1987 (4) TMI 118 - AT - Income Tax

Issues Involved:
1. Disallowance of bonus payments under Section 36(1)(ii) of the Income Tax Act.
2. Addition of Rs. 2,41,298 under Section 41(1) of the Income Tax Act.
3. Addition related to scrap sold outside the books.

Issue-wise Detailed Analysis:

1. Disallowance of Bonus Payments under Section 36(1)(ii) of the Income Tax Act

Background:
The Revenue objected to the CIT(A)'s deletion of the disallowance of Rs. 8,21,755 made by the ITO, which was attributed to payments described as production bonus, ex gratia payment, and attendance incentive bonus. The ITO had allowed only a 20% deduction under the Payment of Bonus Act, disallowing the excess amount.

CIT(A) Decision:
The CIT(A) followed his order for the assessment year 1979-80, holding that the restrictive provisions of Section 36(1)(ii) were not applicable to these payments. The CIT(A) noted that the IAC(Asst.) did not doubt the genuineness of the payments or that the expenditure was incurred wholly and exclusively for business purposes. Citing the Supreme Court's decision in Baidyanath Ayurveda Bhawan (P) Ltd., the CIT(A) concluded that the Payment of Bonus Act applies only to profit bonuses and not to customary, traditional, or contractual bonuses.

Tribunal Decision:
The Tribunal found that the issue was covered by prior orders for the assessment years 1979-80 and 1980-81, where similar objections by the Revenue were rejected. The Tribunal noted that various payments such as those to retrenched/retired employees, loyal workers during strikes, production bonuses, and overtime payments did not fall under the definition of bonus within the meaning of the Payment of Bonus Act. These payments were considered allowable as revenue expenditure incurred for business expediency. Consequently, the Tribunal upheld the CIT(A)'s decision, rejecting the Revenue's objection.

2. Addition of Rs. 2,41,298 under Section 41(1) of the Income Tax Act

Background:
The IAC (Asst.) added Rs. 2,41,298 to the assessee's income, considering it a remission or cessation of trading liabilities under Section 41(1). The amount was transferred to the old firm's account along with advances receivable, and the IAC (Asst.) presumed a benefit to the assessee.

CIT(A) Decision:
The CIT(A) deleted the addition, observing that the IAC (Asst.) misunderstood the factual position. The CIT(A) noted that the consolidation of accounts under "Old Firm Account" did not equate to writing off liabilities. The CIT(A) found no evidence that any liability had ceased to exist and held that Section 41(1) was misapplied.

Tribunal Decision:
The Tribunal agreed with the CIT(A), noting that the consolidated accounts did not imply a cessation of liabilities. The Tribunal emphasized that the liabilities were still carried forward in the books of the Limited Company, and there was no evidence of cessation. The Tribunal found the facts distinguishable from the Indian Motor Transport Co. case cited by the IAC (Asst.) and upheld the CIT(A)'s decision, rejecting the Revenue's objection.

3. Addition Related to Scrap Sold Outside the Books

Background:
The IAC (Asst.) made an addition of Rs. 2,05,470 on account of scrap sold outside the books, which the CIT(A) reduced to Rs. 1,39,000.

Tribunal Decision:
The Tribunal referred to its earlier decision in paragraph 24, where it held that no addition was warranted on this count. Consequently, the Tribunal rejected the Revenue's objection regarding the reduction of the addition made by the CIT(A).

Conclusion:
- ITA No. 5089/84 is allowed in part.
- ITA No. 336/85 is dismissed.

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