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
(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.
Circular : No. 648, dated 30-3-1993.
COMMISSION EARNED BY INSURANCE AGENTS OF THE LIC – ALLOWANCE OF EXPENDITURE
(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.
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  55 TTJ (Ahd.) 667, 669-670)]
EXPLAINED IN – CIT v. M.D. Patil  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  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  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  133 CTR (Raj.) 514, by relying on their earlier decision in Shiv Raj Bhatia’s case (supra)
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.
Instruction : No. 1546 [F. No. 168/9/93-IT(AI)], dated 6-1-1984. [Source : Pankaj Dhirajlal Dhruve v. ITO  55 TTJ (Ahd. – Trib.) 667, 670.
EXPLAINED IN – The above Instruction was explained in T.S. Bhagatwala v. ITO  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.
EXPLAINED IN – The circulars of September 1965 and January 1984 were explained in ITO v. Nathalal P. Thanki  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.
EXPLAINED IN – The above circular was explained in Pankaj Dhirajlal Dhruve v. ITO  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)