R. Jayasimha Babu, J. - (1.)THE common question that arises for our consideration in all these tax cases is as to whether the incentive bonus and the additional conveyance allowance paid to the Development Officers of the Life Insurance Corporation of India form part of their salary and are liable to be assessed to tax as salary.
(2.)THIS court in the case of CIT v. E. A. Rajendran [1999] 235 ITR 514, has held that in the absence of any notification issued by the Central Government under Section 10(14)(i) granting exemption the incentive bonus and additional conveyance allowance are liable to be assessed to tax as salary. THIS court also held that such bonus and the additional allowance are part of the salary of the employee having regard to the terms used in Sections 16 and 17 of the Income-tax Act, 1961.
A view similar to the one taken by this court has been taken by the Andhra Pradesh High Court in the case of K. A. Choudary v. CIT [1990] 183 ITR 29, by the Rajasthan High Court in the case of CIT v. Shiv Raj Bhatia [1997] 227 ITR 7, as also by a Full Bench of the Karnataka High Court in the case of CIT v. M D. Patil [1998] 229 ITR 71.

A contrary view however has been taken by the Bombay High Court and the said judgment has been extracted in the decision of the High Court at Gauhati in the case of CIT v. Ram Krishna Banik [1995] 215 ITR 901. The Gauhati High Court has taken a view similar to that taken by the Bombay High Court. The Gujarat High Court has in their elaborate judgment reported in CIT v. Kiranbhai H. Shelat [1998] 235 ITR 635, taken the same view as that of the High Courts at Bombay and Gauhati.

Thus, there is a conflict of opinion among the High Courts as to whether the incentive bonus and additional conveyance allowance paid to the Development Officers form part of their salary. The reasoning of the Gujarat High Court which judgment has been rendered after considering the decisions of the Rajasthan, Karnataka and the Madras High Courts is that the word "profit" in Section 17(l)(iv) is referable only to the amount actually utilisable by the recipient for his own purposes and therefore necessarily excludes all the expenditure incurred by such recipient, even though he is an employee and the amount is received from his employer.

There is unanimity among the High Courts on the status of the Development Officers as full time employees of the Life Insurance Corporation of India and on the fact that the amounts received by the employees from their employer form part of the salary and further that as this bonus and allowance have not been notified under Section 10(14)(i) of the Act, they are not amounts which can be regarded as exempt from the levy of income-tax.

(3.)THE materials placed before the court by the respective counsel show that the Development Officers are whole time employees of the Life Insurance Corporation of India, who are required to discharge the duties and obligations which, inter alia, include the development of the life insurance business of the Corporation. THE very first duty enumerated for the Development Officer is "to develop, to increase the production of new insurance business in the planned way as far as may be practicable in the area that may be allotted to him from time to time". THE other duties and obligations include the duty to supervise and to guide the activities of agents placed under the supervision of the Development Officers, to recruit new agents so as to develop agency force and to act generally in such a way as to activate existing agents and to motivate new agents and to render certain services to policy holders. THE officer is also required to perform such other duties that are entrusted or assigned to him from time to time.
The remuneration payable to the agent is defined in the applicable service rules, as excluding the incentive bonus and the additional conveyance allowance. It is also made clear in the regulations applicable to the Development Officers that the remuneration paid to them is by way of rewarding their performance by offering them incentives or penalising them with disincentives, linked to the net eligible premium in case of poor performance. The manner in which the cost ratio is determined, viz., the proportion of the remuneration paid to the net eligible premium is also laid down by the corporation. The remuneration payable to the officer is not to be in excess of 20 per cent. of the net eligible premium collected on the policies secured by the Development Officer. The Life Insurance Corporation of India (Special Regulations), 1960, Schedule III contains special provisions relating to Class II Development Officers. The instruction given by the Life Insurance Corporation pursuant to the powers conferred on it in regulation IV of the Staff Regulations provides that where the cost ratio of the Development Officer in any appraisal year exceeds the prescribed cost ratio, he shall be subject to one or more disincentives. The disincentives are graded in Clause 5.2 of the instructions as 50 per cent. cut in conveyance allowance, in addition, to no increment, and one, two or three decrements in basic pay. Clause 5.3 of the instructions states that the appropriate disincentive will depend on the extent by which the actual cost ratio in the appraisal year is in excess of the prescribed cost ratio for that year. It will also depend upon whether the actual cost ratio has exceeded the prescribed cost ratio for the first, second, third or subsequent year in succession.

The instruction also provides for incentive bonus payable to those whose cost ratio is less than 20 per cent. The booklet issued by the Life Insurance Corporation entitled, The Development Officers Guide to Success, at page 15, sets out the meaning of cost ratio. The cost ratio in an appraisal year is to be determined by applying the following formula :

"Yearly expenses x 100 divided by F. Y. S. P. I. (eligible premium income).

Where F. Y. S. P. I. is the first year scheduled premium income (eligible premium income)"