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TMI Blog1989 (11) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... n who had gone to the Bank for encashment with the connivance of the bank officials. The assessee company thereafter instituted a civil suit against the bank and other authorities. While the suit is pending the assessee claimed it as a business loss in computing its business income. The ITO disallowed the claim of the assessee solely on the ground, that since the so-called fraud was committed with the connivance of the bank officials, the assessee company was bound to succeed in the suit and, therefore, it could not be said that the assessee lost this sum of commission and thereby incurred any loss. He was of the opinion that this amount was clearly taxable in this year only perhaps for the reason that it was in this year that the assessee company received the draft for the commission. The ITO, however, observed that the assessee would be given deduction, if and when the case was finally decided against it. Thus, according to the ITO, the loss by way of embezzlement did not occur or accrue to the assessee in this accounting year, all on the ground that a suit was filed which was pending and the chances of success of the suit were very bright. Agreeing with this reasoning, the Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the assessee had no knowledge of misappropriation and, therefore, there was no failure on his part to disclose fully and truly all the material facts relevant for those assessment years. Simultaneously, it was submitted "with which submission we are concerned here" that the amount misappropriated by the employee and now sought to be disallowed should in any case be allowed as a loss against the income of the assessee. The ITO overruled the objections. The Tribunal held that the re-assessment proceedings were valid but the sums of embezzlement were not allowable as deductions in the assessment years in which the embezzlement took place as the assessee had good prospects of recovery. When the matter came before the Karnataka High Court at the instance of the assessee, the Karnataka High Court pointed out that the assessee had succeeded in all the courts in its efforts to recover the embezzled amounts against the defendant which was a nationalised bank. Since recovery from such an Institution could not be said to be impossible or difficult, the Tribunal was right in its conclusion that there was a reasonable prospect of the recovery of the amount by the assessee and, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee had lost the money of Rs. 50,400 with the embezzlement of draft by the employee with the connivance of bank officials. There is no prospect, nothing was heard so far atleast the fate of the proceedings against the bank. It is also not known at what stage the recovery proceedings stand nor do we know whether the employees of the bank against whom proceedings were initiated have admitted their guilt or denied it. Merely because a bank is involved, we do not think, it is possible to say that the chances of recovery are bright unless it is shown that it is on account of the negligence of the bank that the assessee incurred the loss. Without discussing these material facts, we are unable to appreciate that the chances of recovery are bright. Had they been so bright, by now some results must have come out. We are, therefore, of the opinion that the matter requires investigation into these facts, first to establish whether there is any prospect of the recovery of the sum and only after prospect of recovering the amount was established, then it can be said that the loss in question was not allowable in the year under appeal but if there was no reasonable prospect of recovering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd if an insurance policy is taken against accident and if the premium paid is allowable as an expense necessary, wholly and exclusively for the purpose of the business, there is no reason why such an expenditure is not allowable in the case of Directors because Directors are not the owners of the business but only employees in one sense. The ruling by theGujaratHigh Court relied upon by the learned Commissioner of Income-tax reported in 161 I.T.R. 99 does not apply to the facts of the case at all. Here the assessee was a firm, entered into contracts for insuring the lives of its partners. The underlying object being to provide for liquid cash to pay off the dues of the deceased partner and continue the business of the firm without interruption. The claim for deduction was put u/s. 36 or in the alternative u/s. 37. The Tribunal held that the premium was allowable u/s. 37 but the High Court reversed the decision of the Tribunal by pointing out that when the share of the deceased partner was paid off the shares of the surviving partners in the assets of the firm would be augmented. Hence what was sought to be acquired from the insurance company was a capital asset. The amount expende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able and allowed the claim of the assessee in full. He found as a fact that production incentive on attendance bonus was paid to the employees monthly, on the basis of production and attendance of the individual employee concerned and since this bonus was paid with reference to individual performance, with reference to production from month to month, the amount so paid could not be labelled as bonus and would not be subject to the limit provided u/s. 36(1)(ii) of the I.T. Act and in any case it would be allowable u/s 37. He, therefore, allowed the claim. 11. The department is aggrieved by this allowance and came up in appeal before us. After going through the relevant facts found by the C.I.T. which was not refuted before us by any evidence that the production incentive on attendance was paid to the employees monthly on the basis of production and attendance of the individual employees concerned. This shows that the bonus paid to the employees was not the bonus payable ex-gratia voluntarily by the employer to the employees, subject to the limit provided for the Payment of Bonus Act. Section 36(1)(ii) provides for the deduction of the bonds in computing the income. It says : "36 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bonus and a liability on the part of the employer to pay bonus. This right could be enforced through the Industrial Disputes Act of 1947. Now when the liability of bonus had become a statutory obligation, the Income-tax Act adopted this Payment of Bonus Act as a basis for the quantum of the bonus allowable under the Income-tax Act also by introducing the concept of bonus payable under the Payment of Bonus Act retrospective effect from25-9-1975. Thus it provided that the deduction in respect of bonus paid to an employee employed in a factory or other establishment to which the provisions of Payment of Bonus Act, 1965 apply shall not exceed the amount of bonus payable under that Act. In other words, the amount i.e. to be allowed as a bonus is not to exceed the bonus payable under the Payment of Bonus Act. We are not concerned with the formula laid down under the Payment of Bonus Act, but we are concerned here with the question as to whether the Payment of Bonus Act as provided for the payment of bonus and provided a ceiling for all types of bonuses payable under that Act or was it limited to a particular type of bonus. If we read the Payment of Bonus Act, it will become clear that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment to the employer is intended to safeguard his liquid position and his interest, but is not to act as a bar on the payment of these incentive bonuses, in addition to profit bonus. 12. In CIT v. Sivanandha Mills Ltd. [1985] 156 ITR 629 the Madras High Court has pointed out that section 36(1)(ii) of the Income-tax Act, 1961 which has reference only to payments made under the Payment of Bonus Act has no application to incentive bonus, attendance bonus or customary bonus which are not paid under the Bonus Act. These payments are expenditure laid out wholly and exclusively for purposes of the business and hence allowable under section 37. The Madras High Court went to the extent of saying that consequently when the Tribunal allows deduction of such payments, no question of law arises. 13. The Calcutta High Court held in the case of CIT v. Babcock Willcox of India Ltd. [1987] 165 ITR 105/33 Taxman 258 that payment of bonus other than profit bonus must be considered as paid on commercial expediency to maintain good relation with the employees and, therefore, allowable as a deduction. Here also, the application made by the C.I.T. u/s. 256(2) was dismissed. 14. The Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e argument that the second proviso to clause (ii) of section 36(1) of the Act has no application in respect of employees covered under the Bonus Act and any payment made in excess of the statutory requirement under the Payment of Bonus Act (although reasonable when considered with reference to clauses (a) to (c) of the second proviso) is not deductible under section 36. This decision rendered by the Kerala High Court by Justice T. Kochu Thomen (as he then was) shows the real intention of the Legislature in enacting section 36(1)(ii) relating to the Payment of Bonus. Which fortifies any point. First, it must satisfy the requirements of Payment of Bonus Act so as to apply the ceiling and than the other test laid down as to reasonableness. But in no case, it is to be disallowed, if the payment was warranted by business considerations and is reasonable merely because it happened to be in excess of the Payment of Bonus Act. Thus what is allowable u/s. 36(1)(ii) is not only the bonus subject to the limits laid down in Payment of Bonus Act but also excess amount paid, provided it is reasonable and satisfy the requirements of clauses (a) to (c) spoken of about and also the other bonus paya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said to be without any nexus to the business. In fact the licence to start a factory is not given unless there is a clearance from the ecological point of view. The expenditure incurred to maintain a pollution-free atmosphere cannot be said to be unrelated to the business in the present day context. We, therefore, agree with the C.I.T. and uphold the allowance. 17. The next objection is to the allowance of Rs 17,000 claimed to have been paid by way of commission. The ITO pointed out in his order that the assessee had shown as if this commission was paid to one Samrat Udyog for sale of machinery but no supporting independent documentary evidence was produced to justify the payment of commission. It is seen from the order of the ITO that the machinery worth about Rs. 2,36,658 was sold and it was in that connection that commission was paid to Samrat Udyog. On appeal, the Commissioner of Income-tax (A) found that this payment was not disallowable. All that he said was that the payment was made by cheque with reference to the sale of its products and, therefore, the commission was allowable. No other details were given in the order. We are of the view that the reasoning adopted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the ITO should have verified the facts instead of making the disallowance and, therefore, the disallowance was improper. But we are unable to subscribe to the view of the C.I.T. because even for the ITO or for the C.I.T. or for that matter even for any appellate authority the basis for the allowance of claim should be the facts. When the facts were admittedly not brought on record, no case can be said to have been made out for its allowance. The C.I.T. having found fault with the ITO for not bringing on record the facts allowed the claim without bringing the facts on record thereby committing the same mistake. We, therefore, think it proper that the matter be remitted to him to ascertain the facts in this regard and then allow the claim only if it is found that the expenditure was incurred solely and exclusively for the purpose of the business by relating the foreign trips to the business expediency. 20. The next objection taken is to the allowance of 50% of electricity and water charges relating to Directors residence charged to the company's accounts. A sum of Rs. 11,646 was involved in this claim. It was said that it was 50% of the claim on electricity and water charges. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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