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TMI Blog1988 (1) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... ully considered their submissions in the light of the materials placed before us. Para Nos. 3 to 19 omitted for publication by the order of the Bench. 20. The next objection of the Revenue in this appeal is to the decision of the Commissioner(A) directing the ITO to allow the two amounts of s 26,82,365 and Rs. 27,30,734 ad 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 Tribunal. 21. The assessee had claimed a sum of Rs. 43,38,034 as Bonus Payment, out of which the ITO 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 ITO. 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 with the Employees' Union on 22nd Oct., 1980 before the Dy. Commissioner of Labour, Coimbatore under s. 12(3) of the Industrial Disputes Act, 1947. 22. When the matter went before the CIT(A) he examined the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of CIT vs. P. Alikunju, M.A. Nazir Cashew Industries (1987) 62 CTR (Ker) 206 : (1987) 166 ITR 611 (Ker) 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 s. 37(1)(ii) of the IT Act, 1961. The learned Departmental Representative submitted that the agreement at pages 89 to 91 of the assessee's Paper Book entered into on 22nd Oct., 1980 clearly showed that though it was termed as an incentive bonus, it was actually productivity bonus and would, therefore, be covered by s. 31A of the Payment of Bonus Act. He then referred to s. 34 of the Bonus Act which was introduced w.e.f. 25th Sept., 1975 and contended that all contracts or awards would be subject to payment of Bonus Act. Shri Mohanthy argued that s. 31A stood apart as it was excluded by s. 34, since the said payment was in lieu of normal bonus. He contended that it was not open to the assessee to claim normal bonus and also productivity bonus as deductions admissible under the Payment of Bonus Act. He argued that in the present case, the assessee had claimed two payments of bonus to its employee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled 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(A) had rightly allowed the same, and that no interference was called for with this decisions. 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 s. 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 s. 36(1)(ii), while the assessee's claim for deduction of incentive bonus was allowable under s. 37(1) of the IT Act as held by the Madras High Court in the case of Sivananda Mills Ltd. 25. We have perused the terms of agreements dt. 22nd Oct., 1980 entered into by the assessee with its employees under s. 12(3) of the Industrial Disputes Act, 1947, copies of which are available at pages 86 to 91 of the assessee's Paper Book. The first agreement at pages 86 to 88 relates to payment of bonus amounting to Rs. 27,30,737. This agreement shows tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Sivananda Mills' case which is relied on by the CIT(A) in his order. This decision, which is reported in (1985) 156 ITR 629 (Mad) 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 s. 37 of the IT Act. 28. Recently, their Lordships of the Madras High Court accepted the finding of the Tribunal in the case of CIT, Madurai vs. The Srivilliputhur Co-operative Mills Ltd., in Tax Case Petition Nos. 453 and 454 of 1986 dt. 29th Jan., 1987 that the payment of amount in addition to the bonus prescribed under the payment of Bonus Act was in the nature of ex-gratia payment and will not partake of the nature of bonus and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm the order of the CIT(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(A) under the head "Forest Lease Demand". In the course of the assessment proceedings, the assessee claimed before the ITO 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 23rd April, 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 ITO disallowed the assessee's claim for the reason that the prices of Wood seldom changed, that the determination of price had been challenged by the Company by filing a petition in the Court, that the order of the Government was made only on 23rd April, 1982, a date much later than the close of the accounting year and finally on the ground that the Annual General Body before whom the accounts of the current year were placed on 24th Aug., 1981 had not been apprised of the increase in price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 Commissioner(A) allowed the assessee's claim for the deduction of Rs. 70,23,923. This is being objected to by the Revenue in ground Nos. 18 and 19. 30. Before us, Shri B.C. Mohanthy, the learned Departmental Representative relied on para 8 of the assessment order and pointed out that the demand from the Chief Conservator of Forests for the lease arrears of Rs. 1,41,00,637 was received by the assessee only on 23rd April, 1982 out of which Rs. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case of inchoate (sic) and contingent liability which was not admissible in law. Shri Mohanthy contended that the present case was more akin to the case of CIT vs. A. Gajapathi Naidu on facts. He, therefore, argued that the CIT(A) 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 dt. 12th March, 1980 as well as the later order dt. 23rd April, 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 price for the raw-materials purchased by it from the State Government of Tamil Nadu had arisen or accrued immediately after the raw-materials were supplied to the assessee during the year under appeal. He argued that only the quantification of the price for the raw-materials supplied was postponed. He pointed out that the Government had fixed tentative prices subject to the fixation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d further relied on the passage appearing in para 7(b) on page 1187 of Vol. 2 Sampath Iyengar's "Law of Income-tax". The learned counsel finally submitted that the decision in Gajapathi 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 12th March, 1980. He, therefore, submitted that the decision of the CIT(A) on this point was correct and that the same should be upheld. 32. The CIT(A) has quoted the relevant portion of the Government Order in G.O.M.S. No. 482 dt. 21st April, 1982 in the body of his order under which the assessee had to pay this additional price of Rs. 70,23,923 to the Government of Tamil Nadu. It is with reference to the terms of this Government Order that the Commissioner had held that there was an ascertained liability on the part of the assessee to pay this amount during the year of account and that, therefore, it would be an allowable deduction in the computation of the assessee's income for thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d supplied for that season and para 2(ii) of this G.O. 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 plupwood from 1st April, 1981." 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 executing the undertaking specified in the 2nd government order referred to above and also the agreement subsequently executed as per the said Govt. Orders. Thus, the liability of the assessee to pay the price that may be finally fixed by the Government of Tamil Nadu for the pulpwood supplied by them under these Government Orders is already fixed under these Government Orders and has arisen on the execution of the undertaking and the agreement by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay to the Government consequent to the order dt. 21st April, 1982. In our view, the liability on the part of the assessee to pay the additional price was fixed once and for all on 12th March, 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 demand 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 the State Government and it is payable by the assessee in terms of its undertaking to the Government. Thus, there is legally enforceable liability on the part of the assessee to pay this additional price of the raw-materials received by it during the previous year, the moment the State Government fixed the final price and raised the demand. The last two acts on the part of the State Government, namely, fixing the final price and rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im." The learned author has relied on the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. vs. CIT in support of this. 37. In CIT vs. India Cements Ltd. (1975) 98 ITR 69 ((Mad)) 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 IT 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 s. 10(2)(xv) of the Indian IT 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 available to the managed Company by amendments of law retrospectively. While answering the question referred to them in the negative, in favour of the Revenue and against the assessee, their Lordships held as follows at pages 72 and 73 of the reports: "When once a rule is made to take effect retrospectively from an anterior period, we have to imagine that the amended rule had always been in existence even from the anterior date. This ..... X X X X Extracts X X X X X X X X Extracts X X X X
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