Gauhati H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was not in error in law and in facts in holding that the CIT was justified in holding the bona fides of the change in the method of valuation of closing stock and in that view of the matter in deleting the addition of Rs. 1,29,43,042 ?

High Court Of Gauhati

CIT vs. Assam Frontier Tea Ltd.

Section 37(1)

Asst. Year 1984-85

H.K. Sema & P.G. Agarwal, JJ.

IT Ref. No. 5 of 1998

21st March, 2001

Counsel AppearedG.K. Joshi with U. Bhuyan, for the Revenue : Dr. Ashok Saraf, K.K. Gupta & S.K. Agarwal, for the Assessee

JUDGMENT

H.K. SEMA, J. :

The Revenue has referred the following questions under s. 256(1) of the IT Act, 1961, before the Tribunal :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was not in error in law and in facts in holding that the CIT was justified in holding the bona fides of the change in the method of valuation of closing stock and in that view of the matter in deleting the addition of Rs. 1,29,43,042 ?

2. Whether, on the facts and in the circumstances of the case and in view of the first proviso of cl. (ii) of sub-s. (1) of s. 36 of the IT Act, 1961, as existed during the relevant assessment year, the Tribunal has not erred in law and in facts in upholding the CIT(A) order deleting disallowances of Rs. 26.29,657 on account of ex gratia payment paid in excess of the Payment of Bonus Act, 1965, on the ground that the payment has been made wholly the exclusively for the purpose of the business ?

Whether, on the facts and in the circumstances of the case, the Tribunal did not err in admitting the ground regarding deduction of sur-tax in computing the taxable income when such ground did not arise from the order of the CIT ?

Whether prejudice to question No. 3 above whether in view of the provisions of cl. (ii) of sub-s. (a) of s. 40 of the IT Act, 1961, the Tribunal did not err in law in directing the AO to allow deduction of sur-tax payable from the taxable income of the assessee ?”

The Tribunal was of the view that questions Nos. 1, 3 and 4 are not relatable to questions of law and declined to refer the same before this Court. However, the Tribunal was of the opinion that although the order of the CIT was upheld, since no decision of the jurisdictional High Court in so far with regard to question No. 2 is concerned, thereby referred question No. 2 before this Court for opinion.

Mr. G.K. Joshi, learned counsel for the Revenue, and Dr. Ashok Saraf, counsel for the assessee, therefore, confined their argument on reference No. 2 The substantial question of law raised in reference No. 2 is reproduced again.

“2. Whether, on the facts and in the circumstances of the case and in view of the first proviso of cl. (ii) of sub-s. (1) of s. 36 of the IT Act, 1961, as existed during the relevant assessment year, the Tribunal has not erred in law and in facts in upholding the CIT(A) order deleting disallowances of Rs. 26,29,657 on account of ex gratia payment paid in excess of the payment of Bonus Act, 1965, on the ground that the payment has been made wholly and exclusively for the purpose of the business ?”

4. Before we answer the reference, the basic facts strictly for the purpose of answering the reference may be noted. The assessee, Assam Frontier Tea Ltd. is a company registered under the Companies Act. For the assessment year ending 31st March, 1984, the company has declared 14.95 per cent bonus under the Payment of Bonus Act and 5.05 per cent as ex gratia payment to workers and staff eligible for payment amounting to Rs. 26,29,657 and on appeal by the Revenue the Dy. CIT disallowed the deduction of Rs. 26,29,657. On appeal, the CIT(A) allowed the deduction of Rs. 26,29,657 on account of ex gratia payment and hence the reference.

5. Mr. G.K. Joshi, learned counsel, submits that ex gratia payment is not bonus and not deductible under s.

36(1)(ii) of the Act and such payment cannot also be deductible under s. 37 of the Act as this expenditure may be allowed under s. 37 of the Act only when these are not the subject-matter of deduction under ss. 30 to 36 of the Act. On the other hand, it is contended by Mr. Ashok Saraf, learned counsel for the assessee, that ex gratia is not a bonus but it was in the nature of customary bonus. In the case in hand the assessee-company paid the bonus to the labourers for the period ending 30th June, 1985, on the basis of the Payment of Bonus Act, 1965. Subsequent to the payment of bonus to be labourers under the Bonus Act, 1965,the Assam Chah Mazdoor Sangha representing the welfare of the tea garden labourers by its letter dt. 21st Aug., 1984, addressed to the owners of the tea industries to enhance the bonus payable to employees to 20 per cent. After receipt of the aforesaid letter, the assessee-company passed a resolution by resolving to declare 14.95 per cent bonus under the Payment of Bonus Act, 1965, and 5.05 per cent as ex gratia payment extended to all workers and other eligible labourers and staff. The aforesaid resolution was communicated to all the managers of the companies vide Circular No. 183, dt. 11th Sept., 1984. It is obvious that this was done with an eye to buy industrial peace and to save the industries from strike or lock out. This has also been done keeping in view the customary bonus in consonance with the practice followed by commercial and business establishments.

6. Admittedly, the ex gratia payment made by the assessee-company to the labourers and staff for the period under reference does not come within the mischief of the Payment of Bonus Act, 1965. Sec. 37 of the IT Act, allowed deduction of expenses wholly and exclusively for the purpose of the business or profession other than the expenditure prescribed in ss. 30 to 36 of the Act. We have already held that the payment of the ex gratia payment made by the assessee-company to its labourers and staff with a view to buy industrial peace and save industries from strike and lock out and to keep a customary practice adopted in business and commercial establishment, thereby improve production for the company and increase the revenue for the state. In the instant case, as already pointed out the company has considered the letter of the secretary, Assam Chah Mazdoor Sangha, dt. 21st Aug., 1984, and passed a resolution declaring 14.95 per cent bonus under the Payment of Bonus Act and 5.05 per cent as ex gratia to labourers and staff eligible for payment and the said resolution was communicated to all managers vide Circular No. 183, dt. 11th Sept., 1984. The assessee-company is running an industry and the industry cannot survive unless there is a cordial relationship between the employer and the employees. The ex gratia amount was paid to labourers and staff for labourers’ peace. The ex gratia amount has been paid by the assessee exclusively and for the purpose of business of the assessee and hence such expenditure is permissible to be considered under s. 37 of the IT Act, 1961.

7. Dr. Ashok Saraf, learned counsel appearing for the assessee, submits that the issue is not more res integra. Counsel has referred to the following decisions : (a) In CIT vs. Shaw Wallace & Co. Ltd. (1991) 100 CTR (Cal) 188 : (1991) 190 ITR 455 (Cal) : TC 15R.745, the Calcutta High Court held that the payment of Rs. 74,206 by way of ex gratia calculated at 8.17 per cent made by the assessee in terms of the memorandum at 8.17 per cent made by the assessee in terms of the memorandum of settlement wholly and exclusively for the purposes of business and was, therefore, allowable as a business deduction under s. 36(1)(ii) of the IT Act, 1961. (b) In CIT vs. D. Mohamed Ismail (1997) 140 CTR (Mad) 508 : (1997) 227 ITR 211 (Mad) : TC S15.1560, Madras High Court had held that the customary bonus paid to the employees as a matter of practice satisfied the conditions prescribed under the second proviso to s. 36(1)(ii) of the IT Act, 1961. (c) In CIT vs. Thiagarajar Mills Ltd. (1998) 150 CTR (Mad) 334 : (1999) 237 ITR 857 (Mad) : TC S16.1664, the Madras High Court was considering whether the payment of incentive bonus in excess of the bonus payable under the Payment of Bonus Act is an allowable deduction notwithstanding s. 36(1)(ii) and held that it is allowable under the provisions of s. 37 of the Act. (d) In Kumaran Mills Ltd. vs. CIT (2001) 167 CTR (Mad) 228 : (2000) 241 ITR 564 (Mad) the Madras High Court was examining as to whether the payment made over and above the statutory maximum made by the employers to the labourers pursuant to an agreement under the Industrial Disputes Act was deductible under s. 37 of the IT Act, 1961, and held that such payment for the purpose of commercial expediency and business or profession is allowable under s. 37 of the Act.

8. Following the aforesaid decisions, we are of the opinion that the additional amount in the form of ex gratia payment by the assessee-company to the labourers and staff was expended wholly and exclusively for the purpose of the business and profession to keep the labourers satisfied and to buy the industrial peace and to avoid strike and lock out and, therefore, such expenditure paid in excess of bonus in the nature of ex gratia payment is allowable as business expenditure under s. 37 of the IT Act, 1961. We accordingly answer the reference in favour of the assessee and against the Revenue. No costs

[Citation : 249 ITR 469]

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