The Orissa High Court ruled that the Life Insurance Corporation of India (LIC) ought to deduct TDS while paying the conveyance allowances to its development officers.
Mr. S.K. Jena, the counsel for the petitioner, LIC submitted that the impugned order was passed by the ITO without even a show cause notice being issued to it. He submitted that against the impugned order a revision petition under Section 264 of the Act was filed before the Commissioner of Income Tax, Bhubaneswar. The Commissioner dismissed the said revision petition by order relying inter alia on the CBDT circular dated 1st February, 2001 where it was mentioned that conveyance/additional allowance being taxable are liable for deduction of tax at source. However, LIC contends that in the assessment order the ITO has himself concluded that the returns filed by LIC claimed that the aforementioned two allowances were not income under Section 10 (14) of the Act and this was accepted by the Department.
The Department points out that the language of clause (2) of Section 17 emphasizes that the expenses should have been actually incurred during the year wholly, necessarily and exclusively in the performance of the duties of an office or employment; and the expenses so incurred should be for the purpose of duties of an office or employment. Rule 2BB (1) of the Income Tax Rules (‘IT Rules’) has only prescribed such allowance and not the extent of its allowability. It is accordingly contended by the Department that the submission of the Petitioner Assessee that the conveyance and additional conveyance allowance were not to be included in the total income and the Rules framed thereunder had only restricted the allowance is a misrepresentation of the legal position.
The issue raised was whether LIC had a statutory obligation to deduct tax at source while paying the aforementioned allowances to its development officers.
The division bench headed by the Chief Justice S. Muralidhar and Justice B.P. Routray said that the expenditure reimbursed by LIC would qualify for deduction under Section 10 (14) of the Act. If the expenditure is incurred by the Development Officer, he cannot claim deduction under Section 10 (14) of the Act.
“It appears that LIC devised a proforma for the development officer to fill up certifying the expenditure incurred by them for development of insurance business. A portion of the allowance thus granted was then treated as exempt under Section 10 (14) of the act. Way back on March 12th, 1997 the CBDT informed the Chairman LIC that such procedure was not in accordance with Section 10 (14) of the Act read with Rule 2 BB (i) of the IT Rules and that “unless an allowance is notified under Section 10 (14) (i) of the Act no portion of it can qualify for tax exemption,” the court said.
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