Kerala H.C : Whether the payment of bonus in excess of the statutory minimum was a capital expenditure in the hands of the assessee ?

Counsel Appeared

Menon, for the Revenue : P. Radhakrishnan, for the Assessee

KOCHU THOMMEN, J.:

The following questions have been, at the instance of the Revenue, referred to us by the Tribunal, Cochin Bench:

“1. Whether, on the facts and in the circumstances of the case and in view of the finding of the Tribunal in its order for the asst. yr. 1974-75 that the liability for payment of bonus had arisen for the previous owner of the business, the Tribunal is right in law in allowing the bonus payment, relatable to the period up to the date of take over of the business, in excess of 8-1/3 per cent as a deduction from the income of the assessee for the asst. yr. 1975-76 ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the previous owner did not have a liability higher than 8-1/3 per cent as bonus ?

Whether the payment of bonus in excess of the statutory minimum was a capital expenditure in the hands of the assessee ?”

The assessee is a private limited company which purchased its present, business on December 1, 1973, during the asst. yr. 1974- 75. The assessment year in question now is 1975-76. The assessee agreed with the vendor that it would settle with the labour all their claims in respect of bonus for the period preceding December 1, 1973. The amount of that liability, however, had not been quantified, although it was presumably known to the parties that it would lie somewhere in the range between 8-1/3 and 20 per cent, as prescribed under ss. 10 and 11 of the Payment of Bonus Act, 1965. There was, at the time of the take over of the business, a dispute between the union of the workers and the vendor as to the actual rate of payment of the bonus. While the workers presumably asked for bonus at the highest rate, the vendor presumably bargained for the lowest rate. The dispute was finally settled by negotiation on November 8, 1974, as a result of which the assessee agreed to pay bonus at 19 per cent. The assessee then claimed the entire amount paid as bonus as revenue expenditure for the years in which it was paid. A part of the amount at the statutory minimum of 8 1/3 per cent had been paid in the accounting year relevant to the asst. yr. 1974-75 and the balance amount in the following accounting year relevant to the asst. yr. 1975-76. The Tribunal had, by its order for the asst. yr. 1974-75, disallowed the assessee’s claim as regards the bonus paid in the accounting year relevant to that year at 8 1/3 per cent on the ground that that was not revenue expenditure but capital expenditure. However, rejecting the findings of the authorities below, the Tribunal by the present order allowed the assessee’s claim in respect of the balance bonus paid in the accounting year relevant to the asst. yr. 1975-76 towards the liability of the previous accounting year treating that amount as revenue expenditure.

It cannot be gainsaid that in agreeing on the price at which the business was taken over by the assessee from the vendor, all the liabilities as well as the assets of the firm had been taken into account. One of the liabilities obviously was the liability towards bonus for the period preceding the date of the take-over. It was known to the assessee that as a consideration for the take-over, it would have to incur the liability to the full extent finally determined as the amount payable as bonus for the period preceding the date of the take-over. The amount thus spent by the assessee in payment of bonus for that period was not an amount expended by it to carry on, and earn the profits or gains of, the business which it took over, but an amount expended to obtain the business which it purchased. That was not an expenditure, therefore, which partook of the character of revenue but it was clearly capital expenditure. This is the principle laid down by the Privy Council as early as in CIT vs. Kameshwar Singh (1933) 1 ITR 94, 111 (PC) : ” In their Lordships’ view, the solution of the problem is to be found on a consideration of the nature of the particular transaction out of which it has arisen. The assessee agreed to accept the transfer of the colliery in part satisfaction of Kumar Ganesh Singh’s liability to him on the footing that it was valued at Rs. 7,37,399. Had he known, what was concealed from him, that arrears of unpaid rent had accumulated which he would have had to pay to the superior landlord, he would have correspondingly diminished the sum at which he was prepared to take over the colliery and according to the CIT, it was admitted that the assessee has a claim against Kumar Ganesh Singh for the difference, although he may not be able to recover it. If it was recovered, it would properly be credited in diminution of the figure at which the colliery was taken over and would not enter the profit and loss account of the working the colliery. From this, it follows that the sum overpaid by the assessee for the colliery cannot properly be described as a loss sustained by him on income account. It is a sum which was payable by him in order to get possession of the colliery, not a sum expended by him in the carrying out of the colliery. It is not rent for any period of his possession, nor is it an expenditure incurred by the assessee for the purpose of earning the profits or gains of the colliery business. If the assessee paid it without any legal liability or necessity on his part to do so, such a voluntary payment is not a permissible deduction from income. Their Lordships are, therefore, of the opinion that in the circumstances of this transaction, the question should be answered in the negative. ” (emphasis * supplied)

4. The facts of the case and the principle dealt with by the Privy Council are equally relevant to the questions now referred to us. However, we are of the view that the three questions must be recast as one question as follows :

“Whether the Tribunal is right in holding that the bonus paid by the assessee in excess of the statutory minimum of 8 1/3 per cent in respect of the period preceding the date on which the assessee purchased the business was revenue expenditure and not capital expenditure ? “

5. The question so recast is, in the circumstances, answered in the negative, that is, in favour of the Revenue and against the assessee.

6. We direct the parties to bear their respective costs in this tax referred case.

[Citation : 172 ITR 667]