1996 (8) TMI 136 - AT - Income Tax

Summary

Issues:
1. Allowability of ex gratia payment made to supervisory staff over and above bonus under the Payment of Bonus Act.
2. Applicability of provisions of s. 40A(5) in disallowing payments made to directors as perks.

Analysis:

Issue 1:
The appeal by the Revenue challenges the deletion of an addition made on account of ex gratia payment to employees by the CIT(A). The AO disallowed the amount of Rs. 67,361 claimed as ex gratia payment, contending it was neither bonus nor salary and not allowable under s. 37(1) of the Act. The assessee argued that the payment was an incentive to supervisory staff not covered under the Bonus Act for exceptional work. The CIT(A) allowed the claim under s. 37 of the Act, noting that the AO did not add back the disallowed amount to total income, rendering the deduction unnecessary. The Revenue contended that the payment was akin to bonus and should be disallowed, citing a Tribunal decision. The assessee maintained that the payment was an incentive for hard work, similar to a Supreme Court decision on reasonable commission payments. The Tribunal found the facts distinct from the cited case and upheld the CIT(A)'s decision, deeming the payment allowable as an incentive, not bonus.

Issue 2:
The second ground of appeal pertained to the addition of Rs. 18,168 by the AO under s. 40A(5) concerning payments to two directors. The CIT(A) deleted the disallowance, holding that s. 40(c) applied to directors, not s. 40A(5). The Revenue argued that s. 40A(5) applied to employees, including directors, justifying the disallowance. The assessee contended that s. 40(c) specifically addressed directors' expenses, not s. 40A(5), referencing a High Court decision. The Tribunal agreed with the CIT(A), stating that s. 40(c) was the appropriate provision for directors' expenses, not s. 40A(5). Consequently, the appeal was dismissed.

In conclusion, the Tribunal upheld the CIT(A)'s decision on both issues, allowing the ex gratia payment as an incentive and rejecting the disallowance under s. 40A(5) for payments to directors.