Bombay H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in including excise duty paid on goods lying at the company’s depot at the end of the year in value of the closing stock of finished goods?

Counsel Appeared

V.B. Patel with K. Shivram & Ms. U.I. Dalal, for the Applicant : R.V. Desai with B.M. Chatterjee, for the Respondent

JUDGMENT

DR. B.P. SARAF, J. :

By this reference under s. 256(1) of the IT Act, 1961, the Tribunal has referred the following questions of law to this Court for opinion at the instance of the assessee:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in including excise duty paid on goods lying at the company’s depot at the end of the year in value of the closing stock of finished goods?

2. Whether, on the facts and circumstances of the case, the Tribunal was justified in law in treating the amount of Rs. 1,00,000 paid to Shri I.K. Agarwal as ‘profits in lieu of salary’ under cl. (i) of sub-s. (3) of s. 17 of the IT Act 1961 and thereby disallowing the same under s. 40A(5) of the IT Act, 1961?”

So far as the first question is concerned, Ms. Patel, learned counsel for the assessee stated before us that since the controversy therein has now become academic for the assessee, this question is not pressed. Question No. 1 is therefore, returned unanswered.

So far as question No. 2 is concerned, the controversy therein is whether the amount of Rs. 1,00,000 paid by the assessee-company to its executive director Shri I.K. Agarwal at the time of his leaving the company is an expenditure or allowance within the meaning of sub-s. (5) of s. 40A of the IT Act, 1961 (“Act”). The case of the assessee-company is that it was running into losses till 1971 when Shri I.K. Agarwal took over as the executive director of the company and due to the valuable services rendered by him to the company, the profitability of the company went up. The payment of Rs. 1,00,000 was, therefore, sanctioned to Shri I.K. Agarwal as per the resolution of the Board of Directors for the exceptional services rendered by him. The case of the assessee- company before the ITO was that this amount was paid to Shri I.K. Agarwal at the time of his leaving the company in appreciation of his personal qualities as an employee, and, therefore, it was not in the nature of salary. This contention of the assessee was rejected by the ITO. The order of the ITO was confirmed by the CIT(A), and the Tribunal. Hence, the assessee is before us, by way of reference of question No. 2.

We have heard Mr. V.B. Patel for the applicant, who submits that the amount in question cannot be regarded as salary, as it was in appreciation of personal qualities of Shri I.K. Agarwal as an employee. Mr. Desai, learned counsel for the Revenue, on the other hand, drew our attention to the order of the Tribunal, wherein, there is a categorical finding that the amount was paid as a special bonus for exceptional services rendered by him.

We have carefully considered the rival submissions and perused the order of the Tribunal. We find, so far as the nature of the payment is concerned, it is specifically mentioned in the resolution of the Board that the said amount is paid to Shri I.K. Agarwal as a special bonus for the exceptional services rendered by him. That being so, it wiclearly fall within the definition of “profits in lieu of salary” contained in sub-s. (3) of s. 17 of the Act. Sec. 17(3), at the material time, read as under: 17. “Salary”, “perquisite” and “profits in lieu of salary” defined,— (1)…… (2)…… (3) “profits in lieu of salary” includes (i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto:

7. That being so, the Tribunal was right in holding that the amount of Rs. 1,00,000 paid to Shri I.K. Agarwal at the time of his leaving the company was profits in lieu of salary under cl. (i) of sub-s. (3) of s. 17 of the Act. Question No. 2 referred to us, is therefore, answered in the affirmative i.e., in favour of the Revenue and against the assessee.

Reference disposed of accordingly with no order as to costs.

[Citation: 236 ITR 403]