1990 (6) TMI 29 - HC - Income Tax

Summary

Issues:
1. Disallowance of payment under settlement for bonus for the assessment year 1980-81.
2. Applicability of section 36(1)(ii) of the Income-tax Act on bonus payments.
3. Deductibility of bonus payments under the Payment of Bonus Act.
4. Deductibility of bonus payments for subsequent assessment years.

Analysis:

Issue 1: Disallowance of payment under settlement for bonus for the assessment year 1980-81
The case involved a public limited company where the liability for excess bonus payment arose under settlement deeds dated September 5, 1978, and September 8, 1979. The Income-tax Appellate Tribunal confirmed the deletion of disallowance for the payment made under the September 5, 1978 settlement for the year 1977-78. However, the Tribunal held that the payment under the September 8, 1979 settlement for the year 1978-79 was deductible only for the assessment year 1981-82. The court emphasized that the liability for the bonus payment for the year 1977-78 arose within the accounting period for the assessment year 1980-81, making it a permissible deduction.

Issue 2: Applicability of section 36(1)(ii) of the Income-tax Act on bonus payments
The court discussed the applicability of section 36(1)(ii) of the Income-tax Act concerning bonus payments. It noted that the Appellate Tribunal did not adequately evaluate whether the bonus payment claimed was in compliance with the provisions of the Act. The court highlighted the need to assess the reasonableness of bonus payments concerning employee pay, business profits, and industry practices. It referenced previous decisions to emphasize the importance of scrutinizing bonus payments under section 36(1)(ii) for deductibility.

Issue 3: Deductibility of bonus payments under the Payment of Bonus Act
The court referenced the Payment of Bonus Act and outlined that payments in line with the Act can be claimed as deductions. However, amounts exceeding the Act's provisions must meet specific criteria to be deductible under section 36(1)(ii) of the Income-tax Act. The court stressed the importance of evaluating bonus payments against employee pay, business profits, and industry practices to determine deductibility.

Issue 4: Deductibility of bonus payments for subsequent assessment years
Regarding the deductibility of bonus payments for subsequent assessment years, the court addressed the Tribunal's observation that the payment under the September 5, 1978 settlement for the year 1978-79 was deductible only for the assessment year 1981-82. The court deemed this observation unauthorized and unjustified, emphasizing that the Tribunal should not decide matters irrelevant to the assessment year under consideration. It directed the Tribunal to reevaluate the matter in line with relevant legal principles and decisions.

In conclusion, the court upheld the deletion of disallowance for the bonus payment under the September 5, 1978 settlement for the year 1977-78. It directed the Tribunal to reconsider the matter, emphasizing the need for a thorough evaluation of bonus payments under section 36(1)(ii) of the Income-tax Act. The court also deemed the Tribunal's observation on deductibility for subsequent years as unauthorized and directed a focus on matters relevant to the assessment year in question.