Madras H.C : Whether, on the facts and in the circumstances of the case and having regard to the provisions of s. 36(1)(ii) of the IT Act, 1961, the Tribunal was right in deleting the disallowance of Rs.1,93,419 being bonus paid to the employees in excess of 20 per cent of the salary made in the assessment for the year 1976-77?

High Court Of Madras

CIT vs. Egmore Benefits Society Ltd.

Sections 36(1)(ii), 37(1)

Asst. Year 1976-77

Thanikkachalam & N.V. Balasubramanian, JJ.

Tax Case No. 782 of 1982

6th November, 1996

Counsel Appeared

C.V. Rajan for J. Jayaraman, for the Applicant : Aravind R. Pandian, for the Respondent

JUDGMENT

THANIKKACHALAM, J. :

In compliance with the directions of this Court in Tax Case Petition No. 519 of 1980, dt. 9th March, 1981, the Tribunal referred the following question for the opinion of this Court under s. 256(2) of the IT Act, 1961 (hereinafter referred to as the Act) :

“Whether, on the facts and in the circumstances of the case and having regard to the provisions of s. 36(1)(ii) of the IT Act, 1961, the Tribunal was right in deleting the disallowance of Rs.1,93,419 being bonus paid to the employees in excess of 20 per cent of the salary made in the assessment for the year 1976-77?”

The assessee is a non-banking financial institution and it carries on business in moneylending on pledges. During the previous year relevant to the asst. yr. 1976-77, it has paid a sum of Rs. 3,79,204 as bonus to its employees and claimed the same as a deduction. The assessee contended that it was uniformly paying bonus to its employees at the rate of five months salary from 1969 onwards and that they were paying three months and four months salary as bonus in the earlier years, and therefore, the payment being customary bonus, was outside the purview of the Payment of Bonus Act. The ITO held that according to the provisions of s. 36(1)(ii) of the Act, any bonus paid in excess of 20 per cent of the salary of the employees could not be allowed and in this view, he disallowed a sum of Rs. 1,93,419 as excess bonus paid by the assessee. According to the ITO, the Payment of Bonus Act and the amendment of s. 36(1)(ii) came into effect from 25th Sept., 1975, and therefore, they are applicable to the assessment year under consideration and the excess payment could not be allowed as a deduction.

On appeal, the AAC relying on the decision of the Supreme Court in Mumbai Kamgar Sabha vs. Abdulbhai AIR 1976 SC 1456 held that the Bonus Act, 1965, as amended in 1975 will not apply to the customary bonus and hence the amendment to s. 36(1)(ii) would not apply to the assessee’s case and relying on the tests formulated by the Supreme Court in Grahams Trading Co. Ltd. vs. Their Workmen 1959 (II) ILJ 393, the AAC deleted the disallowance of Rs. 1,93,419.

Aggrieved, the Department went on appeal before the Tribunal. The Tribunal relying on its earlier order in ITA No. 936/Mad/77-78, dt. 11th Aug., 1978 in the case of M/s Madurai Ramnad Transport (Pvt.) Ltd. held that the customary bonus paid would not be hit by the first proviso to s. 36(1)(ii) of the Act and that, therefore, the entire payment of bonus should be allowed as a deduction.

Before us, learned Standing Counsel appearing for the Department submitted that inasmuch as the bonus paid by the assessee was in excess of the quantum, as determined under the Payment of Bonus Act, the excess amount should not be allowed as a deduction. According to learned Standing Counsel appearing for the Department, the provisions of s. 36(1)(ii), which came into effect from 25th Sept., 1975 would be applicable to the facts of this case and in order to ascertain the quantum of bonus allowable and in the view of the decision of Kerala High Court reported as CIT vs. Alikunju M.A. Nazir Cashew Industries (1987) 62 CTR (Ker) 206 : (1987) 166 ITR 611 (Ker) : TC 15R.630, the matter should go back to the AO in redetermining the allowable bonus.

We have heard learned Standing Counsel appearing for the Department and we have also perused the records carefully. The fact remains that the excess bonus paid over and above the limit prescribed under the Payment of Bonus Act was allowed as deduction by the Tribunal, inasmuch as the said bonus is customary bonus, in view of the decision of the Supreme Court in Mumbai Kamgar Sabha vs. Abdulbhai cited supra. On facts, the Tribunal came to the conclusion that the quantum of bonus paid in the assessment year under consideration is a reasonable one. It was also found that such payment of bonus was made in the earlier years. Therefore, it is under the customary practice of the assessee to pay bonus every year, in accordance with the profit earned by the assessee. As per the decision of the Supreme Court in Mumbai Kamgar Sabha’s case (cited supra), if the bonus is paid customarily and the payment of bonus is reasonable, it should not be hit by the provisions of s. 36(1)(ii) of the Act. Inasmuch as the Tribunal came to the conclusion on appraisal of facts that the bonus paid was reasonable and customary, we are of the opinion that such payment of bonus is allowable as deduction and the matter need not be remitted back for re-determination of the allowable bonus, as requested by the Department. A similar view was also taken by this Court in CIT vs. D. Md. Ismail by judgment dt. 2nd July, 1996 [reported at (1997) 140 CTR (Mad) 508]

7. Accordingly, we answer the question referred to us in the affirmative and against the Department. No costs.

[Citation : 236 ITR 459]

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