Commissioner of Income Tax vs S.C. Nagpal

N.K. Agrawal, J.—The following question is required to be referred by the Inqome-tax Appellate Tribunal, Amritsar Bench, to this court for its opinion u/s 256(2) of the Income Tax Act, 1961 (for short, "the Act") :

"Whether, on the facts and in the circumstances of the case, the learned Tribunal is right in law in upholding the Deputy Commissioner of Income Tax (Appeals)'' order allowing deduction at 40 per cent, out of incentive bonus received by the assessee, who is a Development Officer of the Life Insurance Corporation of India ?"

The assessee was a Development Officer employed in the Life Insurance Corporation of India and derived income from salary. The assessee received incentive bonus during the previous year relevant to the assessment year 1987-88 amounting to Rs. 11,821 from the said Corporation. At the time of assessment, the assessee claimed deduction on account of expenditure at the rate of 40 per cent, amounting to Rs. 4,729. The balance amount of Rs. 7,092 was included in the total income for the purposes of tax. The Assessing Officer, however, rejected the claim regarding the deduction on account of expenditure and brought the entire amount of incentive bonus to tax.

The assessee went in appeal before the Deputy Commissioner and succeeded. The Tribunal upheld the order of the Deputy Commissioner whereby deduction at the rate of 40 per cent, had been allowed from the income by way of incentive bonus.

An application was moved before the Tribunal u/s 256(1) of the Act asking for a reference of the question regarding the deductibility on account of expenditure from the amount of incentive bonus. Though the Tribunal agreed that it was a question of law yet it declined to refer the question on the ground that the tax effect was less than Rs. 30,000 per year and, in the light of the policy decision taken by the Central Board of Direct Taxes, the matter should not be referred to the High Court for opinion. The Tribunal referred to Instruction No. 1573, dated July 12, 1984, and the Instruction No. 1764, dated July 14, 1987, and also relied upon a decision of the Bombay High Court in Commissioner of Wealth Tax Vs. Executors of Late D.T. Udeshi, .

The petitioner''s main contention is that Instruction No. 1777 issued by the Board on November 4,1987, contains the guidelines to be followed while deciding the question whether an appeal should be filed or whether a reference be made. The Board advised the tax authorities that filing of the Departmental appeal/reference should be selective. The authorities were reminded that guidelines had been issued laying down monetary limit of revenue effect of Rs. 10,000 for filing appeals before the Appellate Tribunal, Rs. 30,000 for references before the High Court and Rs. 60,000 for appeals to the Supreme Court. These guidelines were, however, required to be adhered to subject to certain exceptions. One such exception was to arise where the cumulative revenue effect of the issue in the assessee''s case for all the years up to the year for which returns were filed was taken into consideration while working out the monetary limit as aforesaid. Where the same issue is involved in different cases of a group, the revenue effect of the group and not individual cases has to be taken into account for the purpose of the monetary limit. It was further made clear therein that, while applying the monetary limits, the effect of carry forward and consequential addition or the deletions in other years should be kept in view.

The Revenue''s plea is that, in the case of the assessee, the total tax effect for a total period of six years including the year under reference was Rs. 86,625. It is also stated that many other cases of similarly situated persons are pending before the tax authorities and, in the light of the total tax effect of similar other cases, reference could not be declined by the Tribunal simply for the reason that the tax effect during the year under reference was less than Rs. 30,000.

The case of the assessee is that incentive bonus was earned and received after incurring certain expenditure and, therefore, deduction was rightly allowed. The case of the Revenue is that incentive bonus was part of the salary or in the nature of profit in lieu of salary within the meaning of Section 17(1)(iv) read with Section 17(3)(ii) of the Act.

Looking to the nature of the question, it is apparent that the question sought for opinion of this court is a question of law. The question was declined to be referred to this court without properly appreciating the contents of the instructions issued by the Central Board of Direct Taxes. Since the total tax effect is definitely more than Rs. 30,000 in a period of six years of assessment in the case of the assessee alone, Instruction No. 1777 dated November 4, 1987, would indeed not debar the tax authorities from seeking a reference. The Income Tax Appellate Tribunal, Amritsar Bench, is directed to state the case and refer the following question of law to this court for opinion :

"Whether, on the facts and in the circumstances of the case, deduction on account of expenses at the rate of 40 per cent, may be allowed from the amount of incentive bonus received by the assessee as an employee (Development Officer) of the Life Insurance Corporation of India ?"