1996 (1) TMI 67 - HC - Income Tax

Summary

Issues:
Interpretation of section 36(1)(ii) of the Income-tax Act, 1961 regarding deduction of bonus payable exceeding 8.33%; Applicability of the first proviso to clause (ii) of section 36(1) and its relation to the Payment of Bonus Act, 1965; Analysis of the second proviso to clause (ii) of section 36(1) and its conditions for allowing bonus payment exceeding the prescribed limits.

Analysis:
The judgment revolves around the interpretation of section 36(1)(ii) of the Income-tax Act, 1961 concerning the deduction of bonus payable exceeding the minimum limit of 8.33%. The court delves into the first proviso to clause (ii) which restricts the deduction of bonus paid to an employee employed in a factory or establishment under the Payment of Bonus Act, 1965. The court emphasizes that the payment of bonus should not exceed the amount payable under the Act of 1965, which sets the maximum limit at twenty percent. The court further explains the provisions of section 11 of the Act of 1965, which outlines the conditions for payment of bonus based on allocable surplus and sets the maximum limit at twenty percent.

Regarding the argument raised by the counsel for the assessee that bonus was paid at the maximum rate of 20% under an agreement, the court clarifies that the existence of the agreement is irrelevant in determining the permissible limit for bonus payment. The court highlights the second proviso to clause (ii) which allows for variation in bonus payment beyond the prescribed limits under certain conditions. The court analyzes the conditions under the second proviso, emphasizing that the bonus payment must be reasonable concerning the employee's pay, business profits, and general industry practices.

The court dismisses the argument that the agreement implies a general practice in the business for bonus payment at the maximum rate. It stresses that the mere execution of the agreement is insufficient to establish industry practice without cogent evidence. The court agrees with the conclusion of the Tribunal that the permissible limit for bonus payment should be determined based on the provisions of the Payment of Bonus Act, irrespective of the timing of the agreement. Ultimately, the court answers the question referred to it in the affirmative, affirming that the bonus payment exceeding the minimum limit of 8.33% is not allowable under the given circumstances.