So, the preponderance of the judicial opinion in both these questions referred must be answered in favour of the revenue. In this particular case, the assessee is the Development Officer of L.I. C. of India and during the year he received an amount of Rs. 1,48,165 as incentive bonus from the Life Insurance Corporation of India and he wanted to deduct an mount of Rs. 59,266 as estimated expenditure @ 40% of the incentive bonus and that was refused by the Assessment Officer in view of the question of law answered. The Assessment Officer is correct in refusing that relief. So, the reference is answered accordingly.