TaxTMI 
TaxTMI 
TaxTMI 
2005 (5) TMI 20
X X X X Extracts X X X X
X X X X Extracts X X X X
....s correct in stating that if a particular payment does not fall within the first proviso it can still be considered under the second proviso to section 36(1)(ii) of the Act, or even under section 37(1) of the Act? 4. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the assessee is entitled to the deduction of the entire incentive bonus of Rs. 22,23,518.?" The present reference relates to the assessment year 1981-82. The brief facts of the case are as follows: The assessee-respondent (hereinafter referred to as "the assessee") claimed before the Inspecting Assistant Commissioner that it had paid incentive bonus of Rs. 22,23,518 to its workers and members of the staff. This was in addition to another payment of Rs. 11,31,000 paid under the Payment of Bonus Act. When enquired about the nature of the payment, it was stated before the Assistant Commissioner that it was incentive bonus representing overtime payment for extra work done by the employees in double shifts. It was also stated that the workers had gone on strike in the assessee mill on January 22, 1980, which was called off only in May, 1981. D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al workers, who had stayed within the mill premises during the period of strike. It was also stated that as a consequence the wages had gone down in the above month. Certain vouchers for payments were also produced before the Commissioner of Income-tax (Appeals). It was found that the thumb impressions of the recipients were similar against several payments. This matter was, therefore, enquired into through the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner reported that the finger-print expert had confirmed that thumb impressions on the documents had been forged. As a clarification, it was pointed out to him that sometimes the workers used to authorise their colleagues to receive the payments and that explained the similarity in the thumb impressions. In this connection, the Commissioner of Income-tax (Appeals) also required the Inspecting Assistant Commissioner to examine some of the workers. According to him, a perusal of their statements went to show that they had only selective memory or, in other words, they had come forward only to support the assessee's version. At the instance of the Commissioner of Income-tax (Appeals) it was finally certified by....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as made to the workers and subsequently it was transferred to 'incentive bonus account' is no ground to hold that either the payment had not been made or the expenditure had not been incurred. In this connection, reliance was placed by counsel for the assessee on the decision of the Orissa High Court in Kalinga Tubes Ltd. v. CIT [1974] 96 ITR 20. It was held in this case that the bonus may be paid in cash or it may be adjusted against the pre-existing loan. The nature and character of bonus was not, in any way, affected merely because the same was not paid in cash but was given by way of adjustment. It was for the management to decide for maintaining peace in an industrial concern whether to pay bonus to the workmen to keep them contented for better production, even though bonus had not been statutorily prescribed. It was not for the Income-tax Department to control the management's conduct in paying bonus. 10. The second contention of the Inspecting Assistant Commissioner was that even if it was in the nature of incentive bonus, it was not allowable in view of the first proviso to section 36(1)(ii) of the Act. Section 36(1)(ii) of the Act allows deduction for any sum, among other....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f Baidyanath Ayurveda Bhawan Mazdoor Union v. Management of Shri Baidyanath Ayurveda Bhawan (P.) Ltd. [1984] 64 FJR 33; [1984] 17 Taxman 19 the hon'ble Supreme Court held that it was settled that the Payment of Bonus Act deals only with profit bonus and matters connected therewith and does not govern customary, traditional or contractual bonus. There is no categorical provision in the Payment of Bonus Act nullifying all other kinds of bonus, nor does such a conclusion arise by necessary implication. It was held in this case that on the finding of the Tribunal as also the High Court attendance bonus was being paid from before and it being outside the purview of the Payment of Bonus Act, the High Court was right in vacating the award. In view of the above decisions, it has to be held that if a particular type of bonus does not fall within the first proviso to section 36(1)(ii) of the Act, it can be considered for allowance under the other provisions of the Act including the second proviso to the above section. Regarding the second proviso to section 36(1)(ii) of the Act,- it was submitted that either of the three conditions required to be satisfied if the deduction was considered the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges, part of it should in all fairness go to the employees. This principle, in our opinion, squarely applies to the present case. The above principle is also supported by another decision of the Supreme Court in Sassoon f. David and Co. (P.) Ltd. v. CIT [1979] 118 ITR 261. 12. Even if the case can be treated as not covered by the second proviso to section 36(1)(ii) of the Act, the allowance can still be considered under section 37 of the Act. This was the principle laid down by the Tribunal in the case of ITO v. Arya Vaidya Pharmacy (CBE) Ltd. [1982] 1 ITD 748 (Mad). It was held in this case that ex gratia payments like incentive wages are by now well recognised in trade circles and because of various trade union activities have become a trade practice. They cannot, in all cases, be treated as a camouflage for bonus, so as to circumvent t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pressed by the Commissioner of Income-tax (Appeals) will disappear. It was also in the nature of customary bonus as similar payments have been made by the assessee to its workers in the earlier years. 14. A word about the analysis of the actual payment will also be necessary. The details of the payments are given in a chart, which we were told, was submitted to the lower authorities also. This chart gives monthwise details of the payments. In the assessment year 1980-81, the total payment amounted to Rs. 12,68,682. In the year under appeal, on the other hand, it amounted to Rs. 22,23,518. This included Rs. 8,69,440 in the month of December, 1980 alone. In the earlier year, the payment for December was Rs. 1,57,650. Details for the payment of December, 1980 have also been given by the assessee. Besides, the normal payments, they include an additional payment of Rs. 6,00,006. It is this amount which needs a little explanation. We have already stated above that it was the case of the assessee that during strike period 775 workers had stayed within the mill premises. Besides the normal wages, they were paid an additional amount equal to twice the normal wages. This was also admitted b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1980 22,23,518 Less : Amount paid in 1979 12,68,683 --------- 9,54,835 --------- Reason for difference (i) Payments made to workers in lieu of working during strike period - (a)From 24-11-1980 to 30-11-1980 &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d Co. We quote below from this report. 'We carried out tests to assess the system of internal control in respect of salaries and wages (inclusive of incentive bonus) to determine whether they are reliable and according to such tests and the information and explanations given to us, we are of the opinion that the company only pays for employees' services which it requires and has received and no fictitious employees are introduced on the payroll and the amounts disbursed to the employees properly relate to the business of the company. We have attended a wages and incentive bonus pay out for the period, July 30, 1985 to August 5, 1985 and confirm that during our presence, the recipients or their nominees have proved their identity while receiving payments.' There are also letters from Raza Textiles Labour Union, Rampur and Raza Textiles Mazdoor Sangh stating that there was never any complaint for the non-payment of any amount including bonus by any worker from the management and that some of the workers loyal to the management remained within the premises of the mills during the strike period of November 24, 1980 to May 20, 1981, who were paid extra wages. The finger-print experts....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nus. In our opinion, the submission is devoid of any merit. We have perused the order of the Tribunal. The Tribunal, on the consideration of the entire facts and circumstances of the case, held that workers were allowed to put in extra time and increase the production by their labour and efficiency and for this extra time or overtime, they were paid extra single wages. It was this payment, which was treated as incentive bonus by the assessee. A question for consideration is whether the bonus of the above nature, which is called incentive bonus is liable for deduction under the provisions of section 37(1) of the Act. It is useful to refer to sections 36 and 37(1) as they stood at the relevant time: "Section 36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- ... (ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission: Provided that the deduction in respect of bonus paid to an employee employed in a factory or other est....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rted in [1985] 67 FJR 79; AIR 1985 SC 1010 as follows: "(1) that the payment has been made over an unbroken series of years; (2) that it has been paid for a sufficiently long period-the period has to be longer than in the case of an implied term of employment; (3) that it has been paid even in years of loss and did not depend on the earning of profits; and (4) that the payment has been made at a uniform rate throughout." In the case of CIT v. Mettur Chemicals and Industrial Corporation Ltd. reported in [1999] 239 ITR 537, the Madras High Court held that the customary bonus as well as the amount paid under the agreement entered into with the employees for smooth running of the business without getting embroiled in labour unrest and to avoid friction with the labourers for the efficient running of the business has to be considered under the provisions of section 37(1) because such payments cannot be regarded as part of the bonus under the Payment of Bonus Act, 1965, and thus falling within the purview of section 36(1)(ii). In the case of CIT v. Kasturi Mills Ltd. [1998] 234 ITR 538, the Madras High Court held that incentive bonus paid to the employees is liable for deduction un....