2005 (5) TMI 20 - HC - Income Tax

Incentive bonus deduction - In the present case, the Tribunal has come to the conclusion that workers were allowed to put in extra time and increase the production by their labour, good attendance and efficiency. For this extra time or overtime extra single wages was paid. It was this payment, which was treated as incentive bonus by the assessee. We are of the opinion, that such incentive bonus does not fall within the purview of the Payment of Bonus Act and, thus, it is not covered under section 36(1) (ii) of the Act. Since the payment was wholly and exclusively for the purpose of business it was liable for deduction under section 37(1)

Issues Involved:
1. Genuineness and nature of the payment for deduction in computing business income.
2. Admissibility of incentive bonus over and above the permissible bonus under the Payment of Bonus Act.
3. Consideration of payments under section 36(1)(ii) or section 37(1) of the Income-tax Act.
4. Entitlement to the deduction of the entire incentive bonus of Rs. 22,23,518.

Detailed Analysis:

1. Genuineness and Nature of the Payment:
The Tribunal examined whether the assessee established the genuineness and nature of the payment claimed as incentive bonus. The assessee argued that the incentive bonus was paid for overtime and extra work during a strike period. The Commissioner of Income-tax (Appeals) found inconsistencies in the assessee's explanations and doubted the genuineness of the payments, noting similar thumb impressions on payment vouchers. However, the Tribunal found that the payments were actual and customary, supported by the U.P. Chamber of Commerce and past practice.

2. Admissibility of Incentive Bonus Over and Above the Permissible Bonus:
The Tribunal considered whether the incentive bonus paid over and above the statutory bonus under the Payment of Bonus Act was allowable. The Tribunal noted that the Payment of Bonus Act covers only profit bonus, not other types of bonuses like customary or incentive bonuses. It cited Supreme Court judgments affirming that customary bonuses are outside the purview of the Payment of Bonus Act. Therefore, the Tribunal held that the incentive bonus paid was allowable under the second proviso to section 36(1)(ii) or section 37(1) of the Act.

3. Consideration under Section 36(1)(ii) or Section 37(1):
The Tribunal analyzed whether the payment could be considered under section 36(1)(ii) or section 37(1). It found that if a payment does not fall under the first proviso of section 36(1)(ii), it can still be considered under the second proviso or section 37(1). The Tribunal noted that the payment was reasonable with reference to the employees' pay, service conditions, business profits, and general practice in similar businesses. It cited case law supporting the allowance of such payments under section 37(1) when they do not fall under section 36(1)(ii).

4. Entitlement to Deduction of the Entire Incentive Bonus:
The Tribunal concluded that the entire incentive bonus of Rs. 22,23,518 was deductible. It found that the payment was for extra work done by employees during a strike, was reasonable, and was supported by evidence. The Tribunal dismissed the Revenue's argument that the bonus exceeded the permissible limit under the Payment of Bonus Act, holding that the incentive bonus was outside the scope of the Act and allowable under section 37(1).

Conclusion:
The High Court upheld the Tribunal's decision, affirming that the incentive bonus paid by the assessee was genuine, reasonable, and allowable as a deduction under section 37(1) of the Income-tax Act. The questions referred were answered in favor of the assessee and against the Revenue.

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