B. M. PARMAR, DEVELOPMENT OFFICER, LIFE INSURANCE CORPORATION OF INDIA VS COMMISSIONER OF INCOMETAX, 2000 PTD-HARYANA-HIGH-COURT-INDIA 2057 (1998)

(a) Interpretation of statutes---

---- Statute to be interpreted strictly---Provision to be construed keeping in view purpose and object for which it is enacted.

In the matter of tax the statute has to be interpreted strictly. A provision has to be construed keeping in view the purpose and object for which it is enacted. The concept of commercial principles or business practice would not be relevant unless it is found to be inevitable.

(b) Income-tax---

----Salary---Incentive bonus---Life Insurance Corporation of India-- Development Officers---Are whole time employees employed for promoting and developing life insurance business---Receive incentive bonus for same work for which paid salary---Incentive bonus is for showing better results-- In incentive bonus scheme framed by LTC, profit earned by LTC not distributable as incentive bonus among Development Officers---Incentive bonus "not distributed profits" in addition to salary---Incentive bonus amounts to commission---Incentive bonus not paid for meeting expenses wholly, necessarily and exclusively incurred by Development Officers in performance of their duties---No element or component of reimbursement of expenses involved in grant of incentive bonus---Exclusion of incentive bonus from annual remuneration only for purpose of calculation of amount of incentive bonus--- Incentive bonus is assessable under head "salary" and not under head "profits and gains of business of profession"---Deduction under S.16(i) is admissible and no separate deduction on account of expenditure permissible---Indian Income Tax Act, 1961, Ss. 2(24)(iiia), 10(14), 14, 15, 16 & 17.

Development Officers of the Life Insurance Corporation of India are whole time employees of the Life Insurance Corporation of India. They are employed for promoting and developing life insurance business. Their primary concern and functions are to secure more business for the Life Insurance Corporation of India. It cannot, therefore, be said that while working in the field they are doing work in a different capacity. Whatever income is received by the Development Officers from the Life Insurance Corporation of India, is by way of salary and is to be assessed under the same head. There is nothing on record to show that under the scheme of incentive bonus framed by the Life: Insurance Corporation of India in 1978, they were required to perform a duty different from the one for which they were appointed. In this light, the extra income earned by the Development Officer cannot be said to be assessable under the head "Profits and gains of business or profession".

Sub-clause (iv) of clause (1) of section 17 of the Income Tax Act, 1961, makes it clear that the amount of commission received by an employee from his employer will be treated as part of salary. Similarly, under section 17(3) the profits in lieu of or in addition to any salary or wages are also made part of the salary.

The amount of incentive bonus cannot be said to have been paid as part of profits by the Life Insurance Corporation of India to the Development Officers. Therefore, it cannot be held that the incentive bonus in the hands of the Development Officers was "distributed profits" in addition to salary. The word "profits" would essentially mean profits of the employer. If the remuneration is paid by the employer by sharing the profits, that would be treated to be profits in addition to salary in the hands of the employees.

Incentive bonus is calculated on the basis of the total premium collected by a Development Officer against the number of policies procured. It is paid. on the basis of the volume of business and is, therefore, in the nature of commission. Therefore, amount of incentive bonus received by the assessee was not in the nature of profits distributed or paid in addition to salary but was in the nature of commission. paid to him for doing extra business for the employer.

A conjoint reading of section 2(24)(iiia) and section 10(14) would make it clear that any special allowance or benefit granted to an employee has been made assessable as his income. At the same time, exemption has been allowed in respect of such special allowance or benefit to the extent to which the employee has actually incurred expenses wholly, necessarily and exclusively for the performance of his duties.

In the case of a Development Officer the incentive bonus is not a special allowance payable to him for meeting expenses wholly necessarily and exclusively incurred by him in the performance of his duties. The Development Officers have been made eligible to receive incentive bonus on the number of policies procured by them and the total amount of premium collected during a year. It is also relatable to the territory in which they are required to function for the promotion of insurance business. Thus, there is nothing to show from the scheme framed by the Life Insurance Corporation of India in 1978 that incentive bonus was paid to the Development Officers as any special allowance or benefit granted to them to meet certain expenses.

Section 10(14) has been amended with effect from April 1, 1989, and only such special allowance or benefit has been made eligible for exemption as is notified by the Central Government. It would be, thus, apparent that after the amendment effective from April 1, 1989, no exemption in respect of actual expenses incurred by the employee receiving a special allowance or benefit would be available unless it, has been notified by the Central Government.

Deductions have been separately specified in section 16 for the purposes of computing the income under the head "Salaries". Deduction was allowed, prior to the amendment effective from April 1, 1975, under five specific heads, (i) expenditure on the purchase of books; (ii) expenditure in entertaining people connected with the employer's business; (iii) expenditure on conveyance used by the employee for the purpose of his employment; (iv} expenditure actually incurred by the employee which, by the conditions of his service, he was required to spend out of his remuneration wholly, necessarily and exclusively in the performance of his duties, and (v) amount of tax on professions, trades, callings or employment levied under any State or provincial Act. It would, thus, be obvious that, prior to the amendment effective from April 1, 1975, deductions were allowed from salary under specific heads. Thus, the statute took sufficient care about the need for deduction in respect of a salaried employee. In this light, a second deduction is not permissible.

After the amendment effective from April 1, 1975, standard deduction at ,a fixed rate/amount is allowed under clause (i) of section 16. Two other deductions, one in respect of entertainment allowance and the other on account of payment of tax on employment, are also allowed under clauses (ii) and (iii) of section 16. Though in clause (i) of section 16, no specific item has been mentioned for which standard deduction is allowed, it would be necessary to look to the provisions which existed prior to the amendment and which became effective from the assessment year 1975-76. In this light a second deduction cannot be said to be permissible with the aid of section 10(14) of the Act.

In a taxing statute it cannot be assumed that the concept of business expediency may be taken into consideration while allowing deductions to arrive at the net profit. If it was a case of profits and gains of business or profession, the concept of net profit would emerge. However, in the case of income by way of salary, deduction shall be allowed only as specified in section 16 of the Act.

There is also no element or component of reimbursement expenses in the grant of incentive bonus. The incentive bonus scheme of 1978 is totally silent in this regard. The exclusion of incentive bonus from annual remuneration was done only for the purpose of calculation of the amount of incentive bonus. The amount of incentive bonus depended on the total expenditure incurred on. a Development Officer during a year and the amount of premium collected by him during that year. It is, thus, manifest that in the entire incentive bonus scheme there is no mention of any component of any expenditure in the amount of incentive bonus nor is incentive bonus to be calculated on the basis of expenditure.

The assessee has not shown that he was not paid any travelling allowance while going to the field in connection with the insurance business.

He cannot claim a second reimbursement from the amount of incentive bonus. He being an employee of the Life Insurance Corporation of India, is entitled to the allowance and benefits in respect of his duties as admissible to other employees.

Therefore, incentive bonus is assessable under the head "salaries" and not under the head "profits and gains of business or profession". Therefore, deduction under section 16(i) of the Act is admissible under the head "salaries" and no separate deduction on account of expenditure is permissible.

CIT v. Durga Kumar Nanda (1995) 211 ITR 639 (Orissa) and CIT v. Pramod Kumar Jain,(1995) 216 ITR 598 (Raj.) distinguished.

Badridas Daga v. CIT (1958) 34 ITR 10 (SC); Bhargava (K.P.) v. CIT (1954) 26 ITR 489 (All.); Choudary (K. A.) v. CIT (1990) 183 ITR 29 (AP); CIT v. Anil Singh (1995) 215 ITR 224 (Orissa); CIT v. Baniyan (A. A.) (1992) 197 ITR 717 (Bom.); CIT v. Chinnaiah (B.) (1995) 214 ITR 368 (AP); CIT v. Govind Chandra Pani (1995) 213 ITR 783 (Orissa); CIT v. Kiranbhai H. Shelat (1999) 235 ITR 635 (Guj.); CIT v. Patil (M. D.) (1998) 229 ITR 71 (Kar.); CIT v. Rameshwar Lal Pahwa (Dr.) (1980) 123 ITR 681 (Delhi); CIT v. Shah (M.C.) (1991) 189 ITR 180 (Bom.); CIT v. Shiv Raj Bhatia (1997) 227 ITR 7 (Raj.); Gestetner Duplicators (Pvt.) Ltd. v. CIT (1979) 117 ITR 1 (SC); Poona Electric Supply C o. Ltd. v. CIT (1965) 57 ITR 521 (SC) and Sultan Brothers (Pvt.) Ltd. v. CIT (1964) 51 ITR 353 (SC) ref.

A. K. Mittal and Tarlochan Singh for the Assessee.

R. P. Sawhney, Senior Advocate with Rajesh Bindal for the Commissioner.

JUDGMENT

N. K. AGRAWAL, J.---The following question of law has been referred by the Income-tax Appellate Tribunal, Amritsar Bench (for short, "the Tribunal', at the instance of the assessee section 256(1) of the Income Tax Act, 1961, (for short, "the Act"):

"Whether, in the facts and the circumstances of the case, the Appellate Tribunal is correct in holding that the income from incentive bonus received by the assessee, a Development Officer of the Life Insurance Corporation of India, is liable to be taxed under the head of income 'salary' and no deduction against that was admissible under the section relating to the taxing of salary income?"

The assessee derived income from salary and interest. He was employed in the Life Insurance Corporation of India (for short, "the LIC") as a Development Officer: He filed a return of his income for the assessment year 1980-81 declaring income at Rs.15,880. Salary as per the salary certificate was shown by the assessee at Rs.26,729., He claimed deduction of Rs.3,007 from the incentive bonus amounting to Rs.7,517. The assessee filed his return of income from the assessment year 1981-82 declaring income at Rs.29,140. in this year also, the assessee claimed deduction of Rs.9,20 on account of expenses at 40 per cent of the incentive bonus amounting to Rs.22,549 received by him.

The Assessing Officer declined to grant deduction from the amount of incentive bonus in both the years. The assessee went up in appeal before the Appellate Assistant Commissioner for both the years, but failed. His appeals before the Tribunal also met the same fate.

The case put forward by the assessee before the Assessing Officer was that incentive bonus was given to him by the Life Insurance Corporation of India not as part of salary but by way of professional income earned by him for more insurance business done during the year. It was given for performing business activity in the insurance field beyond duty house. He also incurred expenses for securing more insurance business. Incentive bonus was not paid by way of statutory bonus granted under the Payment of Bonus Act, 1965. Incentive bonus actually depended upon the results of extra efforts made in the field of insurance business. It was also claimed that the Development Officers were different from other employees of the Life Insurance Corporation of India in view of the nature of their duties and conditions of work. They received remuneration from the Life Insurance Corporation of India partly as fixed salary and partly on. the basis of the results. Incentive bonus was linked to the insurance business secured in excess of the normal business and normal premium. Since it was income under the head "profits and gains of business or profession" -expenditure incurred in securing more business was deductible from the amount of incentive bonus before subjecting it to tax.

The plea raised by the assessee is two-fold. Firstly, the amount of incentive bonus was not part of salary and was not assessable under the head "salary". Instead, it was received by way of "profits and gains of profession". Secondly, the expenditure incurred in the course of performance of duties was eligible for deduction from the gross amount of incentive bonus. It is, therefore, argued that even if the amount of incentive bonus is not assessed under the head "profits and gains of business or profession", it may be assessed under the head "salaries" as "profits in lieu of or in addition to the salary". In that situation, the net profits would alone be subjected to tax in accordance with the commercial principles and business practices. It is the real income which should be brought to tax and not the gross amount of incentive bonus.

Shri A. K. Mittal, learned counsel for the assessee, has vehemently argued that the amount of incentive bonus was not received by a Development Officers as part of his salary but as income from profession. The Development Officers are required to go to the field for the purposes of development of insurance business. Expenses are, therefore, incurred while procuring more insurance business. If the first year's premium earned by a Development Officer was in excess of five times the total expenses incurred on him by the Life Insurance Corporation of India, the incentive bonus could be paid to the Development Officer at the rate of six percent. of such income. Similarly, different rates of incentive bonus have been laid down in the Scheme for still higher premium earned for the Life Insurance Corporation of India in a year. Thus, incentive bonus depended on the personal efforts and the volume of business procured by the Development Officer for his employer, the Life Insurance Corporation of India.

Shri Mittal, learned counsel for the assessee, has placed before us a copy of the scheme, relating to the payment of incentive bonus, framed by the Life Insurance Corporation of India in the year 1978. This scheme is called "the Scheme of Incentive Bonus of Development Officers of Life Insurance Corporation of India, 1978". The aforesaid incentive scheme also lays down the formulae for determining incentive bonus. Shri Mittal has pointed out that the expression "annual remuneration" has been defined in the Scheme and the amount of incentive bonus has not been included in "annual remuneration". Shri Mittal has, therefore, contended that if the "annual remuneration" as defined in the incentive scheme did not include incentive bonus, it would be improper to treat the incentive bonus as part of salary. He has argued that the incentive bonus was actually assessable as professional income of the Development Officer. It is production-oriented income and it becomes payable on achieving a higher target. When the actual performance of a Development Officer is beyond the normal level of performance expected of him, he is to be paid incentive bonus. It is given to those who are eligible under the requisite conditions specified in the Incentive Bonus Scheme of 1978. It is a business or professional earning and it depended upon the number of insurance policies procured and the nature of territory operated.

Shri Mittal has further argued that the insurance agents are allowed deduction of expenses from the incentive bonus under Circular No.F8/2/57/IT/AI, dated October 18, 1968, issued by the Central Board of Direct Taxes, New Delhi (for short, "the Board"). Drawing analogy from the circular of the Board, Shri Mittal has argued that the Development Officers should also be allowed the benefit of deduction inasmuch as they were performing almost the same duties as were performed by the insurance agents. Actually, the Development Officer worked in the field through the insurance agents only and the volume of business also depended upon the joint efforts of the Development Officers and the insurance agents.

The next argument of Shri A. K. Mittal, learned counsel for the assessee, is that the incentive bonus, even if treated under the head "salaries", was in the nature of "profits in addition to the salary" under sub -clause (iv) of clause (1) of section 17 of the Act. If it is paid by the Life Insurance Corporation of India as profits in addition to salary, it is then the net profit which should be brought to tax and not the gross receipts. Net income after excluding therefrom the necessary expenses incurred while earning the incentive bonus would be the real income chargeable to tax.

Shri A. K. Mittal, learned counsel for the assessee, has placed reliance on a decision of the Orissa High Court in CIT v. Durga Kumar Nanda (1995) 211 ITR 639, and a decision of Rajasthan High Court in CIT v. Pramod Kumar Jain (1995) 216 ITR 598. On the basis of the aforesaid two decisions, Shri Mittal has argued that remuneration other than salary received by an employee was not assessable as salary. In the first case, certain remuneration was received by a director from the company. It was noticed that there was no relationship of employer and employee between the company and its director. It was, therefore, held that the remuneration received -by the direction from the company could not be held to be salary from which he could claim deduction under section 16(i) of the Act. In the second case, salary was received by a partner. The partner claimed deduction in respect of such salary. It was held that a firm is not a legal person and has no legal existence. apart from its partners. Though under the income-tax law, it is a unit of assessment by virtue of the special provisions, it cannot be considered that the firm is the employer of its partners. It was, therefore, held that the partner was not entitled to special deduction in respect of such salary.

Both the aforesaid decisions are, therefore, found to be distinguishable and do not help the assessee at all.

Shri A. K. Mitial, learned counsel for the assessee, has also placed reliance on two decisions of the Bombay High Court, i.e., (i) CIT v. M. C. Shah (1991) 189 ITR iX0 and (ii) CIT v. A. A. Baniyan (1992) 197 ITR 717. In the first case, the question referred to the High Court under section 256(2) of the Act was in respect of the deduction at 40 percent. from the amount of incentive bonus. In that case, the Tribunal had held that the incentive bonus or commission received by the assessee from the Life Insurance Corporation of India 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 expenses for earning the income for which incentive bonus was paid. The deduction was upheld by the High Court after noticing that the Department had not questioned the order of the Tribunal is so far a it concluded that the incentive bonus/commission received by the assessee from the Life Insurance Corporation of India was income from business o profession. What the Department had challenged was that 40 percent. of the incentive bonus should not have been allowed as deduction. It was held that the question sought to be referred to the High Court was a question of fact which the Court did not like to go into. Similarly, in the second case deduction at 40 per cent was under reference. There also, the amount o incentive bonus was treated to be the professional income of the assessee That finding was not under challenge before the High Court. The question referred to the High Court related to the deduction at 40 percent. of the incentive bonus. It was held that the deduction so allowed was based on a finding of fact and, therefore, no question of law arose.

The aforesaid two decisions of the Bombay High Court do not help the assessee in so far as the question relating to the nature of income is concerned. The High Court, in the absence of a question on the nature of income, did not go into the controversy as to whether incentive bonus was part of salary or was assessable its profit and gains of business or profession. The only question before the High Court in both the cases centered around the deduction clawed by the assessee at 40 percent. of the incentive bonus.

Shri Mittal has also strongly relied upon a decision of the Gujart High Court in CIT v. Kiranbhai II. Shelat (1999) 235 ITR 635. It was held therein that incentive bonus received by a Development Officer of the Lift: Insurance Corporation of India was chargeable to tax under the head "Salaries", but deduction at 40 percent. of the incentive bonus was allowable so as to enable him to met the necessary expenses incurred by him.

Shri A. K. Mittal, learned counsel for tile assessee, has also argued that the Development Officers earned incentive bonus in a different capacity, functioning as professionals. When they went to the insurance field to procure more business, they were working as professionals and in a capacity other than that of employees. Reliance is placed by Shri Mittal oil a decision of the Allahabad High Court in K.P. Bhargara v. CIT (1954) 26 ITR 489. That was a case where the assessee was appointed as a treasurer. and also as a guarantee commission agent of a bank. As a treasurer, the assessee was to be in charge of the cash department. He was responsible for any loss caused to the bank by his conduct or the conduct of the cash department employees who were employed by him and who we're under his control. As a guarantee commission agent, the assessee had to recommend to the bank persons who wanted to borrow money and if the bank agreed to lend money to any person recommended, the assessee got a commission: If any approved borrower failed to return to the bank the money advocated, the bank was entitled to recover the debt from the assessee and from tile security money deposited by him. The assessee had to bear all expenses in making enquiries about the solvency of the borrowers. The question before the Court was whether the work of the assessee as treasurer and guarantee commission agent was service or was partly service and partly business. It was held that the fixed pay received by the assessee as treasurer of the bank was salary received by him as servant of the bank, while the remuneration received by him for the work of guarantee commission agent was income from business.

In the aforesaid case, the assessee was working in a dual capacity and was paid remuneration accordingly. In the case in hand, the Development Officer did not perform any duty other than that which was his normal duty. His normal duty was to promote life insurance business. He had to go to the field for procuring more and more business for his employer. If he exceeded the prescribed limit, he was granted incentive bonus as a reward. The relationship of employer and employee did not cease to exist when the Development Officer went to the field to procure more business. Moreover, the Development Officer worked in the field through the insurance agents. The nature of duty of a Development Officer was, therefore, not different when he worked in the office and when he worked in the field. His primary concern was to promote the life insurance business and procure more policies for the. Life Insurance Corporation. The aforesaid decision of the Allahabad High Court does not, therefore, help the assessee.

Shri A. K. Mittal, learned counsel for the assessee, has also argued that it is the real income which should be subjected to tax. His main contention is that if the gross receipts are brought to tax, the concept of commercial principles and business practice stands ignored. In support of the contention, Mr. Mittal has placed reliance on a decision of the Supreme Court in Badridas Daga v. CIT (1958) 34 ITR 10. That was a case where the assessee, carrying on the business as money-lender, dealer in shares and bullion and commission agent, suffered a loss on account of embezzlement by his employee. The assessee did his business through the agent who held a power of attorney; which conferred on him large powers of management including authority to operate on bank accounts. The agent withdrew from the bank account certain money and applied it in satisfaction of his personal debts incurred in speculative transactions, The assessee claimed deduction on account of the loss sustained by him as a result of misappropriation by the agent on the ground that it was incidental to the carrying on of the business. Their Lordships of the Supreme Court accepted the assessee's plea and allowed the deduction. Depending upon the ratio of the aforesaid decision, Shri Mittal has argued that all legitimate deductions, including losses, are allowable from the gross income if those were incidental to the business. Since the Development Officers were engaged in procuring more business for the Life Insurance Corporation of India, the necessary expenses incurred by them while performing that duty should be allowed as deduction before bringing the income to tax.

Shri Mittal has also relied upon another decision of the Supreme Court in Poona Electric Supply Co. Ltd. v. CIT (1965) 57 ITR 521. It has been observed therein that (headnote): "Income tax is a tax on the real income, i.e., in the case of a business, the profits arrived at on commercial principles subject to the provisions of the Income-tax Act". Shri Mittal has contended that whatever gross receipts were available in the hands of the Development Officers, those receipts were not taxable without ascertaining real income in their hands. Since they had to incur certain necessary expenditure in the course of performance of duties such expenditure was eligible for deduction while arriving at the real income in their hands.

Shri R. P. Sawhney, learned senior counsel for the Department, has, on the other hand, argued that the amount of incentive bonus was nothing but remuneration though determined at a fixed percentage of the total premium earned on the insurance business secured by a Development Officer during a year. He has argued that it was the duty of the Development Officers to develop and promote life insurance business. They were, therefore, paid incentive bonus for extra efforts. They would not earn it if they were not in the employment of the Life Insurance Corporation of India. Incentive bonus was additional remuneration for the services rendered by the employees for exerting more strain to get more life insurance business. Shri Sawhney has argued that the only permissible deduction under the head "Salaries" is the standard deduction specified in section 16(i) of the Act. The Development Officers received incentive bonus as employees of the Life- Insurance Corporation of India. Any receipt by them from the Life. Insurance Corporation of India will be includible and taxable under the head "Salaries". This income accrued to the Development Officers by virtue of their office. Payment was made to them as a reward for acting well as an employee. It was, therefore, not assessable under the head "Profits and gains of business or profession". It was remuneration paid by the employer for extra services rendered by the employee. The Development Officers received remuneration partly by way of fixed salary and partly by way of incentive bonus. It was linked to the percentage of the insurance business procured in excess of certain premium income. It was not a payment for extra-employment considerations. It is an emolument for enhanced business.

Shri Sawhney has also argued that the benefit of deduction allowed by the Board in the cases of insurance agents was not to be extended to the Development Officers inasmuch as the agents were not the employees of the Life Insurance Corporation of India,. Therefore, the benefit of deduction allowed by the Board to the insurance agents cannot be available to the Development Officers. It is also clarified that the Board has declined such benefits to Development Officers as conveyed in Instruction No. 1774.

Shri R. P. Sawhney, learned senior counsel for the Department, has further argued that if a distinct and specific head of income has been given, in section 15 of the Act, the income received by the employee would-only be assessable under that specific head. An employee cannot be allowed to divide his income under two different heads according to his convenience. If the remuneration paid to the employee is assessable under the head "salaries", no part of such income is assessable under the head "profits and gains of business or profession". ,

Shri Sawhney placed reliance on a decision of the Delhi High Court in CIT v. Dr. Rameshwar Lal Pahwa (1980) 123 ITR 681. It was held therein that the amount deducted in computing the income from house property cannot be included in the hands of the assessee as income from other sources. It was observed that by the computation of income under the head "property income" on the basis of the standard rent, the assessment of that source of income is exhausted and it cannot be taxed again though, in fact, some real income has escaped assessment. Shri Sawhney, drawing strength from the ratio of the aforesaid decision, has argued that the emoluments received by the Development Officers from their employer cannot be treated as income under two different heads.

Shri Sawhney has also placed reliance on a decision of the Supreme Court is Sultan Brothers (Private) Ltd. v. CIT (1964) 51 ITR 353. It has been held therein that the several heads of income mentioned in the Income tax Act are mutually exclusive, each head being specific to cover the income arising from a particular source, and it cannot be said that any one of these sections of the Act is more specific than another. Therefore, a particular variety of income must be assignable to one or the other of those sections. Shri Sawhney has argued that the income received from the employer by an employee cannot be bifurcated or divided under two different heads. The entire income is, therefore, assessable under the head "salaries".

Shri R. P. Sawhney, learned senior counsel for the Department, has also placed reliance on two decisions of the Andhra Pradesh High Court, viz., (i) K. A. Choudary v. CIT (1990) 183 ITR 29 and (ii) CIT v. B. Chinnaiah (1995) 214 ITR 368. In both the cases, the amount of incentive bonus paid to the Development Officers of the Life Insurance Corporation of India was held to be taxable under the head "Salaries". Permissible deductions under the said head were to be only allowed as specified under section 16 of the Act.

Shri Sawhney has also pointed out that the High Courts of Orissa, Rajasthan and Karnataka. have also taken the view that the incentive bonus received by the Development Officers of the Life Insurance Corporation of India was part of salary and was assessable as such. No deduction other than those permissible under section 16 of the Act were allowable. These decisions are: (i) CIT v. Govind Chandra Pani (1995) 213 ITR 783 (Orissa); `(ii) CIT v. Sri Anil Singh (1995) 215 ITR 224 (Orissa); (iii) CIT v.. Shiv Raj Bhatia (1997) 227 ITR 7 (Raj.); and (iv) CIT v. M. D. Patil (1998) 229 ITR 71 (Kar.)(FB).

The first question which needs to be decided is whether incentive bonus was assessable as profits and gains of business or profession. There is no dispute about the fact that the Development Officers are whole-time employees of the Life Insurance Corporation of India. They are employed for promoting and developing life insurance business. Their primary concern and functions are to secure more business for the Life Insurance Corporation of India. It cannot, therefore, be said that while working in the field they are doing work in a different capacity. They go to the field through the insurance agents. Their status does not, therefore, change while working in the field for the purposes of getting more business for the Life Insurance Corporation of India. In this situation, it cannot be said that the Development Officers are working in a different capacity while procuring more business. They might have professional expertise in the insurance business, but that would not change their status while they work in the field. They remain Development Officers in the employment of the Life Insurance Corporation of India while working in the field also. Whatever income is received by the Development Officers from the. Life Insurance Corporation of India is by way of salary and is to be assessed under the same head. There is nothing on record to show that under the scheme of incentive bonus framed by the Life Insurance Corporation of India in 1978, they were required to perform a duty different. from the one for which they were appointed. In this light, the extra income earned by the Development Officers cannot be said to be assessable under the head "Profits and gains of business or profession".

The Supreme Court had an occasion to examine the, expression "Salary" in Gestetner Duplicators (Pvt.) Ltd. v. CIT (1979) 117 ITR 1. It was observed as under (headnote):

"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" as defined in rule 2(h) of Part A of the Fourth Schedule to the Act. "

Section 14 of the Act specifies the following heads of income

A -Salaries;

B.---Interest on securities (omitted by the Finance Act, 1989, with effect from 1-4-1989);

C. ---Income from house property;

D. ---Profits and gains of business or profession;

E.---Capital gains;

F.---Income from other sources

The assessee received incentive bonus from the same source from which he received salary. He received incentive bonus for the same work for which he was paid salary. It is another matter that he was made eligible to receive incentive bonus for showing better results, but that would not change the nature of his duties.

Under the head "salaries in section 15 of the Act, any salary due from an employer or a former employer, whether paid or not, and any arrears of salary paid or allowed to the employee is chargeable to tax. Any salary paid in advance is also included in the total income as laid down in Explanation 1 under section 15. Under Explanation 2, any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as "salary".

Deductions from the income from salaries are allowable under section 16 of the Act. Section 16, prior to amendment effective from April 1, 1975 allowed deductions in respect of expenses incurred on the purchase of books, on entertaining people connected with the employer's business, amount paid by way of taxes on. profession, etc., expenditure on the maintenance of a conveyance and other expenditure actually incurred by the assessee wholly, necessarily and exclusively in the performance of his duties. After amendment effective from April 1, 1975, standard deduction at a fixed rate/amount has been allowed under clause (i) of section 16. Further deductions in respect of entertainment and on account of tax on employment are also allowed under clauses (ii) and (iii) of section 16.

"Salary." has been defined in clause(1) of section 17 of the Act as under:

"17: Forth e purpose of sections 15 and 16 and of this section,--

(1) salary includes-

(i) wages;

(ii) any annuity or pension;

(iii) any gratuity;.

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

(v) any advance of salary;'

(vi) any payment received by an employee in respect of any period of leave not availed of by him;

(vi) the annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule; and

(vii) the aggregate of all sums that are comprised in the transferred balance as referred to in sub-rule (2) of rule 11 of Part A of the. Fourth Schedule of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under sub-rule (4) thereof. "

Sub-clause (iv) of clause (1) of section 17 makes it clear that the amount of commission received by an employee from his employer will be treated as part of salary. Similarly, the profits in lieu of or in addition to any salary or wages are also made part of the salary. It is now to be seen whether the Development Officers received incentive bonus by way of commission or as profits in addition to salary.

The expression "profits in lieu of salary" has been defined in clause (3) of section 17 as under:

" 'Profits in lieu of salary' 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 contributions by the assessee or interest on such contributions. "

A close perusal of the above definition would show, that any compensation received from the employer in connection with the termination of employment or a modification of the terms and conditions of employment would be treated to be in the nature of "profits in lieu of salary". Similarly, any payment received from the employer or from a provident fund or a superannuation fund, to the extent to which it did not consist of contributions by the assessee, would also be part of "profits in lieu of salary".

The amount of incentive bonus cannot he said to have been paid as part of profits by the Life Insurance Corporation of India to the Development Officers. In the Incentive Bonus Scheme framed by the Life Insurance Corporation of India in 1978, there is no mention that any profit earned by the Life Insurance Corporation of India is made distributable as incentive bonus amongst the Development Officers for showing better results. In the absence of anything on record to show that the Life; Insurance Corporation of India gave incentive bonus in lieu of distribution of its profits, it would not be appropriate to hold that the incentive bonus in the hands of the Development Officers was "distributed profits" in addition to salary. The word "profits" would essentially mean profits of the employer. If the remuneration is paid by the employer by sharing the profits, that would be treated to be profits in addition to salary in the hands of the employee.

The incentive bonus cannot be treated to be payment of part of the profits of the Life Insurance Corporation of India to the Development Officers. It is by way of commission for higher output and better results.

"Commissioner", according to Webster's New International Dictionary, is the percentage or allowance made to a factor or agent for transacting business for another. It would, thus, appear, in the light of the aforesaid definition, that an employee may be entitled to receive, as part of his remuneration, a commission to be calculated on the basis of a fixed percentage of the turnover of the employer or to be calculated on any other basis.

In sub-clause (iv) of clause (1) of section 17, any fee, commission, perquisite or profit has been included in the definition of "salary": Incentive bonus is calculated on the basis of the total premium collected by a Development Officer against the number of policies procured. It is not paid on the basis of the profits earned by the Life Insurance Corporation of India. It would not, therefore, be appropriate to say that incentive bonus was paid as profit in addition to salary. It was paid on the basis of the volume of business and was, therefore, in the nature of commission. We, therefore, hold that the amount of incentive bonus received by the assessee was not in the nature of profits distributed or paid in addition to salary but was in the nature of commission paid to him for doing extra business for the employer.

The question for determination raised by the assessee is primarily based on his plea that he had to incur certain necessary expenditure in the course of his employment. The plea taken by the assessee is that the incentive bonus is an allowance specially granted to compensate him for the expenses incurred by him in the performance of his duties. It is, therefore, claimed that the genuine expenditure should be deducted from the income chargeable to tax.

Shri A. K. Mittal, learned counsel for the assessee, has argued that the salary of a Development Officer of the Life Insurance Corporation of India is liable to be reduced if he did not conform to the prescribed norms regarding insurance business secured by him and the amount of premium earned for the Life Insurance Corporation of India, while it is not so in other services. Higher incentive bonus becomes payable to a Development Officer on achieving higher insurance business. A Development Officer can show better performance on visiting the customers. It would naturally mean that he will have to incur certain necessary expenses.

Shri Mittal has also argued that under section 2(24)(iiia) of the Act, any special allowance or benefit was assessable as income but. at the same time, section 10(14) allowed exemption of such allowance or benefit to the extent to which expenses are actually incurred by the employee for that purpose.

It would be relevant to read section 2(24)(iiia) and also section 10(14) of the Act:---

2. Definitions:---...

(24) income includes-...

(iiia) any special allowance or benefit, other than perquisite included under sub-clause (iii), specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit:

l0. incomes not included in total income.-...

(14) any special .allowance or benefit, not being in the nature of an entertainment allowance or other perquisite within the meaning of clause (2) of section 17, specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of an office or employment of profit, to the extent to which such expenses are actually incurred for that purpose. "

A conjoint reading of the aforesaid two provisions would make it clear that any special allowance or benefit granted to an employee has been made assessable as his _ income. At the same time, exemption has been allowed in respect of such special allowance or benefit to the extent to which the employee has actually incurred expenses wholly, necessarily and exclusively for the performance of his duties.

In the case of a Development Officer, the incentive bonus does not appear. to be a special allowance payable to him for meeting expenses wholly, necessarily and exclusively incurred by him in the performance of his duties. In the incentive bonus scheme of 1978, there is no mention that incentive bonus is payable so as to meet the expenses incurred by the Development Officers, in the performance of their duties. They have been made eligible to receive incentive bonus on the number of policies procured by theta and the total amount of premium collected during a year, his also relatable to the territory in which they are required to function for the promotion of insurance business. Thus, there is nothing to show from the scheme framed by the Life Insurance Corporation of India in 1978 that incentive bonus was paid to the Development Officers as any special allowance or benefit granted to them to meet certain expenses.

It is also to be noticed that section 10(14) has been- amended with effect from April 1, 1989, and only such special allowance or benefit has been made eligible for exemption as is notified by the Central Government. It would be, thus, apparent that, after the amendment effective from April 1, 1989, no exemption in respect of actual expenses incurred by the employee receiving a special, allowance or benefit would be available unless it has been notified by the Central Government.

It is seen that deductions have been separately specified in section 16 for the purposes of computing the income under the head "Salaries". As noticed earlier, deduction was allowed, prior to the amendment effective from April 1, 1975, under five specific heads, namely, (i) expenditure on the purchase of books, (iii) expenditure in entertaining people connected with the employer's business;. (iii) expenditure on conveyance .used by the employee for the purpose of his employment, (iv) expenditure actually incurred by the employee which, by the conditions of his service, he was required to spend out of his remuneration wholly, necessarily and exclusively in the performance of his duties, and (v) amount of tax on professions, trades, callings or employments levied under any State or Provincial Act. It would, thus, be obvious that, prior to the amendment effective from April 1, 1975, deductions were allowed from salary under specific heads. Thus, the statute took sufficient care about the need for deduction in. respect of a salaried employee. In this light, a second deduction is not permissible.

In a taxing statute it cannot be assumed that the concept of business expediency may be taken into consideration while allowing deductions to arrive at the net profit. If it was a case of profits and gains of business or profession, the concept of net profit would emerge. However, in the case of income by way of salary deduction shall be- allowed only as specified in section 16 of the Act.

After, the amendment effective from April, 1, 1975, standard deduction at a fixed rate/amount is allowed under clause (i) of section 16: Two, other deductions, one in respect of entertainment allowance and the other on account of payment of ,tax on. employment are also allowed under clauses (ii) and (iii) of section 16. Though in clause (i) of section 16, no Specific item has been mentioned for which standard deduction is allowed; it would-be necessary to look to the; -provisions, which existed prior to the amendment and -which became effective from the assessment year 1975-76. Specific deductions in respect of the purchase of the 'books, conveyance and in connection with the performance of duties have been' done away with and instead a fixed deduction lies been made allowable under clause (i) of section 16. In this light, second deduction cannot be said to be permissible with the aid of section 10(.14) of the Act.

There is also no element or component of reimbursement, of expenses in the grant of incentive bonus. The -Incentive Bonus Scheme of 1978 is totally silent in this regard.- In the absence of any provision in the incentive bonus scheme, no presumption can be raised to the effect that incentive bonus was granted by way of special allowance to meet certain specific .expenses or by, way of partial reimbursement. No assumption or inference would arise unless it was specifically laid down in the relevant scheme providing for payment of incentive bonus. The exclusion of incentive bonus from annual. remuneration would also not help the assessee inasmuch as this was done. only for the purpose of calculation of the amount of incentive bonus. The amount of incentive bonus dependent on the total expenditure incurred on a Development Officer during a year and the amount of premium collected by him during that year. If in -the first year, the premium earned by a Development Officer is in excess of five times the total expenses incurred on him by the Life Insurance Corporation of India, incentive bonus was payable at 6 percent. of such income. Similarly, the rate of incentive bonus differed depending upon the amount of premium earned by x Development Officer in a year. It is, thus, manifest that in the entire incentive bonus scheme framed by the Life Insurance Corporation of India in 1978, there is no mention of any component of any expenditure in the amount of incentive bonus nor incentive bonus is to be calculated on the basis of expenditure.

In the matter of tax, -the statute is to be interpreted strictly. A provision has to be construed keeping in view the purpose and object for which it is enacted: The concept of commercial principles or business practice would not be relevant unless it is found to be inevitable. Deduction under section 16 is actually meant to meet various expenses incurred by an employee in the course of his employment. The provisions of section 16 as in force prior to the amendment effective from April 1, 1975, permitted deductions under five different heads/clauses. Out of those five heads, two namely, (i) expenditure incurred in entertaining people connected with the employer's business, and (ii) amount of tax on profession, etc., still exist ,with modifications in clauses (ii) and (iii) of section 16. The remaining three items of deductions, namely, (i) expenditure on the purchase of books, (ii) expenditure on conveyance, and (iii) expenditure incurred by the employee wholly, necessarily and exclusively in the performance of his duties, do not any more exist and instead standard deduction at a fixed percentage/amount is allowed under clause (i) of section 16. When an employee is allowed deduction under clause (i) of section 16, he cannot claim a second deduction on the ground of having incurred certain expenditure in the performance of his duties.

The assessee has not been able to show that he was not paid any traveling allowance while going to the field in connection with the insurance business. He cannot, claim a second reimbursement from the amount of incentive bonus. He, being an employee of the Life Insurance Corporation of India, is entitled to the allowance and benefits in respect of his duties as admissible to other employees.

On a consideration of the entire controversy, it is held that incentive bonus is assessable under the head "salaries" and not under the head "profits and gains of business or profession". It is further held that deduction under section 16(i) of the Act is admissible under the head "salaries" and no separate deduction on account of expenditure is permissible.

In the result, the question in answered in favour of the Revenue and against the assessee.

M.B.A./4112/FCReference answered.