2007 (2) TMI 92 - HC - Income Tax

Deduction Revenue contended that bonus paid subsequently on account of settlement between management and employees is not deductible Held that revenue contention was not correct and allowed the assessee appeal

Summary

Issues:
1. Disallowance of bonus paid in excess of provision made.
2. Whether bonus paid subsequently on account of a settlement is a statutory or contractual liability.
3. Deductibility of bonus not paid within the relevant previous year.

Analysis:
1. The case involved an appeal against the Income-tax Appellate Tribunal's order disallowing a bonus paid in excess of the provision made during the assessment year 1991-92. The assessing officer held that the excess bonus would be allowed in the following year, leading to an appeal by the assessee.

2. The Commissioner of Income-tax (Appeals) upheld the assessing officer's order, considering the excess bonus as a contractual liability only deductible in the year when the actual quantum of bonus payable became an ascertained liability. However, the Income-tax Appellate Tribunal allowed the appeal, stating that the bonus was not a contractual liability but a settlement between the employer and employees, making the amount deductible upon payment.

3. The substantial questions of law raised in the appeal were whether the bonus paid subsequently on account of a settlement was a statutory liability and whether the bonus not paid within the relevant previous year was deductible due to the absence of a dispute between the parties, making the liability statutory rather than contractual.

4. The Court referred to a previous judgment in Commissioner of Income-tax v. Lakshmi Machine Works Ltd, which established that under the Payment of Bonus Act, the employer must pay bonus within a specified time, and the quantification of bonus can be postponed. The settlement between employer and employees was seen as a quantification of liability, not transforming a statutory liability into a non-statutory one.

5. The Court concluded that the bonus paid after the accounting year, as in the present case, was a settlement between workers and management, not a result of disputes between them. Therefore, the bonus was deductible as an expenditure in the relevant accounting year, following the principles laid down in the Lakshmi Machine Works Ltd case.

6. Based on the settled proposition and the application of relevant legal principles, the Court answered the questions of law in favor of the assessee and dismissed the appeal by the Revenue. No costs were awarded in the judgment.