High Court Of Madras
CIT vs. Mettur Chemicals & Industrial Corporation Ltd.
Sections 36(1)(ii), 37(1)
Asst. Year 1978-79
R. Jayasimha Babu & N.V. Balasubramanian, JJ.
Tax Case No. 1894 of 1984
19th March, 1998
C.V. Rajan, for the Applicant : P.P.S. Janarthana Raja for Subbaraya Aiyar, Padmanabhan & Ramamani, for the Respondent
N.V. BALASUBRAMANIAN, J. :
The question of law referred at the instance of the Revenue under s. 256(1) of the IT Act, 1961, relating to the assesseeâs assessment for the asst. yr. 1978-79 is, whether, having regard to the facts and circumstances of the case, the Tribunal was justified in allowing the entire sum of Rs. 18,98,199 as bonus payable under the payment of Bonus Act, allowable under s. 36(1)(ii) of the IT Act, 1961 even though the allowable surplus under the Payment of Bonus Act was only Rs. 99,278. The assessment year involved is 1978-79. A sum of Rs. 18,98,199 was found debited in the Trading and P&L a/c under the head “wages” and this represented two items viz., (a) Rs. 9,14,446, being the one monthâs salary to each worker paid in October, 1977 on the occasion of Deepavali and (b) aprovision of Rs. 9,83,759 made at the end of the accounting year under reference at the rate of one monthâs wages for each worker and paid to the workers in May, 1978. The workmen disputed those payments and claimed much higher amount by way of bonus by a demand dt. 3rd Oct., 1978 on the ground that the assessee had paid higher dividend to the shareholders. The dispute raised by the workmen was ultimately settled by the Labour Officer, Salem, on 21st Oct., 1978, and under the settlement, the assessee-company agreed to pay bonus at the rate of 16.67 per cent and an additional bonus of 8.33 per cent would be paid as ex gratia and from this 25 per cent so claimed, the amount paid in October, 1977 and May, 1978 would be deducted and the balance would be paid later.
The assessee, thereafter, approached the Government for approval of this formula and the Government granted approval under s. 34 of the Payment of Bonus Act by its order dt. 14th Dec., 1978 for the payment of 16.67 per cent of the wages. The assessee made a claim of deduction of the amount which was worked out at Rs. 18,98,199 and the ITO disallowed the claim on the ground that the assessee was not obliged to pay anything more than the minimum bonus of 8.33 per cent, as the allocable surplus for the year under consideration was only Rs. 99,278 and, therefore, he allowed only 50 per cent of the claim of Rs. 18,98,199 and disallowed the balance. The CIT(A) confirmed the disallowance. The assessee filed an appeal before the Tribunal. The Tribunal, after referring to the dispute raised regarding the payment of bonus and the reference to the Labour Officer which was ultimately settled and later approved by the Government at the rate of 16.67 per cent, held that the bonus paid by the assessee cannot be regarded as customary bonus. The Tribunal held that the payment made on the basis of an order of authorisation made under the provisions of s. 34 of the Act was also a payment made under the Payment of Bonus Act and since the payment did not exceed 20 per cent of the maximum bonus allowable under Payment of Bonus Act, the claim of the assessee was sustainable under s. 36(1) (iv) (sic) of the IT Act and the payment so made could not be disallowed on the ground that it was not made in accordance with the Payment of Bonus Act. The Tribunal, in this view of the matter, allowed the assesseeâs claim and deleted the disallowance of Rs. 9,49,102.
5. The Revenue challenged the order of the Tribunal and the learned counsel for the Revenue submitted that the payment made is not in accordance with the Payment of Bonus Act as the allocable surplus was Rs. 99,278 and in the circumstances, the payment of minimum bonus would be sufficient and therefore, the Tribunal was not justified in allowing the entire amount of Rs. 18,98,199. We are unable to accept the contention made by the learned counsel for Revenue. We see that there was a dispute raised by the employees of the assessee-company regarding the payment of bonus and the matter was settled by the Labour Officer and later, the Government by order dt. 14th Feb., 1978 granted approval under s. 34 of the Payment of Bonus Act for the payment of bonus in excess of the minimum amount of bonus prescribed by the Payment of Bonus Act. The agreement also provided that the amount already paid could be adjusted against the payment agreed to be made on the formula approved by the Government. The assessee was required to pay the bonus in accordance with the approval granted by the Government under s. 34 of the Payment of Bonus Act and hence, such payment is also a payment under the terms of the Payment of Bonus Act. It is not disputed by the Revenue that the amount paid is not in excess of the maximum amount payable under the Payment of Bonus Act, though it exceeded the quantum to be payable on the allocable surplus available with the company, but once it is found that the payment made was under the Payment of Bonus Act, the entire claim of the assessee has to be considered as a payment under the Payment of Bonus Act.
We are of the opinion that it is not open to the ITO to go into the further question or delve deep into the matter to find out whether the amount was in excess of the amount payable on the allocable surplus of the assessee as the dispute regarding bonus was settled and ultimately got approved by the Government under s. 34 of the Payment of Bonus Act. In our view, the Tribunal has come to the correct conclusion in holding that what was paid was a bonus and the amount paid was within the limits of the Payment of Bonus Act and since the amount paid was within the permissible maximum limit allowed under the Payment of Bonus Act, the entire claim made by the assessee is allowable as a business expenditure under s. 36(1)(ii) of the IT Act. We find no infirmity of error in the order of the Tribunal holding that the entire claim of the assessee is allowable under s. 36(1)(ii) of the Act and the Tribunal was justified in allowing the claim and deleting the disallowance made by the ITO. Hence, we answer the first question of law referred to us in the affirmative, against the Revenue and in favour of the assessee. The second question that is referred to us is, whether the Tribunal was justified in holding that the sum of Rs. 9,92,972 being the payments made to the workmen in pursuance of an agreement is an expenditure laid out for the purpose of business and is allowable as a deduction in computing the income. The assessee claimed deduction of Rs.9,92,972. The above sum of Rs. 9,92,972 represented two sums viz., a sum of Rs. 4,43,004 which was half monthâs salary given as salary for the Adi festival and another sum of Rs. 5,49,968 which was another half monthâs salary paid in terms of the agreement dt. 22nd Oct., 1977 entered into by the assessee. The assessee initially paid the first half monthâs salary as advance and the payment was made on the condition that the matter would be referred to the Dy. Commissioner of Labour for adjudication. Consequently, the matter was referred to the Dy. Commissioner of Labour for adjudication and the adjudication took place on 22nd Oct., 1977 and therein it was agreed that the advance already given would not be recovered and instead, the assessee also agreed to make further advance of half monthâs salary as ex gratia. The agreement also provided that the bonus payment for the years 1974-75 and 1976-77 would stand settled without affecting the future bonus. The ITO was of the opinion that the payment was covered under the Payment of Bonus Act and, therefore, the amount was not allowable as it exceed the amount prescribed under the Payment of Bonus Act and cannot be allowed under s. 36(1)(ii) of the IT Act.
The CIT(A) also confirmed the view of the ITO. On appeal by the assessee before the Tribunal, the Tribunal came to the conclusion that the payments were made as part of the remuneration for the services rendered by them and the amount was paid as per the conditions of service and, therefore, the amount paid could not be said to be a bonus, though it was described as ex gratia. The Tribunal came to the conclusion that bonus was made for the purpose of business and the assessee was entitled to claim a deduction of the same in the computation of the business income of the assessee for the asst. yr. 1976-77. We are of the opinion that the Tribunal has come to the correct conclusion in holding that the amount paid is an allowable deduction. As already seen, the amount paid consists of two items, one of which is Rs. 4,43,004 which was given as half monthâs salary for Adi festival. It is not disputed that it was a customary bonus payment and if it is so, it falls outside the purview of the Payment of Bonus Act. In so far as the other sum of Rs. 5,49,968 is concerned, originally it was given by way of advance. But virtue of the agreement entered into before the Dy. Commissioner of Labour, Salem, on 22nd Oct., 1997, the assessee agreed that the amount advanced would not be recovered and there would be a further advance of half monthâs salary as ex gratia. We are of the opinion that the assessee had agreed that the amounts paid would be foregone on business consideration and the amounts were paid by the assessee as part of the remuneration and part of the conditions of service and on the basis of settlement arrived at between the assessee and its workmen. It is to be remembered that the settlement entered into was under s. 18 of the Industrial Disputes Act and the settlement is binding on the assessee and if the amount is not paid under a statutory settlement arrived at under the Industrial Disputes Act, there would be industrial unrest affecting the business carried on by the assessee. In other words, the amounts were paid for smooth running of the business without getting embroiled in labour unrest and to avoid friction with the labourer for the efficient running of the business. Therefore, the amount paid by way of customary bonus as well as the amount paid under the agreement entered into before the Dy. Labour Commissioner cannot be regarded as part of the bonus paid under the Payment of Bonus Act, and once they are held to be not bonus within the purview of Payment of Bonus Act, the deduction of the amount has to be considered under the provisions of s. 37 of the IT Act. It is not disputed that it was the revenue expenditure and not a capital expenditure. The amounts were paid for the purposes of business of the assessee and, therefore, the requirements of s. 37 of the IT Act are fully satisfied to enable the assessee to claim the same as a normal business expenditure. We are, therefore, of the opinion that the Tribunal was justified in allowing the amount of Rs. 9,92,972 as incurred for the purpose of assesseeâs business and, the Tribunal was also right in allowing the deduction of this amount in the computation of the total income of the assessee for the asst. yr. 1978-79. Hence, we answer the second question of law referred to us also in the affirmative, against the Revenue and in favour of the assessee. The assessee is entitled to costs of Rs.750.
[Citation : 239 ITR 537 ]