1993 (2) TMI 174 - AT - Income Tax

Tribunal limits bonus deductions, emphasizes financial prudence.

Krishna Sahakari Sakhar Karkhana Limited. Versus Deputy Commissioner Of Income-Tax.

The tribunal upheld the disallowance of excess bonus and ex gratia payments, ruling that the appellant could not claim deductions beyond the statutory ... Accounting Year, Deduction In Respect, Depreciation Reserve, Sugar Factory Issues Involved:1. Addition made on account of bonus exceeding 8.33% allowable under the Payment of Bonus Act, 1965.2. Deductibility of bonus and ex gratia payments as business expenditure.Detailed Analysis:Issue 1: Addition Made on Account of Bonus Exceeding 8.33% Allowable Under the Payment of Bonus Act, 1965The appellant-sugar factory claimed deductions for bonus payments exceeding the 8.33% allowable under the Payment of Bonus Act, 1965, for the assessment years 1986-87 and 1987-88. The Income Tax Officer (ITO) disallowed these claims, and the CIT (Appeals) upheld the disallowance. The primary question was whether the excess bonus payments could be considered allowable business expenditures.The appellant argued that the bonus payments were made as per settlements with workers, which included a productivity bonus at 20% and a festival bonus at 10%, totaling 30%. However, the appellant could not identify the contribution of each worker to the manufacturing process or establish the attendance of each worker. The bonus payments were claimed to be linked with production or productivity, but there was no evidence of increased production during the relevant periods.The tribunal noted that under the amended Payment of Bonus Act, 1965, the bonus linked with productivity could not exceed 20% of the salary or wages earned. The appellant failed to demonstrate that the production or manufacturing of sugar was significantly higher during the relevant years, nor was there any evidence of threats of strikes or unrest among employees.Issue 2: Deductibility of Bonus and Ex Gratia Payments as Business ExpenditureThe tribunal examined whether the bonus and ex gratia payments could be considered reasonable and necessary business expenditures under Section 36(1)(ii) of the Income-tax Act, 1961. This section requires that the bonus or commission paid to employees must be reasonable with reference to the pay of the employee, the profits of the business, and the general practice in similar businesses.The tribunal found that the appellant incurred substantial losses during the relevant years and was unable to recover the current year's depreciation or carry forward unabsorbed depreciation or investment allowance. The tribunal concluded that paying a bonus in excess of 8.33% was not reasonable or justifiable, especially given the appellant's financial losses.The tribunal also considered the argument of commercial expediency, which requires that the expenditure be reasonable from a business perspective. The tribunal held that incurring heavy losses to pay excess bonuses did not constitute commercial expediency. The appellant's financial position needed to be protected to enable smooth operations and profitability.The tribunal emphasized that the conduct of the management in paying excess bonuses must be fair and reasonable. The incentive productivity bonus and ex gratia payments were not considered compulsory payments under any award or accrued liability. The tribunal concluded that the appellant failed to establish the necessity of these payments for maintaining industrial peace or preventing strikes.Conclusion:The tribunal upheld the disallowance of the excess bonus and ex gratia payments, concluding that the appellant was not entitled to deductions beyond the statutory limit of 8.33%. The tribunal found no good reasons to interfere with the CIT (Appeals) order on this point, and the appellant's claim on this ground was dismissed.