Income-Tax Officer vs Rajan Mathur.
1996 Latest Caselaw 444 Del

ORDER

T. V. RAJAGOPALA RAO, PRESIDENT :

ITA No. 2416

This is a Departmental appeal for asst. yr. 1989-90, against the order dt. 22nd January, 1993, passed by the Dy. CIT(A), New Delhi. Two points are involved in this appeal. The first is with regard to the allowances of expenses of Rs. 42,151 from out of the total incentive commission of Rs. 1,05,378 received from his masters M/s. Modi Zerox Ltd. The assessee is an employee with M/s. Modi Zerox Ltd. since April, 1988 and in the relevant accounting year which ended by 31st March, 1989, he was designated as Major Accounts Manager engaged in selling of photocopying machines manufactured by the employer-company. The salary certificate which was issued by the employer-company to the assessee was not produced before this Tribunal. However, the assessee himself admitted that one Shri S. K. Taing, Dehradun was one of his colleagues employed in the same company and assessed by ITO Ward-3, Dehradun, and his assessment order for 1988-89 passed by the ITO Ward-3, Dehradun dt. 28th March, 1990, was produced. In that assessment order, he was shown to be drawing three sources of remuneration from the employer company.

They are salary, incentives and perquisites/allowances. I presume that the assessee also should be drawing the same three types of remunerations from his employer company namely Modi Zerox Ltd. Thus, it is established that the assessee has been drawing salary, incentives and perquisites separately. The assessee claimed Rs. 42,151 out of the total incentive commission as deductible. He drew a similarity with that of LIC development officer who was held entitled to 40 per cent deduction from out of the incentive bonus earned by him. The assessee contends that similarly in his case also Rs. 42,151 should be allowed while making the assessment. The ITO disallowed the same who held that the incentive bonus is a part of the salary from which only the standard deduction is allowable and not any other type of deduction. He, therefore, disallowed Rs. 42,151 and framed the assessment.

2. Having been aggrieved against the assessment, the assessee went in appeal before the Dy. CIT(A), New Delhi. Before the Dy. CIT(A), various types of extra work which was put forth by him before earning the commission was stressed and it is also explained before him that he would be entitled to the commission only if he is able to achieve extra targets of sales from certain customers like defense Ministry, NTPC, STC, etc. which in commercial parlance are called accounts. These extra sale targets require hectic activity of hard selling by making all-out efforts. An aggressive selling approach has to be applied by the sales officer through intensive field activity. To achieve the extra targets, sales officers are required to meet people in various Government and non-Government departments, motivate and entertain them organise free demonstrations of machines at personal cost and also organise the seminars and presentations. To procure business, gifts and novelties have to be given from time to time and the work involves extensive travelling to far off stations like Bombay, Calcutta, Cochin, Goa, Vishakapatnam etc. In the task of achieving the said extra targets, these officers were required to carry a team of major accounts executives, credit executives and customer engineers to satisfy the customer and meet the requirements. The assessee filed written arguments before the learned Dy. CIT(A) in which it is stated that the certificate given by the company was filed before him in order to show the break-up of the amount received as incentive commission. However, the said break-up or the certificate was never filed before this Tribunal by the Department. The assessee no doubt drew a similarity between the sales officers working in the Modi Zerox Ltd. on the one hand and the LIC development officers working in the LIC on the other. Then he relied upon the decisions rendered in the case of LIC officers both by the Tribunal as well as by the High Court. Similarly he also filed the assessment order passed by the ITO Ward-3, Dehradun, dt. 28th March, 1990 passed in the case of Shri S. K. Taing in which 40 per cent of the commission was allowed as a deduction even in the assessment stage. The learned Dy. CIT(A) accepted the arguments advanced on behalf of the assessee and allowed the deduction of Rs. 42,151 from out of Rs. 1,05,378 representing the total incentive commission earned. The Department felt aggrieved against the impugned orders and it came up in second appeal before this Tribunal. Thus, the matter stands for my consideration.

3. I have heard Smt. Saroj Deswal, learned Departmental Representative for the Department and Shri S. L. Deepak, learned advocate for the assessee. The Department relied upon the following decisions :

CIT v. B. Chinnaiah & Ors. (1995) 214 ITR 368 (AP), CIT v. Govind Chandra Pani (1995) 213 ITR 783 (Ori), ITO v. P. M. Suthar (1995) 52 TTJ (Ahd)(TM) 260 : (1995) 53 ITD 1 (Ahd)(TM).

The assessee relied upon the following decisions :

ITO v. P. M. Suthar (supra).

In CIT v. Govind Chandra Pani (supra) in the head note it is stated as follows :

"Sec. 17(1) of the IT Act, 1961, provides that for the purposes of ss. 15 & 16, salary includes any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages". Salary means recompense, reward : to pay for something done. 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 the 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.

The assessee, an employee of the LIC, had received a certain sum from the LIC as incentive bonus. The ITO having examined the details of the scheme of award of incentive bonus found that the same was calculated on a percentage basis on the total first years scheduled premium income secured by the employees who are assigned to work under the jurisdiction of a development officer. Though this finding of the ITO had not been reversed by the appellate authority, the appellate authority being of the opinion that since the employee put in extra effort and secured the stipulated amount of business for getting the incentive bonus, it held that the said bonus did not partake of the character of salary. This view was upheld by the Tribunal. On a reference :

Held, that the incentive bonus partook of the character of salary within the ambit of s. 17, and, therefore, had to be computed under s. 16. The only deductions which could be claimed were those allowed by s. 16".

Thus, the Orissa High Court held that the incentive bonus partook the character of salary within the ambit of s. 17 and, therefore, it is to be computed under s. 16. The only deductions which could be claimed were those allowed by s. 16.

4. Similarly, under (1995) 214 ITR 368 (AP) (supra), the Andhra Pradesh High Court had held in the head note as follows :

"The incentive bonus received by Development Officers of the LIC whether treated as part of the salary or perquisite, is taxable under the head Salary and the permissible deductions under the said head are as specified under s. 16 of the IT Act, 1961.

Deduction can be claimed under s. 10(14) if the following conditions are satisfied :

(1) the amount in question is in the nature of a special allowance or benefit : (2) the special allowance or benefit is not in the nature of perquisite within the meaning of s. 17(2) : (3) such amount is specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or employment of profit : and (4) such amount should be specified and notified in the Official Gazette by the Central Government. It is only where these requirements are satisfied, that the deduction would be allowable only to the extent to which such expenses are actually incurred for the purpose mentioned above.

The incentive bonus received by the development officers of the LIC constitutes salary. To enable the assessee to take advantage of s. 10(14), there must be a notification by the Central Government specifying the extent to which the expenses are allowable. In the instant case there is no such notification. Hence the deduction under s. 10(14) cannot be claimed in respect of the incentive bonus".

So, the Andhra Pradesh High Court held that to claim exemption under s. 10(14), a notification by the Central Government specifying the extent to which the expenses are allowable is a condition precedent. However, in the facts of the present case before us, there is no such notification and hence the deduction cannot be claimed under s. 10(14). It is also further held in the same decision that the incentive bonus received by the development officer of LIC whether treated as part of the salary or perquisite is taxable under the head salary and, therefore, deductions that are available under s. 16 are only available.

In (1995) 214 ITR 12 (AT)(supra), as per the head note obtaining at page 13, the Tribunal at Ahmedabad held the following :

"Held (per M. A. A. Khan and Abdul Razack (JMs.) and B. M. Kothari (AM) : That the definition of the term salary in s. 17 is very wide and includes profits in lieu of or in addition to salary. The incentive bonus received by officers of the Life Insurance Corpn. is an amount given on the basis of additional field work which might have resulted in bringing additional business to the LIC from new customers but that fact does not alter the position that incentive bonus was received by the assessee in various years in lieu of and/or in addition to salary received by him from his employer. It is assessable as salary".

5. I have gone through the three decisions relied upon heavily by the learned Departmental Representative. To my mind it is significant to note that in all the above three cases, the commission earned is considered to be part of salary and after having decided the nature of the commission earned, then the question whether how far deduction is available was next considered. However, if the nature of the commission earned is not salary but it is in the nature of other sources of income, then the other part of the decisions, namely, how much of deduction is allowable from such commission earned cannot be governed by those decisions. Now, in this case before us, the learned counsel for the assessee relied upon the decision of the Pune Bench of the Tribunal reported in Bhaskar B. Patil v. ITO (1993) 44 ITD 65 (Pn).

In that case, the AO while completing the assessment for 1986-87 to 1988-89 held that the incentive bonus or commission received by the assessee as Development Officer of LIC was income from other sources and, therefore, he allowed deduction in respect of the expenditure incurred in procuring such income. The Commissioner invoked provisions under s. 263 and held that the above such income was part and parcel of salary and, therefore, no deduction should have been allowed. The order under s. 263 came up for consideration before the Tribunal. In that case, the Tribunal held in the head note at page 66 as follows :

"In the instant case, the development officer was paid salary for doing official duties. Over and above it, he was asked to do business through the agents for the LIC. For doing this business through the agents, he was separately paid in the form of incentive bonus which was besides salary. Moreover the incentive bonus is described in the LIC Rules itself that it is besides salary. If the Rules of the LIC treat the incentive bonus as besides salary then treating it as part of salary would stand on a wrong footing. In the result, the incentive bonus earned by the assessee was to be treated as income from other sources and the expenditure incurred wholly and exclusively for earning such incentive bonus reasonably was to be estimated at 25 per cent to be allowed as a deduction from such incentive bonus and the balance was to be charged to tax".

6. In CIT v. M. C. Shah (1991) 189 ITR 180 (Bom), the findings of fact of the Tribunal that the incentive bonus or commission received by the assessee from the LIC was income from business or profession and not from salary and the assessee was entitled to deduction of 40 per cent of such bonus/commission as expenses for earning such income have been held to be findings of fact giving rise to no question of law.

Similarly in CIT v. Tukaram Ramchandra Shinde (1994) 121 ITR 251 (Bom), the Tribunal on the basis of the Departments Circular reproduced at XXVIIA at page 1669 Vol. 2 held that the respondent-assessee was entitled to 50 per cent deduction made out of commission (earned as an LIC agent) upto Rs. 60,000. It has been held that the said circular has been correctly interpreted by the Tribunal and there was no infirmity in the view taken by it. In view of the cases, the matter was remanded to the Tribunal to decide whether incentive bonus received by the development officer forms part of the salary or not. They are CIT v. Varghese Mathew (1991) 190 ITR 356 (Ker), and CIT v. K. U. Mathai (1991) 191 ITR 480 (Ker). In the later case, the matter was remanded to ascertain the nature of the commission received by the assessee.

7. Thus, it would appear as per the decided case law also the question what is the nature of the commission earned whether it comes under the category of salary or whether it comes under the other sources is a very important question to be decided. The ITO did not decide it. The first appellate authority by deciding the whole issue in favour of the assessee is presumed to have taken the view that the commission earned partook the character of income from other sources and does not come under salary. In such view of the matter if that is the decision of the learned Dy. CIT(A) then no exception can be taken to the decision given and the decision given cannot be disturbed. Even the learned Departmental Representative also did not attempt to argue for the proposition that the commission earned by the assessee in this case comes under the category of salary and under no other head. We have already found that the commission is paid for getting the extra order of bookings for sale of photocopy machines manufactured by the employer-company. Therefore, it cannot be considered to be part of salary earned for the ordinary duties performed as accounts manager. I agree with the conclusions that for earning the incentive commission an aggressive selling approach has to be employed by the sales officers through intensive field activity and he was required to meet people in various Government and non-Government departments, motivating and entertaining them and organising free demonstrations of machines on personal cost and organising seminars and presentations are also essential. Gifts and novelties have to be given from time to time. Extensive travelling had to be undertaken to far off stations. A lot of local conveyance expenses also was to be incurred and as a measure of compensation for the personal expenditure thus incurred by the assessee and for the aggressive selling approach adopted by him, the company was paying the commission. Therefore, I have no hesitation in my mind to come to the conclusion that the nature of the commission earned cannot be considered to be salary but can be considered only as income from other sources and, therefore, the decisions rendered in cases of LIC Development Officers did not come to the aid of the Department. I also hold that allowing Rs. 42,251 as expenditure to earn income of Rs. 1,05,576 under the facts and circumstances of the case is quite reasonable and was not proved to be excessive by the Department. Therefore, in my considered opinion, there is no valid ground for the Department in this appeal. Hence, the appeal is to fail on this ground.

8. The second ground taken in this appeal is that the ITO while making the assessment made an addition of Rs. 5,000 for inadequate drawls for household expenses. In appeal, the addition of Rs. 5,000 made by the ITO was set aside. The Department took the stand that the fresh evidence which is adduced before the Dy. CIT(A) is in contravention of r. 46A of the IT Rules.

9. I do not agree with this contention of the learned Departmental Representative. In this case, the assessee was asked to produce the following by the AO :

1. Photocopies of bank account;

2. Evidence for claiming expenses against commission;

3. Sources of investment made in NSC, NSS, etc.;

4. Monthwise withdrawals, day-to-day expenses and the time given to him for production upto 4th March, 1992.

This notice is dt. 25th February, 1992. On 4th March, 1992, adjournment application was sought and nobody attended on behalf of the assessee. Then without affording any other opportunity to the assessee, the assessment is made on the materials purported to have been available on the record.

10. Now, when the matter came up in appeal, only summary of bank account was filed. It is not the case of the Revenue that adequate opportunity was not provided to the AO to produce any rebuttal evidence to that evidence which is produced on behalf of the assessee.

11. I hold that, from the facts and circumstances of the case, the assessee was prevented by sufficient cause from producing the evidence which he was called upon to produce by the AO. In fact, I hold that quite inadequate time only was allowed to adduce the bank account, etc. Therefore, there is sufficient cause for producing the additional evidence before the Dy. CIT(A) and so the case is directly covered under r. 46A(1)(b).

12. Now, coming into the merits of the deletion it is to be viewed keeping in mind that in the relevant accounting year, the assessee was staying with his brother, Shri S. K. Mathur in the Government accommodation allotted to him, he being an employee of DESU. Therefore, no rent need be paid by the assessee. The mother of the assessee, Mrs. Sarla Devi Mathur, was staying with them and she had got independent regular income out of which she was contributing towards household expenses, mitigating the financial hardships of the assessee and his family and the mother was a regular income-tax assessee. The assessee has got his wife, one daughter aged six years and a son aged five years in the relevant accounting year. The daughter was sent to nearby school and the son did not as yet start schooling. The ITO made the addition by specifically observing that in the absence of non-production of bank account, not filing monthwise withdrawal as well as not furnishing day-to-day expenses, Rs. 5,000 is added. The ITO himself did not estimate what would be the reasonable expenditure of the assessee, what is the shortfall for which the addition of Rs. 5,000 was made. Now as per the summary of the bank accounts which the assessee maintained with various banks, it is to be seen that he withdrew a total sum of Rs. 94,076.65 from his bank accounts, out of which he spent Rs. 42,151 for depositing in HUDA and a sum of Rs. 51,925.65 was available to him for personal and household expenses. Having regard to the size of the family and the necessities of the family, I hold that this amount of Rs. 51,925.65 is reasonable, the addition of Rs. 5,000 is not warranted. I fail to see any merit in this ground and hence, it is to be dismissed. Since both the grounds are dismissed, the appeal itself is dismissed.

ITA No. 2417

13. This is a Departmental appeal for asst. yr. 1989-90 against the order of Dy. CIT(A), dt. 22nd January, 1993 cancelling the penalty imposed under s. 271(1)(c).

14. I have already seen that the assessee was an employee in Modi Zerox Ltd. For asst. yr. 1989-90, i.e., the same assessment year in which the quantum appeal is involved and is disposed of by me earlier, the assessee was assessed on a total income of Rs. 87,460, against the returned income of Rs. 42,360. In the quantum assessment Rs. 5,000 were added towards low withdrawals and Rs. 42,151 from out of the commission and incentive earned was disallowed rejecting the claim of the assessee. While completing the assessment, the AO had initiated penalty proceedings on the ground that the assessee had filed inadequate particulars of his income and issued notice under s. 271(1)(c). Show-cause notice was issued and the assessee was asked why penalty should not be imposed for furnishing inaccurate particulars of his income. Since the notices issued left unanswered, the AO felt that he has no other alternative except to complete the proceedings on merits. He imposed a penalty of Rs. 18,250 which according to him represents 100 per cent of the tax sought to be evaded as per his penalty order dt. 30th September, 1992.

15. Against the penalty orders, an appeal was taken before Dy. CIT(A) R-I, New Delhi. Since the quantum appeal was fully allowed by the Dy. CIT(A) by his orders dt. 22nd January, 1993 for asst. yr. 1989-90, he held that no concealment penalty appears to have been attracted and, hence, he deleted the penalty.

16. The only ground urged by the Revenue is that the deletion of penalty is wrong and it should be restored. I have already seen that in the quantum appeal, namely, in ITA 2416/D/93, the Departmental appeal is dismissed on both the grounds - on the ground of deductibility of Rs. 42,151 from out of Rs. 1,05,378 as well as the addition of Rs. 5,000 due to low withdrawals. Since the Department failed in the quantum appeal, there is no concealment at all. Therefore, automatically as a consequence this appeal also should fail and is dismissed.