2005 (2) TMI 59 - HC - Income Tax

Whether, Tribunal is correct in law in holding that the payment of Rs. 24,674 under the head Bonus to senior members of employees who are not entitled to receive the bonus under the provisions of the Payment of Bonus Act, 1965, is an admissible expenditure under the Income-tax Act? - we answer the question referred to us in the negative, i.e., in favour of the Department and against the assessee.

Summary

Issues:
1. Interpretation of admissible expenditure under the Income-tax Act regarding bonus payment to senior employees.

Analysis:
The High Court of ALLAHABAD was tasked with determining the admissibility of a bonus payment of Rs. 24,674 to senior employees under the Income-tax Act for the assessment year 1976-77. The Assessing Officer disallowed the bonus payment citing section 36(1)(ii) of the Act, a decision upheld by the Commissioner of Income-tax (Appeals), Kanpur. However, the Tribunal reversed the disallowance, asserting that the bonus payment was reasonable and not excessive. The Department contended that the payment was made despite the absence of business profits, emphasizing the criteria for deduction under section 36(1)(ii). The respondent argued that the reasonableness of the bonus payment should be evaluated based on commercial expediency and business requirements, citing relevant case law, including a judgment from the Madras High Court.

The Court referred to the Supreme Court's guidance in Shahzada Nand and Sons v. CIT [1977] 108 ITR 358, emphasizing the three factors to determine the reasonableness of a payment, as outlined in section 36(1)(ii). The Tribunal's decision was critiqued for not adequately addressing these factors or the pay and service conditions of senior employees. Unlike the case of CIT v. Lakshmi Mills Co. Ltd. [1999] 240 ITR 81 (Mad), where a payment was deemed commercially expedient to avoid a worker strike, no such justification existed in the present case. The absence of evidence demonstrating the bonus payment's commercial necessity led the Court to conclude that the Rs. 24,674 expenditure was not admissible under the Act.

Ultimately, the Court ruled in favor of the Department, holding that the bonus payment was not a justifiable deduction under the Income-tax Act for the assessment year in question. The judgment underscores the importance of establishing commercial expediency and reasonableness in bonus payments to senior employees for tax deduction purposes, as outlined in relevant legal precedents.