1984-VIL-67-ITAT-

Equivalent Citation: ITD 011, 587, TTJ 021, 060

Income Tax Appellate Tribunal BOMBAY

Date: 18.10.1984

SIXTH INCOME-TAX OFFICER.

Vs

NARENDRA V. PATEL.

BENCH

Member(s)  : R. L. SANGANI., T. D. SUGLA., V. BALASUBRAMANYAM.

JUDGMENT

Per Shri V. Balasubramanian, Vice President --- The assessee individual is a Development Officer in the Life Insurance Corporation of India (LIC). For these assessment years under appeal, the assessee claimed that the entire amount of conveyance allowance received by him from the LIC, was incurred by him for procuring insurance business. The assessee maintained a car. He produced before the ITO, the vouchers for the purchase of petrol, oil, etc. The ITO held that part of the expenses claimed must relate to personal use by the assessee of his motor car. He disallowed 20 per cent of the conveyance allowance as on personal account and added it up as perquisites in the total income. The assessee was in receipt of bonus commission from the LIC, for procuring more business for the Corporation. It was claimed before the ITO that substantial amounts had to be spent by the assessee for encouraging the agents. 25 per cent of the amounts received as bonus commission was claimed by the assessee as incurred for procuring more business. According to the ITO, section 16(v) of the Income-tax Act, 1961 ('the Act') provides for deduction of such expenses only when, by the conditions of his service, the assessee was required to spend out of his remuneration wholly, necessarily and exclusively, in the performance of his duties. As the assessee did not fulfil the conditions of section 16(v), the ITO rejected his claim for deduction of any expenses against section 16(v).

2. On appeal, the AAC held that the conveyance allowance given to the assessee was based on the work done by him. The LIC, the employer of the assessee, had certified that the conveyance allowance was given to the assessee exclusively for the performance of his duties. According to the AAC, therefore, there was no reason to disallow one-fifth of the conveyance allowance. The entire amount of conveyance allowance paid to the assessee should be treated as exempt under section 10(14) of the Act for all the years under appeal. Regarding the bonus commission, the AAC held that the assessee was not a mere employee working on fixed salary. The bonus commission was received by the assessee for the extra work done by him. He was also of the view that this part of the receipt from the LIC, should not be taken as income taxable under the head 'Salaries'. The assessee was not getting the bonus commission by virtue of his employment with the LIC, but on account of the extra work done. His claim to deduct 25 per cent of the bonus commission as the expenditure for earning it, in the view of the AAC, should not be regarded as excessive. He, therefore, directed deduction of 25 per cent of the bonus commission as the expenditure incurred for earning the same for all the assessment years. The department has come up on appeal against the order of the AAC for all the years under appeal against both the above points.

3 to 7. [These paras are not reproduced here as they involve minor issues.]

8. As regards the bonus commission, section 16(v), which was in the statute book, would enable the assessee to get the deduction. No evidence as to incurring the expenses is produced. Reference was made to a circular of the CBDT, relating to expenses allowable from commission receipts. The complete circular has not been produced before us. The learned counsel for the department, suggested that the circular was the one referable to LIC agents and not employees of the Corporation. Even though accounts have not been maintained by the assessee to prove the expenses, it should be possible from the nature of the work done by him to find out whether such expenses have to be incurred or not. The mere absence of accounts should not result in the rejection of the claim. Expenses could be allowed as indicated in the circular of the Board, which certainly refers to the LIC agents on some estimated basis. The assessee has maintained books and details of expenditure for the assessment year 1981-82 onwards. Having regard to the nature of expenditure incurred for this and later years, it would be possible for the ITO to make a proper estimate for the years under appeal as well. On this ground also, we therefore, remit the matter back to the ITO to give an opportunity to the assessee to produce the relevant details. The ITO should look into the circular of the Board also and decide this issue. In fixing this amount, he should also have regard to the fact that some expenditure on travelling might have been allowed under the first contention.

9. For the assessment years 1975-76, 1976-77 and 1977-78, it was pointed out that since there was no provision like 16(v) in the statute book, no expenses can be allowed. The learned counsel for the department stressed in this connection the fact that out of the salary income, no deduction otherwise than those specified can be granted. The commission received being treated as salary, no expenses can, therefore, be deducted. There is a fallacy in this argument. While certainly in computing the income under the head 'Salaries', deductions specified in the Act alone can be granted. Such deductions, however, have to be given from the figure of 'Salary', one starts with. There are two issues relevant ; one is the income taxable falling under the head 'Salaries', the other is quantum of salary itself. The salary an employee receives, is to be understood and reckoned in an economic and money sense. If an employer were to give an employee Rs. 1,000, with an attendant obligation to spend for the employer Rs. 900, the salary due accrued, etc., in that case would be only Rs. 100 and not Rs. 1,000. While, therefore, it is correct to hold that only items allowed to be deducted under the statute are deductible from the salary, we have no hesitation in holding that the actual amount of salary fixed---due, received, etc., as specified under section 16---should be 'actually' determined in real sense. Even as in the case of business and other income, there could be no imaginary figure of salary. This should be done for these three years.

10. For statistical purposes, the appeals are partly allowed.

Per Shri R.L. Sangani, Judicial Member --- I agree with what my learned brother has stated in paras 1 to 8 of his order. However, I find myself unable to agree with the observations and directions made in para 9 of the order.

2. The facts are stated succinctly in the order of my learned brother, and as such it is not necessary to state them in detail. We are concerned here with bonus commission received by the assessee, who is a Development Officer in the LIC. The contention of the assessee is that 25 per cent of the bonus commission had been spent by him for procuring more business and, as such, 25 per cent of the bonus commission should be deducted.

3. The AAC had treated the bonus commission as income from other sources. It is not disputed that the said commission would come under the head 'Salaries' under section 17(1)(iv) of the Act. As such, the provisions regarding deduction under the said head of income shall have to be considered.

4. The question to be decided is, whether any amount could be claimed as deduction from bonus commission for the assessment years 1975-76, 1976-77 and 1977-78 after clause (v) of section 16 had been deleted with effect from 1-4-1975 by the Finance Act, 1974. My learned brother is of the opinion that the term 'Salary' in section 16 has to be understood and reckoned with in 'economic and money sense' and, as such, the salary should first be determined in 'real sense' before the question of statutory deduction therefrom is considered. According to an example given by him, the salary of an employee should be treated as Rs. 100 under section 16 and not Rs. 1,000 if out of Rs. 1,000, which the employer pays as salary to the employee, the latter is obliged to spend Rs. 900, in due performance of his duties in connection with the work of his employer. The statutory deduction, according to him, would be from the real salary determined in the above manner. He has given example of computation of income from business and has observed that just as in the case of business, what we have to determine is the real business income, so also, in the case of an employee, what we have to determine is the real salary income by taking into account the expenses incurred in the performance of the duties. He, therefore, has given directions to the ITO to determine the real salary of the assessee in the above sense for the assessment years under consideration.

5. As far as the assessment years prior to 1975-76 are concerned, clause (v) of section 16 was in force. Under that provision, any amount actually expended by the assessee, which, by conditions of service, he is required to spend out of his remuneration, wholly, necessarily and exclusively, in the performance of his duties, was to be deducted in computing the income chargeable under the head 'Salaries'. Consequently, if the assessee was required to incur any expenditure, which by conditions of service he was required to spend out of his remuneration, wholly, necessarily and exclusively, in the performance of his duties, that expenditure could be deducted under that clause for computation of income under the head 'Salaries'. There was no other provision under which an amount of that nature could be deducted.

6. The existence of the said provision indicated that the word 'Salaries' in section 16 meant the amount which the employee actually receives as salary and not that amount as reduced by the amounts spent by him in performance of his duties. The deduction of the amount spent by him in performance of his duties could be made by him only because there was an express statutory provision in that regard in clause (v) of section 16, providing for such deduction and not because the term 'Salary' itself in section 16 meant balance amount, which remained after the amount required to be spent by an employee in the performance of duties assigned to him by the employer was deducted from the emoluments received as salary. Consequently, when clause (v) of section 16 was deleted with effect from 1-4-1975, no deduction of an amount representing the amount spent in earning the salary could be claimed. To hold that such deduction should be claimed even after deletion of clause (v) of section 16, would amount to giving effect to the said provision after its express deletion from the statute book.

7. The only relevant provision, under which deduction could be claimed in such cases after deletion of clause (v) of section 16, is section 10(14) for claiming the said deduction, the assessee will have to show that the bonus commission received by him in 1975-76, 1976-77 and 1977-78 included the special allowance (not being entertainment allowance or other perquisite) specifically granted to him to meet expenses, wholly, necessarily and exclusively, incurred in the performance of duties of the employment. Hence, as far as these three years are concerned, the enquiry can be confined only to the point, whether the bonus commission received by the assessee included any special allowance specifically granted to meet expenses, wholly, necessarily and exclusively, incurred in the performance of duties of employment for earning the said bonus commission. There can be no enquiry to determine, as to what the salary in the economic sense was. The scheme of the Act regarding computation of income under the head 'Salaries' does not contemplate an enquiry of this nature.

8. The legal position, as far as the deductions from salary income is concerned, appears to be as follows :

Where a special allowance is specifically granted to meet expenses, wholly, necessarily and exclusively, incurred in the performance of the duties of an employment, such allowance, if actually spent, is exempt from tax under section 10(14). If no special allowance is granted, but the assessee has to meet such expenses out of his remuneration, he cannot claim such expenditure as a deduction from the assessment year 1975-76 onwards, apart from the standard deduction under clause (i) of section 16. As far as prior assessment years are concerned, such expenditure was deductible under clause (v) of section 16, which now stands deleted.

9. It may be noted here that, as far as the assessment years 1973-74 and 1974-75 are concerned, my learned brother has, in para 8 of his order, held that the assessee would be entitled to get the deduction regarding the amount spent by him under clause (v) of section 16, and the direction has been given to investigate and calculate the amount actually spent by the assessee. As far as those two years are concerned, reliance has not been placed on the concept of economic salary. It would follow, logically, that when clause (v) of section 16 stood deleted, the amount on that score could not be allowed as a deduction and only standard deduction under the amended clause (i) of section 16 could be allowed.

10. It may be stated here that it was not the case of the assessee, that the bonus commission included any special allowance specifically granted to him to meet expenses, wholly, necessarily and exclusively, incurred in the performance of duties of his employment. His case was that since he was required to spend an amount to earn that income, he should get the deduction of the amount actually spent. The claim of this nature could have been covered only under clause (v), which was in force in the assessment years 1973-74 and 1974-75 and, as such, the directions to give deduction for those years have been given. However, as far as the subsequent assessment years are concerned, such amount could not be claimed as a deduction and that the assessee has to be satisfied with the standard deduction to which he would be entitled under clause (i) of section 16.

11. For reasons given above, I do not agree with the conclusion of my learned brother that for the assessment years 1975-76, 1976-77 and 1977-78, directions should be given to the lower authorities to determine the salary in economic and money sense, as mentioned in para 9 of my learned brother's order.

THIRD MEMBER ORDER

Per Shri T.D. Sugla, President --- These three departmental appeals were heard along with other two departmental appeals relating to the assessee's assessments for the assessment years 1973-74 and 1974-75 [IT Appeal Nos. 2235 and 2236 (Bom.) of 1981]. The learned members have passed a consolidated order. However, there is a difference of opinion as regards the appeals for the assessment years 1975-76, 1976-77 and 1977-78. The point of difference is :

" Whether, on the facts and in the circumstances of the case, any deductions are to be made for the assessment years 1975-76, 1976-77 and 1977-78, from the amounts received by the assessee under the head 'Bonus Commission' ?"

2. I have heard the parties and have gone through the orders of the learned members carefully. I have also been taken through the work norms and the scheme of bonus for and to Development Officers issued by the LIC. The proceedings relate to his assessments for the assessment years 1975-76 to 1977-78. The LIC has an incentive bonus scheme for its development officers. The incentive bonus is paid over and above the salary and other perks. It depends upon the extent of business brought by the Development Officers. The Development Officers, thus, do their best to get more and more business for the LIC. There is no dispute that for getting the extra business, the Development Officers have to incur some expenditure.

3. Up to and including the assessment year 1974-75, the assessee was getting deduction in respect of the expenditure incurred by him in this regard under section 16(v). Clauses (iii) to (v) of section 16 have been deleted from the section with effect from 1-4-1975. Both the learned members agree that deduction of such an expenditure cannot be allowed under section 16 in view of the deletion of the aforesaid clauses. The learned Vice-President (Accountant Member) has held that in the absence of clause (v) also, the deduction can be allowed under section 15 of the Act itself. According to him, salary for this purpose has to be understood and reckoned in an economic and money sense and, therefore, the expenditure is solely incurred for getting the extra business for LIC, with regard to which the incentive bonus/commission is received, should be taken into account from the figure of incentive bonus/commission itself, i.e., before it is treated as a part of the salary. The learned Judicial Member, for reasons given in his order, has not agreed with the learned Vice President.

4. In order to appreciate the rival contentions, it is desirable to refer to the scheme of the Act in this regard. For the purpose of charge of income-tax and computation of total income, income has been classified under section 14 of the Act under six heads of income. Sections 15 to 17 of the Act deal with income chargeable under the head 'Salaries' and sections 28 to 43A of the Act with income chargeable under the head 'Profits and gains of business or profession'. As section 16 provides for deduction from the income chargeable under the head 'Salaries', sections 29 to 43A provide for deduction from the income chargeable under the head 'Profits and gains of business or profession'. Questions have often arisen whether the expenses incurred or losses suffered in the course of and for running the business, with regard to which there is no provision for deduction under sections 29 to 43A, should or should not be allowed. One of the earliest decisions in this regard is of Privy Council in the case of CIT v. Sir S.M. Chitnavis 6 ITC 453. It was held that losses incidental to the business, as well as other expenses which are absolutely necessary for the carrying on of the business, have to be taken into account not by virtue of the specific provisions in the Act but, because what are chargeable to income-tax in respect of the business are the profits and gains of a year and for assessing the profits and gains of a year, account must necessarily be taken of all losses and expenses incurred otherwise one cannot arrive at the true profits and gains. This principle has been approved by the Supreme Court in a number of cases, such as Badridas Daga v. CIT [1953] 34 ITR 10 and Poona Electric Supply Co. Ltd. v. CIT [1965] 57 ITR 521. In other words, what has been held is that some deductions have to be allowed under section 28 itself. The reason, perhaps, is that the starting point of section 28 is the profits and gains of business or profession, which have to be understood in a commercial sense. On the face of it, the analogy can be applied in the case of computation of income under the head 'Salaries' also. Moreover, the incentive bonus/commission (which is over and above the salary and perks) the Development Officers get, may not be regarded as salary in the commercial sense. It is treated as income chargeable to income-tax under the head 'Salaries' because of inclusive definition of salary in section 17. The section, however, makes it clear that the meaning of salary has been extended for the purposes of sections 15 and 16 only.

5. The purport and scope of the word 'salary', as stated above, are extended to make it income chargeable under the head 'Salaries'. One has thus to ask himself, whether the gross incentive bonus/commission has to be taken into account at the starting point or only the net incentive bonus/commission, i.e., after reducing the amount of incentive bonus/commission by the expenditure for earning it. In my view, this is a reasonably possible view and should be accepted.

6. The learned Judicial Member has observed that from the fact of deletion of clause (v) from section 16, it should logically follow that after 1-4-1975, only standard deductions can be allowed from the income under the head 'Salaries'. In this context, reference may usefully be made to the memorandum explaining the provisions in the Finance Bill, 1974, which eventually became the Finance Act, 1974, whereby section 16 stands modified. It has been stated in the memorandum that this amendment has been brought about with a view to simplify the assessment procedure of salaried taxpayers. Therefore, per se, it is not possible to draw an inference from the deletion of clause (v) that the Legislature had intended to take into account the cases of incentive bonus/commission, without reducing it by the expenditure incurred for earning it. Cases of this type were, perhaps, not envisaged at all. In the circumstances, instead of going by the assumed logic on deletion of clause (v) of section 16, it will be better to examine, whether or not such expenditure can be taken care of at the starting point itself. For the reasons given by me above and for reasons given by the learned Vice President, I am inclined to hold that the expenditure incurred by the assessee, for the purpose of earning the incentive bonus/commission, should be reduced from the incentive bonus/commission at the starting point itself, i.e., at the point it is treated as the income chargeable under the head 'Salaries'.

7. The order will now go to the Bench for deciding the appeals according to the majority view.

Per Dr. V. Balasubramanian Vice President --- This order is to be read in conjunction with our order of even number, dated 30-7-1983.

2. In conformity with the decision of the majority, we hold that the expenditure incurred by the assessee for the purpose of earning incentive bonus/commission should be reduced from the incentive bonus/commission at the starting point, i.e., at the point it is treated as income chargeable under the head 'Salaries'.

8. The appeals are partly allowed.

 

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