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TMI Blog1996 (2) TMI 177X X X X Extracts X X X X X X X X Extracts X X X X ..... x-gratia If it is former, it is allowable as a deduction. For the assessment years 1979-80 and 1980-81, the ITAT held it to be customary bonus and hence allowable. Its decision did not travel beyond as the High Court rejected the application under section 256(2). But for 1981-82 on identical set of facts, another Bench without referring to earlier orders of the Tribunal took a contrary view. The CIT for these two years following 1979-80 and 1980-81 orders of the Tribunal, allowed the assessee's claim. The Department is in appeal urging that the CIT should have followed later order of the Tribunal and disallowed the claim. Thus there are contrary decisions as to same set of facts. To resolve this apparent controversy, it is necessary and expedient to constitute a larger Bench. The larger Bench is thus constituted by me consisting of Shri U.T. Shah, Sr. V.P., Shri J.P. Bengra, J.M. and myself." Thus it can be seen that during the course of a judicial proceeding the formation of the Full Bench was felt necessary and since the then President happened to be one of the Members of the Division Bench constituted the Full Bench under section 255(3). The only question which is intended to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee as it started production only in the assessment year 1975-76 and in accordance with the provisions of section 16(1A) of the Payment of Bonus Act, the employers were exempt from payment of bonus for five years subsequent to the start of its production. 4. Now we come to survey the position obtaining in assessment years 1979-80 and 1980-81. The ITO allowed ex-gratia payments of Rs. 3,17,3 99 for assessment year 1979-80 and Rs. 15,27,850 for assessment year 1980-81 without mentioning any reasons as to why they were being allowed. The CIT felt that allowing deduction of ex-gratia payments made to the employees of the assessee Sugar Mill are no other than the payments made towards bonus under the Payment of Bonus Act and thus they are restricted to the limits prescribed under section 36(1)(ii) of the IT Act and since the payments were made and deduction was allowed beyond the limits prescribed, he felt that the deduction ought not to have been allowed and hence he proposed revision of the orders of the ITO under section 263 both for assessment years 1979-80 and 1980-81. The copy of the orders under section 263 for assessment years 1979-80 and 1980-81 dated 18-8-1984 was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the Commissioner of Income-tax, the assessee filed an appeal before this Tribunal which came up before 'C' Bench of the Tribunal in ITA Nos. 5150 and 5151/Del/84. The order of the Tribunal dated 21-4-1985, a copy of which is provided at pages 27 to 29 of the assessee's first paper book, went in favour of the assessee. 6. After hearing both sides, the Tribunal had recorded its reasons for its decision in para 5 of its orders which are as follows: "So far as bonus is concerned, the learned Commissioner has merely considered that question from the stand point of the Payment of Bonus Act, 1965. He has not considered at all the assessee's explanation that the incentives were paid from the assessment year 1978-79 as customary bonus. In the case of Mohata Industries Ltd. relied upon on behalf of the Department itself it was held that ex-gratia payment to employees which was made otherwise than as a result of agreement/settlement and without evidence that it was customarily made in the assessee's line of business was deductible. In the case of Egmore Benefit Society Ltd., the Appellate Tribunal had clearly held that, that payment of customary bonus were not covered by the Paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f minimum bonus in case bonus was not payable for the year and its payment should be continued. Therefore, this amount of bonus may be amended as 'ex-gratia' in lieu of minimum bonus equivalent to 8.33 per cent of the wages of the workers. However, it was decided that the position should be handled very carefully." 8. The total amount paid under the Resolution mentioned above was Rs. 8,62,511. It was paid in two parts, the first part of the payment comprised of Rs. 3 lacs which relates to assessment year 1980-81 and the second part of the payment debited in assessment year 1981-82 was Rs. 5,62,511. Thus it can be seen that the amount claimed as deduction for assessment year 1981-82 was Rs. 5,62,511. This claim of the assessee was negatived by the ITO by the assessment orders dated 31-8- 1984, a copy of the said orders was provided at pages 30 to 33 of the third paper book filed by the assessee. The reasons for negativing the claim of the assessee are found in para 4 of the assessment orders now obtaining at page 31 of the third paper book which are as follows : "4. The law governing the deductibility of bonus is laid down in section 36(1)(ii) of the IT Act, 1961. The first prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee claimed ex-gratia payment of Rs. 8,98,646 to its employees/workers. The ITO while framing the assessment by his assessment orders dated 30-3-1985, a copy of which is found provide at pages 40 to 42 of paper book No. III, following the learned CIT (Appeals)'s orders for assessment year 1981-82, disallowed the ex-gratia as lawful deduction to the assessee terming its true nature as bonus. Against the said ITO's order, the assessee carried the matter in appeal to the CIT (Appeals). Barriely who by his orders dated 29-7-1985 deleted the disallowance and allowed the appeal of the assessee on this point. Copy of the CIT (Appeals)'s order is now found provided It pages 43 to 44A of the III-paper book of the assessee. He preferred to follow the ITAT's decision dated 21-4-1985 passed in ITA Nos. 5150 and 5151 /Del/184 referred to supra. 11. For assessment year 1981-82, copy of the CIT (Appeals) order was provided at pages 34 and 35 of the third paper book filed by the assessee. The appeal was disposed of by orders dated 6-4-1985, the disallowance made by the ITO was confirmed by the following reasoning found at paras 2,2a and 2b which is as follows : "2. The first ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to him, the claim was admissible under section 37(1) being customary bonus. Reliance in this connection was placed on the judgment reported in 1979 AIR (SC) 876 and also Calcutta Bench 'A' of the appellate Tribunal in the case of ITO v. Babcock Vilco of India Ltd. for the assessment year 1976-77 in ITA No. 730/Cal/82 placed at page 5 to 7 of the paper book. It was, therefore, urged that the orders of the lower authorities were liable to be reversed. 6. The learned departmental representative, on the other hand, has supported the orders of the lower authorities and contended that the liability in question was on account of bonus and since the payment of bonus Act, was not applicable to the establishment during the accounting year ending 30-9-1979, the same was rightly been disallowed by the lower authorities. 7. We have given our careful consideration to the rival submissions. The case law relied upon by the learned counsel for the assessee in the case of Hukum Chand Jute Mills v. 2nd Industrial Tribunal, W.B. 1979 AIR (SC) 876, has referred to the customary bonus in excess of the bonus admissible under the Payment of Bonus Act, 1965. From the facts noted earlier, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals), Barreily for each of the two assessment years namely 1983-84 and 1984-85. The learned CIT (Appeals) purporting to follow his predecessor's order for assessment year 1982-83 and the ITAT's order for 1979-80 deleted the addition. 14. With regard to the second objection of the ITO that the bonus payment relates to an earlier year and on that ground it is not allowable, the learned CIT (Appeals) states in para 3 of his order for 1983-84 that the payment of customary bonus had been made in terms of the decision taken in the meeting of the Board of Directors held on 30-6-1982 which falls in assessment year 1983-84. Therefore, under the circumstances of the case, he held that in his view the addition of Rs. 10,06,454 for 1983-84 cannot be sustained. Thus the alternative ground on which the disallowance was sought to be sustained by the ITO was also not accepted as correct by the learned CIT (Appeals). For assessment year 1984-85 following his order of even date relating to assessment year 1983-84, he had cancelled the disallowance of Rs. 6,09,656. 15. Aggrieved against the cancellations of the disallowances of amounts paid towards ex-gratia relating to assessment years 1983-84 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x-gratia or customary bonus whereas for assessment year 1981-82, the same Tribunal held that the payment cannot be considered under section 36(1)(ii) at all and it should only be considered as bonus governed by the provisions of Payment of Bonus Act. However, for 1979-80 as well as 1980-81 only loss was computed. Similarly for assessment year 1981-82 loss only was computed. The learned D.R. submitted that under the Payment of Bonus Act, it is obligatory on the part of the assessee to pay bonus only when it earns profits but it is not obligatory on its part to pay bonus in the years of loss. It was especially so for a period of five years from the date when the factory of the assessee commenced production. Therefore, from the facts and circumstances of the case, the order of the Tribunal for assessment year 1981-82 which had considered the case under the Payment of Bonus Act as correct and it should have been followed than the decision of the Tribunal for assessment years 1979-80 and 1980-81. 17. Further assessment year 1981-82 is a later assessment year in which the Tribunal gave its decision. Therefore, in a case where there were diametrically opposite decisions given by the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, the Tribunals and lower authorities cannot ignore the decisions of the jurisdictional High Court on the pretext that appeals are filed or are going to be filed against the judgment of the High Court in the Hon'ble Supreme Court. 18. In Raghubir Singh's case, their Lordships of the Hon'ble Supreme Court approvedly quoted the guidelines summarised in Dr. Alan Paterson's 'Law Lords' in which the following propositions are laid down: as are now found extracted at page 561 of the reported decision: "5. In the interest of certainty, a decision ought not to be overruled merely because the Law Lords consider that it was wrongly decided. There must be some additional reasons to justify such a step. 6. A decision ought to be overruled if it causes such great uncertainty in practice that the parties advisers are unable to give any clear indication as to what the Courts will hold the law to be. 7. A decision ought to be overruled if, in relation to some broad issue or principle, it is not considered just or in keeping with contemporary social conditions or modern conceptions of public policy." The learned Departmental Representative by citing the above authority wanted to imp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laries or wages. Then our attention is drawn to section 31A of the Payment of Bonus Act. This was a special provision with respect to payment of bonus linked with production or producivity. Then learned D.R. pointed out that there is nothing on record to show that the present payment is linked with either production or productivity. Then he invited our attention to section 34 of the Payment of Bonus Act. It states that nothing contained in the Payment of Bonus Act shall be construed to preclude employees employed in any establishment or class of establishments from entering into agreements with their employer for granting them an amount of bonus under a formula which is different from the formula set out under the Payment of Bonus Act. Under this provision, the payment of bonus can be the subject-matter of an agreement between employees and employers. However, this provision is subjected to important limitations namely that every agreement should be entered into with the previous approval of the appropriate Government. The agreement should not deprive the employees with the right of minimum bonus which they are entitled to under section 10. So also it should not exceed 20 per cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be different in different years. However, in this case, the payment figures are different in each of the years if we see the history of payments from assessment years 1979-80 to 1984-85. Further, including in the accounting years relevant to these assessment years under consideration, the assessee has been consistently sustaining losses only. The payment under consideration cannot also be termed as goodwill bonus as explained at page 282 of Law of Industrial Disputes, 3rd Edn., Vol. I by O.P. Malhotra. According to the learned author the goodwill bonus means a bonus given out of free will of the employer without compulsion of any industrial court. However, the same cannot be said to be the case with the present payment made in either of the two years. The learned D.R. further cited the decision of the Kerala High Court reported in CIT v. P. Alikunju, M.A. Nazir, Cashew Industries [1987] 166 ITR 611 and contended that for allowing any type of bonus to be deducted, three factors enumerated in the said decision are to be considered. The three clauses are (i) that the payment is justifiable by reason of the pay of the employee or the conditions of his service, (ii) it is justifiable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profit and loss a/c for 1983-84 of Chandpur Sugar Co. Ltd. was provided at pages 93 and 94 of the Ist paper book. It is contended by the learned D.R. that the assessee is obliged to prove many more factors than the factors which are already shown to prove that the business carried on by the assessee is similar to the business carried on by Chandpur Sugar Co. The onus to prove that the case of Chandpur Sugar Co. is similar to the case of the assessee is always on the assessee and the learned D.R. submitted that the assessee failed to prove ultimately that the case of the assessee is similar to the Chandpur Sugar Co. and, therefore, simply because the bonus is allowed in the case of Chandpur Sugar Co. does not help the assessee in any way to argue for the position that the case of the assessee as well as Chandpur Sugar Co. are similar to each other and on that ground the payment of bonus to the workers or employees is justifiable, just like in the case of Chandpur Sugar Co. Seriously opposing the plea of the assessee that though the claim of the assessee is not allowable under section 36, it is perfectly allowable under section 37(1) of the IT Act, our attention is drawn to the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t held that the statutory liability to pay bonus under the Payment of Bonus Act, 1965 is allowable in the assessment year 1971-72 even when it was finally adjusted and settled on 15-10-1971, i.e., long after the close of the relevant previous year. The Calcutta High Court took the view that the liability having accrued in a particular year, its subsequent quantification will not differ the liability to the year in which the quantification takes place. In the case before the Calcutta High Court, a sum of Rs. 22,49,424 was actually paid to the workers and employees in terms of the agreement reached with the workers union on 30-9-1975. However, the amount in question was provided as bonus payable to the workers in the calendar year, 1974 being the previous year relevant to assessment year 1975-76 and claimed as business deduction. Thus the Calcutta High Court held and took the view that having regard to the past practice, it was nothing unusual for the assessee-company to provide bonus liability @ 10.5 per cent in the calendar year, 1974 and claim it as business deduction in the assessment for the year 1975-76. The learned D.R. relied upon the Calcutta case cited above in support of h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d stated at paras 6 7 of the order dated 24-10-1994. It is submitted by the learned counsel for the assessee Shri K.P. Bhatnagar that the practice of giving ex-gratia is prevalent in the assessee's factory as well as in the area near about assessee's factory. The particulars of the ex-gratia payment made to the workers in the assessee's factory were stated to have been furnished at pages 18 19 of paper book No. IV. In pages 67 onwards of paper Book No. III filed by the assessee, strike notices have been issued by the Mazdoor Union to which majority of the workers and employees of the assessee factory belonged to. The Board of Directors meeting held on 30-1-1980 took a decision to pay ex-gratia to the workers of the assessee Mill for the year 1978-79. The extract of the Resolution passed by the Board of Directors of the assessee-company dated 30-1-1980 was furnished at page 62 of the assessee's paper book. A similar resolution passed in the Board of Directors meeting held on 30-6-1982 is furnished at page 63 of the paper book No. III and it is as follows : Excerpt from the Minutes of Meeting of Board of Directors of Kichha Sugar Company Ltd. held on 30-6-1982 at 25B, Ashok Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e been settled once for all. It is significant to note that references against the Tribunal's order were rejected and they were confirmed by the High Court also. For assessment year 1982-83, the CIT (Appeals) allowed the deduction of ex-gratia payment made to the workers and decided the issue in favour of the assessee. His orders became final since no second appeal was preferred by the Department to the Tribunal. However, curiously for assessment year 1983-84 without referring to the earlier order of the Tribunal which had concluded the matter and without giving any importance whatsoever to the orders of reference under sections 256(1) and 256(2) and without properly keeping in mind the order of the learned CIT (Appeals) passed for assessment year 1982-83, followed the Tribunal's order for assessment year 1981-82, and denied the deduction of the ex-gratia amount paid to the workers. The charge of the learned D.R. against the learned CIT (Appeals) who passed the impugned orders for these two years was that he had followed not the later order but an earlier order. When there is a series of orders passed one has to follow only the later order. However, this allegation is baseless if w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 91] 192 ITR 161 (Delhi) Shahzada Nand Sons v. CIT [1977] 108 ITR 358 (SC) CIT v. Sivanandha Mills Ltd. [1985] 156 ITR 629 (Mad.). The learned counsel for the assessee further contended that when we are considering the allowability of ex-gratia payment made to the workers in assessment years 1983-84 1984-85, we must not lose sight of the fact that the nature of the payment in those accounting years almost became the traditional payments or a customary payments since similar payment was being made over years and if it is a customary payment or a traditional payment, it is allowable and in support of this proposition, the learned counsel for the assessee relied upon : CIT v. Arya Vaidya Pharmacy (CBE) Ltd. [1985] 156 ITR 630 (Mad.) CIT v. Babcock Willcox of India Ltd. [1987] 165 ITR 105 (Cal.) CIT v. Orissa Industries Ltd. [1993] 203 ITR 449 (Ori.) CIT v. Holman Climax Mfg. Ltd. [1992] 196 ITR 698 (Cal.) Baidyanath Ayurveda Bhawan Mazdoor Union v. Management of Shri Baidyanath Ayurveda Bhawan (P.) Ltd. [1984] 17 Taxman 19 (SC) Hukumchand Mills Ltd.'s case AIR 1959 SC 876. Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai AIR 1976 SC 1455. Ultimately the learned Advoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he pay of the employee and the conditions of his service; (b) the profits of the business or profession for the previous year in question; and (c) the general practice in similar business or profession." Section 29 of the Payment of Bonus (Amendment) Act, 1976 has inserted a new proviso to section 36(1)(ii) IT Act. The amendment came into effect from 25-9-1975 relevant to assessment year 1976-77. Under the amendment the previously existing proviso quoted above became the second proviso and a new proviso was inserted as the first proviso. After the amendment introduced from 25-9-1975 the new proviso termed as Ist proviso and the amended second proviso read as under : "Provided that the deduction in respect of bonus paid to an employee employed in a factory or other establishment to which the provisions of the Payment of Bonus Act, 1965 (21 of 1965) apply shall not exceed the amount of bonus payable under that Act. Provided further that the amount of bonus (not being bonus referred to in the first proviso) or commission is reasonable with reference to --- (a) the pay of the employee and the conditions of his service; (b) the profits of the business or profession for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of business. This led to litigation. The conditions laid down by the second proviso in case of payment of bonus to employees not governed by the Bonus Act or payment of commission also led to protracted litigation on the issue. In order to avoid litigation and uncertainty in the matter and also to bring rationality to the provisions, the Amending Act, 1987 has omitted both the provisions to clause (ii) so that bonus or commission paid by the employer to the employees will be allowed without any restriction. Of course, if unreasonably excessive payments are made to relatives or connected persons, the same can be disallowed under the provisions of section 40A(2)." 27. Now we are concerned with the resultant legal position obtaining in law prior to 1-4-1989 and, it is in our understanding the following : Employees or workers whose salary or wages exceed Rs. 1,600 per month are not governed by the provisions of the Payment of Bonus Act and the reasonableness or otherwise of any bonus, paid to such employees/ workers should be judged in view of the wording of the second proviso to section 36(1)(ii) and in their case, the first proviso does not at all come into play. This position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led or unskilled, manual, supervisory, managerial, administrative, technical or clerical work for hire or reward, whether the terms of employment be express or implied." Section 10 of the Payment of Bonus Act prescribes the payment of minimum bonus. It says that the bonus shall be paid @ 8.33% of the salary or wage earned by the employee during the accounting year, whether or not the employer has any allocable surplus in the accounting year. Section 11 of the Payment of Bonus Act prescribes the maximum bonus which can be paid and it should not exceed 20% of salary or wages payable to the employees/workers. Section 16 of the Payment of Bonus Act deals with cases of certain new establishments. That section states that where an establishment is newly set up whether before or after the commencement of the Act, the employees of such establishment shall be entitled to be paid bonus under this Act in accordance with sub-sections (1A), (1 B) and (1C). Sub-section (1A) states that in the first five accounting years following the year in which the employee began to sell the goods produced or manufactured by him from such establishment, bonus shall be payable only in respect of the accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) which could be utilised for the purpose of payment of the minimum bonus, then, such minimum amount or the deficiency, as the case may be, shall be carried forward for being set-off in the succeeding accounting year and so on up to and inclusive of the fourth accounting year in the manner illustrated in the Fourth Schedule. (3) The principle of set-on and set-off as illustrated in the Fourth Schedule shall apply to all other cases not covered by sub-section (1) or sub-section (2) for the purpose of payment of bonus under this Act." Under section 17 of the Payment of Bonus Act, the customary or interim bonus paid can be adjusted against the bonus payable under the Payment of Bonus Act. Therefore, the employer has got the liberty to adjust the interim bonus, or customary bonus or the puja bonus, whichever he might have paid to the workers can as well be adjusted towards the statutory bonus payable by him under the Payment of Bonus Act. Section 31A of the Payment of Bonus Act is a Special provision made with respect to payment of bonus, linked with production or productivity. Section 34 of the Payment of Bonus Act is a provision under which the employees and employers are not pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Bonus Act is exhaustive of all the kinds of bonuses or ex-gratia amounts payable to employees or workers of an establishment is thoroughly and exhaustively considered by the Hon'ble Supreme Court in the Mumbai Kamgar Sabha's case. Shri V.R. Krishna Iyer in his landmark judgment in that case had laid down that sections 17 34 of the Payment of Bonus Act deal only with profit bonus and connected matters. They did not cover customary bonus and the customary bonus is not annihilated by the provisions of Payment of Bonus Act. At page 1466 of the reported decision, para 33, the Hon'ble Supreme Court held the following : "33. The objects and reasons of the Bonus Act indicate that the subject matter of the statute is the question of payment of bonus based on profit to employees employed in establishments. The Report of the Commission is also referred to in the Objects and Reasons and the tenor is the same. The long title of the Act is non-committal, but the concept of 'profit' as the basis for bonus oozes through the various provisions. For instance, the ideal of accounting year, gross profit and the computation thereof, the methodology of arriving at the available surplus and the it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Bonus Act speaks, and speaks as a whole Code, on the sole subject of profit-based bonus but is silent on, and cannot, therefore, annihilate by implication, other distinct and different kinds of bonus such as the one oriented on custom. We confess that the gravitational pull on judicial construction of Part IV of the Constitution, has, to some extent, influenced our choice." At para 41, which is the last para of the judgment at page 1470 of the reported decision, summing up their findings, their Lordships of the Hon'ble Supreme Court held the following: "The findings we have reached may now be formally set down. We hold that the Bonus Act (as it stood in 1965) does not bar claims to customary bonus or those based on conditions of service." 30. Under what circumstances ex-gratia payment is to be made to the workers and whether any limitation is placed over the payment of ex-gratia is the subject touched upon by the Hon'ble Supreme Court in the case of Coffee Board Employees Association v. A.C. Shiva Gowda [1992] 1 CLJ 175 (SC). The main question considered by the Hon'ble Supreme Court in that case was whether the provisions of the Bonus Act were applicable to the Coffee Boar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a practice prevailed in the sugar industries for payment of ex-gratia to the labour force working in it and in pursuance of that practice it had paid ex-gratia for its labour/ employees for the year ending September 1981. The claim was made on the basis of approval given by Board of Directors to give ex-gratia. It was claimed on payment basis in the year when the amount was paid as per the practice followed in earlier years. This type of payment was also made by other Sugar Mills governed by the U.P. State Sugar Corpn. Ltd. like Kisan Sehkari Chini Mills, Majhola, Kisan Sehkari Chini Mills Ltd., Bazpur, Chandpur Sugar Co. Ltd., Chandpur, Distt. Bijnor. In this connection, the Minutes of the Meeting held by the Board of Directors of U.P. State Sugar Corpn. Ltd. dated 30th and 31st January, 1985 regarding the demand of ex-gratia made by the Unions of Kiccha Sugar Co. Ltd. (assessee-company) is as follows : A copy of the said Resolution is placed at page 1 of paper book No. III. "Minutes of the meeting held on 30th and 31st January, 1985 regarding the demand of ex-gratia made by the Unions of Kichha Sugar Co. Ltd. ............................................................. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor asked them to settle it on 35 days. Therefore, Executive Director was asked to pursue it with the Unions to settle the issue up to 40 days. Joint Managing Director." This document would clearly show that it was customary for the assessee mill to pay ex-gratia to its employees represented by their Unions in order to derive the maximum work and co-operation from the workmen in a labour incentive industry like Sugar Mill. 32. Invariably the ex-gratia was settled in agreement with the labour unions and this is the practice which is being followed year after year. For 1980-81, as can be seen from the table given in the Minutes of the Meeting held by the Board of Directors of UP State Sugar Corpn. Ltd. dated 30th and 31st January, 1985, the ex-gratia was settled as equivalent to 50 days wages. Similarly for 1981-82, the ex-gratia was settled at 30 days of wages. The payment was made on 30-6-1982 as per the agreement and the amount thus paid to the workers towards ex-gratia was Rs. 10,06,454. Similar payment made on 18-4-1983 was Rs. 6,89,656. When we take the dates of payments of ex-gratia, they fall in assessment years 1983-84 and 1984-85 and as is the case of the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n industrial peace and harmony. Now the assessee contends that firstly its claim may be considered as falling u/s 36(1)(ii) proviso No. 2 or in the alternative under section 37 of the IT Act and in support of this contention, the learned counsel for the assessee relies upon the Delhi High Court decision in CIT v. Rama Krishna Steel Rolling Mills [1974] 95 ITR 97 (Delhi) and CIT v. Shaw Wallace Co. Ltd. [1989] Taxman 352 - 360 (Cal.) and CIT v. Kelvinator India Ltd. [SLP (Civil) Nos. 15305-15307 of 1987] - [1988] 171 ITR Statutes 256 (SC) wherein the Supreme Court rejected the SLP on the following ground : "The Hon'ble Supreme Court has rejected the SLP filed by the department against order dated 23-7-1987 of the Delhi High Court declined to call for a statement of the case on the question whether production incentive paid to employees was bonus and, therefore, hit by the limits prescribed by section 36(1)(ii) of the IT Act, 1961." The learned Advocate for the assessee thus concede that there are some Kerala High Court decisions which had taken the view that in order to get the payment allowed which falls outside the purview of the Payment of Bonus Act still all the three cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount of commission. It may be that one of these factors yields a negative response. To take an example, there may be no general practice in similar business or profession to give commission to an employee, but yet, having regard to the other circumstances, the amount of commission paid to the employee may be regarded as reasonable. What the proviso requires is merely that the reasonableness of the amount of commission shall be determined with reference to the three factors. But, it is well settled that these factors are to be considered from the point of view of a normal, prudent businessman. The reasonableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency. What is the requirement of commercial expediency must be judged, not in the light of the 19th century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self interest, but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 37 of the IT Act, 1961. In Baidyanath Ayurveda Bhawan Mazdoor Union's case, the Hon'ble Supreme Court clearly ruled that Payment of Bonus Act deals only with profit bonus and does not govern customary, traditional or contractual bonus as per the Head Note of the decision, the following is what is held : It is well settled that the Payment of Bonus Act deals with only profit bonus and matters connected therewith and does not govern customary, traditional or contractual bonus. There is no categorical provision in the Payment of Bonus Act nullifying all other kinds of bonus nor does such a conclusion arise by necessary implication. In Holman Climax Mfg. Ltd.'s case, the question was whether special incentive bonus and lawful incentive bonus paid to employees in pursuance of agreement for higher productivity fall within the purview of the Payment of Bonus Act and whether the payment is or is not admissible for deduction. Their Lordships held that looking to the nature of agreement under which the special incentive bonus was paid by the assessee to its employees, it cannot be said that the special incentive bonus and monthly incentive bonus were not related to production and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the three conditions enumerated in clauses (a) to (c) of the second proviso to section 36(1)(ii) Must be satisfied in order that the payment which is not required by the Bonus Act is regarded as reasonable so as to warrant the deduction under section 36(1)(ii). These three decisions of the Kerala High Court can be distinguished. inasmuch as they did not follow the ratio of the Supreme Court decision in Shahzada Nand Sons case in which a similar view taken by the Kerala High Court was also taken by the Punjab Haryana High Court and it was overruled by the Supreme Court. The learned D.R. relied upon the Calcutta High Court decision in Texmaco Ltd.'s case, the question what is the correct assessment year in which the bonus claim was allowable came for consideration. In that connection, the Calcutta High Court was considering an earlier decision of its own reported in Bisra Stone Lime Co. Ltd. case wherein it was held that the statutory liability to pay bonus under the Payment of Bonus Act is allowable in the assessment year 1971- 72 even when it was finally adjusted and settled on 15-10-1971, i.e., long after the close of the relevant previous year. In that case, the Calcutta H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that in view of Texmaco Ltd.'s case adverted to above, the assessee's claim should not be allowed in assessment years 1983-84 1984-85. We are unable to agree with the contention of the learned D.R. In the case before the Calcutta High Court in Texmaco Ltd.'s case referred to above, the payment was due under the provisions of the Payment of Bonus Act, and, therefore, it is a statutory liability which the assessee has to discharge. However, the same cannot be the case with the present payment of ex-gratia before us for the two assessment years under consideration. They are only customary bonus or ex-gratia not governed by the Payment of Bonus Act. The claim is allowable only under section 37 of the IT Act and the liability of the assessee to pay the ex-gratia amount arose from out of the agreement or under the Resolutions passed by the Board of Directors. We have already extracted the text of the resolutions at pages 63, 64 as well as 66 of the Third Paper Book in the earlier paras. The relevant resolution for assessment year 1983-84 was passed on 30-6-1982. It is no doubt true that under the agreement the exgratia amount was quantified with reference to 50 days of wages for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 17-1-1955, the Labour Appellate Tribunal raised the amount of dearness allowance determined by the Industrial Court as payable to the labourers of the assessee-company by 5 per cent, for the years ending 31-3-1953, and 31-3-1954, corresponding to the assessment years 1953-54 and 1954-55, and the extra amount payable by the assessee amounted to Rs. 1,08,884 and Rs. 3,43,278 respectively. The assessee claimed before the Income-tax Officer that the aforesaid amounts were permissible deductions, as the assessment proceedings for the two years 1953-54 and 1954-55 were pending before the officer when the Labour Appellate Tribunal made the order. The Income-tax Officer disallowed the claim but the Appellate Tribunal allowed the deduction relying on the decision in Commissioner of Income-tax v. Nagri Mills Co. Ltd. [1958] 33 ITR 681. On a reference : Held that as the employer followed the mercantile system of accounting, the liability of the employer towards the allowance arose only when it was finally settled amicably or by industrial adjudication, and the claim to deduction was admissible only in the year when the liability under the award was finally determined. The Nagri Mills case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver the said order was rejected under section 256(2) by the Hon'ble High Court ultimately in 1988. Simply stated the payment of exgratia amounts to the workmen/employees working in the assessee's Mill were allowable as admissible deductions for these two assessment years was the gist of the final order passed by the High Court while rejecting the reference under section 256(2). However, for assessment year 1981-82, which is the immediate succeeding assessment year for 1980-81, the same type of ex-gratia paid was disallowed all through right from ITO CIT as well as the Tribunal. The Tribunal passed its orders in ITA No. 3109/D/ 85 dated 24-4-1987 whereas the earlier order of the Tribunal for 1979-80 and 1980-81 was in ITA Nos. 5150 and 5151 /Del/84 dated 21-4-1985. Now the earlier orders dated 21-4-1985 passed in ITA Nos. 5150 and 5151 /Del/ 84 were neither referred to nor discussed in any detail whatsoever by the later Tribunal decision rendered in ITA No. 3109/D/85 dated 24-4-1987. As per the Bombay High Court decision in Thana Electricity Supply Ltd.'s case, the general principle to be followed is that a later decision is to be preferred over the earlier one if reached after full ..... X X X X Extracts X X X X X X X X Extracts X X X X
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