1982 (3) TMI 176 - AT - Income Tax

Summary

Issues:
1. Whether a sum paid by the assessee to its employees as bonus can be disallowed under section 36(1)(ii) of the Income-tax Act, 1961.
2. Whether the excess amount paid as an incentive wage is deductible under section 37(1) of the Act.

Analysis:
1. The primary issue in this case is whether a sum paid by the assessee to its employees as bonus can be disallowed under section 36(1)(ii) of the Income-tax Act, 1961. The dispute arose when the ITO sought to restrict the bonus payment to 20% instead of the 25% paid by the assessee, leading to the disallowance of the excess amount. The Commissioner (Appeals) allowed the excess 5% as an incentive wage, contending that it falls outside the provisions of the Payment of Bonus Act, 1965. The departmental appeal challenged this decision, arguing that the term 'incentive wage' is used to circumvent the Payment of Bonus Act.

2. The controversy hinges on the distinction between bonus and incentives. The Tribunal rejected the department's contention that there is no real difference between bonus and incentives. It emphasized that bonus is a statutory right of employees guaranteed by the Payment of Bonus Act, ensuring automatic accrual at the end of the accounting year. In contrast, incentives require special efforts on the part of employees and are often discretionary payments by the employer. The Tribunal highlighted that the Payment of Bonus Act does not prohibit ex gratia payments to employees, and such payments are a recognized trade practice. In this case, the 5% incentive wage was granted as part of a settlement for an industrial dispute, supported by commercial expediency, and not as a camouflage for bonus.

3. The Tribunal clarified that while bonus is deductible under section 36(1)(ii) of the Act, other ex gratia payments, like the incentive wage in this case, are deductible under section 37(1). It emphasized that the incentive payment was crucial for settling the industrial dispute and maintaining business operations. The Tribunal upheld the decision of the Commissioner (Appeals) to allow the 5% incentive wage as a deductible expense under section 37(1) due to its commercial expediency. By distinguishing between bonus and incentives, the Tribunal resolved the controversy and dismissed the departmental appeal.