1961 (2) TMI 94 - HC - Income Tax

Bonus Payment Deemed Deductible Trading Expense Under Industrial Disputes Act

The court held that the liability to pay a bonus was legally enforceable against the assessee company, as it was a statutory obligation under the ... - Issues Involved:1. Liability for bonus payments2. Nature of the liability (capital or revenue expenditure)3. Allowability of the bonus payment as a deduction4. Timing of the deductionDetailed Analysis:1. Liability for Bonus Payments:The primary issue was whether the liability to pay Rs. 54,140 as bonus for 1949 and 1950, undertaken by the assessee company in its year of account 1951-52, was an allowable item of expenditure. The Tribunal held that the primary liability was that of the predecessor company. However, the court noted that the bonus for 1950 could not be viewed as payable wholly for services rendered to the predecessor company since the assessee company had taken over the business on February 1, 1950. The court emphasized that it was a statutory liability under Section 18 of the Industrial Disputes Act, which made the award enforceable against the successor in business. Thus, the liability to pay the bonus was legally enforceable against the assessee company.2. Nature of the Liability (Capital or Revenue Expenditure):The Tribunal had disallowed the claim on the grounds that the payment of bonus was capital in nature, as it was seen as a loss referable to goodwill adjustment. The court, however, disagreed, stating that under normal circumstances, the payment of bonus to employees would be a trading expense and not a capital expenditure. The court further clarified that the liability to pay the bonus was not part of the price payable by the assessee company for the transfer of the business. Therefore, the discharge of this liability could not be viewed as a capital expenditure.3. Allowability of the Bonus Payment as a Deduction:The court held that the sum of Rs. 54,140 constituted an allowable item of expenditure in computing the profits and losses of the assessee company. The requirements of Section 10(2)(xv) of the Indian Income Tax Act were satisfied. The court noted that the payment was necessary for the continuance of the business and to secure industrial peace and harmony. The Tribunal's view that the assessee received no direct benefit from such payments was rejected, as the assessee company did benefit by being able to continue its business with a contented set of employees.4. Timing of the Deduction:The department contended that the bonus payments for 1949 and 1950 should be debited to the years of account that ended on January 31, 1950, and January 31, 1951, respectively. However, the court noted that this contention was not put forward by the department for adjudication by the Tribunal and did not arise as a question of law on the order of the Appellate Tribunal. The court held that the expenditure was properly debitable in the year of account that ended on January 31, 1952, as the liability accrued only in that year. The court referenced the principle that a contingent liability is not an allowable item of deduction, as explained by the Supreme Court in Indian Molasses Co. v. Commissioner of Income Tax.Conclusion:The court concluded that Rs. 54,140 is an allowable deduction in the assessment year 1952-53. The Tribunal should verify if Rs. 3,204 added back in the assessment year 1953-54 was included in the sum of Rs. 54,140, and if it was, it should be excluded. The assessee was entitled to the costs of the reference, with counsel's fee set at Rs. 250.