1986 (5) TMI 54 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of monthly incentive wages.
2. Disallowance of special incentive for attaining target of despatches.
3. Applicability of the first proviso to Section 36(1)(ii) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Monthly Incentive Wages:
The assessee, a limited company, claimed a deduction for monthly incentive wages amounting to Rs. 3,66,579. The Income Tax Officer (ITO) treated this amount as a bonus and disallowed it under the first proviso to Section 36(1)(ii) of the Income Tax Act, 1961. The assessee argued that the monthly incentive was wages, not linked to profitability, and should be allowed as a deduction. The CIT(A) upheld the ITO's decision, considering the monthly incentive as a bonus linked with productivity. The Tribunal examined the agreements dated 19th May 1971 and 8th April 1974, which outlined the terms of the monthly incentive scheme. It was concluded that the monthly incentive depended on the productivity achieved by the workmen and was related to production, not profit. Therefore, the Tribunal held that the monthly incentive was an additional emolument and not a bonus under the Payment of Bonus Act, 1965. Consequently, the disallowance of Rs. 3,66,579 was deleted.

2. Disallowance of Special Incentive for Attaining Target of Despatches:
The assessee also claimed a deduction for a special incentive amounting to Rs. 1,30,135, paid for attaining the target of despatches for the year 1978-79 as per an agreement between the management and the employees' union. The ITO treated this amount as a bonus and disallowed it under the first proviso to Section 36(1)(ii). The CIT(A) upheld this disallowance, considering it as a bonus linked with productivity. The Tribunal reviewed the agreement dated 5th June 1976, which specified that the special incentive was payable only if the required invoiced despatches were achieved. The Tribunal concluded that the special incentive was related to production and not profit. Therefore, it was considered an additional emolument and not a bonus under the Payment of Bonus Act, 1965. Consequently, the disallowance of Rs. 1,30,135 was deleted.

3. Applicability of the First Proviso to Section 36(1)(ii) of the Income Tax Act, 1961:
The first proviso to Section 36(1)(ii) of the Act excludes the payment of bonus exceeding the amount payable under the Payment of Bonus Act, 1965. The Tribunal analyzed whether the monthly incentive and special incentive fell under the purview of the Payment of Bonus Act, 1965. It referred to the Supreme Court's decision in the case of Titaghur Paper Mills Co. Ltd., which clarified that production bonus is an additional emolument for extra effort put in by workmen over the standard performance and is not linked to profits. The Tribunal also noted that the Payment of Bonus Act, 1965, relates to profit-based bonuses and not production-based bonuses. Based on these findings, the Tribunal concluded that the monthly incentive and special incentive did not fall under the provisions of the Payment of Bonus Act, 1965, and therefore, the first proviso to Section 36(1)(ii) was not applicable. Consequently, the disallowances made by the authorities below were not justified.

Conclusion:
The Tribunal allowed the appeal, deleting the disallowances of monthly incentive wages amounting to Rs. 3,66,579 and special incentive amounting to Rs. 1,30,135 from the total income of the assessee-company.