1989 (8) TMI 16 - HC - Income Tax

Summary

Issues Involved:
1. Admissibility of additional payment as ex gratia or customary bonus u/s 36(1)(ii) of the Income-tax Act, 1961.
2. Applicability of section 37 of the Income-tax Act, 1961 for the additional payment.
3. Interpretation of the Payment of Bonus Act, 1965 in relation to the additional payment.

Summary:

Admissibility of Additional Payment u/s 36(1)(ii):
The primary issue was whether the additional payment of Rs. 74,206 to the assessee's employees by way of ex gratia or customary bonus, in excess of the bonus payable under the Bonus Act, 1965, was an admissible deduction u/s 36(1)(ii) of the Income-tax Act, 1961. The Tribunal held that the restriction imposed by the first proviso to section 36(1)(ii) was not applicable to bonuses other than those payable under the Bonus Act, 1965. The Tribunal found that the additional payment was made to maintain good employer-employee relations and industrial peace, thus qualifying for deduction.

Applicability of Section 37:
The Tribunal also considered the applicability of section 37 of the Income-tax Act, 1961. It was argued that the additional payment was made wholly and exclusively for business purposes, to avoid labour trouble and ensure smooth production. The Tribunal held that such payments, made out of commercial expediency, were allowable under section 37. The Tribunal further noted that similar payments had been made in previous years, establishing the payment as customary.

Interpretation of the Payment of Bonus Act, 1965:
The Revenue argued that any payment in excess of what was admissible under the Payment of Bonus Act, 1965, could not be allowed as a deduction. However, the Tribunal referred to various Supreme Court decisions, which clarified that the Bonus Act deals only with profit bonuses and does not govern customary, traditional, or contractual bonuses. The Tribunal found that the additional payment had the character of customary bonus, as it had been made over an unbroken series of years, even in years of loss, and at a uniform rate.

The Tribunal's findings were supported by the Kerala High Court's decision in CIT v. P. Ali Kunju, which held that payments not covered by the Bonus Act could be allowed as deductions if they satisfied the conditions of the second proviso to section 36(1)(ii).

Conclusion:
The High Court affirmed the Tribunal's decision, holding that the additional payment was allowable as a business expenditure under section 37 of the Income-tax Act, 1961. The question was answered in the affirmative and in favor of the assessee, with no order as to costs.