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TMI Blog1988 (1) TMI 101X X X X Extracts X X X X X X X X Extracts X X X X ..... d Shri Janardhanaraja, the learned counsels for the assessee and Shri B.C. Mohanthy, the learned Departmental Representative and carefully considered their submissions in the light of the materials placed before us. 3 to 19. [These paras are not reproduced here as they involve minor issues.] 20. The next objection of the revenue in this appeal is to the decision of the Commissioner (Appeals) directing the Income-tax Officer to allow the two amounts of Rs. 26,82,365 and Rs. 27,30,734 as admissible deductions in the computation of the assessee's business income for the year under appeal. This objection of the revenue is contained in ground Nos. 7 to 11 of the grounds of appeal before the Appellate Tribunal. 21. The assessee had claimed a sum of Rs. 43,38,034 as Bonus Payment, out of which the Income-tax Officer allowed only a sum of Rs. 16,07,300 on the basis of what he called the bonus formula, which was also subject to rectification according to the Income-tax Officer. He did not accept the assessee's claim for deduction of the incentive payment of Rs. 26,82,365 and the further amount of Rs. 27,30,734 as bonus ; in terms of settlements entered into by the assessee-company wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mohanthy, the learned Departmental Representative submitted that the Commissioner (Appeals) erred in allowing the assessee's claim for deduction of these two amounts, as there was no Allocable Surplus in the year under appeal. He relied on the recent decision of the Kerala High Court in the case of CIT v. P. Alikunju, M.A. Nazir, Cashew Industries [1987] 166 ITR 611 and submitted that this decision had considered payments of bonus which were not covered by the Payment of Bonus Act and held that such payments would be covered by the second proviso to section 37(1)(ii) of the Income-tax Act, 1961. The learned Departmental Representative submitted that the agreement at pages 89 to 91 of the assessee's Paper Book entered into on 22-10-1980 clearly showed that though it was termed as an incentive bonus, it was actually productivity bonus and would, therefore, be covered by section 31A of the Payment of Bonus Act. He then referred to section 34 of the Bonus Act which was introduced with effect from 25-9-1975 and contended that all contracts or awards would be subject to the Payment of Bonus Act. Shri Mohanthy argued that section 31A stood apart as it was excluded by section 34, since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missible under the first proviso to section 36(1)(ii) of the Income-tax Act, 1961 as stated in this circular. The learned counsel pointed out that the earlier circular of the Board dated 4-12-1980 is published at page 1544 of Vol. 2 of Sampath Iyengar's Law of Income-tax (7th Edn.). Shri K.R. Ramamani argued that the assessee was entitled to the deduction of both these payments made to its employees under valid agreements entered into with them under the provisions of the Industrial Disputes Act and that the Commissioner (Appeals) had rightly allowed the same, and that no interference was called for with this decision. He further submitted that the decision of the Kerala High Court relied on by the learned Departmental Representative was inapplicable to the facts of the present case as it related to bonus allowable under the second proviso to section 36(1)(ii) of the Act whereas the assessee's claim for bonus under the Payment of Bonus Act was admissible under the first proviso to section 36(1)(ii), while the assessee's claim for deduction of incentive bonus was allowable under sec. 37(1) of the Income-tax Act as held by the Madras High Court in the case of Sivanandha Mills Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich higher production has been made possible in the first two quarters of the year 1980-81, the management agree to pay an incentive bonus equivalent to 12 per cent of the annual wages earned during the period from 1-1-1979 to 31-3-1980. 2. The payment shall be made on 10-11-1980. 3. In view of the payment, workmen assure their continued co operation for maintaining high production. " 27. A perusal of the aforesaid settlement shows that the payment was made as an incentive to the workmen to put in better efforts to ensure higher production. This payment was not made under the Payment of Bonus Act, though it is called an incentive bonus. In our view, this payment would be squarely covered by the decision of the Madras High Court in Sivanandha Mills Ltd.'s case which is relied on by the Commissioner of Income-tax (A) in his order. This decision, which is in Sivanandha Mills Ltd.'s case specifically refers to incentive bonus and holds that the Bonus Act has no application to incentive bonus and that, therefore, the said payment of incentive bonus is allowable under section 37 of the Income-tax Act. 28. Recently, their Lordships of the Madras High Court accepted the finding of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. 37(1) of the Act. In the view we have taken in the light of these two decisions of the Madras High Court which are in favour of the assessee, it is not necessary for us to examine the decision of the Kerala High Court in the case of P. Alikunju, M.A. Nazir, Cashew Industries relied, on by the Revenue. We, therefore, confirm the order of the Commissioner of Income-tax (A) on this point and reject these grounds. 28A. The next item in dispute, is the sum of Rs. 70,23,923 which has been allowed by the Commissioner (Appeals) under the head "Forest Lease Demand". In the course of the assessment proceedings, the assessee claimed before the Income-tax Officer that it has received a demand for the sum of Rs. 1,41,00,637 as lease arrears due to the Forest Department on account of enhancement of price for pulpwood, etc., from the Chief Controller of Forests on 23-4-1982 and that the sum of Rs. 70,23,923 out of this demand related to the year under appeal and that, therefore, the same should be allowed as a deduction in the computation of its business income. The Income-tax Officer disallowed the assessee's claim for the reason that the prices of wood seldom changed, that the determinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as fixed/determined and where an additional price was called upon to be paid by the user of the raw-material, the increased quantum of liability would be deducted in the year for which the liability arose. Applying the aforesaid principles to the facts of the present case, the Commissioner held that the supplier of the raw-material was the Government of Tamil Nadu, that no other source of raw-material was available to the assessee in view of the vast quantities of the wood that it requires, that the Government of Tamil Nadu had only indicated a tentative price as was evident from its order and that such a price was bound to be finally fixed. The Commissioner held that since that liability was a liability of the year in which the supplies were made, the additional payment had to be recognised for that year, though the final determination that price may be postponed to a subsequent date. For this view, he derived considerable support from the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. and further held that there need be no entries in the books of account in the year in which the liability is claimed as a deduction. In this view of the matter, the Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turo and that, therefore, it was not admissible. He, further, relied on the last para of the judgment of the Supreme Court in the case of CIT v. Hindustan Housing Land Development Trust Ltd. [1986] 161 ITR 524 (SC) and submitted that in the present case, there was no existing liability on the part of the assessee to pay these arrears in the year of account and that it was a case of inchoate and contingent liability which was not admissible in law. Shri Mohanthy contended that the present case was more akin to the case of A. Gajapathy Naidu, on facts. He, therefore, argued that the Commissioner of Income-tax (Appeals) erred in allowing the assessee's claim for deduction in the year under appeal. 31. The learned counsel for the assessee, Shri K.R. Ramamani submitted that the Government order dated 12-3-1980 as well as the later order dated 23-4-1982 conclusively established that the supply of raw-materials to the assessee had taken place during the year under appeal and that the said raw-materials had been utilised by the assessee in the manufacture of its products in the year under appeal. The learned counsel submitted that the liability on the part of the assessee to pay the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ascertained liability which was enforceable at law as per the undertaking given by the assessee in terms of the letter dated 12-3-1980 before the supply of the raw-material started in the year under appeal. In support of his submissions the learned counsel relied on the decision of the Gujarat High Court in the case of Nagri Mills Co. Ltd. v. CIT [1981] 131 ITR 257 and further relied on the passage appearing in Para 7(b) on page 1187 of Vol. 2 of Sampath Iyengar's Law of Income-tax (7th edn.). The learned counsel finally submitted that the decision in A. Gajapathy Naidu's case also supported the assessee's contentions in the present appeal as the assessee's legal liability to pay the amount in question had arisen in the year under appeal, when it executed the undertaking even before the supply of raw-materials began in terms of the letter of the Chief Conservator of Forests on 12-3-1980. He, therefore, submitted that the decision of the Commissioner of Income-tax (Appeals) on this point was correct and that the same should be upheld. 32. The Commissioner of Income-tax (Appeals) has quoted the relevant portion of the Government order in GO MS No. 482 dated 21-4-1982 in the body ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement to the effect that the assessee-company would pay the difference in the rates of the cost of the wood and administrative charges, if a higher rate is fixed by the Government for 1980-81 allotment, immediately on demand. We may mention here that in the Government Order GO MS No. 336 dated 24-3-1981 which relates to the allotment for 1981-82 the Government of Tamil Nadu had fixed the revised tentative rates for the pulpwood supplied for that season and para 2(ii) of this GO contains the following direction regarding a similar undertaking : " 2. The ad hoc allotment ordered in para 1 above is subject to the following conditions :-- (i) The Company should execute fresh agreements in the prescribed format on stamped paper with the District Forest Officer/Wild Life Warden concerned for the supply of Pulp Wood. (ii) The Company should give an undertaking on stamped paper in the prescribed format agreeing to pay whatever price that is finally fixed for the supply of pulpwood from 1-4-1981. " [Emphasis supplied] It is in pursuance of these orders that the assessee got supplies of pulpwood which are the raw-materials for its factory from the Government of Tamil Nadu after ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that consequently there was no enforceable legal liability that had arisen or accrued in the year of account. We may mention here that there is no dispute before us about the tentative rates of prices that were fixed by the Government by their order dated 12-3-1980 as it has been allowed by the department itself as the cost of the raw-materials. The dispute is only in regard to the additional price which the assessee is called upon to pay to the Government consequent to the order dated 21-4-1982. In our view, the liability on the part of the assessee to pay the additional price was fixed once and for all on 12-3-1980 itself, or at any rate on the execution of the undertaking and the agreement by the assessee in favour of the Government of Tamil Nadu agreeing to pay the additional price that may be finally fixed for 1980-81 allotment immediately on demand by the Government. Only its quantification had been postponed till the fixation of the final price. When once the final price is fixed by the Government of Tamil Nadu and demanded from the assessee, the assessee is bound to pay the same. It is the balance of the price or cost for the raw-materials supplied to the assessee by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abovesaid proposition. Again, on the same page it is stated as follows : " Normally, an assessee maintaining his books according to the mercantile system of accounting should value or quantify at least provisionally the amount of the liability and debit it in the books for claiming a deduction, though where the existence of the liability is clear, the failure to make an entry in the books would not be fatal to the claim. " The learned author has relied on the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd.'s case in support of this. 37. In CIT v. India Cements Ltd. [1975] 98 ITR 69 it was held by their Lordships of the Madras High Court that as the Managing Agency agreement provided for remuneration on the basis of the net profits after allowing depreciation in accordance with the Income-tax Act and the Rules, any payment in excess of an agreement, cannot be considered as one spent for the purpose of the business and hence, the amount paid was not an allowable deduction under sec. 10(2)(xv) of the Indian Income-tax Act, 1922. In the said case there was a payment of Rs. 73,272 by way of managing agency remuneration as a result of higher depreciation being availab ..... X X X X Extracts X X X X X X X X Extracts X X X X
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