SECTION 57 l DEDUCTIONS FROM INCOME
FROM OTHER SOURCES

463. Foreign exchange entitlement certificate fee under Ceylon Exchange Control Law - Whether deductible expense under clause (iii)

1. Indians, who have been and are being repatriated from Ceylon under the Ceylon Government’s repatriation policy, cannot bring with them more than a very limited amount of their savings. The balance has to be left in Ceylon in a bank to the credit of a non-resident blocked account.

2. According to the Ceylon Exchange Control Law, a fee called “foreign exchange entitlement certificate fee” is to be paid before any amount could be remitted outside Ceylon. Thus the interest on the non-resident blocked account is remitted to the assessees who are repatriates from Ceylon after deducting the foreign exchange entitlement certificate fee. A question has arisen as to whether, for the purpose of income-tax in India, the gross interest income is assessable or whether it could be assessed only after allowing the deduction of the “foreign exchange entitlement certificate fee”, under section 57(iii).

3. The matter has been examined and the Board are advised that the interest on the blocked account has already been earned before the fee under the Ceylon Exchange Control Law is deducted. It could not, therefore, be said that the expenditure in question is for the purpose of making or earning the said income. Hence, the fee under the Ceylon Exchange Control Law is not a deductible expense under section 57(iii).

Circular : No. 156 [F. No. 173/96/72-IT(A-I)], dated 23-12-1974.

464. Deduction for expenses on commission payable to agents appointed under the Standardised Agency System for Government securities and the agents of Post Office Time Deposits and Unit Trust of India

1. The agents of Standardised Agency System, Post Office Time Deposits and Unit Trust of India, have drawn the attention of the Board to the fact that where no detailed accounts are maintained and the gross commission received by them is less than Rs. 60,000, the benefit of an ad hoc deduction for expenses, at the rate of 50 per cent of the gross receipts of commission, is available to the authorised agents of Unit Trust of India and the agents of the following securities :—

  (i)  National Savings Certificates II Issue;

(ii)  National Savings Certificates VI Issue;

(iii)  National Savings Certificates VII Issue;

(iv)  Social Securities Certificates; and

(v)  Post Office Time Deposits.

2. In view of the discontinuance of some of the above certificates and the notification of new schemes, the aforesaid agents have requested that the currently notified schemes, as listed in paragraph 3 below, may be allowed the benefit of the same ad hoc deduction.

3. The Board has considered these representations and has decided that the benefit of an ad hoc deduction, at the rate of 50 per cent of the gross receipts of commission, be given to the authorised agents of Unit Trust of India and the agents of the following securities :—

(1)  National Savings Certificates VIII Issue;

(2)  Social Securities Certificates;

(3)  Post Office Time Deposit Accounts;

(4)  Post Office Recurring Deposit Accounts;

(5)  National Savings Scheme, 1987;

(6)  Post Office Monthly Income Account Scheme;

(7)  Kisan Vikas Patra;

(8)  Public Provident Fund Accounts; and

(9)  Deposit Scheme for Retiring Government Employees, 1989.

Circular : No. 594, dated 27-2-1991.

465. 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 no ad hoc deduction will be allowed from this amount.

5. The benefit of ad 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)

466. Whether benefit of ad hoc deduction for expenses @ 50 per cent of gross receipts of commission should be given to agents of those mutual funds which are notified by Central Government for purposes of section 10(23D) and who are not maintaining detailed accounts for expenses incurred by them and having gross commission of less than Rs. 60,000 for the year, including gross commission, as authorised agents of UTI and securities specified in Circular No. 594, dated 15-5-1991 and Circular No. 648, dated 30-3-1993

1. The Board in Circular No. 594, dated 27-2-1991 (Sl. No. 461) and corrigendum dated 15-5-1991 has granted, subject to conditions therein specified, benefit of ad hoc deduction for expenses @ 50 per cent of the gross receipts of commission, to the authorised agents of the Unit Trust of India and the agents of the Securities specified in the circular. The benefit of ad hoc deduction is available only where no detailed accounts are maintained and the gross commission received by the agents is less than Rs. 60,000.

2. The Board has received representations for grant of similar ad hoc deduction to agents of mutual funds.

3. The Board has considered these representations and has decided that the benefit of ad hoc deduction for expenses @ 50 per cent of the gross receipts of commission be given to the agents of those mutual funds which are notified by the Central Government for purposes of section 10(23D) of the Income-tax Act, 1961. The benefit of ad hoc deduction will only be available to agents not maintaining detailed accounts for the expenses incurred by them and having gross commission of less than Rs. 60,000 for the year, including gross commission as authorised agents of Unit Trust of India and agents of Securities specified in Board’s Circular No. 594, dated 27-2-1991 and corrigendum dated 15-5-1991, as well as total commission from Life Insurance Corporation as specified in Board’s Circular No. 648, dated 30-3-1993. (Sl. No. 462).

4. The benefit of ad hoc deduction will not be available to agents who have earned gross commission as computed above of more than Rs. 60,000 from all the abovementioned sources put together during the year. The admissibility of expenditure claimed by such agents (with higher income) will be decided by the Assessing Officers as per the provisions of the Income-tax Act.

Circular : No. 677, dated 28-1-1994.

INSTRUCTIONS ISSUEd PRIOR TO CIRCULAR NO. 594, DATED 27-2-1991; CIRCULAR NO. 648, DATED 30-3-1993 & CIRCULAR NO. 677, DATED 28-1-1994

467. Commission earned by agents on deposits under Post Office Time Deposits - 40 per cent of gross receipts to be allowed as deduction under clause (iii)

The Board have decided that 40 per cent of the gross receipts from the commission earned by the authorised agents on the deposits secured by them for the Post Office Time Deposits should also be allowed as a deduction under section 57 while assessing such commission.

Instruction : No. 460 (extracts) [F. No. 168/3/72-IT (A-I)] dated 4-10-1972.

468. Commission earned by agents of Unit Trust of India - 40 per cent of gross receipts to be allowed as deduction under clause (iii)

The Unit Trust of India have appointed agents throughout the country for canvassing the sale of units. The agents are paid 1 per cent commission on the face value of units in respect of applications canvassed by them. It has been decided by the Board that the instructions contained in the Board’s Letter F. No. 8/7/61-IT(A-I), dated 13-11-1961, should also be followed for assessing the income from commission earned by these agents on the sale of units. Thus, a sum representing 40 per cent of the gross receipts from such commission should normally be allowed as deduction under section 57 in assessing such commission income.

Letter : F. No. 8/2/68-IT (A-I), dated 18-10-1968.

469. Commission earned by agents on sales of national savings certificates - 40 per cent of gross receipts to be allowed as deduction under clause (iii)

1. Attention is invited to the Board’s Letter C. No. 39(2)-IT 45, dated 29-1-1945 wherein it was laid down that in assessing the 2½ per cent commission on sales of national savings certificates, effected by the agents appointed by the Central Government, a deduction equivalent to 20 per cent of the commission should be allowed under section 12(2) of the 1922 Act [corresponding to section 57(iii) of the 1961 Act] to cover the expenditure incurred in canvassing, conveyance and other incidental items for earning the commission.

2. Under the central agency system, since introduced, the agents are paid commission at the reduced rate of 1¼ per cent on sales. As it is unlikely that expenses incurred by the agents would have diminished, the Board have decided that in view of the reduction in the rate of commission earnings of the agents, 40 per cent of the gross receipts from commission should be normally allowed as a deduction under section 12(2) in assessing such commission for and from the assessment year 1955-56.

Circular : No. 25(LXVII-8)-D, dated 7-6-1955.