2008 (8) TMI 504 - HC - Income Tax

Business Expenditure- Excess amount paid- . The respondent has made payment of ex-gratia in the sum of Rs. 2, 37, 702 to its employees (in excess of the limit of 8.33 per cent. under the Payment of Bonus Act). The respondent claims the deduction of the said amount in computing its total income. The Deputy Commissioner of Income-tax (Assessment) Special Range-II Panaji disallowed the said claim on the ground that it is an excess payment than permissible limits as per the Act. The Deputy Commissioner of Income-tax held that the payment of only 8.33 per cent. was in accordance with the Bonus Act and therefore the payment of Rs. 2, 37, 702 which was in excess of 8.33 per cent. maximum statutory limit under the Act could not be allowed. Commissioner (Appeals) allow the appeal and the Tribunal allowed the deduction in respect of ex gratia payment made to the employees. Held that- the Tribunal was justified in holding that the ex gratia payment made in excess of the limit prescribed under the payment of Bonous Act 1965 either under section 36(1)(ii) of the Act was allowable as business expenditure. The Tribunal was justified in holding that exgratia payment made over and above the amount paid in accordance with the Bonous Act was an alloweable expenditure though the payment did not cover contractual payment or customary payment.

Summary

Issues:
1. Whether ex-gratia payment exceeding the limit prescribed under the Payment of Bonus Act is allowable as business expenditure under section 36(1)(ii) or section 37(1) of the Income-tax Act 1961?
2. Whether ex-gratia payment made over and above the statutory limit, not covering contractual or customary payment, is an allowable business expenditure?

Analysis:
1. The case involved a company earning income from hiring vehicles, which made an ex-gratia payment exceeding the statutory limit under the Payment of Bonus Act. The Deputy Commissioner disallowed the claim, but the Commissioner of Income-tax (Appeals) allowed it, citing the payment was to maintain healthy relations. The Income-tax Appellate Tribunal upheld the decision, relying on a Bombay High Court judgment.

2. The Tribunal's decision was challenged by the Department, but the Pune Bench dismissed the appeal, referencing another Bombay High Court judgment. The Tribunal then referred the matter to the Bombay High Court, which considered various High Court decisions supporting the allowance of ex-gratia payments beyond statutory limits as business expenditure under section 36(1)(ii) or section 37(1) of the Act.

3. The High Court analyzed the legal position, including the object of the proviso to section 36(1)(ii) to encourage bonus payments exceeding statutory limits if justifiable as "reasonable payment." It also cited a Rajasthan High Court case allowing deduction of ex-gratia payments for maintaining industrial harmony and business operations. The court referred to the apex court's decision on the Payment of Bonus Act, emphasizing the Act's focus on profit-based bonuses.

4. The High Court also considered a previous case involving ex-gratia payments, where the Tribunal's decision was remitted for further review to ensure compliance with statutory provisions. In the present case, the Court found the ex-gratia payment was made, verified by authorities, and allowed as a deduction from the assessee's income.

5. Referring to previous judgments, including the Raghuvanshi Mills Ltd. case, the High Court concluded that the points raised in the reference deserved affirmative answers based on precedents, directing the Tribunal to return the reference accordingly. The Court's decision aligned with previous rulings, emphasizing the permissibility of ex-gratia payments exceeding statutory limits as allowable business expenditure under the Income-tax Act.