1993 (2) TMI 68 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of provision for contribution to the recognized gratuity fund.
2. Deletion of disallowance of Rs. 5,56,963 out of provision made for contribution to the recognized fund in excess of 8% of salary.
3. Deletion of disallowance of Rs. 2,32,669 as ex gratia payment in excess of 20%.
4. Justification of payment made by the assessee in excess of the statutory limit of 20% as customary bonus.
5. Material before the Tribunal to conclude that payment in excess of the statutory limit of 20% was customary bonus.
6. Admissibility of the claim under section 37(1) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Deduction of Provision for Contribution to the Recognized Gratuity Fund:
The assessee, a government company, claimed a deduction of Rs. 8,15,070 for contribution to the recognized gratuity fund. The Income-tax Officer disallowed Rs. 5,56,963, stating the amount exceeded limits prescribed in rule 103 of the Income-tax Rules. The Commissioner of Income-tax (Appeals) deleted this addition, asserting the liability was certain. The Tribunal upheld this decision, noting the contribution conformed to rules and regulations. The High Court affirmed the Tribunal's decision, stating the contribution was in line with the rules approved by the Department and satisfying the requisite conditions for its recognition.

2. Deletion of Disallowance of Rs. 5,56,963:
The Income-tax Officer's disallowance of Rs. 5,56,963 was based on the assertion that the contribution exceeded 8% of the salary. The Tribunal found the contribution was made in accordance with the rules approved by the Department. The High Court agreed, noting the contribution was necessary to meet the demands of employees as on December 31, 1975, and was not in excess of the maximum amount stipulated in rule 103. The Tribunal's decision to allow the deduction was upheld.

3. Deletion of Disallowance of Rs. 2,32,669 as Ex Gratia Payment:
The assessee claimed Rs. 2,32,669 as ex gratia payment for the liability incurred in 1974. The Income-tax Officer disallowed this, arguing it should have been claimed for the assessment year 1975-76 and exceeded the statutory limit of 20%. The Commissioner of Income-tax (Appeals) allowed the claim, stating the liability arose from the Government's decision. The Tribunal upheld this decision, noting the ex gratia payment was customary. The High Court affirmed, stating the Tribunal found the payment to be customary and reasonable under section 36(1)(ii) of the Income-tax Act.

4. Justification of Payment in Excess of Statutory Limit as Customary Bonus:
The Tribunal found the ex gratia payment to be customary bonus, made on the basis of a Government order. The High Court noted the Tribunal's finding that such payments were made regularly and were customary for the assessee. The payments were considered reasonable and necessary for maintaining industrial peace. The High Court upheld the Tribunal's decision, agreeing that the payment was allowable as a deductible expenditure under section 36(1)(ii) of the Income-tax Act.

5. Material Before the Tribunal to Conclude Customary Bonus:
The Tribunal observed that the ex gratia payments were made regularly and were customary for the assessee. The High Court noted the Tribunal's finding that such payments were made to maintain industrial peace and were in line with the conditions embodied in section 36(1)(ii). The High Court upheld the Tribunal's decision, stating the payments were justifiable and allowable as a deduction.

6. Admissibility of Claim under Section 37(1):
The Tribunal found the claim admissible under section 37(1) of the Income-tax Act. However, the High Court disagreed, stating section 37(1) is a residual provision and cannot be applied if the expenditure is covered under sections 30 to 36. Since the expenditure was deductible under section 36(1)(ii), the High Court held that section 37(1) was not applicable. The Tribunal's finding on this point was reversed.

Conclusion:
The High Court answered questions 1 to 5 in the affirmative, in favor of the assessee and against the Revenue. Question 6 was answered in the negative, in favor of the Revenue and against the assessee. The judgment directed the Income-tax Appellate Tribunal, Cochin Bench, to take note of this decision.