Commissioner of Income Tax vs Travancore Titanium Products Ltd. (No. 1)

K.S. Paripoornan, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following three questions of law for the decision of this court:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the addition of an amount of Rs. 3,14,377 being ex gratia payment made in excess of the statutory limit of 20% bonus and in violation of Section 36(1)(ii) ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing a deduction of Rs. 375 out of Rs. 1,025 for the assessment year 1977-78 ?

Whether, on the facts and in the circumstances of the case, and also in view of the facts averred in ground No. 3 in the appeal memo before the Income Tax Appellate Tribunal, the Tribunal was correct in holding that the claim for an amount of Rs. 7,725 if at all admissible relates to the accounting year ending December 31, 1977, relevant for the assessment year 1978-79?"

The respondent is an assessee to Income Tax. It is a public limited company engaged in the manufacture and sale of titanium dioxide. We are concerned with the assessment year 1977-78 for which, the relevant accounting period ended on December 31, 1976. The assessee was keeping its accounts on mercantile basis. Amongst others, the assessee claimed an amount of Rs. 3,14,377, which represented ex gratia payment in excess of the 20% bonus, payable under the Bonus Act. This claim was negatived by the Income Tax Officer. Certain other expenses, called "prior paid expenses", amounting to Rs. 48,219, claimed by the assessee, were also disallowed by the Income Tax Officer. Out of the said sum of Rs. 48,219, a sum of Rs. 7,775 represented stores consumed on March 9, 1977, and a sum of Rs. 1,025 related to short provision of earlier years, made good on printing and stationery. In appeal, the Commissioner of Income Tax (Appeals) held that the ex gratia payment of Rs. 3,14,377 is a customary payment which fell outside the scope of the Payment of Bonus Act. It was held to be a permissible deduction. The Commissioner of Income Tax (Appeals) also held that, except a sum of Rs. 5,572, which represented an erroneous earlier provision made good, the balance of the amount claimed as "prior paid expenses", out of Rs. 48,219, is also a permissible deduction. The Revenue, as well as the assessee, filed appeals before the Income Tax Appellate Tribunal. They were considered together--I. T. A. No. 158 (Coch) of 1981 and I. T. A. No. 214(Coch) of 1981--and a common order was passed dated December 10, 1982. The Income Tax Appellate Tribunal held that the assessee is entitled to deduction of the ex gratia payment in the sum of Rs. 3,14,377. The Appellate Tribunal also held that the amount of Rs. 7,775, the short provision of earlier years made good on account of stores, was not admissible for the instant assessment year 1977-78, but it will be relevant for the assessment year 1978-79. Similarly, the Appellate Tribunal held that, out of the sum of Rs. 1,025, "prior paid expenses", on account of printing and stationery, a sum of Rs. 375 was expended on February 3, 1976, during the accounting year and so it is a permissible deduction. It is thereafter at the instance of the Revenue that the Income Tax Appellate Tribunal has referred the three questions of law, formulated hereinabove, for the decision of this court.

We heard counsel. As to whether the amount of Rs. 3,14,377, claimed as ex gratia payment made in excess of the statutory limit of 20% bonus, payable under the Payment of Bonus Act is allowable, the matter is governed by Section 36(1) of the Income Tax Act. Normally, the payment made, envisaged by the Payment of Bonus Act, can be claimed as a deduction. The amounts paid, over and above the amount payable under the Payment of Bonus Act, can be claimed as deduction u/s 36(l)(-ii) of the Act only if certain conditions are fulfilled- This principle has been laid down in a series of Bench decisions of this court. The earlier decision is the one reported in Commissioner of Income Tax Vs. P. Alikunju, M.A. Nazir, Cashew Industries, . The subsequent decisions are Commissioner of Income Tax Vs. Kumar Industries, , and the Bench decisions of this court in Commissioner of Income Tax Vs. Kerala Agro Industries Corporation, , I. T. R. No. 13 of 1987, Commissioner of Income Tax Vs. Travancore Titanium Products Ltd., and I. T. R. No. 104 of 1988, CIT v. Travancore Titanium Products [1991] 188 ITR 345. Whatever may be the label that is given to the payment on the occasion when the payment is made, any amount paid, which represents bonus, should stand the scrutiny u/s 36(l)(ii) of the Income Tax Act. The fact that the payment made was a customary payment or that it was paid as per a Government order is of no consequence. It should stand the scrutiny envisaged by Section 36(1)(ii) of the Income Tax Act. This aspect of the matter which has been laid down by the above Bench decisions of this court was not considered by the Appellate Tribunal. Therefore, we decline to answer question No. 1 referred to us, but, at the same time, direct the income tax: Appellate/Tribunal to consider whether the amount of Rs. 3,14,377, the ex gratia payment made by the assessee in excess of the amount payable under the Payment of Bonus Act, can be allowed, bearing in mind the touch-stone laid down by this court in Commissioner of Income Tax Vs. P. Alikunju, M.A. Nazir, Cashew Industries, and other Bench decisions referred to hereinabove. Question No. 1 is answered accordingly.

It is for the Appellate Tribunal, as a final fact-finding authority, to consider all the aspects bearing on the question and should the Appellate Tribunal feel that the matter requires a remit to the Income Tax Officer, it is free to do so.

The Appellate Tribunal held that the assessee is entitled to a deduction of Rs. 375 out of the sum of Rs. 1,025, short provision of earlier years made good, coming under "prior paid expenses." In paragraph 17 of the appellate order, it is stated that the amount of Rs. 375 was expanded on February 3, 1976. The period comes within the accounting period. The assessee, admittedly, keeps its books of account on mercantile basis. If so, the actual date when the payment was made is irrelevant. The question is when was the liability incurred. On that aspect, the Tribunal has not applied its mind. If the liability was incurred in the earlier years, it could not be claimed as deduction during the assessment year 1977-78. Since this aspect of the matter has not been properly considered by the Appellate Tribunal, we decline to answer question No. 2 as well, but direct the Appellate Tribunal to pose the question as to whether the sum of Rs. 375, allowed by it as a deduction, was a liability incurred during the accounting period relevant to the assessment year 1977-78 or in the earlier years. It is only based on such a finding, that the question of permitting the deduction of Rs. 375 arises. We direct the Appellate Tribunal to adjudicate the matter afresh.

In the appeal filed by the Revenue before the Appellate Tribunal, the amount of Rs. 7,775, representing short provision of earlier years made good for stores under "prior paid expenses" was attacked as an impermissible deduction. In paragraph 17 of the order, the Appellate Tribunal stated that the amount of Rs. 7,775 represented stores consumed on March 9, 1977, which, admittedly, is a period after the end of the relevant accounting period. Even so, the Appellate Tribunal observed that the claim, if at all admissible, relates to the accounting period ending on December 31, 1977, relevant for the assessment year 1978-79. This observation of the Appellate Tribunal is attacked as unauthorised and illegal. We should state that the said observation cannot be said to be a finding at all. It is only an observation which was unauthorised and uncalled for. The Tribunal was not invited to consider whether the sum of Rs. 7,775 can be an admissible deduction for the year 1978-79 in the appeal filed by the Department against the assessment made for the year 1977-78. The Tribunal should not have made the observation contained in paragraph 17 of the appellate order. In this connection, the unreported decision of this court in I. T. R. No. 14 of 1987, dated June 22, 1990--since reported in CIT v. Chackola Spinning and Weaving Mills Ltd. [1991] 188 ITR 532, paragraph 6, is relevant, where the law on the subject has been discussed in detail. We answer question No. 3 in the negative, against the assessee and in favour of the Revenue.

In view of our answers to questions Nos. 1 and 2, the Tribunal should restore the appeals to the file and decide the matter afresh in the light of the directions contained hereinabove.

The Income Tax reference is answered as above.

A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.