THE COMMISN OF INCOME TAX V. M.KRISHNA REDDY

RC/197/1996

AI Insights

The case involves Sri M. Krishna Reddy, a Development Officer at the Life Insurance Corporation of India, who claimed 40% of his incentive bonus as exempt under Section 10(14) of the Income Tax Act, 1961 for the assessment year 1984-85. The Commissioner of Income-tax revised this claim, stating that the incentive bonus is part of salary under Section 17 and not covered by Section 10(14). The Income Tax Appellate Tribunal (ITAT) initially ruled in favor of Reddy, allowing the deduction. However, upon reference by the revenue, the High Court examined whether the ITAT was justified in its decision and whether the CIT's order under Section 263 was prejudicial to the interests of the revenue. The court found that the incentive bonus does not meet the criteria set out in Section 10(14) as it is a perquisite under Section 17(2) and not specifically granted to meet expenses incurred in the performance of duties.

• Counselvise Citation: [2010] 140 COUNSELVISE.COM (IT) 682903 (HC-NOT SPECIFIED)
• Appeal Type: Others
• Pronouncement Date: 16-11-2010
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax v. B. Chinnaiah (1994) 214 ITR 368, K. A. Chowdary v. Commissioner of Income Tax (1990) 183 ITR 29
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Keywords: Exempt; Expenses; Incentive bonus; Perquisite; Salary; Special Allowance; Performance of duties
• Section: 263; 10(14); 16(1); 17

Judgement Text

"THE HON'BLE SRI JUSTICE V.V.S.RAO AND THE HON'BLE SRI JUSTICE RAMESH RANGANATHAN R.C. No.197 of 1996 ORDER: (Per Hon’ble Sri Justice V.V.S.Rao) The respondent Sri M. Krishna Reddy, Development Officer in Life Insurance Corporation of India filed return for 1984-85. He claimed 40% of incentive bonus as exempt under Section 10(14) of the Income-tax Act, 1961. The Commissioner of Income-tax, however, suo motu revised holding that incentive bonus forms part of salary under Section 17 and, therefore, is outside the scope of Section 10(14). The assessee appealed successfully. On a reference sought by the revenue, the following question are referred to the High Court. 1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that 40% of the incentive bonus should be allowed as an expenditure in addition to the standard deduction under Section 16(1) and more so when the expenditure involved, if any, in travelling is covered by the conveyance and additional conveyance allowance provided by the employer and exempted under Section 10(14) of the Income Tax Act, 1961? 2. Whether on the facts and in the circumstances of the case, the ITAT is correct in law in holding that the order of the CIT passed under Section 263 was not prejudicial to the interests of revenue? Inspite of service of notice, none appears for the assessee. This Court heard the Junior Standing Counsel for Income-tax department. He placed reliance on Commissioner of Income Tax v. B. Chinnaiah (1994) 214 ITR 368 and submits that the incentive bonus cannot be treated as a deduction under Section 10(14) of the Act. In K. A. Chowdary v. Commissioner of Income Tax (1990) 183 ITR 29, it was held that the incentive bonus would fall within the meaning of salary under Section 17. In B. Chinnaiah1, following the same, the Division bench answered a similar question in favour of the revenue. The relevant observations are as follows: “A perusal of the abovesaid provisions shows that their requirements are : (1) the amount in question is in the nature of special allowance or benefit; (2) the special allowance or benefit is not in the nature of perquisite within the meaning of section 17 (2); (3) such amount is specifically granted to meet expenses wholly, necessarily and exclusively incurred in the performance of duties of an office or employment of profit; and (4) such amount should be specified and notified in the Official Gazette by the Central Government. It is only where there requirements are satisfied, that the deduction would be allowable only to the extent to which such expenses are actually incurred for the purpose mentioned above. We shall now examine whether the said requirements are fulfilled in this case. We have already noted the Division Bench judgment in M. Krishna Murthy's case [1985] 152 ITR 163 (AP), wherein it is laid down that the incentive bonus is in the nature of a perquisite within the meaning of section 17 (2) of the Income-tax Act; further, to enable the assessee to have the advantage of the said provision there must be a notification by the Central Government specifying the extent to which the expenses are allowable. In the instant case, there is no such notification. For these reasons, in our view, the assessees cannot draw any support from section 10 (14) of the Act. No judgment is brought to our notice taking a view contrary to the decision of this court in K. A. Choudary v. CIT [1990] 183 ITR 29, which is binding on us. In our view, that judgment does not require reconsideration. In this view of the matter, we do not consider it necessary to delve into the other contentions raised by learned counsel appearing for the assessee or deal with the judgments cited in support thereof.” In view of the two Division bench judgments of this Court, we answer the reference in the negative in favour of the revenue. There shall be no order as to costs. ______________ V.V.S.RAO, J ____________________________ RAMESH RANGANATHAN,J Date: 16.11.2010 MRKR "