1972 (2) TMI 8 - HC - Income Tax

High Court grants full bonus deduction based on commercial expediency under Income-tax Act

The High Court ruled against the revenue, finding that the Tribunal and revenue authorities erred in assessing the reasonableness of the bonus payment. ... Assessee in this case is a dealer in paper. During the assessment year 1960-61 he paid a bonus of Rs. 39,541 to his employees and claimed it as allowance under section 10(2)(x) of the Income-tax Act, 1922. The Income-tax Officer took the view that the bonus paid by the assessee which is equivalent to 13 months' salary was excessive and not justified by the profits derived by him in the assessment year, and disallowed a sum of Rs. 19,000 from and out of the total claim of the assessee on the ground that the bonus equivalent to six months' salary can alone be justified - Held that disallowance of bonus to the extent of three months' salary was not valid Issues Involved:1. Disallowance of bonus claim under section 10(2)(x) of the Income-tax Act, 1922.2. Reasonableness of the bonus paid by the assessee.3. Comparison of profits across different assessment years.4. Commercial expediency in determining bonus payments.5. Jurisdiction and role of the Tribunal and High Court in assessing reasonableness.Detailed Analysis:1. Disallowance of Bonus Claim under Section 10(2)(x):The primary issue revolves around the disallowance of a portion of the bonus paid by the assessee to his employees. The Income-tax Officer disallowed Rs. 19,000 from the total bonus claim of Rs. 39,541, deeming the bonus equivalent to six months' salary as justified. This decision was upheld by the Appellate Assistant Commissioner. The Tribunal, however, allowed a bonus equivalent to ten months' salary. The question referred to the High Court was whether the disallowance of the claim for deduction of bonus to the extent of three months' salary was lawful.2. Reasonableness of the Bonus Paid by the Assessee:The assessee argued that the bonus paid was reasonable given the increased workload due to higher business turnover. The Tribunal and revenue authorities did not dispute the genuineness of the payment but deemed it excessive due to lesser profits compared to previous years. The High Court emphasized that the reasonableness of the bonus should be judged with reference to section 10(2)(x) and not merely based on profit comparison with previous years.3. Comparison of Profits Across Different Assessment Years:The Tribunal compared the profits of the assessment year with those of prior years to determine the reasonableness of the bonus. The High Court found this approach flawed, stating that the reasonableness should be assessed based on the factors outlined in section 10(2)(x), which include the pay of the employee, the profits of the business for the year in question, and the general practice in similar businesses.4. Commercial Expediency in Determining Bonus Payments:The High Court reiterated that the reasonableness of bonus payments should be judged from the point of view of commercial expediency. The Court cited various precedents, including *Subodhchandra Popatlal v. Commissioner of Income-tax*, *Mysore Fertiliser Co. v. Commissioner of Income-tax*, and *Commissioner of Income-tax v. Walchand & Co. Private Ltd.*, emphasizing that the assessment should consider the pay of the employee, the profits of the business, and general business practices.5. Jurisdiction and Role of the Tribunal and High Court:The High Court noted that the Tribunal's decision lacked specific reasons for deeming ten months' salary as reasonable. It criticized the revenue authorities for not providing a clear basis for their conclusions. The Court highlighted that the Tribunal should approach and decide cases in a judicial spirit, indicating disputed questions and recording reasons for its decisions. It concluded that the Tribunal's order was unsustainable as it lacked supporting evidence and reasoning.Conclusion:The High Court answered the referred question in the negative, ruling against the revenue. The Court held that the Tribunal and revenue authorities erred in their assessment of the bonus payment's reasonableness. The assessee's claim for deduction of the full bonus amount was deemed justified based on commercial expediency and the specific factors outlined in section 10(2)(x) of the Income-tax Act, 1922. The assessee was awarded costs, with counsel's fee set at Rs. 250.