Commissioner of Income Tax vs Kerala Premo Pipe Factory Ltd.

Paripoornan, J.—At the instance of the revenue, the Tribunal has referred the following questions of law, for the decision of this Court, in the above two referred cases:

"I.T. Reference No. 143 of 1987:

1.Whether, the Tribunal was right in holding that the provisions of the Payment of Bonus Act were not applicable to the goodwill bonus paid by the assessee to its employees and the Managing Director on the basis of agreement with the employees and on the basis of terms and conditions of the services of the Managing Director.

Whether, the Tribunal was right in holding that the aforesaid payment was made on grounds of business expediency and, therefore, was an allowable deduction even u/s 37 of the income tax Act, 1961?

IT. Reference No. 147 of 1987:

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee is entitled to claim deduction on the bonus paid in excess of the minimum and in holding that the customary bonus paid will not attract the provisions of section 36(1)(ii) of the income tax Act, 1961?"

The respondents are different public limited companies. In I.T. Reference No. 143 of 1987, we are concerned with the assessment year 1979-80. In I.T. Reference No. 147 of 1987, we are concerned with the assessment year 1980-81.

In income tax Reference No. 143 of 1987, the assessee''s previous year ended on 31-3-1979. The assessee claimed a sum of Rs. 2,06,027 representing goodwill bonus paid by it to its employees over and above the bonus at the rate of 81/2per cent. This plea was rejected by the assessing authority. Similarly, a sum of Rs. 3,229 paid to the Managing Director as goodwill bonus was also rejected. In appeal, the Commissioner (Appeals) held that bonus was paid as per an agreement dated 12-9-1978. The said agreement was entered into by the assessee with the employees in order to avoid labour unrest. In order to maintain cordial relations, the said sum was expended. It was for the purpose of business. The conditions of service of the Managing Director entitled him to receive the bonus declared by the company. On these premises, the Commissioner (Appeals) deleted the disallowance made. The revenue filed an appeal before the Tribunal and objected to the deletion of disallowance. The Tribunal held that the payment of bonus was made on the basis of an agreement between the assessee and its employees. Similarly, bonus was paid to the managing director on the basis of terms and conditions of service entered into with him. There was contractual bonus to which the provisions of the Payment of Bonus Act will not apply and even if the amount paid was not allowable as deduction as "bonus", it should be allowed u/s 37 of the income tax Act, 1961 (''the Act''), on the ground of business expediency. Thereafter, at the instance of the revenue, the two questions of law formulated hereinabove have been referred for the decision of this Court, in the said referred case.

Regarding the facts in income tax Reference No. 147 of 1987, the assessee claimed a sum of Rs. 4,85,000 as bonus paid during the relevant year, in terms of the settlement arrived at with the employees. Admittedly, the said payment exceeded the maximum of 20 per cent allowable under the Payment of Bonus Act. The ITO disallowed the excess payment of Rs. 1,51,875. In appeal, the Commissioner (Appeals) held that the payment in the instant case was by way of customary bonus outside the purview of the Payment of Bonus Act. So, the entire claim was admissible. This was affirmed by the Tribunal, in the appeal filed by the revenue. It is, therefore, at the instance of the revenue, the question of law formulated hereinabove has been referred for the decision of this Court.

We heard the counsels. The short question that arises for consideration in both the cases, is whether the payment made by way of bonus in excess of the amount permissible or postulated by the Payment of Bonus Act can be allowed as a deduction for the purposes of the Act. In other words, to what extent the bonus paid to the employees is deductible as revenue expenditure in the light of the provisions of the Act, calls for consideration. Section 36(1)(ii) deals with the situation. The said section has been interpreted by a Bench of this Court in CIT v. P. Alikunju MA. Nazir, Cashew Industries [1987] 166 ITR611 1 (Ker.) and Commissioner of Income Tax Vs. Kumar Industries, and CIT v. Kerala Agro Industries Corpn. [1990] 183 ITR 197 (Ker.). Ordinarily, a payment envisaged by the Payment of Bonus Act can be claimed as a deduction. It is a revenue expenditure. But the amount paid over and above the amount payable under the Payment of Bonus Act can be claimed as deduction u/s 36(1)(ii) provided the following conditions are fulfilled. The amount should be 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. In the two cases on hand, the guidelines stated above, which have been exhaustively dealt with in P. Alikunju''s case (supra), have not been followed. The Tribunal stated that the payment of bonus, over and above the limit prescribed by the Payment of Bonus Act, is a permissible deduction in both the cases. In I.T. Reference No. 143 of 1987, the Tribunal said that the amount was paid on the basis of an agreement between the assessee and its employees and for the Managing Director in view of the terms and conditions of his service. In I.T. Reference No. 147 of 1987, the Tribunal stated that the payment of amount in excess of the amount payable under the Payment of Bonus Act was a customary bonus. Whatever may be the occasion or character of the bonus paid, whether it be under an agreement or as a customary bonus, if the amount paid is in excess of the amount payable under the Payment of Bonus Act, it can be claimed as a deduction only if the conditions envisaged by section 36(1)(ii) are satisfied. That has been exhaustively dealt with by this Court in P. Alikunju''s case (supra) and by the latest decision rendered by this Court in I.T. Reference No. 13 of 1987.

This crucial aspect has not been borne in mind in both these cases by the Tribunal when it allowed the payment of amount in excess of the amount payable under the Payment of Bonus Act, as a permissible deduction. We are of the view that the Tribunal has failed to act in accordance with law and has also further failed to apply section 36(1)(ii), as interpreted by this Court in P. Alikunju''s case (supra).

Therefore, we decline to answer the questions referred to us in both the cases. But we direct the Tribunal to restore the appeals to file and dispose of them in accordance with law and in the light of the Tribunal''s order to remit the matter to the ITO, if necessary.

The references are disposed of as above.