Circular No. 648

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

What this is

Circular No. 648 was issued by the Central Board of Direct Taxes on 30 March 1993. Its subject is 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.

What it does

Fixes fresh ad hoc deduction rates for expenses of Life Insurance Corporation agents whose total commission - first year, renewal and bonus commission taken together - is less than Rs. 60,000 for the year and who do not maintain detailed expense accounts. Where separate figures of first year and renewal commission are available, 50 per cent of first year commission and 15 per cent of renewal commission; where they are not, 33 1/3 per cent of gross commission. Either way the ad hoc deduction is capped at Rs. 20,000. Gross commission for the second limb takes in first year and renewal commission but excludes bonus commission, and bonus commission is fully taxable with no ad hoc deduction against it. The circular supersedes the earlier letter of 22-9-1965 and Instruction No. 1546 dated 6-1-1984, and applies from assessment year 1993-94 onwards.

Why it was issued

The Board revisited the older ad hoc allowance, which had been given by the 1965 letter as modified in 1984, and decided to replace it.

Who it reaches

Life Insurance Corporation agents with commission below Rs. 60,000 in the year
Agents who do not keep detailed accounts of their expenses
Agents earning bonus commission
Assessing Officers examining agents' expense claims

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.

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)]

What to watch

An agent whose total commission exceeds Rs. 60,000 gets nothing under this circular; his expenditure is decided on the ordinary provisions of the Act.
Bonus commission counts towards the Rs. 60,000 test but earns no ad hoc deduction.
The Rs. 20,000 ceiling applies to both limbs, so the percentage is only a first step.
An agent who keeps complete and reliable accounts is assessed on those accounts and the ad hoc scale does not apply to him.

Where you meet it

In the assessment of an insurance agent's return where expenses are claimed without vouchers, and in appeals against disallowance of an agent's expenditure.

An example

Ours, not the Board’s: a worked case built from the rule the instrument sets, to show how it falls out.

An agent earns first year commission of Rs. 30,000, renewal commission of Rs. 20,000 and bonus commission of Rs. 5,000, a total of Rs. 55,000, and keeps no accounts. The ad hoc deduction is 50 per cent of Rs. 30,000 plus 15 per cent of Rs. 20,000, that is Rs. 18,000, which is within the Rs. 20,000 cap; the Rs. 5,000 bonus commission is taxed in full.

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.