1985 (2) TMI 78 - AT - Income Tax

Summary

Issues Involved:
1. Deductibility of Rs. 4,07,776 paid under 'Labour welfare and incentive'.
2. Interpretation of the Payment of Bonus Act, 1965, and its amendments.
3. Applicability of Section 36(1)(ii) and Section 37(1) of the Income-tax Act, 1961.

Detailed Analysis:

1. Deductibility of Rs. 4,07,776 paid under 'Labour welfare and incentive':

The primary issue in the appeal was whether the amount of Rs. 4,07,776 paid by the assessee to its employees under the head 'Labour welfare and incentive' was deductible. The ITO disallowed the claim, arguing that the payment exceeded the permissible bonus under the Payment of Bonus Act, 1965, as amended by the Payment of Bonus (Amendment) Act, 1977. The Commissioner (Appeals) allowed the claim, stating that the payment was necessary for the protection, preservation, and continuation of the business and was not merely a bonus but a compulsory payment due to implicit pressure from the State Government.

2. Interpretation of the Payment of Bonus Act, 1965, and its amendments:

The Tribunal examined the provisions of the Payment of Bonus Act, 1965, particularly the amendments introduced in 1977. The ITO's argument was based on the first proviso to Section 36(1)(ii), which limits the deductible bonus to the amount payable under the Payment of Bonus Act. The assessee argued that the payment was not a bonus but an ad hoc payment agreed upon in a settlement with the employees. The Tribunal noted that the dispute between the assessee and its workers was over the quantum of bonus, and the settlement included a payment of 4.42% of total earnings as welfare expenses/ad hoc payment.

3. Applicability of Section 36(1)(ii) and Section 37(1) of the Income-tax Act, 1961:

The Tribunal analyzed whether the payment could be allowed under Section 36(1)(ii) or Section 37(1) of the Income-tax Act, 1961. The Judicial Member concluded that the payment was essentially a bonus and could not be allowed under Section 36(1)(ii) due to the ceiling imposed by the Payment of Bonus Act. He also argued that what is prohibited by Section 36(1)(ii) cannot be permitted under Section 37(1). The Accountant Member, however, disagreed, stating that the additional payment was not a bonus but an ad hoc payment necessary for maintaining industrial peace and was allowable under Section 37(1) for commercial expediency. The Third Member, Vice President, resolved the difference by concluding that the payment could be considered under the second proviso to Section 36(1)(ii) as traditional or customary bonus, which is outside the purview of the Payment of Bonus Act. He also stated that the payment was allowable under Section 37(1) as it was made wholly and exclusively for the purposes of the business.

Conclusion:

The Tribunal ultimately held that the assessee was entitled to the deduction of Rs. 4,07,776 paid to its employees over and above the amount of Rs. 7,55,877 allowable under the Payment of Bonus Act, 1965. The matter was referred back to the original Bench for a final decision in light of this conclusion.