1991 (12) TMI 139

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....ct, 1961. The assessee has taken grounds to urge that the CIT erred in his direction and conclusion that the first proviso to section 36(1)(ii) is applicable to the assessee company and disregarding the instructions of the CBDT contained in Circular No. 206 dated 9-8-1986. Therefore, it was prayed that the order of the CIT should be vacated and the order of the IT be restored. 2. The assessee is a Resident company and the assessment year involved is 1985-86 for which the accounting year ended on 31-12-1984. The original assessment order was passed on 1-12-1986. This order was considered to be erroneous and prejudicial in terms of section 263 of the Income-tax Act, 1961 by the CIT for the reason that excess bonus of Rs. 14,918 was not disal....

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....admissible under section 37(1) as explained in Circular No. 287 dated 4-12-1980. Accordingly he modified the order of the ITO with a direction to recompute the income by disallowing the excess payment of Rs. 14,918. 3. At the time of hearing, the learned counsel for the assessee submitted that the bonus has been paid in this case only at the rate of 8.33% as per allocable surplus including the Directors of the company who are employees. Out of 15 employees considered by the CIT six employees, viz. S/Shri V.S. Mulay, P.K. Bhagwat, Y.K. Joshi, U.Y. Joshi, Shrikant V. Godbole and Sadanand V. Godbole were getting salary in excess of Rs. 1,600 p.m. and, therefore, they are not the employees governed by the Payment of Bonus Act as per the defini....

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....aim of deduction of bonus paid to them requires to be considered only under the second proviso to section 36(1)(ii) of the Income-tax Act, 1961 as clarified by the CBDT in Circular No. 206 dated 9-8-1976. The Board clarified that the persons drawing salary or wage exceeding Rs. 1,600 p.m. and who are employed in a factory or establishment to which the provisions of Payment of Bonus Act apply, are not covered by the provisions of that Act relating to compulsory payment of bonus. In view thereof, the restrictions laid down in the aforesaid first proviso regarding the deduction in respect of bonus paid to employees covered by the Payment of Bonus Act will not apply in relation to such persons. The bonus paid to such persons will therefore, fal....

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....s of the limit laid down under the Payment of Bonus Act by way of customary bonus and observed that even in respect of excess payment of bonus to employees governed by the first proviso to section 36(1)(ii) the admissibility would be required to be tested by the three conditions specified under the second proviso, viz. (a) pay of the employee and the conditions of service ; (b) the profits of the business or profession for the previous year in question ; and (c) the general practice in similar business or profession. Accordingly the Kerala High Court has also observed that these tests would be applicable for employees who are not governed by the Payment of Bonus Act i.e., to those employees who are in receipt of salary or wages exceeding Rs....