1992 (1) TMI 184 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of damages paid to Provident Fund and Employees State Insurance authorities.
2. Disallowance of provision for bonus.
3. Allowability of excess payment of bonus.
4. Disallowance of excess liability under the Payment of Bonus Act.
5. Allowability of damages levied under Section 14B of the EPF Act.

Issue-wise Detailed Analysis:

1. Disallowance of Damages Paid to Provident Fund and Employees State Insurance Authorities:
The assessee contended that damages paid due to financial problems should be allowed as a deduction, citing that these were compensatory rather than penal. The CIT(A) disallowed this, considering it as penalties for infraction of the law. The Tribunal referred to the judgment in *Organo Chemical Industries vs. Union of India* and the case of *ITO vs. Havers Industries Ltd.*, concluding that 40% of the damages could be treated as compensatory and deductible under Section 37(1) of the IT Act, 1961. The amounts of Rs. 92,025, Rs. 65,518, and Rs. 10,005 were considered, but the amount of Rs. 1,94,435 was deferred to the next assessment year.

2. Disallowance of Provision for Bonus:
The assessee claimed a deduction for bonus payments, including a provision for Rs. 2,22,193. The ITO disallowed this provision, adhering to the practice of allowing bonus in the year of payment. The Tribunal upheld this disallowance, noting that the provision was not paid within the relevant accounting year.

3. Allowability of Excess Payment of Bonus:
The Revenue appealed against the CIT(A)'s allowance of Rs. 83,443 as excess bonus paid under a settlement. The Tribunal upheld the CIT(A)'s decision, referencing the *Shahzada Nand & Sons vs. CIT* and *CIT vs. Shaw Wallace & Co. Ltd.* cases, which supported the allowance of such payments made under commercial expediency and industrial agreements.

4. Disallowance of Excess Liability Under the Payment of Bonus Act:
The assessee claimed bonus and ex gratia payments totaling Rs. 1,82,660, which the AO disallowed as they exceeded statutory limits. The CIT(A) upheld this disallowance, noting that the liability arose after the accounting year. The Tribunal confirmed the disallowance for the relevant year but directed that the payments be considered for deduction in the subsequent assessment year upon actual payment.

5. Allowability of Damages Levied Under Section 14B of the EPF Act:
The Tribunal considered the additional ground regarding the damages of Rs. 1,94,435 levied under Section 14B of the EPF Act. It held that since the liability arose in the accounting year ending 30th June 1982, the amount should be allowed as a deduction in the assessment year 1983-84.

Conclusion:
The assessee's appeals were allowed in part, with specific directions for the allowability of certain deductions in the subsequent assessment years. The Departmental appeal was dismissed, upholding the CIT(A)'s decision on the excess bonus payment. The Tribunal's decisions were consistent with established practices and legal precedents, ensuring that deductions were allowed based on actual payments and commercial expediency.