1991 (12) TMI 139 - AT - Income Tax

Summary

Issues:
1. Whether the CIT was justified in invoking jurisdiction under section 263 to disallow the excess payment of bonus under section 36(1)(ii) of the Income-tax Act, 1961.
2. Whether the bonus paid to certain employees should be considered under the first proviso or the second proviso to section 36(1)(ii) of the Income-tax Act, 1961.
3. The applicability of Circular No. 206 dated 9-8-1976 and Circular No. 287 dated 4-12-1980 in determining the admissibility of bonus payments.

Analysis:
The appeal before the Appellate Tribunal ITAT Pune involved a dispute regarding the disallowance of excess bonus claimed as a deduction under section 36(1)(ii) of the Income-tax Act, 1961. The CIT Pune had held the original assessment order as erroneous and prejudicial to revenue, directing the ITO to disallow the excess bonus amount. The CIT based the decision on the Payment of Bonus Act, 1965, and Circular No. 287 dated 4-12-1980, arguing that the bonus payment exceeded the prescribed limits and was not admissible. The appellant contended that the bonus was paid within permissible limits and should be considered under the second proviso to section 36(1)(ii) or section 37(1) for business purposes.

The Tribunal analyzed the definitions under the Payment of Bonus Act and the applicability of Circular No. 206 dated 9-8-1976. It noted that certain employees receiving bonuses exceeding Rs. 1,600 per month were not covered under the Payment of Bonus Act, thus requiring consideration under the second proviso to section 36(1)(ii). The Tribunal referred to precedents from the Kerala High Court and Calcutta High Court, emphasizing the conditions for admissibility of bonus payments. It highlighted that the CBDT clarified the treatment of bonus payments to employees not covered by the Payment of Bonus Act, aligning with Circular No. 206 dated 9-8-1976.

The Tribunal concluded that the CIT erred in solely applying the first proviso to section 36(1)(ii) without considering the applicability of the second proviso. It emphasized that the bonus payment to certain employees should be assessed under the second proviso, as clarified by the CBDT. The Tribunal disagreed with the CIT's decision to disallow the excess bonus and set aside the revisional order, restoring the original assessment by the ITO. The Tribunal relied on the legal interpretations provided by the CBDT and previous court judgments to support its decision to allow the appeal.