Commissioner of Income Tax vs Kerala Agro Industries Corporation

Varghese Kalliath, J.—At the instance of the Commissioner of Income Tax, Trivandrum, the Income Tax Appellate Tribunal (for short, "the Tribunal"), Cochin, has referred the following question of law for the decision of this court :

''''Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that the payment of bonus was contractual bonus and that it did not attract the provisions of Section 36(1)(ii) ?"

The matter arises out of the Income Tax assessment for the assessment year 1976-77. The previous year is the year ended on March 31, 1976. The assessee paid a sum of Rs. 77,200 by way of bonus to its employees. It was contended before the Income Tax Officer that the payment was customary bonus and that was paid as per the Government order dated August 19, 1976. The Income Tax Officer found that the assessee had no allocable surplus for the accounting period and that, as per the provisions of the Payment of Bonus Act, the assessee was not bound to pay any bonus. He held that the amount paid as bonus could not be allowed in view of the provisions of Section 36(1)(ii).

The assessee filed an appeal. The Commissioner of Income Tax (Appeals) accepted the contention of the assessee that the bonus paid was customary bonus. The Department filed an appeal before the Tribunal. The Tribunal, after considering the rival contentions of the assessee and the Department and the materials produced before it and relying on The Mumbai Kamgar Sabha, Bombay Vs. Abdulbhai Faizullabhai and Others, and Hukumchand Jute Mills Ltd. Vs. Second Industrial Tribunal, West Bengal and Others, , held that the payment of bonus by the assessee has to be treated as contractual bonus and that the first proviso to Section 36(1)(ii) will not be attracted in the case. On the above circumstances, at the instance of the Commissioner of Income Tax, the question stated in paragraph 1 has been referred by the Tribunal for the decision of this court.

We heard counsel on both sides. The question that has to be decided is one u/s 36(1)(ii) of the Income Tax Act. The above Section reads thus :

"36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28-

(i) the amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession ;

(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 in 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 ;"

The second proviso to Section 36(1)(ii) is relevant in this case. In order to attract the second proviso, the conditions are that the amount of bonus should be reasonable with reference to the pay of the 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. It has to be noted that the application of the second proviso depends upon the fact that all the above requirements are satisfied in the given case.

In Commissioner of Income Tax Vs. P. Alikunju, M.A. Nazir, Cashew Industries, , a Division Bench of this court held that all the three conditions enumerated in Clauses (a) to (c) of the second proviso to Section 36(1)(ii) must be satisfied in order that the payment which is not required by the Bonus Act is regarded as reasonable so as to warrant the deduction u/s 36(1)(ii). What is stated in Clauses (a) to (c) of the second proviso is a definite guideline for the assessing authorities to apply the proviso to Section 36(1)(ii) of the Act. In The Mumbai Kamgar Sabha, Bombay Vs. Abdulbhai Faizullabhai and Others, , the Supreme Court has said that the Payment of Bonus Act deals only with profit-sharing bonus and matters connected therewith and that they did not govern customary, traditional or contractual bonus. This position was reiterated in Hukumchand Jute Mills Ltd. Vs. Second Industrial Tribunal, West Bengal and Others, . In fact, this aspect of the matter is discernible from the second proviso to Section 36(1)(ii) of the Act. Certainly, the first proviso to Section 36(1)(ii) will not be attracted to the case of payment of customary or contractual bonus.

The assessee contended that the bonus was paid as customary bonus and that too as per the Government order dated August 19, 1976. The Tribunal, on a consideration of all the aspects, took the view that the contention of the assessee that the payment of bonus should be treated as contractual bonus is acceptable. While doing so, we feel that the Tribunal has not borne in mind the definite guidelines given by the statute in Clauses (a) to (c) to the second proviso to Section 36(1)(ii) and explained by this court in Commissioner of Income Tax Vs. P. Alikunju, M.A. Nazir, Cashew Industries, and in I. T. R. No. 185 of 1985 Commissioner of Income Tax Vs. P. Balakrishna Pillai, International Cashew Traders, ) and I. T. R. No. 399 of 1985 ( Commissioner of Income Tax Vs. Udayalaxmi Hardware Stores, ). We are of the opinion that the Tribunal has not adjudicated the matter in the true spirit of the provisions of law, particularly Clauses (a) to (c) of the second proviso to Section 36(1)(ii) of the Act.

In the circumstances, the specific aspect as to whether the bonus paid by the assessee may stand the tests specified in Section 36(1)(ii) of the Act read along with the proviso requires adjudication. We decline to answer the question. We direct the Tribunal to consider the matter afresh in the light of the decision of this court in Commissioner of Income Tax Vs. P. Alikunju, M.A. Nazir, Cashew Industries, and I. T. R. No. 185 of 1985 ( Commissioner of Income Tax Vs. P. Balakrishna Pillai, International Cashew Traders, and I. T. R. No. 399 of 1985 ( Commissioner of Income Tax Vs. Kumar Industries, ). The question referred is answered as above.

A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench, forthwith.