2024 (3) TMI 666 - HC - Income Tax

Liability for salary and wages arising out of the Justice Palekar Award - Whether allowable as expenditure in the present year or only in the year in which the agreement between the Management and the employees is entered into? - HELD THAT - ITAT decided the issue in one paragraph by simply stating that the arguments of the learned DR that the impugned liability to pay salary and wages is a contractual liability out of the agreement with the employees and hence, the liability would arise only when it is ascertained find support from the decision of Swadeshi Cotton Mills Co. Ltd. 1979 (9) TMI 26 - ALLAHABAD HIGH COURT - We have to note that the portion, which is quoted allegedly from the judgment, is not found in the copy of the judgment made available to this Court. This Court in Commissioner of Income Tax V/s. United Motors (India) Ltd. 1989 (9) TMI 73 - BOMBAY HIGH COURT has held on identical facts that the payment by assessee in the aggregate sum to its workmen was for the services that were rendered by them during the previous year under consideration and since such expenditure was incurred for the purpose of earning the income of the previous year, it must be deducted in the previous year. Ex-gratia bonus paid to the employees over and above the eligible bonus under the Payment of Bonus Act - allowable expenditure u/s 37 (1) or not? - As in Commissioner of Income Tax V/s. Maina Ore Transport P. Ltd. 2008 (8) TMI 504 - BOMBAY HIGH COURT a Division Bench of this Court, after considering Rajaram Bandekar Sons (Shipping) Pvt. Ltd. (Supra), held that the Tribunal was justified in holding that the ex-gratia payment in excess of the limit prescribed under the Payment of Bonus Act, 1965, either under Section 36(1)(ii) or Section 37(1) of the Act was allowable as business expenditure. The Court also held that the Tribunal was justified in holding that ex-gratia amount paid over and above the amount paid in accordance with the Bonus Act was an allowable expenditure although the payment did not cover contractual payment or customary payment. We answer the questions of law in negative. We hold that the ITAT was not right in law in holding that the liability for salary and wages arising out of the Justice Palekar Award is not allowable as expenditure in the present year but only in the year in which the agreement between the management and the employees is entered into. We further hold that the ITAT was not right in law in holding that ex-gratia bonus paid to the employees over and above the eligible bonus under the Payment of Bonus Act is not allowable as expenditure u/s 37 (1) of the Act.

Summary

Issues Involved:
1. Allowability of liability for salary and wages arising out of the Justice Palekar Award.
2. Allowability of ex-gratia bonus paid to employees over and above the eligible bonus under the Payment of Bonus Act.

Summary:

Issue 1: Allowability of Liability for Salary and Wages Arising Out of the Justice Palekar Award

The primary question was whether the liability for salary and wages arising from the Justice Palekar Award should be allowable as expenditure in the year the agreement between the management and employees was signed or in the year the liability was incurred. The Assessing Officer disallowed the provision for additional salary and wages amounting to Rs. 17 lakhs, arguing that the liability arose only after the signing of the agreement on 8th May 1987, post the accounting year's closure. The CIT(A) allowed the deduction, stating that events post the close of accounts could be considered if the accounts were not finalized, supported by accounting standard 4. The ITAT upheld the Assessing Officer's view, citing the Allahabad High Court's decision in Swadeshi Cotton Mills Co. Ltd. v/s. CIT 125 ITR 33 (All). However, the High Court referred to its own precedent in Commissioner of Income Tax v/s. United Motors (India) Ltd. 1990 (181) ITR 347, which held that such liabilities for services rendered in the previous year should be deductible in that year. The High Court agreed with this view and held that the ITAT was not right in law in its decision.

Issue 2: Allowability of Ex-Gratia Bonus Paid Over and Above the Eligible Bonus Under the Payment of Bonus Act

The second issue was whether the ex-gratia bonus amounting to Rs. 16,28,258/- paid over the eligible bonus was allowable as expenditure under Section 37(1) of the Act. The Assessing Officer disallowed the claim based on the first proviso to Section 36(1)(ii) of the Act. The CIT(A) reversed this, allowing the deduction under Section 37(1). The ITAT restored the Assessing Officer's decision, referencing CIT vs. Rajaram Bandekar & Sons (Shipping) Pvt. Ltd. 237 ITR 628 (Bom.). However, the High Court referred to its decision in Commissioner of Income Tax v/s. Maina Ore Transport P. Ltd. (2010) 324 ITR 100 (Bom.), which allowed such ex-gratia payments as business expenditure under Section 37(1), even if they exceeded the statutory limits. The High Court agreed with this view and held that the ITAT was not right in law in its decision.

Conclusion:

The High Court answered both questions of law in the negative, holding that the ITAT was not right in law in disallowing the liabilities for salary and wages arising from the Justice Palekar Award and the ex-gratia bonus paid over the eligible bonus under the Payment of Bonus Act. The appeal was disposed of accordingly.