High Court Of Madhya Pradesh
Bhagwandas Shobhalal Jain vs. DCIT & ANR.
Section 36(1)(ii), 37(1)
Asst. Year 1985-86
Arun Mishra & Smt. Sushma Shrivastava, JJ.
IT Appeal No. 87 of 2000
18th August, 2010
Counsel Appeared : Sumit Nema, for the Appellant : Sanjay Lal, for the Respondents
ORDER
Arun Mishra, J. :
This appeal has been admitted on 10th May, 2001 on three questions. It is conceded at the Bar that question No.1 oes not arise. Necessary questions are question Nos. 2 and 3. They are quoted below :
“(ii) Whether in view of the fact that the bonus to the extent of 12-1/2 per cent of the salary and wages was paid under an agreement with the employees, there is justification in law to still hold that payment of bonus could be allowed only to the extent of 8.33 per cent ?
(iii) Whether the order dt. 28th Jan., 2000 (P/5) of the Tribunal, disallowing the claim of bonus to the extent of Rs. 1,58,090 is perverse ?”
2. Facts in short are that the AO for the accounting period ending on 31st March, 1985 made an addition of Rs.
1,58,090 out of the bonus amounting to Rs. 4,73,893. According to the AO, there was a loss in the business and when there was no allocable surplus, as per the provisions of Payment of Bonus Act, 1965 (hereinafter referred to as ‘Bonus Act’), it could not have been paid more than 8.33 per cent. Sec. 36(1)(ii) of the IT Act, 1961 (hereinafter referred to as ‘Act of 1961’) restricts the payment in excess of the limits laid down by the Bonus Act. The order of assessment (P/1) was issued on 30th March, 1990. The loss determined in their assessment order is at Rs. 3,93,213. Aggrieved by the order of assessment, appeal was filed and the same has been dismissed vide order (P/3) dt. 17th March, 1993. Aggrieved by the appellate order passed by the CIT(A), an appeal was filed before the Income-tax Appellate Tribunal, Jabalpur (in short ‘Tribunal’). The appeal has been partly allowed, however, disallowance of bonus has been upheld by Tribunal also. Aggrieved by the aforesaid order, the present appeal has been preferred by the appellant.
3. Shri Sumit Nema, learned counsel for petitioner has submitted that under s. 36(1)(ii) of the Act of 1961, bonus to certain extent is permissible and in case it is not covered under the aforesaid section, it is to be allowed as other expenditure within the purview of s. 37 of the Act of 1961 as there was no profit but loss was suffered, however, bonus was paid in view of the agreement entered into between the management and workers. Consequently, excess bonus ought to have been allowed. It is also submitted by him that proviso to s. 36(1) of the Act of 1961 stands deleted now. Counsel for petitioner has relied upon the decision of apex Court in Shahzada Nand & Sons vs. CIT 1977 CTR (SC) 246 : (1977) 108 ITR 358 (SC), decision of the High Court of Calcutta in CIT vs. Shaw Wallace & Co. Ltd. (1991) 100 CTR (Cal) 188 : (1991) 190 ITR 455 (Cal) and decision of High Court of Kerala in CIT vs. P. Alikunju, M.A Nazir Cashew Industries (1987) 62 CTR (Ker) 206
: (1987) 166 ITR 611 (Ker).
4. Shri Sanjay Lal, counsel for respondents has submitted that once the nature of expenditure is covered under s.
36 of the Act of 1961, it cannot be claimed under s. 37 of the Act of 1961. Only those expenditures which are not covered under ss. 30 to 36 can be claimed under s. 37 of the Act of 1961. Once payment of bonus is covered under the provision of s. 36 of the Act of 1961, it cannot be claimed under s. 37 of the Act of 1961. Counsel for respondents has relied upon the decisions in Subodhchandra Popatlal vs. CIT (1953) 24 ITR 566 (Bom); CIT vs. Travancore Titanium Products Ltd. (1993) 203 ITR 714 (Ker); Malwa Vanaspati & Chemical Co. Ltd. vs. CIT (1985) 44 CTR (MP) 90 and Addl. CIT vs. Moolchand Jaikishandas & Co. (1977) 108 ITR 500 (Guj).
5. It is not in dispute that the payment of bonus upto the extent of 8.33 per cent is covered under the provisions of Bonus Act. In the instant case, bonus over and above the aforesaid rate has been paid. The bonus paid is @ 12.5 per cent as per agreement between the management and workers. Sec. 36(1)(ii) of the Act of 1961 as it stood at the relevant time before its amendment is quoted below : “Sec. 36(1)(ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission : Provided that the deduction in respect of bonus paid to an employee employed in a factory or other establishment to which the provisions of the Payment of Bonus Act, 1965 (21 of 1965) apply, shall not exceed the amount of bonus payable under that Act : Provided further that the amount of the bonus (not being bonus referred to the first proviso) or commission is reasonable with reference to— (a) the pay of the employee and the conditions of his service; (b) the profits of the business or profession for the previous year in question; and (c) the general practice in similar business or profession.”
It is apparent from the aforesaid provision that the deduction in respect of bonus paid to an employee to which the provisions of the Payment of Bonus Act apply, shall not exceed the amount of bonus payable under that Act. Second proviso makes it clear that further amount of bonus or commission not being the bonus referred to in the first proviso is reasonable with reference to the pay of an employee and the conditions of his service, the profits of the business or profession for the previous year in question and the general practice in similar business or profession.
In the instant case, there was no profit but on the other hand loss was suffered. Payment of bonus to the extent of 8.33 per cent has been allowed under the first proviso to s. 36(1)(ii) of the Act of 1961. Sec. 37 of the Act of 1961 is quoted below : “37(1). Any expenditure (not being expenditure of the nature described in ss. 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’.Explanation : For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. (2) ………… (2B) Notwithstanding anything contained in sub-s. (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.” It is apparent from s. 37(1) of the Act of 1961 that any expenditure not being expenditure of the nature described in ss. 30 to 36 of the Act of 1961 and not being in the nature of capital expenditure or personal expenses of the assessee shall be allowed in computing the income chargeable under the head of ‘profits and gains of business or profession.
In the instant case, nature of expenditure i.e. bonus is clearly covered under s. 36 of the Act of 1961. Thus, it could not have been allowed as expenditure under the provisions of s. 37 of the Act of 1961.
The apex Court recently in Southern Technologies Ltd. vs. Jt. CIT (2010) 228 CTR (SC) 440 : (2010) 34 DTR (SC) 11 : (2010) 320 ITR 577 (SC) has laid down that if an item falls under ss. 30 to 36, but is excluded by the Explanation to s. 36(1)(vii), then s. 37 cannot come in. Sec. 37 applies only to items which do not fall in ss. 30 to 36 of the Act of 1961. The apex Court has laid down thus : “45. As stated above, s. 36(1)(vii) after 1st April, 1989 draws a distinction between write off and provision for doubtful debt. The IT Act deals only with doubtful debt. It is for the assessee to establish that the provision is made as the loan is irrecoverable. However, in view of the Explanation which keeps such a provision outside the scope of ‘written off’ bad debt, s. 37 cannot come in. If an item falls under ss. 30 to 36, but is excluded by the Explanation to s. 36(1)(vii) then s. 37 cannot come in. Sec. 37 applies only to items which do not fall in ss. 30 to 36. If a provision for doubtful debt is expressly excluded from s. 36(1)(vii) then such a provision cannot claim deduction under s. 37 of the IT Act even only the basis of ‘real income theory’ as explained above.”
10. The High Court of Gujarat in Addl. CIT vs. Moolchand Jaikishandas & Co. (1977) 108 ITR 500 (Guj) (supra) considered the question whether the payment of commission falls under s. 36(1)(ii) of the Act of 1961 and not under s. 37 of the Act of 1961. Referring to the decision in Laxmandas Sejram vs. CIT (1964) 54 ITR 763 (Guj), it has been laid down in the context of IT Act, 1922 that reasonableness of the payment has to be examined under s. 10(2)(x) of the Act. The akin provision to s. 37 of the Act of 1961 was s. 10(2)(xv). It was also held that such an expenditure would not fall within the purview of s. 10(2)(xv). In Subodhchandra Popatlal vs. CIT (supra), the apex Court has laid down the law to the similar effect on due consideration of the provisions of s. 10(2)(x) and 10(2)(xv) of the Act of 1922. In CIT vs. Travancore Titanium Products Ltd. (supra), it has been held that for such an expenditure s. 37 would not be attracted. Reference has also been made to the decision of the High Court of Madhya Pradesh in Malwa Vanaspati & Chemical Co. Ltd. vs. CIT (supra), in which it has been held that s. 37(1) of the Act of 1961, being a residual provision, the aid of which cannot be taken, unless and until it is established that none of the provisions of ss. 30 to 36 is applicable to a given case.
Shri Sumit Nema, counsel for petitioner has relied upon the decision of High Court of Calcutta in CIT vs. Shaw Wallace & Co. Ltd. (supra). No doubt about it that in the aforesaid decision, the High Court of Calcutta relying upon the decision of the High Court of Kerala in P. Alikunju, M.A Nazir Cashew Industries (supra) has observed that the payment which is not covered by the Bonus Act is regarded as reasonable so as to warrant allowance under s. 36(1)(ii) of the Act of 1961. Two provisos must be read together to correctly understand the permissible deduction in terms of cl. (ii) of sub-s. (1) of s. 36 of the Act of 1961. Referring to decision of the High Court of Kerala in P. Alikunju, M.A Nazir Cashew Industries (supra), their Lordships of the High Court of Calcutta have proceeded to consider that additional amount of Rs. 74,206 which was paid satisfies the three conditions laid down in second proviso to s. 36(1)(ii) of the Act of 1961, therefore, allowable as a business deduction under s.
37 of the Act of 1961. Though, High Court of Calcutta appears to have followed the decision of the High Court of Kerala in P. Alikunju case (supra) but in P. Alikunju case (supra), the reasonable bonus was allowed in second proviso to s. 36(1)(ii) of the Act of 1961 on existence of the three conditions provided therein not under s. 37 of the Act of 1961. One of the important ingredients of second proviso to s. 36(1)(ii) is that there has to be profit. In the instant case, there was not profit but loss was suffered.
13. We are unable to persuade ourselves to follow the decision of the High Court of Calcutta in CIT vs. Shaw Wallace & Co. Ltd. (supra) wherein it has been observed that three conditions are required and if condition Nos. 1 and 2 of s. 36(1) of the Act of 1961 stand satisfied hence, such an expenditure has to be allowed under s. 37 of the Act of 1961. This runs contrary to the scheme of the section, the plain language of s. 37 and what is not permissible under ss. 30 to 36 is only allowable under s. 37 as laid down by the apex Court in Southern Technologies Ltd. vs. Jt. CIT (supra). Reliance has also been placed on the decision of the High Court of Rajasthan in CIT vs. Premier Vegetable Products (1996) 133 CTR (Raj) 372 : (1997) 227 ITR 931 (Raj). We are unable to agree with the view taken for the aforesaid reasons.
The decision of the High Court of Madhya Pradesh in Malwa Vanaspati & Chemical Co. Ltd. vs. CIT (supra), accords with the view taken by us in the instant case. The decision in CIT vs. Sesa Goa Ltd. (2009) 221 CTR (Bom) 590 : (2009) 17 DTR (Bom) 258 : (2009) 316 ITR 399 (Bom) Bench at Panaji is also distinguishable as deduction was allowed under s. 36(1)(ii) of the Act of 1961.
For the foregoing reasons, we find that the bonus in excess to 8.33 per cent which has been paid there being loss is not admissible under second proviso to s. 36(1) of the Act of 1961. The allowance of permissible bonus as per first proviso to s. 36(1) of the Act of 1961 has already been allowed to the petitioner. The disallowance of the remaining bonus paid in excess, there being loss, was not permissible. Such an expenditure cannot be allowed under s. 37 being of the nature admissible under s. 36 of the Act of 1961. Resultantly, the appeal being devoid of merit is hereby dismissed. No costs.
[Citation : 330 ITR 217]
