1996 (7) TMI 74 - HC - Income Tax

Summary

Issues:
1. Interpretation of the Payment of Bonus Act regarding bonus payment exceeding 20% of salary.
2. Application of section 36(1)(ii) of the Income-tax Act in disallowing bonus payment exceeding the prescribed limit.
3. Determination of whether bonus payment qualifies as customary bonus exempt from section 36(1)(ii) provisions.

Detailed Analysis:
1. The first issue in this case revolves around the interpretation of the Payment of Bonus Act concerning bonus payment exceeding 20% of the salary. The Income-tax Officer disallowed a portion of the bonus payment under section 36(1)(ii) of the Income-tax Act, contending that the bonus exceeded the permissible limit. However, the Commissioner of Income-tax (Appeals) noted the existence of a customary practice among Muslim-owned businesses to pay higher bonuses relative to salaries, which was upheld based on a Supreme Court ruling. The Appellate Tribunal further found that the bonus was treated as part of remuneration rather than profits, thus justifying the deletion of the disallowance.

2. The second issue pertains to the application of section 36(1)(ii) of the Income-tax Act in disallowing bonus payments exceeding the prescribed limit. The Tribunal determined that if the bonus payment is considered customary and not covered by the Payment of Bonus Act, the provisions of section 36(1)(ii) would not apply. The Tribunal considered factors such as the nature of the business, past bonus payment practices, and the relationship between bonus and salary to conclude that the excess bonus amount qualified as customary and, therefore, not subject to disallowance under section 36(1)(ii).

3. The final issue focuses on establishing whether the bonus payment qualifies as a customary bonus exempt from section 36(1)(ii) provisions. The Tribunal assessed the pay of the employee, business profits, and general practices in similar industries to determine the customary nature of the bonus payment. Considering the consistency in bonus payments relative to salaries in previous years and the specific practices among Muslim traders, the Tribunal concluded that the excess bonus amount was indeed a customary bonus. Consequently, the Tribunal found no fault in allowing the excess bonus as part of the customary practice, thereby ruling in favor of the assessee and against the Department.