Patna H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was correct in allowing a separate deduction for bonus out of the net profit estimated by the ITO in a case where no books of account were kept by the assessee ?

Counsel Appeared

B.P. Rajgarhia & S.K. Sharan, for the Revenue : Rameshwar Prasad & S.K. Narain, for the Assessee

S.B. SANYAL, J.:

The present reference is under s. 256(2) of the IT Act, 1961, arising out of the order of the Tribunal. The reference called for reads as hereunder :

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in allowing a separate deduction for bonus out of the net profit estimated by the ITO in a case where no books of account were kept by the assessee ? “

Facts : The assessee is a handling contractor and has maintained no books of account for his work. The bank account maintained showed a receipt of Rs. 8,32,346 from the Tata Iron & Steel Co. Ltd., in respect of the contract works done. The ITO estimated the net profits at Rs. 83,240 for the asst. yr. 1974-75. The claim of the assessee to deduct a sum of Rs. 29,228 out of the estimated net profit was disallowed on the ground that the estimation of net profit takes within its sweep all conceivable expenses including payment of bonus, depreciation, etc. On appeal, it was held that in the earlier years, deduction under the head of bonus, as claimed, used to be allowed and the same pattern has been followed in the cases of other contractors in the region. With this observation, the deduction of bonus claimed out of the net profit was allowed. The Department preferred an appeal before the Tribunal. Having referred to the history of the case of the Revenue allowing deduction of bonus in the earlier years as a separate deduction and also having borne in view that the same principle applied to other contractors, it recorded a finding: ” In this particular case, a lower profit has been considered to be reasonable in the past. We have also looked into the comparable cases of the other handling contractor, Shri S. G. Patel. As in that case, in this case also, the profit has to be estimated and a separate deduction for bonus has to be allowed. We may observe that similar result would follow if a lower percentage is adopted considering the circumstances of the case. “

3. On the application of the Revenue, the Tribunal refused to refer the case to the High Court by observing: ” …the quantum of income should be estimated by reducing the claim for bonus from 10 per cent of the receipts. This is a pure finding of fact and no question of law arises from the order of the Tribunal. “

4. Mr. Rajgarhia, appearing for the Revenue, contended that in a case where the assessee does not maintain books of account, the estimate of ten per cent of the receipts as net profit takes within its sweep all conceivable expenses including payment of bonus, depreciation, etc. Once the net profit is arrived at by the aforesaid process, no other deduction to reduce the net profit is permissible in law, be it bonus or anything else. The Revenue, however, did not challenge that a sum of Rs. 29,228 has been paid by the assessee by way of bonus to his employees.

Mr. Rameshwar Prasad No. 2, appearing on behalf of the assessee, on the other hand, submitted that the question referred is a pure question of fact as it relates to the quantum of expenditure to be allowed based on comparable cases and assessment of previous years. The net taxable income held by the Revenue is based on an estimate which by itself is a finding of fact. Learned counsel also submitted that bonus is a statutory liability deduction whereof is allowable under s. 36(1)(ii) of the IT Act and this having not been questioned, the argument, on behalf of the Revenue, does not arise out of the order of the ITO.

Before I proceed to deal with the question, a cursory look at the Payment of Bonus Act, 1965, appears to be relevant at this stage. The relevant provisions are ss. 4, 5, 6 and 7., Under the scheme of the aforesaid sections, out of the gross profit calculated in the manner specified in the First Schedule to the Act, deductions as envisaged under ss. 6 and 7 have to be made in order to arrive at the available surplus. One of the items is deduction of any direct tax which the employer is liable to pay for the accounting year in respect of his income. The direct tax payable by the employer has been provided for under s. 7 of the Act. In substance, payment of bonus is made to the employees out of the net profit of the establishment as is done in the case of payment of dividend to share holders of a company.

In the case of CIT vs. Babcock & Willcox of India Ltd. (1987) 165 ITR 105 (Cal), it was held that where it is found as a matter of fact that the assessee had paid bonus in past years and had been allowed deduction of the same, the Tribunal was justified in allowing deduction of the amount paid as bonus and no question of law arose from its order. That was a case of customary bonus prior to the promulgation of the Payment of Bonus Ordinance but the rate at which the bonus was paid was within the range allowed by the Payment of Bonus Ordinance. In the case of CIT vs. Golecha Firms (P.) Ltd. (1987) 63 CTR (Raj) 12 : (1987) 164 ITR 753 (Raj), it was held that where the taxable income was arrived at by estimate, determination of the question of quantum of expenditure by the Tribunal was a pure question of fact. In the case of Ram Singh & Sons vs. CIT (1981) 131 ITR 622 (All), it was held that the liability for statutory bonus created by ss. 10 and 11 of the Payment of Bonus Act, 1965, is analogous to the liability for payment of sales tax. The liability is created by the statute itself and no formal order is necessary. The assessee is entitled to the deduction of such a liability in the year in which it arises. This deduction was allowed even though the assessee did not make a provision for it in its accounts.

In the instant case, the Tribunal found that in the earlier years, the profit had been calculated at ten per cent minus the bonus paid. In comparable cases of handling contractors, such was the method adopted. The finding of fact arrived at by the Tribunal was that the quantum of income should be estimated by reducing the claim of bonus from ten percent. of the receipts keeping in view the nature of the business carried on by the assessee. In my opinion, in estimating the income, the Tribunal kept in view the conditions of trade obtaining and the average margin of profit in the particular line of business which is a relevant consideration for arriving at a finding of fact.

I am, therefore, of the further opinion that it is not possible to say that the estimate of income was arbitrary or capricious to justify holding that some error of law has been committed by the Tribunal. What would be the net taxable income and the quantum of expenditure allowable to the assessee is a pure question of fact and not of law. The finding of fact arrived at by the Tribunal is final on this aspect and no interference can be made on a finding of fact.

For the reasons given above, the question referred is answered in favour of the assessee and against the

Department. The assessee is entitled to costs which are assessed at Rs. 200.

UDAY SINHA, J.:

I agree.

[Citation : 173 ITR 235]