The appellant, T.K. Ginarajan, Development Officer in the LIC, claimed deduction of 40 % of the incentive bonus paid to him in the return of income-tax for the various years prior to 1st April, 1989, on the ground that he had incurred expenditure to the extent of 40 % of the incentive bonus for canvassing business.
The claim for exclusion of 40 % of the incentive bonus towards the expenditure was declined by the Income-tax Officer. The Commissioner of Income-tax (Appeals) dismissed the appeal. However, the Incometax Appellate Tribunal held in favour of the assessee. But the High Court was in favour of the Revenue.
The Supreme Court noted that LIC of India had requested the Central Board of Direct Taxes (hereinafter referred to as “the CBDT”) for a clarification on deduction explaining that the Development Officer had actually incurred some expenditure in the performance of their duty, to the tune of at least 40 % of the incentive bonus paid to them. However, the CBDT affirmed that the incentive bonus paid by the LIC to the Development Officers formed part of their income towards salary. To quote :
“ Such portion of the incentive bonus which is actually spent by the Development Officer for duties of office can still be exempted from tax if the LIC makes the payment against the expenses incurred by the Development Officer by way of reimbursement of expenses. In that case, such reimbursement will not form a part of the salary of the Development Officer and only the incentive bonus will appear in their salary certificate. LIC has not certified that a part of the incentive bonus is against the expenses incurred by the Development Officers by way of reimbursement of expenses. If such a part is certified and that part of the salary and that part of the incentive bonus which is not certified will appear in the salary certificate. Hence, no deduction is contemplated from the incentive bonus, which finds a place in the salary certificates…”
The Supreme Court further noted that, however, with effect from 1st April, 1989, the LIC itself issued a clarification to the effect that the Development Officers would be entitled to claim reimbursement to the extent of 30 % of the incentive bonus granted to them.
The Supreme Court observed that thus, the dispute was confined only to the period prior to 1st April, 1989, and, thereafter, the Development Officers were entitled to the reimbursement of actual expenses incurred by them, to the extent of 30 %. In other words, after 1st April, 1989, only that part of the incentive bonus after reimbursing the expenses to the extent of 30 % would appear in the salary certificate. What is the fate of the incentive bonus to the Development Officers in LIC prior to 1st April, 1989, for the purpose of income tax was therefore the question to be considered in this case.
The Supreme Court held that compartmentalisation of income under various heads and computation of the taxable portion strictly in accordance with the formula of deductions, rebates and allowances are to be done only as per the scheme provided under the Act. The appellant being a salaried person, the incentive bonus received by him prior to 1st April, 1989, had to be treated as salary and he was entitled only for the permissible deductions u/s. 16 of the Act. The expenses incurred in the performance of duty as Development Officer for generating the business so as to make him eligible for the incentive bonus was not a permissible deduction and, hence, the same was eligible to tax. According to the Supreme Court, there was no merit in the appeal of the Appellant. The appeal was accordingly dismissed.
