Commissioner of Income Tax vs A.P. Paper Mills

A. Lakshmana Rao, J.—The respondent herein paid to its employees during the assessment years 1980-81 and 1981-82 profit bonus, production bonus and ex gratia amount. So far as the profit is concerned, though the Income Tax Officer did not allow the deduction, the Commissioner of Income Tax as well as the Income Tax Appellate Tribunal allowed the deduction, in our view rightly, under the first proviso to section 36(1)(ii) of the Income Tax Act. There is no dispute about allowing the deduction under the provision as it is not the case of the Department that the profit-sharing bonus exceeded the statutory limit fixed under the Payment of Bonus Act. So far as production bonus is concerned, the Income tax Officer himself allowed the deduction and that was affirmed by the Commissioner of Income Tax as well as the Income Tax Appellate Tribunal. Therefore, it is not open to the Department to question the same at this stage. So far as the questions relating to profit bonus and production bonus are concerned, having regard to the facts and circumstances of the case, we do not see any reason to direct the Income Tax Appellate Tribunal to refer the questions relating to the payment of those two kinds of bonuses for the decision of this court.

However, having regard to the facts and circumstances of the case, we are of the view that the Income Tax Appellate Tribunal shall be directed to state the case and refer the following question of law in both the cases for the decision of this court :

"Whether, on the facts and in the circumstances of the case, the deduction of ex gratia payment to the employees is permissible either under the second proviso to section 36(1)(ii) or u/s 37 of the Income Tax Act?"

The Income Tax cases are partly allowed to the extent indicated above. No costs.