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Applicability of Maintenance of Books of Accounts for Insurance Agents

applicability-of-maintenance-of-books-of-accounts-for-insurance-agents

The law on applicability of maintaining books of accounts by insurance agents including agents of LIC, general insurance, PPF agents etc. in accordance with section 44AA is a subject matter of great importance. Further, type of income tax return (ITR) forms and applicability of presumptive taxation scheme under section 44AD on insurance agents needs clarity to avoid any confusion.


    Introduction


    There are many types of insurance agents who are securing business for the insurance companies and in turn, they get a commission for securing the business. This commission is the source of their income. Some agents are earning high income and work on a full-time basis as their career whereas some agents do the job on a part-time basis.


    One of the major confusion in the minds of many insurance agents is whether insurance agents need to maintain books of accounts under the income tax law. This attains more importance for selecting the option in ITR forms. ITR-3 requires the taxpayer to state whether the assessee is required to maintain books of accounts as per section 44AA and the taxpayer has to tick appropriately.


    Maintenance of Books of Accounts by Insurance Agents


    The commission income that an insurance agent earns in a previous year normally falls under the head ‘Income from Business/Profession’. As per para 4.5 of the Guidance Note on Tax Audit under Section 44AB of the Income-tax Act, 1961 issued by ICAI, the activities of an Insurance Agent fall under the category of ‘Business’.



    Section 44AA mandates the requirement for maintenance of books of accounts by a person carrying on business/profession. There are two criteria to determine the requirement of maintaining books of accounts by an insurance agent-


    1. Income criteria: When income from business or profession is likely to exceed Rs 1,20,000 then an assessee is required to maintain books of account.


    2. Turnover Criteria: When total sales, turnover or gross receipts, as the case may be, in business or profession exceed or exceeds Rs. 10 Lakh in any one of the 3 years immediately preceding the previous year, then an assessee is required to maintain books of account.


    It should be noted that if any one of the two criteria is fulfilled, then the insurance agent is required to maintain regular books of accounts under section 44AA. If none of the criteria is fulfilled, then there is no requirement to maintain the books of accounts. This is because, in section 44AA, these two criteria are dealt with connective "or" which means that either income of Rs. 1,20,000 or Turnover of Rs. 10,00,000 is required to be satisfied. In case anyone out of the two criteria is satisfied, there exists a need to maintain the Books of Accounts under section 44AA.



    Once an insurance agent is required to maintain regular books of accounts under section 44AA then he needs to fill full details of Profit & Loss and Balance sheet in his income tax return.


    Insurance agent and Presumptive Taxation Scheme of section 44AD


    Applicability of Presumptive Taxation under Section 44AD on Insurance Agents


    There is a doubt in the minds of many insurance agents including LIC agents whether they can opt for a presumptive taxation scheme under section 44AD to declare income @ 6% or 8% of gross receipts of commission income. 


    Under the scheme of section 44AD, a sum equal to 8% of the total turnover or gross receipts is deemed to be the profits and gains from business.


    In this context, one should note that ICAI has categorized the insurance agency as business activities and thus is covered by section 44AD. Section 44AD provides that an eligible assessee carrying on any eligible business can opt for the presumptive taxation scheme.


    The presumptive taxation scheme of section​ 44AD can be adopted by the following persons :


    1) Resident Individual

    2) Resident Hindu Undivided Family

    3) Resident Partnership Firm (not Limited Liability Partnership Firm)


    In other words, the scheme cannot be adopted by a non-resident and by any person other than an individual, a HUF or a partnership firm (not Limited Liability Partnership Firm).


    Further, the scheme of   section 44AD is designed to give relief to small taxpayers engaged in any business, except the following businesses:


    Business of plying, hiring or leasing goods carriages referred to in sections 44AE.

    A person who is carrying on any agency business.

    A person who is earning income in the nature of commission or brokerage

    Any business whose total turnover or gross receipts exceeds two crore rupees.​


    Section 44AD(6) explicitly prohibits the applicability of these provisions on a business where the person earns income by way of commission or brokerage. This condition was inserted in the statute by an amendment by Finance Act, 2012.


    The FAQs on the web portal of the income tax department further clarifies that an individual who is earning income in the form of commission or brokerage from cannot adopt the presumptive taxation scheme of Section 44AD. Given that insurance agents earn income by way of commission, they will not be able to adopt the presumptive taxation scheme of Section 44AD.


    The relevant FAQ reads as follows-


    Can an insurance agent adopt the presumptive taxation scheme of section 44AD?


    ​​​​​​​​A person who is earning income in the nature of commission or brokerage cannot adopt the presumptive taxation scheme of section 44AD​. Insurance agents earn income by way of commission and, hence, they cannot adopt the presumptive taxation scheme of section 44AD​.


    Since LIC agents receive a commission from insurance companies which fall under the head business income, they can file their returns using ITR-3. Insurance agents cannot file ITR-4 (Sugam), since ITR-4 (Sugam) cannot be filed by a person who cannot adopt section 44AD.


    Instructions for filling ITR-4 (SUGAM) clearly states that “Please note that the scheme of presumptive business income u/s 44AD is not applicable for persons carrying on professions as referred to in Section 44AA, or earning income in the nature of commission or brokerage or carrying on any agency business. In such cases, it is mandatory to maintain books of accounts as required u/s 44AA and return of income should be filed in regular Form ITR-3 or ITR-5, as applicable”. 


    This return form ITR-4 (Sugam) also cannot be used by a person who has any income of the following nature during the previous year “Profits and gains from business and professions which is not required to be computed u/s 44AD, 44ADA or 44AE, such as income from speculative business, agency business, commission or brokerage income etc.


    Income Tax Return for Insurance Agents


    As stated earlier, the commission income by insurance agents is chargeable to tax under the head business income. Since an insurance agent cannot adopt presumptive taxation scheme as per section 44AD, an insurance agent including LIC agent is required to file his return of income in ITR-3. An insurance agent cannot use ITR-4 (Sugam).


    Regarding the provisions related to maintenance of books of accounts by an insurance agent, CBDT Circular No. 648 dated 30.03.1993 issued in this regard is noteworthy.


    This Circular does not deal with the maintenance of books of accounts by an insurance agent, it deals with ad-hoc deduction of expenses from commission income not maintaining detailed accounts for expenses.


    This circular clarifies the position of the income tax department regarding allowability of ad-hoc deduction of expenses from total commission income including first-year commission, renewal commission and bonus commission.


    One should note that this circular covers only the commission income earned by the LIC agents and not other insurance agents. This, even, does not cover other life insurance agents other than LIC agents. This is because this Circular was issued in the year 1993 when IRDA was not in existence. This was not modified even after the incorporation of IRDA in the year 2000 when private life insurers were allowed to commence life insurance business in India.


    Circular No. 648 of 1993 allows an ad-hoc deduction for expenses for a maximum amount of Rs. 20,000 in a year if total commission income does not exceed Rs. 60,000 and the LIC agent does not maintain a detailed account of expenses incurred by him.


    The circular adds 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, maybe 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.


    The "gross commission" will include first year as well as renewal commission but will exclude bonus commission.


    The entire 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.


    The benefit of ad-hoc deduction will not be available to agents who have earned a total commission of more than Rs. 60,000 during the year.


    From the literal reading of the Circular it is clear that this circular does not mandate non-maintenance of books of account by insurance agents/LIC agents, but it allows an ad-hoc deduction from insurance commission income who don’t maintain a detailed account of expenses incurred and that too if the total annual commission income does not exceed Rs. 60,000. Once this exceeds Rs. 60,000, the LIC agent needs to maintain a detailed account of all the expenses incurred.


    Thus the law is clear that it is mandatory for insurance agents to maintain books of accounts for claiming expenses. However, a relief is given to small LIC agents whose annual commission income does not exceed Rs. 60,000 from maintaining a detailed account of expenses.


    Note: The circular related to the allowability of deduction against commission income of insurance agents was first clarified in 1965. This was thereafter amended in 1984 and then in 1993. There is no further amendment to the ceiling amount of gross commission income for allowing ad hoc deduction in case no regular books of accounts are maintained.

     

    The quantum of Rs 60,000 ceiling was undoubtedly substantial in 1993 but this amount is minuscule in today’s context. Not only this, presently, the overall ceiling on the deduction of Rs. 20,000 is also a meagre amount. In 1993 or 1994, the basic exemption limit was at around Rs. 30,000-35,000 as against Rs. 2,50,000 in the present era. Hence, the ceiling amount of Rs. 60,000 and ad-hoc deduction of Rs. 20,000 has lost its significance.

     

    Therefore, it follows that every insurance agent has to maintain books of accounts if he satisfies income criteria or turnover criteria as specified in section 44AA.


    Computation of Insurance Commission Income


    Commission income from insurance agencies is computed in the normal manner in which business income is computed. 


    All the receipts by way of commission income, incentive etc., is credited to the P & L account. All the expenses viz., telephone expenses, printing and stationery, conveyance expenses, staff salary, etc., are charged to the P&L account. The net surplus of income over expenses is business income.


    Similarly, the Balance Sheet of the insurance agent is prepared.


    It should be noted that for the preparation of the P & L account and Balance Sheet, one needs to maintain books of accounts.


    Section 44AA does not prescribe any books of accounts which specifically needs to be maintained by insurance agents. They have to maintain such books of accounts from which income can be correctly computed.


    Insurance Agents having commission income of less than Rs. 60,000 per year: One important point to be noted here is that in case the total commission income of an insurance agent is less than Rs. 60,000 in a financial year, then he is not required to maintain detailed accounts for the expenses incurred. However, in this case, he can claim a deduction for expenses up to Rs. 20,000 as per CBDT Circular No. 648 of 1994.


    Tax Audit Requirement of Insurance Agents


    Section 44AB of the Income Tax Act, 1961 provides the conditions for applicability of tax audit in certain cases. It has 5 clauses (a) to (a) which lays down the provisions for tax audit under 5 different cases. 


    Clause (a) to section 44AB provides for tax audit in the case total sales, turnover or gross receipts in business of the person exceeds Rs 1 crore in any previous year.


    Finance Act, 2020 has inserted a proviso to the said sub-section to provide that where the total cash receipts or payments do not exceed 5% of aggregate receipts and payments respectively, the limit of  total sales, turnover or gross receipts in business of the person shall be increased to Rs 5 Crores.


    Thus the turnover limit of the person for the purpose of applicability of tax audit is Rs 5 crore if the amounts of cash payments and receipts do not exceed 5% and Rs 1 crore in other cases. For the purpose of this proviso, the receipts or payments should include all the receipt or payments whether on revenue account or capital account. 


    There is an exception to this rule which provides that, if total sales, turnover or gross receipts in business of the person is up to Rs 2 crore and if he is eligible and has declared profits as per presumptive taxation scheme u/s 44AD, he shall not be liable for a tax audit.


    Section 44AB(b) provides for tax audit where the gross receipts of a person carrying on profession exceed Rs 50 lakh in any previous year.


    As stated above, the activities of insurance agents have been classified as ‘business’. Hence, if the commission income of an insurance agent exceeds Rs. 1 crore or Rs. 5 crore, as the case may be, is liable for tax audit under section 44AB(a). This shall apply to all insurance agents including LIC agents. Further, an insurance agent is ineligible for declaring his income under the presumptive taxation scheme under section 44AD, so clause (e) to section 44AB is inapplicable for insurance agents.


    Penalty for failure to furnish Tax Audit Report by Insurance Agents


    Where an insurance agent’s total sales, turnover or gross receipts in business in the previous year exceeds the specified limit and if he fails to get his accounts audited then he may be liable to pay penalty as stipulated in section 271B.


    Section 271B provides that "if any person fails without reasonable cause" to get his accounts audited in respect of any previous year or years relevant to an assessment year or obtain a report of such audit as required under Section 44AB, the Assessing Officer may direct that such person shall pay by way of penalty, a sum equal to one-half per cent, of the total sales, turnover or gross receipts in business in such previous year or a sum of Rs. 1,50,000, whichever is less. If reasonable cause has been shown, then it is always a discretion of the Income-tax Officer to levy the penalty or not to levy the penalty.


    TDS on Insurance Commission earned by Insurance Agents


    Insurance agents typically earn money in the form of commissions from the sale of insurance policies. Section 194D of the Income Tax Act, 1961, provides for deduction of income tax (TDS) from such commission income of insurance agents.


    As per this Section, the insurance company must deduct income-tax (TDS) while making payment of commission income to a resident insurance agent shall deduct TDS at the prescribed rates if the aggregate amount of payment of commission to an insurance agent exceeds Rs. 15,000 in a financial year. If the amount of payment does not exceed Rs. 15,000 in a financial year then no tax is required to be deducted from the commission income.


    The prescribed rate of TDS for insurance commission under section 194D is 5%.


    Furnishing Form 15G/Form 15H for non-deduction of TDS from insurance commission income: Where the commission payment to an insurance agent exceeds Rs. 15,000 in a financial year, the payer will start deducting TDS from such payment.


    In order to avoid such TDS from commission income, the insurance agent shall submit Form 15G or Form 15H to the insurance company.


    Readers are aware that Form 15G can be filed by a resident person and the commission income does not exceed the basic exemption limit of Rs. 2,50,000/- in a financial year. Similarly, Form 15H is filed by a resident senior citizen individual only. Such a senior citizen shall have nil taxable income in the financial year; limit of which is currently limited at Rs. 5,00,000.


    CBDT Circulars on Insurance Agents/Commission income from insurance agency


    CBDT has issued clarifications on the allowability of ad hoc deduction income from insurance and mutual fund business on Insurance Agents/Commission income from insurance agency by Circular Nos. 594 dated 27-2-1991 , 648 dated 30-3-1993 and 677 dated 28-1-1994.


    Circular No. 594 dated 27-2-1991 allows ad hoc deduction at the rate of 50 per cent of the gross receipts of commission by agents of Standardised Agency System, Post Office Time Deposits and 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;


    where no detailed accounts are maintained and the gross commission received by them is less than Rs. 60,000.


    Circular No. 648 dated 30-03-1993 allows 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 upto a maximum of Rs. 20,000 per annum.


    Circular No. 677 dated 28-1-1994 allows the benefit of ad hoc deduction for expenses @ 50 per cent of gross receipts of commission 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 a gross commission of less than Rs. 60,000 for the year, including gross commission.


    Read the full text of these Circulars


    Circular No. 594, dated 27-2-1991


    461. 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. 648 dated 30-03-1993


    462. 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)


    Circular No. 677, dated 28-1-1994


    463. 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.



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