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TMI Blog1992 (3) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... eal before us, the learned counsel for the assessee contended that a part of the entertainment expenses should be treated as having been incurred on the employees of the assessee and the disallowed should be reduced to this extent. In this connection he invited out attention to Explanation 2 to s. 37(2A) of the IT Act. After hearing the learned departmental representative Shri Sen, we estimate that 25 per cent of the disallowance may be taken as expenses incurred by the assessee on its employees and that the disallowance should be reduced to that extent. We direct accordingly. 4. The next ground of appeal is against disallowance of Rs. 4,807 under r. 6B of the IT Rules. The amount was disallowed by the Assessing Officer on the basis of as statement filed by the assessee itself showing the total value of presents exceeding Rs. 50. The CIT(A) confirmed the disallowance. In further appeal before us, the learned counsel for the assessee contended that the articles intended for presentation did not contain any advertisement value or publicity value and that the articles were presented only to persons who are already having business contacts with the assessee. He, therefore, submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year under appeal, the assessee company had no allocable surplus within the meaning of the Payment of Bonus Act, 1965. Its workmen were, therefore, entitled only to the statutory minimum bonus of 8.33 per cent of their wages which amounted to Rs. 2,76,069. The assessee, however, entered into a memorandum of settlement on 18th Dec., 1978 with its workmen represented by the trade union. This memorandum of settlement was entered into after protracted negotiations between the assessee and its workmen in the presence of the Asstt. Labour Commissioner and Conciliation Officer who also signed the memorandum of settlement a party thereto. The memorandum of settlements extracted in full as under: "Memorandum of Settlement arrived at between the Management of M/s Shriram Bearings Ltd. Ratu, Ranchi, and its workmen represented by Bharat Ball Bearings Karmachari Sangh (Regd. No. 1172), Ratu, Ranchi, in the course of conciliation on 18th Dec., 1978. Representation the Management Representing the Union 1. Mr. S.P. Verma (Works Manager) 1. MR. Durga Bagchi (President) 2. Mr. D.L. Mukharjee(Prod. Manager) 2. Mr. Rejendra Rai(Vice-President ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Representing the Management Representing the Union 1. Mr. S.P. Verma sd. 1. Mr. Durga Bagchi sd. 2. Mr. D.L. Mukherjee sd. 2. Mr. Rajendra Rai sd. 3. Mr. R. Sahadavan sd. 3. Mr. Suraj Oraon sd. 4. Mr. S.A. Narain sd. 4. Mr. Sankata Upadhyay sd. 5. Mr. K.L. Gandhi sd. 5. Mr. K.P. Sharma sd. . 6. Mr. Vishwakarma Prasad sd. Sd. K. K. Singh Asstt. Labour Commissioner Conciliation Officer." It is not in dispute before us that the payments were in fact made by the assessee as per the above terms to its workmen. The payment as per memorandum of settlement amounted to Rs. 2,78,218 for the purpose of maintaining industrial peace and harmony and to achieve higher production/productivity. In addition, Explanation gratia of Rs. 3,193 was also paid by the assessee. 7. The Assessing Officer while dealing with the claim for deduction of the aforesaid the three amounts took the view that the assessee would be entitled to deduction of bonus under s. 36(1)(ii) of the Act only in respect of the amount payable under the Payment of Bonus Act, that under the said Act, the employer and the workmen can opt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no bar imposed by the Payment of Bonus Act on the payment of other amount to workmen to keep them in good humour or to maintain cordial relationship, goodwill and industrial peace. According to him, the statutory bonus of Rs.2,76,069 has to be allowed under s. 36(1)(ii) of the Act and the other amount of Rs. 2,78,213 paid by the assessee under the memorandum of settlement has to be considered for allowance under s. 37(1) of the IT Act. Shri Syali for the assessee submitted in the alternative that even if both the payments were to be treated as payments under the Payment of Bonus Act, the second; proviso to s. 36(1)(ii) of the Act would come into play to govern the allowability of the payment over and above what the assessee was liable to pay under the Payment of Bonus Act, and that it is not as if such excess payment has to be straightway disallowed. In this connection he drew our attention to the decision of the Kerala High Court in CIT vs. P. Alikunju M.A. Nazir, Cashew Industries (1987) 62 CTR (Ker) 206 : (1987) 166 ITR 611 (Ker). 10. Mr. Sen, for the department, while supporting the order of the CIT(A) on this point, drew our attention to the decision of the Tribunal, Cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two reasons. First, the memorandum of settlement provides for payment in addition to and not in lieu of statutory 8.33 per cent bonus based on profit. Second, it does not provide for such payment `annually', but specifically says that the payment will not be taken as a precedent in the future. There is yet another reason for our view that the memorandum of settlement dt. 18th Dec., 19678 cannot be construed as falling under s. 31A. The compelling reason for the settlement entered into the presence of a Conciliation Officer who has also signed the same, is ensure industrial harmony and peace and to give a sort of incentive to labour to desist from instigating industrial strike, and unrest in future. We have n doubt that the payment of Rs. 2,78,218 made in the terms of the memorandum of settlement is not a payment falling within the purview of the Payment of Bonus Act, 1965. An agreement of the nature contemplated by s. 31A of the Payment of Bonus Act, in our view is more fundamental in nature under which both the management and that labour should agree to accept that production, and not profit would form the basis of payment of annual bonus. We find no such feature in the memorandu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Garware Synthetics (P) Ltd. vs. ITO (1982) 31 CTR (Trib)(Bom) 25 : (1982) 14 TTJ (Bom) 628 : (1982) 2 ITD 176 (Bom) similar payments were allowed by the Tribunal as business expenditure under s. 37(1) of the IT Act construing the settlement entered into between the assessee and the workmen as settlement under the Industrial Disputes Act, 1947. For this reason, we direct the Assessing Officer to allow the payment of Rs. 2,76,069 under s. 36(1)(ii) first proviso of the IT Act and the payment of Rs. 2,78,218 under s. 37(1) of the IT Act. Though the latter amount has been allowed by the Assessing Officer for different reasons, we do not agree with those reasons but prefer to direct the allowance of the same in the assessment under s. 37(1) of the IT Act. The assessee succeeds on this point. 13. In the view we have taken we are not considering the alternative argument of Mr. Syali for the assessee based on the decision of the Kerla High Court reported in CIT vs. P. Alikunju, M.A. Nazir, Cashew Industries (1987) 62 CTR (Ker) 206 : (1987) 166 ITR 611 (Ker). 14. The next item of the dispute in the assessee's appeal is the disallowance of Rs. 2 lakhs paid by the assessee under the tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the expenditure brought an enduring benefit to the assessee and was, therefore, not allowable. The CIT(A) endorsed this finding of the Assessing Officer. He, however, added his own reasoning for the disallowance. He took the view that the assessee obtained an enduring advantage by obtaining patent rights from INA on an exclusive basis not only during the currency of the agreement but also after the expiry thereof. In this view of the matter, he sustained the disallowance. 15. In the further appeal before us, Shri Syali, for the assessee, relied on the following decisions in support of his contention that what the assessee obtained under the Technical Collaboration Agreement with INA was not a benefit of enduring nature and that the expenditure could not be disallowed as capital expenditure: (1) CIT vs. British India Corporation Ltd. (1987) 60 CIT (SC) 54: (1987) 165 ITR 51 (SC) (2) Alembic Chemical Works Co. Ltd. vs. CIT (1989) 77 CTR (SC) 1 : (1989) 177 ITR 377 (SC) (3) Agarwal Hardware Works (P) Ltd. vs. CIT (1980) 121 ITR 510 (Cal) (4) CIT vs. B.N. Elias Co. (P) Ltd. (1987) 168 ITR 190 (Cal) (5) CIT vs. Bhai Sunder Dass Sons. P. Ltd. (1986) 158 ITR 195 (Del) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of the case before the Calcutta High Court. The assessee in the present case is already manufacturing ball bearings and under the Technical Collaboration Agreement it was allowed to use the technical know-how developed by INA which was also in the same manufacturing line. The crucial test as laid down by the Calcutta High Court in the decision cited is that there should be no outright transfer of know-how to the assessee and the know-how supplied should remain the property of the supplier company. The assessee should only the user of the know-how during the currency of the agreement. Applying this test laid down by the Calcutta High Court to the instant case we find that the assessee's case answered positively all the above test. The relevant clauses of the Technical Collaboration Agreement which we have narrated above would clearly show that INA had not made any outright transfer of the technical know-how to the assessee but it only allowed the assessee to use the technical know-how for a period of 10 years. The Calcutta High Court further held that the fact that the assessee had to pay lump sum in addition to royalty was not of much relevance in deciding the nature of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n an effort to discover in it some fractional element or other of a capital nature, merely on the score that the resulting benefit or advantage tends to pay in the business. This, however, is not the law." We, therefore, hold that the existence of cl. 10(b) in the Technical Collaboration Agreement in the assessee's case does not militate against the claim of the assessee that the lump sum payment of Rs. 2 lacs is to be allowed as revenue expenditure. As stated earlier, we also find from the agreement that the lump sum payment is made only for the use of the technical know-how and the use of the patents is not covered by the lump sum payment. We are, therefore, unable to accept the submission of Mr. Sen that the lump sum payment also covers the use of the patents. 17. For these reasons, we direct the Assessing Officer to allow the payment of Rs. 2 lacs as revenue expenditure. 18. Ground No. 8 before us is against the addition to the value of closing stock made by the Assessing Officer. The learned counsel for the assessee stated that this ground was not considered by the CIT(A). We, therefore, direct the CIT(A) to deal with this matter and for this purpose remit the matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion to two decisions of the Tribunal in IAC vs. Teletube Electronics (P) Ltd. (1987) 28 TTJ (Del) 485: (1987) 21 ITD 228 (Del) and the other in Anand Dyes Industries (P) Ltd. vs. ITO (1986) 25 TTJ (Ahd) 482: (1986) 17 ITD 1041 (Ahd) and submitted that the facts are same in the assessee's case also and that the incentive wages should not be treated as bonus but should be treated as addition to wages and allowed on that basis. 21. We have heard the rival submissions and we have also gone through the incentive scheme as well as the decisions of the Tribunal cited by Mr. Syali, for the assessee. The incentive scheme is divided into two broad parts—(1) Group Scheme and (2) Day-to-day production scheme. The aim of the payment is to fetch more production as per the capacity of the machines to produce within the stipulated time. The payment of incentive is done on the excess production made over the basic production under the stipulated time. The preamble to the scheme states that the intention of the job incentive scheme is to increase productivity to the benefit of both workers and the company. The incentive earned can, therefore, accrue only on the basis of increased efforts. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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