THE COMMIJSSIONER OF INCOMETAX A.P.HYD V. P.JAGANMOHAN RAO

RC/108/2000

AI Insights

The case involves an appeal by the Revenue against the decision of the Income Tax Appellate Tribunal (ITAT), which had held that the deduction claimed by the assessee on the expenses incurred to earn an incentive bonus was a highly debatable issue. The assessee, a development officer with LIC of India, had claimed a deduction of 40% of the incentive bonus earned by him in his return for the assessment year 1993-1994. The Assessing Officer disallowed this deduction, leading to a series of appeals. The ITAT's decision, which was challenged by the Revenue, led to the reference of the question to the High Court under Section 256(2) of the Income Tax Act. The court, after reviewing relevant precedents and legal provisions, upheld the ITAT's decision, emphasizing that the issue was debatable and thus not subject to adjustment under Section 143(1)(a) at the initial stage of return processing.

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 719195 (HC-ANDHRA_PRADESH)
• Appeal Type: Others
• Pronouncement Date: 28-12-2011
• Assessment Year: misc
• Other Referred Cases: K.A.Chowdary v Commissioner of Income Tax, Commissioner of Income Tax v B.Chinnaiah, Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd., Kvaverner John Brown Engg. (India) P. Ltd. V. Asst. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Applicant
• Court: HIGH COURT
• Keywords: Deduction; Highly Debatable Issue; Incentive bonus; Income Tax
• Section: 15; 143(1)(a); 256(2)

Judgement Text

"THE HON’BLE SRI JUSTICE V.V.S.RAO AND THE HON’BLE SRI JUSTICE B.N.RAO NALLA R.C.NOs.15 AND 108 OF 2000 COMMON ORDER: (Per the Hon’ble Sri Justice V.V.S.Rao) As the question referred in both the Referred Cases is common, they are being disposed of by this common order. But for the sake of convenience, the facts in RC.No.15 of 2000 are taken into consideration. This reference is made by the Income Tax Appellate Tribunal, Hyderabad Bench ‘A’, Hyderabad, in obedience to the order of this Court dated 04.02.1999 in ITC.No.78 of 1998 made under Section 256(2) of the Income Tax Act, 1961 (the Act). The respondent (hereafter, the assessee) was working as a development officer with LIC of India. In his return of income for the assessment year 1993-1994, he claimed deduction of 40% of the incentive bonus earned by him towards expenses for earning the same. The return was processed under Section 143(1)(a) of the Act. While doing so, the Assessing Officer disallowed the deduction. The appeal by the assessee before the Commissioner of Income Tax (Appeals) was dismissed. In his further appeal, the Tribunal held that the question whether 40% incentive bonus can be allowed as deduction is highly debatable and therefore, the Assessing Officer while processing the return, could not have made an adjustment under Section 143(1)(a) of the Act. Being aggrieved, the Revenue filed R.A.No.138/Hyd/97 under Section 256(1) of the Act seeking reference of the following questions to the opinion of this Court. 1. Whether on the facts and in the circumstances of the case, the ITAT was correct in law in holding that the net of incentive bonus alone is to be taken as salary deducting the expenditure incurred for earning the incentive bonus at the starting point itself under Section 15 of the IT Act. 2. Whether on the facts and in the circumstances of the case, the ITAT was correct in law in holding that though the A.P. High Court in the case of B.Chinnaiah & Others (214 ITR 368) impliedly rejected the contention that 40% of incentive bonus should be allowed as deduction, it was not available to the Assessing Officer as on the date of passing the intimation under sec.143(1)(a) and as such the Assessing Officer was not correct in disallowing 40% of incentive bonus claimed as deduction. The same were rejected. Thereafter, the Revenue filed an application under Section 256(2) of the Act in ITC.No.78 of 1998, when this Court directed the appellate Tribunal to refer the question. The Tribunal referred the question, which is as below. “Whether on the facts and in the circumstances of the case, the ITAT was correct in law in holding that the claim of deduction of expenses out of incentive bonus is a highly debatable issue and as such the deduction of 40% of incentive bonus claimed by the assessee can be disallowed under clause (iii) of the first proviso under S.143(1)(a) of the Income Tax Act?” After perusing the application of the Revenue under Section 256(1) of the Act being R.A.No.138/Hyd/97, especially the question they sought to refer to this Court as extracted hereinabove, we reframe the question referred to this Court as below. “Whether on the facts and in the circumstances of the case, the ITAT was correct in law in holding that the claim of deduction of expenses out of incentive bonus is a highly debatable issue and as such the deduction of 40% of incentive bonus claimed by the assessee cannot be disallowed under clause (iii) of the first proviso under S.143(1) (a) of the Income Tax Act?” There is no dispute that in view of the decision of this Court in K.A.Chowdary v Commissioner of Income Tax[1] and Commissioner of Income Tax v B.Chinnaiah [2], the question whether an employee, who received incentive bonus can claim deduction of 40% towards expenses was highly debatable. Therefore, while processing the return, the Assessing Officer could not have made any adjustments. This view is also supported by the decision of the Supreme Court in Asst. CIT v. Rajesh Jhaveri Stock Brokers P. Ltd.,[3] wherein it was held as under. “What were permissible under the first proviso to section 143(1)(a) to be adjusted were, (i) only apparent arithmetical errors in the return, accounts or documents accompanying the return, (ii) loss carried forward, deduction, allowance of relief, which was prima facie admissible on the basis of information available in the return but not claimed in the return and similarly (iii) those claims which were on the basis of the information available in the return, prima facie inadmissible, were to be rectified/allowed/disallowed. What was permissible was correction of errors apparent on the basis of the documents accompanying the return. The Assessing Officer had no authority to make adjustments or adjudicate upon any debatable issues. In other words, the Assessing Officer had no power to go behind the return, accounts or documents, either in allowing or in disallowing deductions, allowance or relief.” (emphasis supplied) The above view was reiterated in Kvaverner John Brown Engg. (India) P. Ltd. V. Asst. CIT [4] wherein it was held as under. “One of the main conditions stipulated by way of the first proviso to section 143(1)(a), as it stood during the relevant time, referred to prima facie adjustments. The first proviso permitted the Department to make adjustments in the income or loss declared in the return of cases of arithmetical errors or in cases where any loss carried forward or deduction or allowance which on the basis of information available in such return was prima facie admissible but which was not claimed in the return or in cases where any loss carried forward, or deduction or allowance claimed in the return which on the basis of information available in such return was prima facie inadmissible. In the present case, therefore, when there were conflicting judgments on interpretation of section 80-O, in our view, prima facie adjustments contemplated under section 143(1)(a) was not applicable and, therefore, consequently the appellant was not liable to pay additional tax under section 143 (1A) of the 1961 Act.” In view of the said legal position, we answer the question in the affirmative in favour of the assessee and against the Revenue and both the Referred Cases shall stand disposed of accordingly without any order as to costs. _______________ (V.V.S.RAO, J) ____________________ (B.N.RAO NALLA, J) 28th December 2011 RRB [1] (1990) 183 ITR 29 [2] (1995) 214 ITR 368 [3] (2007) 291 ITR 5090 (SC) [4] (2008) 305 ITR 103 (SC) "