Circular No. 648-Income tax dated 30-3-1993

 Whether benefit of ad hoc deduction to insurance agents of LIC, having total commission (including first year commission, renewal commission and bonus commission) of less than Rs. 60,000 for the year, and not maintaining detailed accounts for expenses incurred by them, may be allowed

1. The Board in F. No. 14/9/65-IT(A-I), dated 22-9-1965 (Annex I), as subsequently modified in Instruction No. 1546, dated 6-1-1984 (Annex II), had granted, subject to conditions therein specified, the benefit of ad hoc deduction in respect of the expenses incurred by agents of the Life Insurance Corporation.
2. In supersession of the above Circular and Instruction, the Board have decided that the benefit of ad hoc deduction to insurance agents of the Life Insurance Corporation having total commission (including first year commission, renewal commission and bonus commission) of less than Rs. 60,000 for the year, and not maintaining detailed accounts for the expenses incurred by them, may be allowed as follows:

(i)   where separate figures of first year and renewal commission are available, 50 per cent of first year commission and 15 per cent of the renewal commission;

(ii)   where separate figures as above are not available 33¹ /3 per cent of the gross commission.

In both the above cases, the ad hoc deduction will be subject to a ceiling limit of Rs. 20,000.

3. The “gross commission” in (ii) above will include first year as well as renewal commission but will exclude bonus commission.
4. The complete amount of bonus commission is taxable and will be taken into account for purposes of computing the total income, and noad hoc deduction will be allowed from this amount.
5. The benefit ofad hoc deduction will not be available to agents who have earned total commission of more than Rs. 60,000 during the year.  The admissibility of the expenditure claimed by such agents will be decided by the Assessing Officers as per the provisions of the Income-tax Act.
6. This will apply to assessment year 1993-94 and subsequent years.

Circular : No. 648, dated 30-3-1993.

ANNEX I

COMMISSION EARNED BY INSURANCE AGENTS OF THE LIC – ALLOWANCE OF EXPENDITURE

1. Where detailed accounts regarding expenses incurred are not maintained, the deduction may be allowed as follows :

(i)   An ad hoc deduction for expenses @ 40 per cent of the first year’s commission and 15 per cent of the renewal commission, where sepa­rate figures with regard to the first year’s commission and the renewal commission are available.

(ii)   Where such separate figures are not available, an ad hoc deduction of 25 per cent of the total commission may be allowed.

In both the above two types of cases, however, the amount of total expenditure allowed should not exceed Rs. 6,000 per annum where the gross insurance commission does not exceed Rs. 20,000 for the year.

2. Where the gross insurance commission exceeds Rs. 20,000, if in any particular case there are special circumstances to justify deduction beyond the aforesaid ceiling, the ITO may grant a larger allowance but not exceeding Rs. 10,000. For this purpose, the ITO may take into account such factors as whether the agent’s insurance activity is on a part-time basis or professional basis, whether a regular establishment is maintained, whether the busi­ness is new or established, etc.
3. If an agent has to incur expenditure in excess of the above limits and desires allowance thereof, he should be able to main­tain regular accounts of his receipts and expenses and claim the expenditure on the basis of the said accounts.

Similarly, in cases where the agents maintain complete and reli­able accounts the assessment would of course be made on the basis of the accounts and the above ad hoc deductions would not apply in their cases. F. No. 14/9/65-IT(AL), dt. 22nd Sept., 1965.

Circular : F. No. 14/9/65-IT(AI) dated 14/22-9-1965. [Source : Pankaj Dhirajlal Dhruve v.  ITO [1996] 55 TTJ (Ahd.) 667, 669-670)]

JUDICIAL ANALYSIS

EXPLAINED IN – CIT  v. M.D. Patil [1998] 100 Taxman 516 (Ker.), the contention was that the Board’s Circular No. E-14/65-IT(A-I), dated 22-9-1965, on which reliance was placed by the assessee, was issued for assessing the income of the insurance agents of the LIC on an estimated basis in case regular books of account were not found to have been maintained.

The Court held that agents are not employees of LIC. Thus, the above Circular is not applicable to LIC Development Officers, who are employees of LIC.

REFERRED TO IN – The above circular was referred to in CIT v. Moti Mal Mohnot [1996] 134 CTR (Raj. – Trib.) 88. The  Tribunal observed as follows :

“5. The material facts, on which the question mentioned in para 1 above has to be decided is similar to those in DBIT Ref. No. 8 of 1992 – CIT v. Shiv Raj Bhatia [reported at [1996] 133 CTR (Raj.) 379]. The controversy involved in the present case as well as in the case of Shiv Raj Bhatia is that the incentive bonus received by the Development Officer of the LIC whether can fall within the meaning of the words ‘salary’, ‘perquisites’ or ‘profits in lieu of salary’ and as such is taxable under the head ‘salary’ or it is an income from business or profession on which the assessee is entitled for deduction in respect of the amount which he spent for procuring the business to earn the incentive bonus and wheth­er the Board’s Circular No. 14/9/65-IT(A-I) dated 22nd Sept., 1965, which, in fact, is applicable to the LIC agents, is ap­plicable to the Development Officer or not? It has been held in CIT v. Shiv Raj Bhatia’s case decided by us today, that the incentive bonus paid to the Development Officer is not the per­sonal gift but is paid as remuneration for his services as the employee and, therefore, it forms the part of the ‘salary’. As the incentive bonus is the part of the ‘salary’ of the assessee and is exigible to tax and the assessee is entitled only for the standard deduction permissible under section 16 of the Act only. It has further been held in Shiv Raj Bhatia’s case that the Board’s Circular No. 14/9/65-IT(A-I) dated 22nd Sept., 1965, which relates to the agents of the LIC only, is not applicable in the case of the Development Officers.” (p. 89).

APPLIED IN – The  Tribunal took a similar view in P.N. Verma v. CIT [1996] 133 CTR (Raj.) 514, by relying on their earlier decision in Shiv Raj Bhatia’s case (supra)

ANNEX II

COMMISSION EARNED BY INSURANCE AGENTS OF THE LIFE INSURANCE CORPORATION – TAXATION OF ALLOWANCE OF EXPENDITURE

Attention is invited to Board Circular dated 14th Sept., 1965 issued from F.No. 14-9-65-IT(A&I) on the subject. It has been mentioned in that Instruction, inter alia, that where detailed accounts regarding expenses incurred by the insurance agents are not maintained an ad hoc deduction for expenses at the rate of 40 per cent of the first year’s commission should be allowed. A ceiling of Rs. 6,000 in respect of such expenditure where the gross insurance commission do not exceed Rs. 20,000, this laid down and the discretion to grant a larger allowance not exceeding Rs. 10,000 in special circumstances was explained in detail.

2. The Board has been receiving representations that the rate of deduction should be raised from 40 per cent having regard to increase in costs. The Board has considered these representations and has decided that expenditure may be allowed @ 50 per cent of the year’s commission where the gross commission is less than Rs. 60,000. The above instructions of 22nd Sept., 1965 are modified to this extent. It may be clarified that these instructions will also apply to commission earned by authorised agents on the deposits secured by them under the Public Provident Fund Scheme.
3. These instructions may be brought to the notice of all Offi­cers in your charge.

Instruction : No. 1546 [F. No. 168/9/93-IT(AI)], dated 6-1-1984. [Source : Pankaj Dhirajlal Dhruve v.  ITO [1996] 55 TTJ (Ahd. – Trib.) 667, 670.

JUDICIAL ANALYSIS

EXPLAINED IN – The above Instruction was explained in T.S. Bhagatwala v.  ITO [1987] Taxation 86 (4) – 1 (Ahd. – Trib.), in the following words :

“4. On behalf of the  assessee, Shri Divatia argued that the above, second para mentions ‘year’s commission’ and not first year’s commission. Therefore, according to him full play should be given to these words and the assessee’s right under that circular should not be whittled down.

5. The learned D.R. however pointed out that the first para quoted above refers to the first year’s commission and the second para should be read in continuation thereof making an obvious reference only to the first year’s commission.
6. Shri Divatia in reply relied upon the Circular letter dated 20-3-1985 from the LIC to the various agents where it has been stated that according to the aforesaid CBDT circular the agents would be entitled to 50 per cent deduction of the total commission of the whole year which would include the renewal commission.
7. Now, the circular has to be read as a whole. The second para cannot be separated from the first para. In the first para, there is a clear reference to the first year’s commission. Therefore the reference in the second para to the ‘year’s commission’ must necessarily mean the first year’s commission and not the renewal commission. Whatever the LIC might have written to its agent that cannot influence the decision of the Tribunal. . . .” (p. 2)

EXPLAINED IN – The circulars of September 1965 and January 1984 were explained in ITO v. Nathalal P. Thanki [1992] 44 TTJ (Ahd. – Trib.) 390, with the following observations :

“4. This question has been decided by an earlier order of the Tribunal, Ahmedabad Bench where it has been held that the second circular is regarding only the first year’s commission and does not relate to the commission for the subsequent year. However, this time another attempt has been made by the assessee’s advo­cate by making the following two new submissions. He first of all argued that the intention of the second circular was simplifica­tion of the rate applicable for all kinds of commission and pointed out the words ‘year’s commission’ in para 2 thereof. He submitted that this paragraph did not use the expression ‘first year’s commission’ and that, therefore, the rate of 50 per cent was applicable to commission for all the years whether first year or subsequent years. Secondly, he submitted that the deposits in the Public Provident Fund Scheme clearly brought out this meaning.

5. I am unable to accept the contentions of the assessee’s advo­cate. Although in the second paragraph the words are ‘year’s commission’, the context makes it very clear that they relate to the first year’s commission. The representations referred to in the second paragraph mentioned 40 per cent which is the commission payable for the first year according to the earlier circular. The first paragraph makes a clear reference to 40 per cent for the first year’s commission. This was the reason given in the earlier order of the Tribunal. Secondly the purpose of the second circular was not to completely substitute the first circular but only to mitigate the hardships caused by giving a higher deduction of 50 per cent from the first year’s commission. In the first circular the commission payable is 25 per cent where separate figures for first and second year’s commission are not available. If what the assessee argues was to be accepted, the increase would be by further 25 per cent and not by only 10 per cent. Thirdly, so far as the deposits in public provident fund are concerned, every deposit is separate payment by itself having no necessary connection with earlier or subsequent deposits and is, therefore, not like the payment of premia for subsequent years. In the case of insurance policy once a policy is issued on the payment of the first premium the insured is himself interested in making payment for subsequent premia to keep the policy in force. This is not so in the case of deposits in the public provident fund. The depositor will get the benefit of the first deposit and the subsequent deposit on the same terms and conditions. In other words, while the premia in the case of an insurance policy have a certain continuity the deposits in the case of public provident fund do not have that necessary continuity. Therefore, every deposit in public provident fund is like the first premium in the case of an insurance policy. It takes as much effort to secure every deposit, be it first or subsequent, as for the first premi­um in the case of an insurance policy. . . .” (pp. 393-394)

EXPLAINED IN – The above circular was explained in Pankaj Dhirajlal Dhruve v. ITO [1996] 55 TTJ (Ahd. – Trib.) 667, with the fol­lowing observations :

“. . . On close reading of the two circulars the action of the  Assessing Officer appears to be justified. As per the first circular the assessee was entitled at the rate of 40 per cent on the first year’s commission and @ 15 per cent on the renewal commission. That situation continued even after the introduction of Instruction No. 1546, dt. 6th Jan., 1984 with certain modifications. The deduction @ 50 per cent of the first year’s commission, however, is allowable in case where the gross commission is less than Rs. 60,000. In the present appeal, the first year’s commission itself is Rs. 1,64,294. So as stated above the provision as contained in the first circular still holds good in the present case. In fact the learned CIT has misconstrued the paragraph 2 of the first circular dated 22nd Sept., 1965. This paragraph is necessarily to be read with the first paragraph. In para 1 it has been laid down that in the first year’s commission the deduction towards ex­penses is to be allowed @ 40 per cent and similarly @ 15 per cent for the renewal commission. The CBDT has never intended or meant that even in the event of gross insurance commission exceeding Rs. 20,000 the maximum deduction for expenses is to be given at Rs. 10,000 only. If the manner in which the learned CIT has interpreted or con­strued the circular in that case it will be seen that there are contradictory provisions which according to us and as has been said above has never been the intention of the CBDT. Besides above, it is to be pointed out that if the maximum deduction towards expenses allowable @ Rs. 10,000 only as per para 2 of the circular of 1965 in that case it will be highly prejudicial and unjustified to allow deduction of Rs. 10,000 only even if there are higher earnings of insurance commission. Speaking otherwise, for earning more commission, naturally, the agent has to spend more expenditure but even then to allow the maximum deduction of only Rs. 10,000 has never been the intention of the CBDT. In fact, Instruction No. 1546, dated 6th Jan., 1984, has been brought about only to overcome the hardship of the agent and that is why the above deduction for expenses @ 50 per cent for the year’s commission was allowed where the insurance commission is not more than Rs. 60,000.” (pp. 671-672)