High Court Of Calcutta
Macneill & Magor Ltd. vs. CIT
Asst. Year 1970-71
Sabyasachi Mukharji & C.K. Banerji, JJ.
IT Ref. No. 176 of 1979
8th September, 1981
SABYASACHI MUKHARJI, J. :
In this reference under s. 256(2) of the IT Act, 1961, the following question, as directed by this Court, has been referred to this Court : “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability to pay additional bonus in the sum of Rs. 1,32,795 did not arise in 1969 and the said sum was not, therefore, allowable as a deduction in the asst. yr. 1970-71 ?”
2. In order to appreciate the question, it would be necessary to refer to certain facts. The assessment year involved is 1970-71, which covers the calendar year 1969. The ITO disallowed the assessee’s claim for Rs. 1,32,795 on the ground that it was a provision for an ex gratia compensation and that the liability was neither ascertained nor quantified. There was an appeal from the said order of the ITO before the AAC. Before we mention anything about that, it may be mentioned that, as for income-tax assessment purpose, the business loss was computed at Rs. 1,97,350. It was further contended on behalf of the assessee, before us, that the business loss was computed after disallowance of certain amount and after allowing depreciation of Rs. 1,87,897, which was necessary for income- tax purpose, but actually there was a business profit. In any event, we are not concerned, in the present reference, with that aspect but we are merely noting it because one argument was advanced before us which we shall presently indicate. In the appeal before the AAC, he held as follows : “5. The next ground of appeal is regarding the disallowance of provision for ex gratia amount (compensation) totalling Rs. 1,32,795 which the ITO disallowed on the ground that this provision for ex gratia compensation is a liability not ascertained and quantified and hence he disallowed it. The A/R of the company submits before me that the ITO was not justified in disallowing this provision for expenditure amounting to Rs. 1,32,795 on the ground that the liability was not ascertained and quantified without going into the details of this item. He further submits that this amount though called ex gratia is in fact a provision for bonus for the year 1969, for the Western Region of Kilburn Division, by the appellant-company. He further submits that the total provision for bonus for this region for the year 1969, amounted to Rs. 1,25,292 including Rs. 59,434, which has been provided in the accounts in accordance with the Bonus Act and the balance sum of Rs. 1,32,795 represents bonus payable on account of settlement grant as agreed with the employees’ union. He further submits that in the statement of salaries this amount has been wrongly described as ex gratia. He finally submits that as the liability was determined and quantified it should be allowed. I have given a careful consideration to the submissions made by the learned counsel but find that there is not enough force in the arguments advanced by him. The memorandum of settlement regarding bonus payable for the accounting years 1968 to 1971 has been signed by the respective parties on 15th of January, 1970, which goes to prove that the matter regarding the payment of bonus was under dispute till the end of this assessment year under appeal. It was also outlined in the said settlement that the current result of the appellant- company did not justify payment of bonus beyond the level obtaining under the agreement which expired in 1967. However, the company was prepared to consider a higher quantum only on the basis that this be separated into two parts, the first part being paid as bonus according to the Act formulated and the second part being paid as fixed allowance to the existing staff on the basis of difference between bonus payable under the Act formulated and the higher quantum of bonus they have been accustomed to receive in the past and such payment was termed as a settlement grant. From this agreement it is clear that the appellant-company had not admitted its liability to pay the settlement grant till the end of the year under appeal and also till the agreement was drawn up in January, 1970. The Bonus Act, 1965, gave statutory basis to payment of bonus under a formula set out in the Act itself. It is also provided therein under s. 34(3) of the Act that bonus could be paid in accordance with formula different from the formula given under the Bonus Act should there be agreement between the employers and employees to this effect provided that no such agreement deprived the employees from receiving the minimum bonus as provided under s. 10 of the Act. The appellant-company has not given any satisfactory reasons for bifurcating the payment of bonus into two parts and claiming the ex gratia payment also as bonus which in fact it is not because nothing prevented the company from turning it into bonus as demanded by the employees’ union unless it was a sort of payment which was left to the discretion of the management instead of turning it into an enforceable legal claim. In my opinion, therefore, the ITO was justified in disallowing this provision which did not become a legally enforceable liability till the end of this accounting year under appeal ; this liability should, therefore, be allowed in the year of actual payment.”
3. Being aggrieved by the order of the AAC, the assessee went up in appeal before the Tribunal. The Tribunal noted the rival contentions as also the contentions of the ITO and the AAC. The Tribunal held as follows: “5. We have considered the rival submissions of the learned representative of the parties. The Bonus Act provided for the payment of minimum bonus but it left to the parties to settle at a higher rate. The assessee had been paying bonus in the past and the earlier settlement came to an end in 1967. By the new settlement the parties were required to settle the formula, i.e., the basis of liability and it was not mere quantification of the liability which was to be done. The decision of the Tribunal in I.T.A. No. 3725 (Cal) of 1974-75 is, therefore, not applicable to the facts of the present case as in that case the liability involved was only under the Bonus Act. We may point out that the mere levelling of a part of the liability as a settlement grant would not change the nature of the liability which became legally enforceable on the execution of the settlement on 10th January, 1970. It appears that the assessee paid the earlier liability of bonus as finally settled between the parties for 1968, by the end of 1969. This supports that a tentative decision had been taken but no finality can be attached to it as a formal document was to be executed and until that was done, the settlement did not become final and legally enforceable. We thus hold that the liability to pay Rs. 1,32,795 did not arise during the year under consideration and the AAC was right in affirming the disallowance. In these facts and circumstances, as directed by this Court, the question as indicated above has been referred to this Court.
4. In this case it is clear that the minimum bonus of Rs. 59,434, which was payable under the Bonus Act, has been allowed. But the balance sum of Rs. 1,32,795 was not allowed. It was characterised by the ITO as an ex gratia payment. The AAC held that there was no legal liability for that payment. The Tribunal, as we have mentioned hereinbefore, noted that the assessee had been paying bonus in the past and the earlier settlement in respect of the bonus between the assessee and its workmen came to an end in 1967. Under the settlement , the parties were required to settle the formula, that is, the basis of the liability, and it was not a mere quantification of the liability, according to the Tribunal, which was to be done, and, on the execution of the settlement on 10th January, 1970, the liability was fastened. The assessee had paid the earlier liability of bonus, as finally settled between the parties for 1968, by the end of 1969. The Tribunal was of the view that a tentative decision had been taken, but no finality, according to the Tribunal, could be attributed to it as a formal document was to be executed and until that was done the settlement would not become final or legally enforceable. , On behalf of the assessee it was contended that under the Payment of Bonus Act, 1965, as prevalent in the year in question, viz., 1969, there was a certain statutory liability to pay bonus, quite apart from the liability to pay a minimum bonus, which was the liability imposed by s. 10 of the Act. Sec. 10 enjoins payment of a minimum bonus irrespective of the fact whether the company or undertaking had made any profit or not. Under s. 11 and sub-s. (3) of s. 34, there was an obligation to pay bonus. Sec. 11 stipulated, in substance, that in respect of an accounting year, if certain profit had been made, the workmen were entitled to the payment of bonus in certain manner as indicated in the Second Scheduleâthe details of which we are not really concerned withâif ascertainable surplus was there and there was allocable profits. If that was not done, then under s. 34(3), as was prevalent in that year, the assessee was obliged to enter into an agreement for payment of the bonus. Therefore, it was contended, firstly, on behalf of the assessee that there was a statutory liability quite apart from the liability of payment of minimum bonus as enjoined under s. 10 of the Act to pay certain amount of bonus in this case. It was further submitted that, the fact that in the past the bonus was paid, the fact that the agreement was reached on the 10th January, 1970, after the expiry of the relevant accounting year and the fact that the bonus was actually paid in the year in question in accordance with the settlement which was subsequently entered into between the parties, indicated that there was a certain amount of agreement between the workmen and the assessee-company pursuant to which the payment had been made, and, as such, there was the legal liability for the assessee to make payment, and the discharge of that liability was not only a provision but there was a liability, which was deductible before computing the profit. In the premises, it was submitted that the claim for Rs. 1,32,795 should have been allowed. In this connection, our attention was drawn to ss. 2(1), 2(4), 6, 8, 10, 11, 15 and 34(3) of the Payment of Bonus Act. On behalf of the Revenue, however, our attention was drawn to ss. 11, 2(4), 2(6), 5, and 34(3) and it was contended that where s. 34(3) was invoked, S.11 could not have any application. According to the Revenue, the language of s. 34 (3) makes that position clear. It was further contended that from the order of the ITO, it appeared that there was a loss and, therefore, there was no available surplus and as such there was no scope for the application of s. 11 of the Act. There could only be a liability under s. 34(3) of the Act, if there be any, and that liability could arise only in the year when there was settlement between the parties. In the several decisions the Supreme Court and the different High Courts have examined the question of bonus, when it would become a liability. We shall presently note the decisions but we do not think that there is much dispute as to the principle. The only question is, whether there was a proper application of this principle in the facts and circumstances of the case. Our attention was drawn first to the decision in the case of CIT vs. Swadeshi Cotton & Flour Mills P. Ltd. (1964) 53 ITR 134 (SC), where the Supreme Court, after analysing several decisions, observed, inter alia, as follows (p. 138): “It follows from the above decisions of this Court that: (a) workmen are entitled to make a claim to profit bonus if certain conditions are specified; (b) the workmen have to make a claim from year to year; (c) this claim has either to be settled amicably or by natural adjudication; and (d) if there is a loss or if no claim is made, no bonus will be permissible.”
5. This case, however, was rendered before the coming into operation of the Payment of Bonus Act, 1965. Our attention was also drawn to the observations of the Supreme Court in the case of Calcutta Co. Ltd. vs. CIT (1959) 37 ITR I (SC), where the Supreme Court reiterated that the undertaking to carry out the developments within six months from the dates of the deeds of sale, which, in view of the fact that time was not of the essence of the contract, meant a reasonable time was unconditional and the appellant bound itself absolutely to carry out the same. Therefore, there was an accrued liability that should be allowed, and there was no question about it. The facts of that case were entirely different from the instant case. Oar attention was drawn to the decision in the case of Metal Box Co. of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC), where the Supreme Court observed that where the liability under the scheme of gratuity in respect of the accounting year was stated in the P & L a/c in the absence of any challenge by the workmen to the correctness of the method of valuation and in the absence of a challenge that such a liability could not be estimated air any fair standard, the amount claimed, according to the P & L a/c should be presumed to be genuine and allowed. The Second Schedule of the Payment of Bonus Act, 1965, required the adding back to the net profit shown in the P & L a/c, the amount of depreciation deducted in that account while computing the gross profits. The Supreme Court further observed that the contingent liability discounted and valued as necessary could be taken into account as trading expenses if they were sufficiently certain to be capable of valuation and if profits could not be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if properly ascertainable and its present value was discounted, was deductible from the gross receipts while preparing the P & L a/c. This was recognised in trading circles and there was nothing in the Bonus Act which prohibited such a practice. Such a provision provided for a known liability, of which the amount could be determined with substantial accuracy. It could, therefore, be termed as a reserve. Relying on this proposition, it was submitted on behalf of the assessee that this liability for the payment of bonus was an ascertainable one and in view of the facts and circumstances of this case it was estimated not only with substantial but with actual accuracy and should have been allowed as a deduction.
Reliance was also placed on certain observations of this Court in the case of CIT vs. Eastern Spinning Mills Ltd. (1980) 19 CTR (Cal) 94 : (1980) 126 ITR 686 (Cal). That dealt with the statutory liability created after the coming into operation of the West Bengal Employees Payment of Compulsory Gratuity Act, 1971. We are not directly concerned with that question. If a statutory liability is created certainly that liability has to be taken into consideration in computing the profits of the assessee.
6. Our attention was drawn to the decision in the case of CIT vs. Somasundaram Mills (P) Ltd. (1974) 95 ITR 365 (Mad), where the Madras High Court considered the case of the assesseecompany’s accounts for the calendar year 1956 relevant to the asst. yr. 1957-58. The assessee had made a provision for payment of bonus of a sum of Rs. 1,50,000 for the year 1956, on the basis of 3-3/4 months’ wages. The actual bonus which was paid subsequently was Rs. 1,98,993 equivalent to 5 months’ wages. The claim of the assessee for deduction of the entire amount paid as deduction was negatived by the officer. The AAC and the Tribunal, however, held that the assessee was entitled to the deduction of only Rs. 1,50,000 provided in the accounts and not the balance of Rs 48,993 which had neither been provided for in the accounts nor was it an accrued liability. On a reference to the High Court at the instance of the Department regarding the allowability of Rs. 1,50,000 being the provision for bonus, it was held that as the provision of the sum of Rs. 1,50,000 made in the accounts was not towards any liability for bonus incurred under an award or a settlement by agreement arrived at between the employer and the employee, the amount was not an admissible deduction in law, even though the assessee was adopting the mercantile system of accounting. On the other hand, on behalf of the assessee, reliance was placed on the decision in the case of Addl. CIT vs. Jai Bajrang Nail Industries (1974) 95 ITR 415 (P & H). There the assessee was a manufacturer. In the original return for the asst. yr. 1965-66, for which the financial year was 1964-65, the claim for payment of bonus to employees was limited by the assessee to Rs. 2,000. The provisions regarding payment of bonus under the Payment of Bonus Act of 1965 were made applicable in respect of every “accounting year” commencing on any day in the year 1964. In view of this, the assessee filed a revised return on March 28, 1966, and claimed additional bonus of Rs. 6,200. The ITO rejected this claim but it was allowed on second appeal by the Tribunal. On a reference, it was contended for the Revenue that the liability in that case, though it accrued for the year ending March 31, 1965, the same not having been entered in the account books nor any provision having been made for the same, could not be accounted for in that year. It was held that the stand of the Revenue was untenable. Under the legislation, the assessee was required to pay the bonus for the year in question and he was entitled to make an adjustment in his accounts, which would relate back to the last date of the accounting period. The effect of the enforcement of the Bonus Act would be that the amount of bonus sought to be accounted for subsequently would be deemed to have been included for all intents and purposes in the accounting year for which it was required to be paid by the statute, and it would be deemed to be part of the expenditure for that accounting year. The bonus payable in that case related to the accounting period in question and the assessee would be entitled to the deduction of bonus in accordance with the provisions of the Payment of Bonus Act. The ratio of this decision would be applicable if it could be demonstrated that there was a statutory liability apart from the agreement under s. 33 and apart from the minimum bonus liability to be paid under s. 10 of the Act.
But the real question is, whether there was any liability incurred by the assessee for adjustment or agreement or understanding under s. 34(3) of the Payment of Bonus Act, 1965. Reliance was placed on certain observations of the Bombay High Court in the case of CIT vs. Nagri Mills Co. Ltd. (1958) 33 ITR 681 (Bom). There, a company which maintained its accounts on the mercantile basis did not make any entry towards bonus for the calendar year 1951, but, on a dispute regarding bonus payable to the workers for that year being referred to the conciliation board, the board, by its award in June, 1952, directed the company to pay bonus out of the profits for that year, and the company in making the return claimed to deduct for the year 1951, the bonus which it distributed in December, 1952, against the last item of Pt. IV of the income-tax return. It was held that as under s. 10(5) of the IT Act actual payment was not necessary for the purpose of deduction and it was sufficient if the liability to bonus was incurred according to the method of accounting upon the basis of which the profits or gains were computed, the company was entitled to the deduction of the bonus paid from the profits for the year 1951, even though the amount had not been entered in its accounts for that year. This proposition cannot be disputed. Liability incurred for that year, even though not included in the accounts made for that year, would not disentitle the assessee to claim bonus. The main question is : was there any liability incurred in the accounting year for payment of this additional bonus which was disallowed by the Revenue ? More or less the same view was expressed by the Division Bench of this Court in a different context in the case of Textile Machinery Corporation Ltd. Vs. CWT (1968) 67 ITR 122 (Cal). There, the assessee claimed certain deductions to which he was entitled under the taxing statute, under a wrong section of the statute, and it was held that it was open to the High Court to hold that the deduction was permissible not under the erroneous section quoted by the Tribunal in the question referred, but under some other section. We are not concerned with this aspect of the matter. It was further held that liability for sales tax was a permissible deduction in determining the net wealth of the assessee. We are not concerned with this aspect of the matter also. It was held that the liability, to pay bonus was a debt and not a contingent liability and was liable to be taken into consideration in computing the net wealth under s. 2(m) of the WT Act, 1957. Though we are not directly concerned with the computation of the net wealth, yet in the particular facts and circumstances of the case if it can be demonstrated that the liability for payment of bonus in that particular year was incurred, it would certainly be tenable in computing the net profit of the assessee. This view was also echoed by the Bombay High Court in the case of CWT vs. Associated Cement Co. Ltd. (1981) 128 ITR 626 (Bom) at pp. 631 & 632. Learned advocate for the Revenue drew our attention to a decision of the Madras High Court in the s of CIT vs. Anamallais Bus Transports (P.) Ltd. (1975) 99 ITR 445 (Mad). This case does not carry us any further and need not be discussed in detail.
Our attention was also drawn to another decision of the Madhya Pradesh High Court in the case of Addl. CIT vs. Kale Khan Mohammad Hanif (1978) CTR (MP) 286 : (1978) 114 ITR 812 (MP). This decision also does not help us very much in deciding whether, in the facts and circumstances of the case, a liability did arise or could be said to have arisen. More or less similar situation arose before this Court in the case of CIT vs. Longview Tea Co. Ltd. (1978) 113 ITR 515(Cal). The Court had to consider the case where, in the asst. yr. 1961-62, the assessee- company claimed deduction in respect of a sum of Rs. 37,835 on account of staff and labour bonus. The ITO disallowed this claim on the ground that this provision had not been made pursuant to any agreement entered into or any award passed during the year. In second appeal, the Tribunal observed that the matter related to the bonus for the current year, that the same was an existing liability and had to be allowed as such and that the claim of the assessee would thus be allowed. On a reference it was held that the Tribunal had gone only on the basis that there was a provision for bonus in the accounts of the assessee. There was no finding that in the particular year there had been any payment of bonus though bonus had been paid in other years. There was no indication as to the basis on which the bonus which had been provided for in the accounts was arrived at, viz., whether it was on the basis of mere claims made by the employees or whether it was on the basis of the accepted and past practice of the company or whether such provision had been made pursuant to any understanding or agreement between the assessee and its workmen: It was not even found whether this provision for bonus had been made pursuant to any resolution of the directors or the shareholders of the assessee. The Court held that if it was found on enquiry that the bonus in question had been provided for pursuant to any regular practice of the assessee to pay a percentage of its profits as bonus every year and/or pursuant to a lawful resolution of the assessee after a claim had been made by the workmen, it might be held to be an admitted liability amicably settled and, therefore, deductible. The matter was, therefore, remanded to the Tribunal.
In this case there are certain features which require investigation. The point whether there was any settlement under s. 34(3) of the Bonus Act, even though it was formally executed after the accounting year in question, has not been clearly adjudicated by the Tribunal. The Tribunal seems to have proceeded on the basis that there was a tentative decision; whether that tentative decision was only a unilateral decision on the part of the assessee or really as a result of bilateral adjustment or understanding, the Tribunal has not gone into. But the Tribunal has gone on to observe that the formal document was to be executed. If the Tribunal had meant to say that before executing the formal document there could not be any agreement for payment of bonus which could be treated as a liability deductible under the Act, then, in our opinion, the Tribunal was not correct. But it is not quite clear as what the Tribunal meant to say. Whether the Tribunal meant to say that there was a tentative agreement pursuant to which a provision for payment of bonus had been made or there was a unilateral tentative decision by the assessee itself is not clear. Even when there was a formal document or there was understanding or agreement or adjustment between the parties, and a liability was incurred, then this would be deducted in view of the scheme of the. IT Act. Whether this was done as such, in our opinion, is not clear from the findings of the Tribunal. Therefore, in the light of the observations made herein, we should decline to answer the question and direct the Tribunal to dispose of the appeal by deciding whether there was any understanding or any adjustment or arrangement between the parties in the year in question even though formal documents might have been executed after the expiry of the accounting year. If there was any such understanding or adjustment or agreement then the amount would be deductible. But if there was no understanding or no agreement between the parties and only a unilateral decision by the assessee itself without anything more, then in the light of the decisions there was no accrued liability of the assessee. In this light, therefore, the Tribunal should dispose of the appeal after giving the parties opportunity to adduce such evidence as the Tribunal thinks fit and proper.
C.K. BANERJI, J. :
10. In the premises, we decline to answer the question and the matter is remanded to the Tribunal. In the facts and circumstances of the case, parties will pay and bear their own costs.
[Citation : 141 ITR 521]