1996-VIL-06-RAJ-DT

Equivalent Citation: [1997] 227 ITR 7, 133 CTR 379

RAJASTHAN HIGH COURT

Date: 01.05.1996

COMMISSIONER OF INCOME-TAX

Vs

SHIV RAJ BHATIA

BENCH

Judge(s)  : B. R. ARORA., P. C. JAIN 

JUDGMENT

The judgment of the court was delivered by

B. R. ARORA J.--The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, under section 256(1) of the Income-tax Act, 1961, in the case of the assessee for the assessment year 1986-87, referred the following question of law for the opinion of this court :

" Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in directing 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 (A-1), dated September 22, 1965, which, in fact, is applicable to the Life Insurance Corporation agent and not to the Development Officer. The cases of the Development Officer are governed by the Board's Circular F. No. 200/127/84-IT (A), dated September 29, 1987/October 14, 1987 ?"

The assessee was working as the Development Officer with the Life Insurance Corporation of India. During the previous year relevant to the assessment year 1986-87, the assessee received a sum of Rs. 68,206 as incentive bonus from the Life Insurance Corporation and he claimed 40 per cent. deduction (Rs. 27,282) on this incentive bonus. The Income-tax Officer, Sirohi, by his order dated March 24, 1987, relying upon the judgment of the Jaipur Bench of the Tribunal in ITA No. 490/JP of 1994 (ITO v. K. M. Baheti) disallowed this claimed deduction. While disallowing the deduction, the Assessing Officer held that the incentive bonus received by the assessee is a part of the salary in the hands of the assessee and no deduction is permissible since the standard deduction under section 16(i) of the Act has already been allowed. The Income-tax Officer further held that the assessee is an employee of the Life Insurance Corporation of India and any receipt by the assessee from the Life Insurance Corporation of either nature will be included and taxed under the head "Income from salary" under section 15 of the Act.

The assessee, dissatisfied with the order dated March 24, 1987, passed by the Income-tax Officer disallowing the deduction, preferred an appeal before the Assistant Commissioner of Income-tax (Appeals), Udaipur. The Assistant Commissioner (Appeals), by his order dated December 29, 1988, relying upon the judgment of the Income-tax Appellate Tribunal, Chandigarh, as well as on the judgment of the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, in I. T. A. No. 334 of 1987 and 335 of 1987 in the case of Modi Lal Mohnot v. ITO, decided on November 21, 1986, allowed the appeal filed by the assessee and directed the Income-tax Officer to allow deduction as claimed by the assessee. The Revenue, aggrieved by the order dated December 29, 1988, passed by the Assistant Commissioner of Income-tax (Appeals), Udaipur, preferred an appeal before the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur. The appeal filed by the Revenue was heard by the Tribunal at Jodhpur and the Tribunal, by its order dated January 19, 1990, dismissed the appeal filed by the Revenue on the ground that the majority of the decisions of the Jaipur Bench of the Tribunal are in favour of the assessee and against the Revenue. Dissatisfied with the order dated January 19, 1990, passed by the Tribunal dismissing the appeal filed by the Revenue, the Revenue moved an application under section 256(1) of the Act to the Tribunal to refer the questions of law mentioned in the application for the opinion of the High Court. The Income-tax Appellate Tribunals by its order dated April 15, 1991, referred the question, mentioned in paragraph No. 1 above, for the opinion of this court.

It is contended by learned counsel for the Revenue that the incentive bonus paid to the assessee by the Life Insurance Corporation falls within the meaning of "salary" and it would be chargeable to tax under the head "Salary" and the only deduction permissible under the law are those specified in section 16 of the Act. In support of his contention, learned counsel for the Revenue has placed reliance over : CIT v. B. Chinnaiah [1995] 214 ITR 368 (AP), CIT v. Govind Chandra Pani [1995] 213 ITR 783 (Orissa), K. A. Choudary v. CIT [1990] 183 ITR 29 (AP), Krishna Murthy (M.) v. CIT [1985] 152 ITR 163 (AP), Gestetner Duplicators P. Ltd. v. CIT [1979] 117 ITR 1 ; [1979] 54 FJR 185 (SC), CIT v. Hind Lamps Ltd. [1980] 122 ITR 451 (All) and CIT v. Shri Anil Singh [1995] 215 ITR 224 (Orissa).

Learned counsel for the assessee, on the other hand, has submitted that the annual remuneration paid by the Corporation to the Development Officer, as per the rules of service does not include incentive bonus paid to him. As per rule 7, the annual remuneration includes the basic pay, personal pay, dearness allowance and other allowances but does not include the incentive bonus. It has further been submitted by learned counsel for the assessee that the incentive bonus is a production oriented income and becomes payable to the Development Officer on achieving the higher target. When his actual performance is beyond the normal levels of performance expected of him, he has to incur expenditure in respect of (i) entertainment to the agents and the clients, (ii) conveyance facilities to his agents, (iii) prizes declared in competition amongst his agents, (iv) office expenses such as rent, secretarial assistance, printing and stationery, postage, trunk calls and telephone charges, etc. It has further been submitted by learned counsel for the assessee that every Development Officer will not get the incentive bonus and it is payable only to those persons who are eligible under clause (iv) of the conditions and, therefore, the payment made to the Development Officer (assessee) as incentive bonus cannot be treated as "salary". The incentive bonus is not paid as a term of contract or business but is based on the business done by the Development Officer, therefore, it is a business or professional earning and is not a result of the relationship of employer and employee. In support of his contention, learned counsel for the assessee has placed reliance over : Gestetner Duplicators P. Ltd. v. CIT [1979] 117 ITR 1 (SC).

Learned counsel for the assessee also submitted that the quantum of incentive bonus is decided taking into consideration certain factors, such as the number of the policies procured by the Development Officer, his agents, organisation, the nature of the territory operated by him, i.e., whether rural or urban. These factors increase the size of his expenditure and, therefore, these are the necessary expenditure which have to be incurred by the Development Officer for earning the incentive bonus and, therefore, they are allowable expenditure as has been allowed to the insurance agents, vide Board's Circular No. F. 8/2/57/IT (A.I.), dated October 18, 1968. The nature of the duties of the Development Officer and the insurance agent are the same and being a beneficial circular it should be interpreted liberally and the benefit of this circular should also be extended to the Development Officers. In support of this contention, learned counsel for the assessee has placed reliance over: Maddanappa (R. S.) v. Chandramma [1965] AIR 1965 SC 1812, Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913 (SC). It has also been submitted by learned counsel for the assessee that while construing a fiscal/tax statute, one must have regard to the strict nature of the law and not merely the spirit of the statute or substance of the law. In support of his contention, learned counsel for the assessee has placed reliance over : Polestar Electronic (Pvt.) Ltd. v. Addl. CST [1978] 41 STC 409 (SC).

Learned counsel for the assessee has also raised three preliminary objections that (i) no question of law arises in the matter and the findings arrived at by the Tribunal are purely findings of facts and the Revenue never contested nor raised the ground as to under which head the incentive bonus can be charged to tax ; (ii) the tax effect in the present reference is below Rs. 30,000 and, therefore, as per the policy decision of the Central Board of Direct Taxes, no question of law is to be raised at the instance of the Revenue; and (iii) the Tribunal has not given any finding: whether the income was from business or from profession. Learned counsel for the assessee, therefore, prayed that the reference may be returned unanswered. In support of his contention, learned counsel for the assessee has placed reliance over : CIT v. A. A. Baniyan [1992] 197 ITR 717 (Bom), CIT v. M. C. Shah [1991] 189 ITR 180 (Bom), CIT v. ITAT [1992] 196 ITR 683 (Orissa) and CIT v. Sarat Ch. Sahu [1992] 195 ITR 364 (Orissa).

We have considered the submissions made by learned counsel for the parties.

Before dealing with the real controversy we would first like to take up the preliminary objections raised by learned counsel for the assessee. The first preliminary objection raised by learned counsel for the assessee is that no question of law arises in the present case and the findings arrived at by the learned Members of the Tribunal are purely findings of fact and the Revenue neither contested nor raised any issue as to under which head the incentive bonus could be charged and, therefore, the reference should be returned unanswered. The jurisdiction vested in the High Court under section 256 of the Act is advisory jurisdiction. The object in making the reference is to get a decision from the High Court on a problematic or debatable question of law. The High Court is not expected, under section 256 of the Act, to investigate or examine the facts of the case because it is neither a court of appeal nor a court of revision. Section 256 of the Act excludes from the jurisdiction of the High Court the question of fact and the party cannot ask for a reference on a question of fact. It is only the question of law which arises out of the order passed by the Tribunal that the reference can be made and the opinion of the High Court can be obtained on that question of law.

In the present case there are conflicting judgments of the Tribunal on the issue : whether the assessee, who is a Development Officer, is eligible for any deduction towards the expenses out of the incentive bonus paid to him under the Incentive Bonus Scheme of the Life Insurance Corporation ? The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (I.T.A. No. 496/JP/ 1984-ITO v. K. M. Baheti), for the assessment year 1981-82, took the view that "the Development Officer of the Life Insurance Corporation cannot be equated to an agent. In agent, the relationship is that of the agent and the principal while the assessee's relationship with the Life Insurance Corporation is that of the employee and the employer and since incentive bonus is part of the salary, he is allowable the standard deduction only as permissible under section 16 of the Act." The Tribunal, in Baheti's case, further held that "the deduction of any expenditure out of the incentive bonus is not permissible while the Jaipur Bench of the Tribunal, in the case of Sri Shiv Raj Bhatia v. ITO (ITA No. 1124/JP/1987), R. P. Kunteta v. ITO, Jaipur (ITA No. 334 and 335/JP/1987) and Moti Lal Mohnot v. ITO, Pali (ITA No. 905/JP/1987) has taken the contrary view that "the expenses incurred by the Development Officer for the purpose of earning the incentive bonus should be deducted from the incentive bonus at the starting point of its source." The learned Members of the Tribunal, while allowing the deduction on the incentive bonus, relied upon the circular of the Board, which is applicable to insurance agents. In view of the conflicting decisions of the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, the decision of the High Court is necessary to resolve this problematic and debatable question of law. The question regarding the applicability of the Board's circular to the Development Officer of the Life Insurance Corporation and whether the circular has been rightly applied or it has been misunderstood or misconstrued also is a question of law which requires to be adjudicated and decided by the High Court.

In CIT v. A. A. Baniyan [1992] 197 ITR 717 (Bom), the assessee, who was working as the Development Officer in the Life Insurance Corporation of India, during the relevant assessment year, received incentive bonus apart from the salary. The Tribunal held the incentive bonus as the professional income of the assessee for these years and allowed 40 per cent. deduction on the incentive bonus. The finding that the income of the assessee is professional income was not under challenge and the only question referred to the High Court for adjudication was the allowing of 40 per cent. deduction. Therefore, the Division Bench of the Bombay High Court returned the question of law unanswered as the deduction so allowed is based on the findings of fact as to the quantum of the expenditure to be incurred by the assessee for the purpose of earning the incentive bonus. Likewise, in CIT v. M. C. Shah [1991] 189 ITR 180 (Bom), the Tribunal held that "the incentive bonus received by the assessee from the Life Insurance Corporation was not salary income but income from business or profession". The Tribunal also held that "on such incentive bonus the assessee was entitled to deduction at 40 per cent. of the incentive bonus by way of estimated expenditure for earning the income for which the incentive bonus was paid".

These cases are, therefore, not applicable to the case in hand because in the present case there is a conflict of views expressed by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, in the various judgments. The question whether the circular issued by the Central Board of Direct Taxes relating to the allowance of the expenditure to insurance agents is applicable to the case of a Development Officer of the Life Insurance Corporation or not, has also to be decided and to be given finality. We are, therefore, of the opinion that the question of law does arise in the present case and the reference, therefore, cannot be returned unanswered. The preliminary objection raised by learned counsel for the assessee is, therefore, bereft of any substance.

The next preliminary question raised by learned counsel for the assessee is that as per the Central Board of Direct Taxes circular, where the tax effect is less than Rs. 30,000, no question of law is to be raised at the instance of the Revenue. In CWT v. Executors of late D. T. Udeshi [1991] 189 ITR 319 (Bom), the Division Bench of the Bombay High Court, in a writ petition discharged the rule on the ground that the Board has taken a policy decision not to file reference in the case where the tax effect is going to be less than Rs. 30,000. It is true that the tax effect in the present case is less than Rs. 30,000 per year so far as the case of the assessee is concerned, but looking to the question of law involved in the various cases, it cannot be said that collectively in all the cases the tax effect will be less than Rs. 30,000 per year. If all the cases are taken together in which the same points were involved, the tax effect will be more than Rs. 30,000. Moreover, there is a conflict of opinion between the two Benches of the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, itself and the question also relates to the applicability of the Board's circular to the Development Officer of the Life Insurance Corporation and, therefore, the reference cannot be returned unanswered on this ground alone that the tax effect is less than Rs. 30,000. In order to maintain certainty and uniformity in administering the law and to maintain judicial discipline, it is necessary that the conflict of opinion between the two Benches of the Tribunal should be set at rest and a clear guideline has to be provided to the taxing authority to make the assessment in accordance with law and not to put them in a fix which of the judgments of the Tribunal laying down a contradictory law on the point is to be followed. In this view of the matter, the reference cannot be returned unanswered. The decision on the question referred for the opinion of the High Court is necessary in order to finally decide the law on the point so far as this court is concerned. The preliminary objection raised by learned counsel for the assessee is, therefore, devoid of any substance.

The next preliminary objection raised by learned counsel for the assessee is that the Tribunal has not recorded any finding whether the income was from the business or profession and, therefore, the case may be returned to the Tribunal for stating the case afresh. To support this contention, learned counsel for the assessee has placed reliance over: CIT v. Sarat Ch. Sahu [1992] 195 ITR 364 (Orissa). In the case of Sarat Ch. Sahu [1992] 195 ITR 364, the Tribunal held that the incentive bonus was part of the salary of the assessee but allowed the deduction treating the same to be the income from business. As two contradictory conclusions have been arrived at by the Tribunal, therefore, the Division Bench of the Orissa High Court remanded the case to the Tribunal to consider the basic question : whether the amount forms part of the salary or was earned from business. But in the case in hand, the Tribunal has not given any contradictory finding. The Tribunal has not given any finding that the income earned by the assessee from the incentive bonus is part of salary or it has been earned from business of profession, but allowed the deduction treating the income as business income. In view of the fact that the deduction has been allowed by the Tribunal, the income earned by the Development Officer from the incentive bonus has been treated as business or professional income which has been challenged by the Revenue and, therefore, it is not necessary to remit the case to the Tribunal. The case relied upon by learned counsel for the assessee is, therefore, not applicable to the present case. The preliminary objection raised by learned counsel for the assessee is, therefore, devoid of any substance.

The main question which, therefore, requires consideration is : whether the "incentive bonus" earned by the assessee falls within the meaning of "salary" or is a business or professional income and if so the assessee is entitled to deduction on the amount of the part of the incentive bonus spent by the assessee for earning of the incentive bonus ?

The test is to determine whether the income accrued by virtue of his office and the payment is made to him as reward for acting as the employee of the insurance company ? It is, no doubt, true that the incentive bonus is a production oriented income and if a person achieves the higher production, he is entitled for higher incentive bonus. The quantum of incentive bonus is decided taking into account the factors such as the number of the policies procured by the Development Officer, his agents or organisation, etc., and in the process of earning incentive bonus some expenditure has to be incurred by him. As per the instructions of the Life Insurance Corporation, a Development Officer has the following duties and obligations to perform:

"(4) Duties and obligations,--

(A) His duties as a Development Officer shall be,--

(i) to develop and increase the production of life insurance business in a planned way as far as may be practicable in the area that may be allotted to him or in which he is allowed to work from time to time through the agents placed under his supervision by the Corporation and in consonance with the corporate objectives of the Corporation.

(ii) to guide, supervise and direct the activities of the agents, placed under his supervision by the Corporation.

(iii) to introduce suitable persons to the Corporation for appointment as new agents.

(iv) to act generally in such a way as to activise existing agents and motivate new agents, so as to develop a stable agency force.

(v) to render all such services to policyholders as conducive to better policy servicing.

(vi) to carry out investigation of claims, revival of lapsed policies and liaison work in connection with salary savings scheme business.

(vii) to perform such other duties as may be entrusted or assigned to him from time to time.

(viii) He shall ensure that the agents in his organisation conduct their work and/or business strictly in accordance with the provisions of the Insurance Act, 1938, rules framed thereunder and such other rules and regulations that the Corporation may issue from time to time and the Life Insurance Corporation of India (Agents) Regulations, 1972, as amended from time to time and in the best interest of the Corporation.

(B) & (C)........."

According to sub-clause (j) of clause (ii) of rule 12(2) of the terms and conditions of the service applicable to the Development Officers, the "gross yearly salary" means the aggregate of the monthly basic pay, special pay, personal pay, dearness allowance and all other allowances which may be allowed to a Development Officer for any such succeeding year if the terms of his appointment are fulfilled, and shall include any non-profit sharing ex gratia bonus payable in that year and an estimate of the expenditure that may be allowed during that year in respect of the travelling, residential, telephone and insurance premium and tax on motor vehicle but shall not include any incentive bonus or additional conveyance allowance that may accrue to him.

Section 15 of the Income-tax Act, 196 1, specifies the income as chargeable to income-tax under the head "Salary". "Salary" has been defined in section 17 as well as in sections 10(10), 36(1)(iia) and 40A(5) of the Act. The words "salary", "perquisite" and "profits in lieu of salary" are defined in section 17 for the purpose of sections 15 and 16. Section 17 of the Income-tax Act states that :

" For the purposes of sections 15 and 16 and of this section,--

(1) 'salary' includes-....

(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages."

Clause (3) of section 17 defines "profits in lieu of the salary" which includes (i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto ; (ii) any payment (other than any payment referred to in clause (10), clause (10A), clause (10B), clause (11), clause (12) or clause (13A) of section 10 due to or received by an assessee from an employer or a former employer or from a provident or other fund (not being an approved superannuation fund) to the extent to which it does not consist of contribution by the assessee or interest on such contributions.

Thus, according to these provisions, if the incentive bonus falls within the meaning of "salary" or "perquisites" or "profits in lieu of salary" within the meaning of these expressions under section 17, it would be chargeable to tax under the head "Salary".

In CIT v. B. Chinnaiah [1995] 214 ITR 368 (AP), the question : whether the incentive bonus received by the Development Officer of the Life Insurance Corporation can be treated as part of the salary or perks and is taxable under the head 'Salary' came up for consideration before the Division Bench of the Andhra Pradesh High Court and the High Court, after considering the law on the point, held that "the incentive bonus, whether treated as part of the salary or perks, is taxable under the head 'Salary' and the permissible deduction under the said head are as specified under section 16 of the Act and if any expenditure does not fall within the meaning of section 16, it cannot be allowed."

In CIT v. Govind Chandra Pani [1995] 213 ITR 783, the Division Bench of the Orissa High Court held that "incentive bonus which the assessee as the Development Officer gets from the employer, the Life Insurance Corporation, partakes of the character of salary as defined under section 17 of the Income-tax Act and is chargeable to income-tax under section 16 of the Act. "

In Choudary (K. A.) v. CIT [1990] 183 ITR 29 (AP), the assessee, who was employed as a Development Officer in the Life Insurance Corporation of India received a sum of Rs. 9,536, as incentive bonus and claimed deduction of the expenditure incurred in earning the bonus. The Income-tax Officer declined to allow the deduction claimed by the assessee on the ground that the incentive bonus was part of the salary for which standard deduction was allowed. The order passed by the Income-tax Officer was confirmed by the Commissioner and by the Income-tax Appellate Tribunal in the appeal. In the writ petition filed before the High Court, the Division Bench of the Andhra Pradesh High Court held that "the assessee received the amount of incentive bonus because he was in the employment of the Life Insurance Corporation and, therefore, it forms part of the 'salary'."

In Krishna Murthy (M.) v. CIT [1985] 152 ITR 163, the Division Bench of the Andhra Pradesh High Court held that "the definition of 'perquisites' in section 17(2) begins with the words 'perquisite includes'. The definition is, therefore, comprehensive. Cash allowances are included in the ordinary meaning of 'perquisites' and would fall under section 17(2). City compensatory allowance, bad climate allowance, shift allowance and incentive bonus are 'perquisites' within the meaning of section 17(2) and, therefore, they constitute taxable receipts."

In Gestetner Duplicators P. Ltd. v. CIT [1979] 117 ITR 1, the Supreme Court held that "if under the terms and conditions 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' as defined in rule 2(h) of Part A of the Fourth Schedule to the Act ".

In CIT v. Hind Lamps Ltd. [1980] 122 ITR 451, the Division Bench of the Allahabad High Court held that "profit bonus comes within the ambit of section 17(3)(ii), for it is an amount paid by the employer to its employees".

In CIT v. Shri Anil Singh [1995] 215 ITR 224, the Division Bench of the Orissa High Court held that "for the purpose of section 17 of the Income-tax Act, 1961, there is no difference between the commission which is wholly dependent upon the work done and the fixed salary on the periodical footing."

Now, the question which requires consideration is whether the incentive bonus received by the assessee from the Life Insurance Corporation, is part of the salary or it is an income from business and is entitled for deduction. "Salary" is the remuneration paid by the employer to its employee for the work done or services rendered by him. The assessee is being remunerated partly by payment of fixed salary and partly on the basis of the dividend, i.e., the business procured by him. The incentive bonus is linked with the percentage of business secured in excess of certain stipulated premium income. Payment of incentive bonus is relatable to employment and is not exempted under section 10 of the Act. It is not a payment made on personal or extra-employment consideration. It is linked with the relationship of employee and employer. The Development Officer, under the scheme, gets the incentive bonus being an employee of the Life Insurance Corporation, Clause (iv) of the scheme of incentive bonus, which deals with the eligibility, states that "a Development Officer, whose cost ratio (i.e., the ratio of his annual remuneration in an appraisal year to the eligible premium in that year) did not exceed 20 per cent. in the appraisal year shall only become eligible for grant of the incentive bonus in respect of that appraisal year in accordance with the scheme". The incentive bonus paid by the Life Insurance Corporation to the Development Officer is an emolument of the office which is paid by the Life Insurance Corporation to its employee, i.e., the Development Officer, for negotiating for enhancement of the business. The payment of incentive bonus is, therefore, due to the relationship of the employer and the employee. This relationship is a sine qua non for the grant of incentive bonus. The incentive bonus paid to the Development Officer is not a personal gift but is paid as a remuneration for his services as an employee and, therefore, it forms part of the "salary". Thus, the incentive bonus is part of the salary of the assessee and is exigible to tax and the assessee is entitled only for the standard deduction permissible under section 16 of the Income-tax Act.

The next question which requires consideration is whether the assessee is entitled for the benefit available under the Central Board of Direct Taxes Circular No. F.8/2/68-IT(A.I), dated October 18, 1968, issued with respect to the commission earned by insurance agents of the Life Insurance Corporation of India and the allowance of expenditure. According to this circular, an ad hoc deduction for the expenses up to 40 per cent. of the first year's commission and 15 per cent. of the renewal commission subject to maximum of Rs. 6,000 where the gross insurance commission does not exceed Rs. 20,000 for the year and subject to a maximum of Rs. 10,000 in cases where the commission exceeds Rs. 20,000 per year, is allowed to the insurance agents in certain circumstances on the business procured by them. The Life Insurance Corporation's agents, working for the Corporation on commission basis, are not employees of the Corporation while the Development Officers working in the Life Insurance Corporation are employees of the Corporation and it is on account of this relationship that the Development Officer is rewarded in the form of incentive bonus for the extra labour he puts in procuring the business. The circular issued by the Board allowing certain deductions to the extent of 40 per cent. to insurance agents, therefore, cannot apply to the case of the Development Officer. The applicability of this circular to Development Officers came up for consideration before the Central Board of Direct Taxes itself. The Board issued Instruction No. 1774 clarifying its stand regarding the applicability of the circular to the Development Officers, Clause (3) of the Instruction No. 1774 reads as under :

"(3) The Board wishes to clarify that the aforesaid instructions refer to the commission earned by insurance agents and provides for a deduction of a fixed percentage on account of expenses for earning the commission where no detailed accounts regarding expenses are maintained. But the cases of the Development Officers are quite different inasmuch as they are not doing any agency business but are paid employees of the Life Insurance Corporation. Their duties involve appointments of the agents, training them and helping them in the sale of insurance policies but they themselves cannot act as agents. There is a clear employer employee relationship between the Life Insurance Corporation and the Development Officer. The payment received by the Development Officers as incentive bonus or bonus commission (or by any other name) is for the work done for the employer. It is in lieu of or in addition to salary and forms part of salary by virtue of section 17(1)(iv) of the Income-tax Act, 1961. "

The Board's circular dated October 18, 1968, which relates to the allowance of expenditure to insurance agents of the Life Insurance Corporation only, is not applicable in the case of Development Officers. The Development Officer is the paid employee of the Life Insurance Corporation. He receives the incentive bonus for the work done by him for the Corporation. It is the recompense for the work done or for the services rendered by him in the capacity of the employee of the Corporation. The insurance agent is not an employee of the Corporation. He only gets the commission for the work procured by him for the Corporation. The Board's circular, which was issued for the grant of allowance of expenses to insurance agents, therefore, cannot apply in the case of the Development Officer, howsoever liberal a construction may be given to the notification because the circular restricts its ambit to give relief to the Life Insurance Corporation agents only.

In Polestar Electronic (Pvt.) Ltd. v. Addl. CST [1978] 41 STC 409, the Supreme Court held that "in construing a taxing statute one must have regard to the strict letter of the law and not merely the spirit of the statute or the substance of the law. If the Legislature has failed to clarify its meaning by use of appropriate language, the benefit should go to the assessee. Even if there is a doubt, it must be resolved in favour of the subject." The ratio of this case does not show that the benefit of the exemption granted by the circular to a particular class of persons, i.e., Life Insurance Corporation agents, who are not employees of the Corporation, can be extended to Development Officers who are employees of the Corporation, even if to some extent their duties are the same. The circular is meant only for insurance agents and is not applicable to Development Officers. The judgment of the apex court, therefore, does not apply to the facts and the circumstances of the present case.

The other judgments of the Supreme Court, i.e., Navnit Lal C. Javeri v. K. K. Sen [1965] 56 ITR 198 and Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913, on which reliance has been placed by learned counsel for the assessee, are also not applicable to the present case and the controversy raised in the present case is different from what was decided by the Supreme Court in the aforesaid cases. In this view of the matter, the Tribunal was, therefore, not justified in applying this circular in the case of the Development Officer (assessee) and allowing 50 per cent. deduction to the assessee on the basis of the Circular F. No. 14/9/65-IT (A.I), dated September 22, 1965.

We, therefore, answer the question 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 Life Insurance Corporation agents and not to Development Officers and the case of Development Officers is governed by the Board's Instruction No. 1774.

 

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