Circular No. 120

What it does

Says an insurer cannot net off earlier debits before deducting on commission. When an agent brings a proposal his account is credited with commission, and if part of the premium is later refunded his account is debited with the commission on the refunded premium; the doubt was whether, on the next credit, tax could be deducted at 10 per cent on the credit as reduced by those intervening debits. The Board holds that such an adjustment is not permissible. Section 194D requires deduction at the time of credit of the commission to the payee's account or at payment, whichever is earlier, and on a plain reading tax is to be deducted from the amount credited or paid, so where the credit is made after the debits the deduction must be made on the full amount credited.

Why it was issued

A doubt had been raised by insurers on whether intervening debits in an agent's running account could be set off before deducting on a later credit.

Who it reaches

Insurers operating running accounts with agents
Insurance agents whose commission is clawed back on refunded premium
Assessing Officers examining an insurer's deduction on commission

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.194D	s.393

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

1124. Whether, at the time of deducting tax from insurance commission credited to agent’s account, adjustment for debits made earlier is permissible
1. A doubt has been raised whether at the time of deducting tax from the insurance commission credited to an agent’s account adjustment for the debits made earlier is permissible or not. At the time a proposal is brought by an agent, his account is credited with the appropriate amount of commission. It may happen after some time that a portion of the premium paid earlier is refunded to the insurer. At the time of making the refund of premium the agent’s account is debited by an appropriate amount representing the commission on the premium refunded. On the original credit the insurer is required to deduct tax at the rate of 10 per cent. The doubt is whether at the time when a subsequent credit is made and the tax is to be deducted from such credit, an adjustment for intervening debits is permissible so that deduction at the rate of 10 per cent is made only on the amount credited as reduced by the debit made to that account.
2. The Board are of the view that in such cases adjustment for intervening debits is not permissible. Under section 194D, the person responsible for paying insurance commission to a resident is required to deduct tax at the time of credit of such insurance commission to the account of the payee or at the time of payment thereof, whichever is earlier. A plain reading of this section would suggest that the deduction of income-tax is to be made from the amount credited or paid. If the credit to the account is made subsequent to making of the debits, the deductions will have to be made from the full amount credited.
Circular : No. 120 [F. No. 275/107/73-ITJ], dated 8-10-1973.

What to watch

Deduction is on the gross credit; a net figure struck after debits leaves a short deduction with the consequences that follow.
The trigger is credit or payment, whichever is earlier, so a mere book credit starts the obligation.
The 10 per cent figure is the rate then in force for the payee in question, not a fixed rule.
The agent's remedy for the tax deducted on commission he did not ultimately keep lies in his own assessment, not in the deduction.

Where you meet it

In a short-deduction proceeding against an insurer that deducted on the net credit in an agent's account.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Notification No. 31 — Income-tax (Eighth Amendment) Rules, 2009 - Amendments in Forms 24Q, 26Q, 27Q, 27EQ; Substitution of Rules 30, 31, 31A, 25 March 2009
Circular No. 656 — Section 194D l Insurance Commission 26 August 1993
Circular No. 633 — Financial Year 1992-93 20 August 1992
Circular No. 619 — Section 194H l Commission, Brokerage, ETC 1 4 December 1991
Circular No. 614 — Financial Year 1991-92 14 November 1991
Circular No. 570 — Financial Year 1990-91 27 July 1990

← Circular No. 121 · Circular No. 119 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.

What this is