R. Jayasimha Babu, J.
1. The common question that arises for our consideration in all these tax cases is as to whether the incentive bonus and the additional conveyance allowance paid to the Development Officers of the Life Insurance Corporation of India form part of their salary and are liable to be assessed to tax as salary.
2. This court in the case of CIT v. E. A. Rajendran : [1999]235ITR514(Mad) , has held that in the absence of any notification issued by the Central Government under Section 10(14)(i) granting exemption the incentive bonus and additional conveyance allowance are liable to be assessed to tax as salary. This court also held that such bonus and the additional allowance are part of the salary of the employee having regard to the terms used in Sections 16 and 17 of the Income-tax Act, 1961.
3. A view similar to the one taken by this court has been taken by the Andhra Pradesh High Court in the case of K. A. Choudary v. CIT : [1990]183ITR29(AP) , by the Rajasthan High Court in the case of CIT v. Shiv Raj Bhatia , as also by a Full Bench of the Karnataka High Court in the case of CIT v. M D. Patil : [1998]229ITR71(KAR) .
4. A contrary view however has been taken by the Bombay High Court and the said judgment has been extracted in the decision of the High Court at Gauhati in the case of CIT v. Ram Krishna Banik [1995] 215 ITR 901. The Gauhati High Court has taken a view similar to that taken by the Bombay High Court. The Gujarat High Court has in their elaborate judgment reported in CIT v. Kiranbhai H. Shelat [1998] 235 ITR 635, taken the same view as that of the High Courts at Bombay and Gauhati.
5. Thus, there is a conflict of opinion among the High Courts as to whether the incentive bonus and additional conveyance allowance paid to the Development Officers form part of their salary. The reasoning of the Gujarat High Court which judgment has been rendered after considering the decisions of the Rajasthan, Karnataka and the Madras High Courts is that the word 'profit' in Section 17(l)(iv) is referable only to the amount actually utilisable by the recipient for his own purposes and therefore necessarily excludes all the expenditure incurred by such recipient, even though he is an employee and the amount is received from his employer.
6. There is unanimity among the High Courts on the status of the Development Officers as full time employees of the Life Insurance Corporation of India and on the fact that the amounts received by the employees from their employer form part of the salary and further that as this bonus and allowance have not been notified under Section 10(14)(i) of the Act, they are not amounts which can be regarded as exempt from the levy of income-tax.
7. The materials placed before the court by the respective counsel show that the Development Officers are whole time employees of the Life Insurance Corporation of India, who are required to discharge the duties and obligations which, inter alia, include the development of the life insurance business of the Corporation. The very first duty enumerated for the Development Officer is 'to develop, to increase the production of new insurance business in the planned way as far as may be practicable in the area that may be allotted to him from time to time'. The other duties and obligations include the duty to supervise and to guide the activities of agents placed under the supervision of the Development Officers, to recruit new agents so as to develop agency force and to act generally in such a way as to activate existing agents and to motivate new agents and to render certain services to policy holders. The officer is also required to perform such other duties that are entrusted or assigned to him from time to time.
8. The remuneration payable to the agent is defined in the applicable service rules, as excluding the incentive bonus and the additional conveyance allowance. It is also made clear in the regulations applicable to the Development Officers that the remuneration paid to them is by way of rewarding their performance by offering them incentives or penalising them with disincentives, linked to the net eligible premium in case of poor performance. The manner in which the cost ratio is determined, viz., the proportion of the remuneration paid to the net eligible premium is also laid down by the corporation. The remuneration payable to the officer is not to be in excess of 20 per cent. of the net eligible premium collected on the policies secured by the Development Officer. The Life Insurance Corporation of India (Special Regulations), 1960, Schedule III contains special provisions relating to Class II Development Officers. The instruction given by the Life Insurance Corporation pursuant to the powers conferred on it in regulation IV of the Staff Regulations provides that where the cost ratio of the Development Officer in any appraisal year exceeds the prescribed cost ratio, he shall be subject to one or more disincentives. The disincentives are graded in Clause 5.2 of the instructions as 50 per cent. cut in conveyance allowance, in addition, to no increment, and one, two or three decrements in basic pay. Clause 5.3 of the instructions states that the appropriate disincentive will depend on the extent by which the actual cost ratio in the appraisal year is in excess of the prescribed cost ratio for that year. It will also depend upon whether the actual cost ratio has exceeded the prescribed cost ratio for the first, second, third or subsequent year in succession.
9. The instruction also provides for incentive bonus payable to those whose cost ratio is less than 20 per cent. The booklet issued by the Life Insurance Corporation entitled, The Development Officers Guide to Success, at page 15, sets out the meaning of cost ratio. The cost ratio in an appraisal year is to be determined by applying the following formula :
'Yearly expenses x 100 divided by F. Y. S. P. I. (eligible premium income).
Where F. Y. S. P. I. is the first year scheduled premium income (eligible premium income)'
10. The eligible premium is defined to mean the scheduled first year premium income received by the corporation in respect of business secured by the agents under the Development Officer which is adjusted in the relevant appraisal year.
11. The Development Officer whose cost ratio does not exceed 20 per cent. in an appraisal year alone is eligible for incentive bonus. The formula for determining the basic incentive bonus is as under :
Net eligible premium in excess of five times the annual remuneration6 per cent. of such excessNet eligible premium in excess of seventimes the annual remuneration4 per cent. of such excessNet eligible premium in excess of ninetimes the annual remuneration2 per cent. of such excess.
12. This formula is also liable for modification. It is liable to be increased or decreased depending on the performance of the Development Officer in respect of (1) number of lives, (2) agents organisation, and (3) recruitment of agents.
13. It is clear from what has been set out above that the Development Officers of the Life Insurance Corporation are full time employees of the Corporation whose main task is to develop the business of life insurance. Such development is measured by the amount of premium secured in the first year on new policies by reason of efforts put in by the Development Officer. The efficiency of the Development Officer is judged with reference to the amount of the first year premium that he generates and if the amount of premium so generated is at least five times the amount of yearly expenses incurred by the Life Insurance Corporation of India on the Development Officer, his performance is regarded as satisfactory. With a view to encourage the Development Officer to rise above that minimum standard, the officers are given incentives. If the performance falls below the minimum standard he is penalised by way of disincentives.
14. All the amounts paid by the Life Insurance Corporation to the Development Officer are paid pursuant to the relationship of employer and employee and no other relationship between the two is contemplated by any of the regulations. The Development Officer is not an independent contractor nor is he a partner with the Life Insurance Corporation in the business of life insurance by reason of the fact that he is able to reduce the percentage of the expenditure incurred on him in relation to the premium income generated by him, to a figure below 20 per cent.
15. As a full time employee the Development Officer receives salary and that salary is liable to suffer a decrease if his efficiency falls below a standard which is measured by the cost ratio. He is given an incentive for efficient performance which has resulted in the cost ratio being brought down. The amount paid as incentive, the amount paid as remuneration as also the amount paid after deducting the disincentives constitute the 'salary' in the hands of the employees receiving those amounts. Such payments do not have any other legal character. Sections 16 and 17 of the Act are sufficiently wide to take within their ambit all these payments which are made only by virtue of the Development Officer being an employee of the Life Insurance Corporation who receives the amount from the Life Insurance Corporation by reason of the performance of the work which he is required to carry out.
16. Learned counsel for the assessee submitted that the additional amount earned by the Development Officer as incentive bonus is earned solely on account of the efforts voluntarily put in and, therefore, the amounts earned as a result of such voluntary effort do not stand on the same footing as the salary received for performing normal duties at the level of efficiency prescribed as minimum. It was contended that the amount so received by the officer for his more efficient performance of the work by way of incentive is in fact in the nature of a profit which has been earned and that profit cannot be treated as part of the salary income and assessed as such. This argument proceeds on the premise that an employee even while performing the duties attached to his office can have two distinct legal capacities one as employee and the other as independent contractor or a partner. No factual foundation is available to the assessee to permit the assessee to contend that he could, even while being a whole time employee, still claim to be an independent contractor while performing efficiently the work which he was required to perform as a full time employee. There is nothing on record to support the argument that the Development Officer is a partner with the Life Insurance Corporation with a right to share in the agreed proportion the premium income generated by the officer.
17. The Development Officer can claim a right to exclude a part or the whole of the incentive bonus or the additional conveyance allowance only if those amounts can be brought under any of the provisions in the Act which permit the assessee to exclude those amounts from the computation of his income or salary. If these allowances are regarded as perquisites, they cannot be excluded, as admittedly there is no notification issued under Section 10(14)(i) of the Act.
18. Counsel submitted that having regard to the use of the word 'profit' in Section 17(i)(iv) of the Act, the expenditure incurred by the employee for earning that amount over and above the normal salary, should be excluded and the amount determined after excluding that expenditure alone be taken into account for being added to the normal salary as profit. This argument is in fact the one that found favour with the Gujarat High Court.
19. Profits, fees, commissions and perquisites referred to in Section 17(1)(iv) may be in lieu of or in addition to regular salary or wages. They are all as such taxable as regular salary or wages. A lumpsum paid in lieu of a taxable benefit is equally taxable. The payment must be a reward or return for his acting as an employee. Incentive bonus cannot in any view be properly regarded as 'profit' for the earning' of which expenditure is required to be incurred and which expenditure can be claimed as a deduction. It can at best be regarded as a commission as it is calculated as a percentage of the premium generated. No deduction thereafter is permissible while computing the total income of the assessee. Having regard to the scheme providing for these payments which shows in abundantly clear terms that the incentive is an addition to the normal remuneration for performance at a level higher than the minimum it is only an addition to the salary. Incentive bonus paid is not only to Development Officers of the Life Insurance Corporation but to workers in almost every large industry and such incentive bonus has not been regarded as 'profit'.
20. Learned counsel for the assessee sought to persuade us to differ from the earlier judgment of this court and to refer the matter to a large Bench. Having examined the contentions put forth by learned counsel and having considered the material placed before us, we are not persuaded that the judgment rendered by this court in CIT v. E. A. Rajendran : [1999]235ITR514(Mad) , requires reconsideration.
21. The question referred to us, therefore, is answered in favour of the Revenue and against the assessee by holding that the incentive bonus and the additional conveyance allowance paid by the Life Insurance Corporation to its Development Officers form part of the salary of the Development Officers and are exigible to tax accordingly. In the circumstances of the case, we direct the parties to bear their respective costs.