2005 (4) TMI 19 - HC - Income Tax

Amount paid as incentive bonus - The Commissioner of Income-tax (Appeals) and the Tribunal have recorded findings that it was paid at figures varying from 10 per cent. to 19 per cent. of the salary depending upon the performance appraisal of each employee on time scale by way of additional salary linked with productivity and efficiency of the worker. The said amount was paid to the employees as production incentive and was wholly and exclusively for the purposes of business and as such, allowable under section 37 of the Act.

Summary

Issues involved:
1. Allowability of incentive bonus as business expenditure under the Income-tax Act, 1961 for the assessment year 1982-83.

Detailed Analysis:
The case involved a company (referred to as "the assessee") claiming an incentive bonus of Rs. 59,271 as business expenditure in its profit and loss account. The assessing authority disallowed this amount, considering it in excess of the 20% bonus limit under the Payment of Bonus Act. However, the Commissioner of Income-tax (Appeals) allowed the incentive bonus, stating it was linked to productivity and efficiency, not profit. The Tribunal upheld this decision, emphasizing the historical payment of incentive bonuses and their productivity-based nature.

The key legal provisions considered were Sections 36(1)(ii) and 37 of the Income-tax Act, 1961. Section 36(1)(ii) allows deductions for sums paid as bonus or commission, provided they would not have been payable as profits or dividends. Section 37 permits the allowance of expenditure wholly and exclusively for business purposes. The Tribunal found that while the incentive bonus may not fall under Section 36, it qualifies as an expenditure for business purposes under Section 37 due to its productivity and efficiency linkage.

The Tribunal's decision was based on the finding that the incentive bonus, paid varying from 10% to 19% of salaries based on performance appraisal, was an additional salary linked to productivity. This payment was considered production incentive, wholly and exclusively for business purposes. Consequently, the Tribunal upheld the allowance of the incentive bonus as business expenditure under Section 37, rejecting the Revenue's argument that it should be treated as a bonus under Section 36.

In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the assessee and against the Revenue. The incentive bonus was deemed allowable as business expenditure under Section 37 of the Income-tax Act, 1961, for the assessment year 1982-83.