Commissioner of Income-tax Vs. Varghese Mathew and K.i. Kuriakose - Court Judgment

K.S. Paripoornan, J.

1. These cases are connected. At the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following questions of law, in the above cases, for the decision of this court:

Income-tax References Nos. 560 to 563 of 1985 :

'Whether, on the facts and in the circumstances of the case :

(i) cannot the entire incentive bonus received by the assessee be treated as part of the salary ?

(ii) the assessee is entitled to deduction of the expenditure claimed ?'

Income-tax References Nos. 90 to 93 of 1986 : 'Whether, on the facts and in the circumstances of the case, incentive bonus received by the assessee who is a Life Insurance Corporation Development Officer can only be treated as part of the salary and whether he is entitled to claim 40% out of it as expenditure ?'

2. The respondents, in this batch of cases, are Development Officers in the Life Insurance Corporation of India. Identical questions arise for consideration in these cases. In I. T. R. Nos. 560 to 563 of 1985, we are concerned with the assessment years 1980-81 and 1981-82 and in I. T. R. Nos. 90 to 93 of 1986, we are concerned with the assessment years 1979-80 and 1980-81. The sole question that arises for consideration is whether the respondents/assessees--Development Officers--are entitled to deduction of the expenditure from the amounts received as incentive bonus from their employer. It is stated that the incentive bonus was paid for having canvassed additional business for which the assessee had incurred considerable expenditure which will not be covered by conveyance allowance and additional conveyance allowance granted by the employer. 40% of the incentive bonus was claimed as expenditure for earning the income. This plea was disallowed by the Income-tax Officer. He held that the incentive bonus was only part of the salary and so the assessees will be entitled only to the standard deduction under Section 16(1) of the Act. The Appellate Assistant Commissioner accepted the plea of the asses-sees. He allowed 20% deduction. The assessees as well as the Revenue appealed before the Appellate Tribunal. Following one of its earlier orders in I. T. A. Nos. 2237 to 2239 (Bom) of 1981, the Appellate Tribunal held that 40% of the incentive bonus constitutes a reasonable deduction as expenditure incurred for earning the said amount. Thereafter, at the instance of the Revenue, the Income-tax Appellate Tribunal has referred the questions of law, formulated hereinabove, for the decision of this court.

3. We heard counsel for the Revenue as also counsel for the assessees. The main plea of the Revenue was that the Appellate Tribunal having found that the incentive bonus received by the assessees--Development Officers--forms part of their salary was wholly in error in upholding the assessees' claim for deduction of 40% of the incentive bonus as expenditure for earning the income. On the other hand, counsel for the assessees contended that the Appellate Tribunal had before it the different decisions of the various Benches of the Tribunal and the incentive bonus will broadly be covered by Section 10(14) of the Income-tax Act and so it is not taxable at all. It is an error to say that the Appellate Tribunal found that the incentive bonus received by the assessees will form part of their salary. It was only in the nature of a compensation and was different from salary. It is broadly a bonus in the sense that it was paid for the services rendered outside the agreed or normal allotted work.

4. We considered the rival pleas put forward before us. We should state that the Appellate Tribunal has failed to adjudicate the real issue that arose before it in a proper or valid manner. The Appellate Tribunal referred to the various decisions of the Cochin Bench in K.P. Kurien's case (I. T. A. No. 510(Coch) of 1983), of the Chandigarh Bench in ITO v. Rajkumar Sethi [1982] 1 ITD 907. of the Bombay Bench in M.V. Varghese v. Second ITO (I. T. A. No. 4671 (Bom) of 1982) and of the Hyderabad Bench in ITO v. K. Kami Reddy (I. T. A. No. 1331 (Hyd) of 1983). It also referred to the provisions of Section 10(14) of the Act. Finally, after referring to the conflicting decisions of the various Benches the Appellate Tribunal, in paragraph 10 of its order, referred to the observations of the President of the Tribunal as a third Member in I. T. A. Nos. 2237 to 2239 (Bom) of 1981 and observed that the order so passed by the President, dated July 31, 1984, showed that only the net incentive bonus, after reducing from the gross incentive bonus the expenditure incurred for earning the same, can be treated as forming part of salary. On this basis, it was held that the expenditure incurred by the assessee for the purpose of earning the incentive bonus or commission should be reduced from the incentive bonus/commission at the starting point itself, i.e., at the point it is treated as income chargeable under the head 'Salaries'. Following the said decision of the President, the Appellate Tribunal held that the assessees' claim for deduction of 40% of the incentive bonus as expenditure for earning the income will stand allowed.

5. The order of the Appellate Tribunal is far from satisfactory. The Tribunal has mechanically followed the order passed by the President of the Tribunal dated July 31, 1984, in I. T. A. Nos. 2237 to 2239 (Bom) of 1981. We are not in a position to know the contents of the various conflicting decisions rendered by various Benches of the Tribunal. The decisions as such were not placed before us. That apart, the order of the Tribunal suffers from a fundamental infirmity. The tenability of the assessees' claim for deduction of an amount from the incentive bonus received by them, as an expenditure incurred for earning the same, depends upon the fundamental question as to the nature of the income received by the assessees. Does the incentive bonus received by the assessees form part of their salary or is it outside the salary income, is the fundamental question to be adjudicated. The contract of employment by which the salary and other amounts are payable to the Development Officers by the Life Insurance Corporation of India does not form part of the paper book. Why and for what reason, and on what basis, was the incentive bonus paid to the various Development Officers This should be evaluated to find whether the incentive bonus received by the Development Officers forms part of their salary. Only when a finding is rendered on that aspect, the further question as to whether the assessees are entitled to any deduction for earning the incentive bonus will arise for consideration. These fundamental aspects were not borne in mind, nor Has any attempt been made to ascertain the basic facts regarding the source and nature of payment of the incentive bonus. In these circumstances and in the light of the conflicting decisions of the various Benches of the Tribunal, we are not in a position to give any definite answer to the questions referred for our decision. The matter requires a more careful analysis and appraisal, bearing in mind the salient features stated above.

6. In all the circumstances of the case, we decline to answer the questions referred to us. At the same time, we direct the Income-tax Appellate Tribunal to restore the appeals to file and decide the question afresh, in the light of the observations contained hereinabove. It is only fair that, in the light of the conflicting decisions of the various Benches, a larger Bench is constituted to resolve the controversy and appropriate documents, inclusive of the order of appointment of the Development Officers, the nature of their duties, their salary and the basis for payment of incentive bonus, etc., are properly evaluated before a final decision is rendered in the matter.

7. The references are disposed of as above.

8. A copy of this judgment, under the seal of this court and the signature of the Registrar, shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.