1984 (7) TMI 126 - AT - Income Tax

Summary

Issues:
- Disallowance of bonus deduction by the ITO in three consecutive assessment years
- Interpretation of the provisions of the Income Tax Act and the Payment of Bonus Act regarding bonus payments
- Applicability of the first proviso to s. 36(1)(ii) of the IT Act in relation to bonus payments exceeding statutory limits

Analysis:
In this case, the Appellate Tribunal ITAT CALCUTTA-C addressed the common issue of disallowance of bonus deduction by the ITO for three consecutive assessment years, which was subsequently cancelled by the CIT(A). The primary contention was whether the bonus paid by the assessee-company, M/s Daga & Co. (P) Ltd., exceeded the allocable surplus and thus, was disallowed by the ITO. The CIT(A) overturned these disallowances, leading to the Department appealing for all three years.

The Tribunal examined the provisions of the Payment of Bonus Act and the Income Tax Act to determine the eligibility of the bonus payments made by the assessee. The ITO disallowed the bonus deduction citing the first proviso to s. 36(1)(ii) of the IT Act, which restricts deductions for bonus exceeding the amount payable under the Bonus Act. However, the CIT(A) accepted the argument that the excess bonus paid was customary and not covered by the Bonus Act, allowing it under s. 37 of the Act.

The Departmental representative argued that if bonus is not deductible under s. 36, it cannot be claimed under s. 37 of the Act. They relied on a Tribunal decision and a CBDT circular to support this position. The Tribunal analyzed sections 30 to 37 of the Act, emphasizing that s. 37 is a residuary section and expenditure covered under other sections cannot be claimed under s. 37.

The Tribunal delved into the nature of bonus payments, distinguishing between statutory, contractual, and customary bonuses. It highlighted that contractual bonuses are recognized under the Bonus Act, specifically referring to s. 31A which validates bonus payments under agreements. The Tribunal noted that the first proviso to s. 36(1)(ii) was inserted to limit bonus deductions but acknowledged that contractual bonuses are within the purview of the Bonus Act.

Ultimately, the Tribunal held that bonus paid under agreements is an allowable deduction under s. 36 of the Act, subject to the 20% limit of salary and wages of employees. The Tribunal affirmed the CIT(A)'s decision, albeit on different grounds, emphasizing the inclusion of contractual bonuses within the Bonus Act's scope.