1996 (2) TMI 177 - AT - Income Tax

Summary

Issues Involved:

1. Whether the bonus paid by the assessee was customary bonus or ex-gratia.
2. Whether the payment made by the assessee to its employees was governed by the Payment of Bonus Act, 1965.
3. Whether the deduction of the bonus payment was allowable under section 36(1)(ii) or section 37 of the IT Act.
4. Whether the limits set out under the Payment of Bonus Act governed the allowance of deduction.
5. Whether the deduction for the bonus payment should be allowed in the year it was settled or the year it was paid.

Detailed Analysis:

1. Customary Bonus vs. Ex-Gratia Payment:

The Full Bench was constituted to resolve conflicting decisions regarding whether the bonus paid by the assessee was a customary bonus or an ex-gratia payment. The Tribunal had previously allowed the bonus as a deduction for the assessment years 1979-80 and 1980-81, considering it as customary bonus. However, for the assessment year 1981-82, another Bench disallowed the claim, treating it as ex-gratia. The Full Bench reviewed the resolutions passed by the Board of Directors and the payments made to determine the nature of the bonus.

2. Applicability of the Payment of Bonus Act, 1965:

The Tribunal examined whether the payments made by the assessee were governed by the Payment of Bonus Act, 1965. The Act applies to employees earning less than Rs. 1,600 per month and prescribes a minimum and maximum bonus payable. The Tribunal found that the assessee's payments were not governed by the Act as the payments were made to employees earning more than Rs. 1,600 per month and were not linked to the allocable surplus or profits of the business. The Tribunal also noted that the assessee was not obliged to pay bonus under the Act during the initial five years of production as per section 16(1A) of the Payment of Bonus Act.

3. Deduction Under Section 36(1)(ii) vs. Section 37 of the IT Act:

The Tribunal considered whether the deduction for the bonus payment should be allowed under section 36(1)(ii) or section 37 of the IT Act. Section 36(1)(ii) applies to bonuses governed by the Payment of Bonus Act, while section 37 applies to other business expenditures. The Tribunal concluded that since the payments were not governed by the Payment of Bonus Act, they should be considered under section 37. The Tribunal referred to several case laws, including the Supreme Court's decision in Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai, which held that the Payment of Bonus Act does not exhaust all types of bonuses and customary bonuses are not annihilated by the Act.

4. Limits Set Out Under the Payment of Bonus Act:

The Tribunal examined whether the limits set out under the Payment of Bonus Act governed the allowance of deduction. The Act prescribes a minimum bonus of 8.33% and a maximum bonus of 20% of the salary or wages. The Tribunal found that the payments made by the assessee exceeded these limits but were justified as customary bonuses based on long-standing practice and agreements with the labor unions. The Tribunal referred to the Supreme Court's decision in Coffee Board Employees Association v. A.C. Shiva Gowda, which recognized the legitimacy of ex-gratia payments for securing cooperation and efficient work from employees.

5. Year of Allowance of Deduction:

The Tribunal considered whether the deduction for the bonus payment should be allowed in the year it was settled or the year it was paid. The Tribunal noted that the liability to pay the bonus arose when the resolutions were passed by the Board of Directors and the payments were made. Therefore, the deduction should be allowed in the years when the payments were actually made, i.e., assessment years 1983-84 and 1984-85. The Tribunal distinguished this case from the Calcutta High Court's decision in Texmaco Ltd. and the Allahabad High Court's decision in Amrit Banaspati Co. Ltd., which dealt with statutory liabilities under the Payment of Bonus Act.

Conclusion:

The Full Bench concluded that the bonus payments made by the assessee were customary bonuses and not governed by the Payment of Bonus Act. Therefore, the deductions were allowable under section 37 of the IT Act in the years the payments were made. The Tribunal's earlier decision for the assessment years 1979-80 and 1980-81, which allowed the deductions, was upheld, and the decision for the assessment year 1981-82, which disallowed the deductions, was set aside. The matter was remitted back to the Division Bench for consideration of other issues, if any.