1996 (2) TMI 177 - AT - Income Tax

Assessee's Customary Bonus Payments Deductible under IT Act: Full Bench Ruling

The Full Bench concluded that the bonus payments made by the assessee were customary bonuses and not governed by the Payment of Bonus Act. Therefore, ... Customary bonus versus profit-based statutory bonus - deductibility under section 36(1)(ii) vis-a-vis residuary deduction under section 37 - applicability and scope of the Payment of Bonus Act to ex-gratia/customary payments - assessment year determined by date when liability crystallises (date of agreement/payment) - precedential value of tribunal decisions and duty to consider earlier coordinate decisions before deviatingCustomary bonus versus profit-based statutory bonus - deductibility under section 36(1)(ii) vis-a-vis residuary deduction under section 37 - assessment year determined by date when liability crystallises (date of agreement/payment) - Deductibility of the ex-gratia payments made in the accounting years relevant to assessment years 1983-84 and 1984-85 - HELD THAT: - The Full Bench held that the impugned payments for assessment years 1983-84 and 1984-85 were ex-gratia/customary payments and not statutory profit-bonus liabilities under the Payment of Bonus Act. The liability to pay arose on passing of Board resolutions and by the dates of payment (30-6-1982 for the 1983-84 claim and 15-6-1983/18-4-1983 for the 1984-85 claim); accordingly the claims were correctly made in the assessment years in which the agreements and payments were effected. Because the payments were not statutory bonus liabilities, they fell to be examined under section 37 (and, where applicable, under the second proviso to section 36(1)(ii) for employees outside the Bonus Act), and were allowable as business expenditure incurred for commercial expediency to maintain industrial peace and labour cooperation. The Tribunal decision for 1981-82 which treated the payments as statutory bonus was set aside as vitiated by error of law and misappreciation of facts; the CIT(A)'s deletions of additions for 1983-84 and 1984-85 were upheld. [Paras 33, 36, 37]Ex-gratia/customary payments made and crystallised by Board resolutions/payments in the accounting years relevant to assessment years 1983-84 and 1984-85 are deductible (under section 37 / as permissible under second proviso to section 36(1)(ii) where applicable) in those assessment years.Applicability and scope of the Payment of Bonus Act to ex-gratia/customary payments - customary bonus versus profit-based statutory bonus - Whether the Payment of Bonus Act is exhaustive and excludes customary or ex-gratia bonuses - HELD THAT: - Relying on the Supreme Court's precedents (notably Mumbai Kamgar Sabha and related decisions), the Full Bench held that the Payment of Bonus Act deals with profit-based (statutory) bonus and does not annihilate or absorb other distinct kinds of bonus such as customary, festival or contractual ex-gratia payments. Sections 17 and 34 of the Bonus Act recognise the independent existence of customary bonus (including adjustment/recognition mechanisms) and the Act was not intended to eliminate customary or traditional bonus by implication. Thus ex-gratia/customary payments can survive outside the statutory bonus scheme and be evaluated for tax deductibility accordingly. [Paras 28, 29, 30, 31]The Payment of Bonus Act is not exhaustive; customary/ex-gratia bonuses remain distinct from profit-based statutory bonus and may be considered independently for deductibility.Precedential value of tribunal decisions and duty to consider earlier coordinate decisions before deviating - Whether the Tribunal's later decision for assessment year 1981-82 should prevail over earlier Tribunal/High Court decisions for 1979-80 and 1980-81 - HELD THAT: - The Full Bench emphasised that a later decision of a coordinate forum should be preferred only if it is reached after full consideration of earlier decisions and records reasons for not following them. Here the Tribunal's order for 1981-82 did not advert to or distinguish the earlier Tribunal orders for 1979-80 and 1980-81, and therefore lost persuasive value. Moreover, the earlier Tribunal orders for 1979-80 and 1980-81 had become final on rejection of references under section 256(2) by the High Court. The Full Bench held that the Tribunal's earlier decisions (1979-80 and 1980-81) were correctly decided and should be followed. [Paras 35, 36, 37]A later tribunal decision that fails to consider earlier coordinate decisions does not automatically overrule them; the earlier Tribunal/High Court orders for 1979-80 and 1980-81 should be followed.Final Conclusion: The Full Bench held that the impugned payments were ex-gratia/customary bonuses (not statutory profit-bonus under the Bonus Act), were crystallised on the dates of Board resolutions/payments and were deductible in assessment years 1983-84 and 1984-85 (under section 37 / as permissible under the second proviso to section 36(1)(ii) where relevant). It further held that the Payment of Bonus Act does not extinguish customary bonus and that earlier Tribunal/High Court decisions for 1979-80 and 1980-81 are correctly decided and must be followed. Issues Involved:1. Whether the bonus paid by the assessee was customary bonus or ex-gratia.2. Whether the payment made by the assessee to its employees was governed by the Payment of Bonus Act, 1965.3. Whether the deduction of the bonus payment was allowable under section 36(1)(ii) or section 37 of the IT Act.4. Whether the limits set out under the Payment of Bonus Act governed the allowance of deduction.5. Whether the deduction for the bonus payment should be allowed in the year it was settled or the year it was paid.Detailed Analysis:1. Customary Bonus vs. Ex-Gratia Payment:The Full Bench was constituted to resolve conflicting decisions regarding whether the bonus paid by the assessee was a customary bonus or an ex-gratia payment. The Tribunal had previously allowed the bonus as a deduction for the assessment years 1979-80 and 1980-81, considering it as customary bonus. However, for the assessment year 1981-82, another Bench disallowed the claim, treating it as ex-gratia. The Full Bench reviewed the resolutions passed by the Board of Directors and the payments made to determine the nature of the bonus.2. Applicability of the Payment of Bonus Act, 1965:The Tribunal examined whether the payments made by the assessee were governed by the Payment of Bonus Act, 1965. The Act applies to employees earning less than Rs. 1,600 per month and prescribes a minimum and maximum bonus payable. The Tribunal found that the assessee's payments were not governed by the Act as the payments were made to employees earning more than Rs. 1,600 per month and were not linked to the allocable surplus or profits of the business. The Tribunal also noted that the assessee was not obliged to pay bonus under the Act during the initial five years of production as per section 16(1A) of the Payment of Bonus Act.3. Deduction Under Section 36(1)(ii) vs. Section 37 of the IT Act:The Tribunal considered whether the deduction for the bonus payment should be allowed under section 36(1)(ii) or section 37 of the IT Act. Section 36(1)(ii) applies to bonuses governed by the Payment of Bonus Act, while section 37 applies to other business expenditures. The Tribunal concluded that since the payments were not governed by the Payment of Bonus Act, they should be considered under section 37. The Tribunal referred to several case laws, including the Supreme Court's decision in Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai, which held that the Payment of Bonus Act does not exhaust all types of bonuses and customary bonuses are not annihilated by the Act.4. Limits Set Out Under the Payment of Bonus Act:The Tribunal examined whether the limits set out under the Payment of Bonus Act governed the allowance of deduction. The Act prescribes a minimum bonus of 8.33% and a maximum bonus of 20% of the salary or wages. The Tribunal found that the payments made by the assessee exceeded these limits but were justified as customary bonuses based on long-standing practice and agreements with the labor unions. The Tribunal referred to the Supreme Court's decision in Coffee Board Employees Association v. A.C. Shiva Gowda, which recognized the legitimacy of ex-gratia payments for securing cooperation and efficient work from employees.5. Year of Allowance of Deduction:The Tribunal considered whether the deduction for the bonus payment should be allowed in the year it was settled or the year it was paid. The Tribunal noted that the liability to pay the bonus arose when the resolutions were passed by the Board of Directors and the payments were made. Therefore, the deduction should be allowed in the years when the payments were actually made, i.e., assessment years 1983-84 and 1984-85. The Tribunal distinguished this case from the Calcutta High Court's decision in Texmaco Ltd. and the Allahabad High Court's decision in Amrit Banaspati Co. Ltd., which dealt with statutory liabilities under the Payment of Bonus Act.Conclusion:The Full Bench concluded that the bonus payments made by the assessee were customary bonuses and not governed by the Payment of Bonus Act. Therefore, the deductions were allowable under section 37 of the IT Act in the years the payments were made. The Tribunal's earlier decision for the assessment years 1979-80 and 1980-81, which allowed the deductions, was upheld, and the decision for the assessment year 1981-82, which disallowed the deductions, was set aside. The matter was remitted back to the Division Bench for consideration of other issues, if any.