1996 (11) TMI 9 - HC - Income Tax

High Court Upholds Decision Allowing Excess Bonus Deduction under Income-tax Act

The High Court upheld the Tribunal's decision, ruling in favor of the assessee in a case concerning the disallowance of excess bonus paid to employees ... Bonus, Excess, Business Expenditure Issues:Interpretation of section 36(1)(ii) of the Income-tax Act, 1961 regarding the disallowance of excess bonus paid to employees.Analysis:The case involved a non-banking financial institution that paid a bonus to its employees during the assessment year 1976-77. The Income-tax Officer disallowed a portion of the bonus payment as it exceeded 20% of the employees' salary, citing section 36(1)(ii) of the Income-tax Act, 1961. The Appellate Assistant Commissioner, however, ruled in favor of the assessee, stating that the Payment of Bonus Act, 1965, as amended in 1975, would not apply to customary bonuses. The Appellate Tribunal also supported this view, emphasizing that customary bonuses are not impacted by the provisions of section 36(1)(ii).The Department appealed to challenge the Tribunal's decision, arguing that the excess bonus should not be allowed as a deduction since it surpassed the limit set by the Payment of Bonus Act. The Department contended that section 36(1)(ii), effective from September 25, 1975, should apply to determine the allowable bonus. However, the Tribunal maintained that the bonus paid was customary and reasonable, following the precedent set by the Supreme Court in Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai.The High Court concurred with the Tribunal's decision, emphasizing that if a bonus is paid customarily and reasonably, it should not be restricted by section 36(1)(ii) of the Act. The Court noted that the bonus payment in question was within reasonable limits and aligned with the assessee's past practices. Consequently, the Court upheld the Tribunal's decision to allow the bonus payment as a deduction, citing the decision in CIT v. Mohamed Ismail (D.). The Court ruled in favor of the assessee, affirming that the excess bonus was allowable and dismissing the Department's appeal.