Income Tax Appellate Tribunal - Madras
Inspecting Assistant Commissioner vs Jawahar Mills Ltd. on 31 December, 1983
Equivalent citations: [1984]8ITD20(MAD)
ORDER
T.N.C. Rangarajan, Judicial Member
1. This appeal by the revenue is directed against the order of the Commissioner (Appeals) deleting certain disallowances of expenditure in computing the total income for the assessment year 1980-81.
2. The assessee is a public limited company engaged in the manufacture of cotton yarn. The first point in dispute relates to the claim for deduction of certain amounts paid to the workmen under a settlement dated 12-10-1979 between the management and the workmen of the assessee-company. That settlement states that the workmen will be paid bonus as per the Payment of Bonus Act, 1965, for the accounting year 1978. Since the agreement was for the entire industry covering several companies engaged in textile manufacturing, we find that in the annexure to that agreement, the assessee-company has been put down as No. 64 and the percentage of bonus payable according to the Act at 20 per cent. This amount has been claimed and allowed and there is no dispute about it. The second clause of the agreement is that for the three accounting years 1978, 1979 and 1980, the management will pay additional amount equal to 60 per cent of the bonus liability subject to a minimum of 3.67 per cent and a maximum of 12 per cent in consideration of the assurance of the trade unions to extend their co-operation for uninterrupted and smooth working and better profit in the mills. Under Annexure II, the assessee-mills which is at item No. 64 has to pay 12 per cent as additional payment. This amounted to Rs. 4,99,916. According to the revenue, this amount is an additional bonus and being in excess of 20 per cent prescribed as the maximum under the Payment of Bonus Act cannot be allowed as a deductible expenditure under Section 36(1)(ii) of the Income-tax Act, 1961 ('the Act'). On the other hand, according to assessee, this amount was not bonus at all, but an expenditure laid out for the purpose of the business as without such payment, it would not have been possible to carry the workers with them and run the factory at all. Therefore, it was claimed that this amount was to be allowed as a deduction under Section 37 of the Act. While the ITO rejected this contention, the Commissioner (Appeals) has accepted it and, hence, the appeal where the same contentions are repeated.
3. Before we consider the objection of the revenue to the allowance of this expenditure, we may notice the historical background of the legislation relating to bonus which has been elaborately set down in the recent judgment of the Madras High Court dated 2-12-1982 in the case of S. Kothandaraman v. Union of India [Writ Appeal Nos. 122 and 589 of 19811. Before 1930, bonus was paid by the management to the employees as ex gratia payments. Correspondingly, the amount was rarely allowed as an expenditure since it was not established to have been laid out for the purpose of the business as far as the computation of income is concerned. However, by the Indian Income-tax (Third Amendment) Act, 1930, Clause (viiia) was added to Section 10 of the Indian Income-tax Act, 1922 ('the 1922, Act') in the following terms:
(viiia) 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 amount of the bonus or commission is of a reasonable amount with reference to--
(a) the pay of the employee and the conditions of his service;
(b) the profits of the business, for the year in question; and
(c) the general practice in similar businesses.
This section specifically provided that bonus could be allowed as a deduction provided it was not a share of the profits. This was because the concept of bonus as ex gratia payment had been slowly changing and claims adjudicated by the different Industrial Tribunals and the labour Courts considered such payment as deferred wages taking into account the payment of regular wages at a lower figure. There was a further change in the concept of bonus when the Supreme Court in the case of Muir Mills Co. Ltd. v. Suti Mills Mazdoor Union [1955] 1 SCR 991 accepted as sound the view taken by the Industrial Tribunal that since the labour and capital both contribute to the earnings of the industrial concern, it is fair that labour should also derive some benefit if there was a surplus after meeting the necessary charges referred to in what came to be known as Full Bench formula. According to that formula, the award of bonus was a recognition of the fact that the labour has contributed to the earning of the profit and is entitled to a share in it and it was intended to narrow down the gap between the living wage which the labour is entitled and the actual wage received by it. Conformably with this concept, when the Act was enacted, the provision for deduction of bonus was given in Section 36(1)(ii) as follows:
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 amount of the bonus or commission is reasonable with reference to--
(a) the pay of the employee and the conditions of his 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;
The Legislature then thought of modifying the law with regard to the payment of bonus and enacted the Payment of Bonus Act in 1965, which came into force on 25-9-1965. This Act recognised that the payment of bonus under the provisions of that Act was only a share of the profits and prescribed that that share should be worked out as a percentage of the available surplus subject to a minimum of 8.33 per cent and a maximum of 20 per cent. It also provided that if the parties agreed, they could have a different formula for working out of the bonus. Needless to say that the concept of bonus has so completely changed to a share of profit that in the computation of income, it could have no place because the payment of profit sharing bonus could not be considered to be an expenditure laid out for the purpose of business. It is in this context that when the Payment of Bonus Act was amended by the Payment of Bonus Act, 1976, Section 29 of that amending Act introduced a proviso to Section 36(1)(ii) of the Act, as follows:
29. Amendment of Section 36 of the Income-tax Act, 1961.--In subsection (1) of Section 36 of the Income-tax Act, 1961 (43 of 1961), in the proviso to Clause (ii), for the words 'Provided that the amount of the bonus or commission', the words and brackets 'Provided further that the amount of the bonus (not being bonus referred to in the first proviso) or commission' shall be substituted and before that proviso as so amended, the following proviso shall be inserted, namely:--
Provided that the deduction in respect of bonus paid to an employee employed in a factory or other establishment to which the provisions of the Payment of Bonus Act, 1965 (21 of 1965), apply shall not exceed the amount of bonus payable under that Act.
At the same time, the words 'not being bonus referred to in the first proviso' was added to the second proviso which sets the limits for which the bonus or commission was allowable as a deduction. Thus, this amendment actually enabled a deduction of a profit-sharing bonus which was otherwise not allowable as a deduction. At the same time, it did not interfere with the earlier settled law relating to the deduction of customary bonus or other bonus which is actually an expenditure laid out for the purpose of the business and being allowed with reference to several decisions of the Courts. In fact, this distinction between the bonus payable under the Payment of Bonus Act and other bonus which is not a profit-sharing bonus was brought out by the Supreme Court in the case of Hukumchand Jute Mills Ltd. v. Second Industrial Tribunal AIR 1979 SC 876 where it was held that it was clear that the Act did not deal with the bonus other than profit-sharing bonus. It, therefore, becomes necessary for us to consider whether the amount calculated at 12 per cent, paid over and above the bonus payable under the Payment of Bonus Act, was in the nature of profit-sharing bonus or other bonus and whether it is deductible under Section 36(1)(ii) or under Section 37. Clearly it is not a profit-sharing bonus because the agreement did not envisage that it should be paid as a share of profit. This is underlined by the admitted fact that the additional amount was not to be taken into account for the purpose of set on and set off of the bonus from the available surplus of the other accounting years. Clearly, therefore, this additional amount was not a profit-sharing bonus at all. The question is whether it is a bonus otherwise allowable under Section 36(1)(ii) or an expenditure laid out for the purpose of the business under Section 37. It has been held by the Madras High Court in the case of N.M. Rayaloo Iyer & Sons v. CIT/EPT [1954] 26 ITR 265 that when there is a specific provision for deduction of bonus under Section 10(2)(x) of the 1922 Act corresponding to Section 36(1)(ii) of the 1961 Act, resort cannot be had to Section 10(2)(xv) corresponding to Section 37. At the same time, it has been provided that the deduction under Section 10(2)(x) corresponding to Section 36(1)(ii) must be given by applying the test of commercial expediency with regard to the reasonableness of the deduction. The second proviso to Section 36(1)(ii) gives three relevant matters to be considered, namely, the pay of the employee and the condition of service, the profits of the business and the general practice in similar business. When we have an agreement for the entire industry as a whole with the management of the factories and the trade unions participating under the auspices of the Government and fixing the amount of additional bonus payable to the workmen, it is impossible to say that it was fixed without regard to these three factors or that the payment of that amount could be considered in any way unreasonable. Therefore, even without resorting to Section 37, we find that the additional amount payable was reasonable and must be allowed under the second proviso to Section 36(1)(ii) itself. If, for the sake of argument it has to be considered that this amount was not bonus at all and not falling within the scope of Section 36(1)(ii), then obviously it is an amount laid out for the purpose of the business because without such payment, we can hardly expect the factory to survive. Therefore, it is equally allowable under Section 37 as an expenditure wholly and exclusively laid out for the purpose of the business.
4. The objection of the revenue is that there being two provisos in Section 36(1)(ii), this amount should be considered as falling within the first proviso itself and should not be considered in any other provision of the Act. On the basis of the admitted fact that this additional amount was not considered for set on and set off under the Payment of Bonus Act, we have to overrule the objection on the simple fact that this amount was not a profit-sharing bonus at all and could not fall within the scope of the Payment of Bonus Act and within the first proviso to Section 36(1)(ii). The other objection is that by a subsequent amendment of the Payment of Bonus Act by the introduction of Section 34(iii) by the Amendment Act, 1965, there was a ban on payment of bonus exceeding 20 per cent and, therefore, the amount paid in excess should be considered to be illegal and not qualified for deduction under Section 36(1)(ii). There are several reasons why we cannot accept this contention. Reliance was placed by the revenue on the decision of the Madras High Court in the case of S. Kothandaraman (supra) which upheld the validity of Section 31A of the Payment of Bonus Act providing for the maximum of 20 per cent. Reliance was also placed on the observation that the restriction of the maximum was valid because it was in public interest and it was designed to protect the interest of the revenue also. But those observations relating to the validity of a section cannot affect the validity of a payment when in fact that payment has been made under the auspices of the State Government itself. We find that the dispute was resolved by conciliation under Section 18(1) of the Industrial Disputes Act, 1947. Moreover, the Payment of Bonus Act provides that any agreement varying the method of payment of bonus has to have the approval of the State Government. It is impossible to imagine that the State Government could have given its assent to an agreement which is void by reason of its being contrary to the statute. Under article 261 of the Constitution of India, full faith and credit shall be given to public acts of every State. Since the industrial adjudication made under the auspices of the State Government was a public act, the Income-tax Department cannot ignore it as either illegal or void or against public policy. Moreover the Supreme Court having held that the Payment of Bonus Act applies only to profit-sharing bonus, the maximum prescribed under that Act can apply only to profit-sharing bonus even under Section 31A and cannot affect the payment of bonus otherwise by settlement of industrial disputes. If it were the intention of the Parliament that after the amendment of the Payment of Bonus Act prescribing the maximum of 20 per cent, no other sum should be paid to the workmen at all, Section 36(1)(ii) of the Act would have been suitably amended omitting the second proviso. Since the second proviso of Section 36(1)(ii) continued to exist, we cannot attribute any redundancy to the Parliament and must allow that section to operate by considering the claim of the assessee for deduction under that section.
5. We are also aware that same view has been taken by several decisions of this Tribunal and we are not pursuaded to depart from any of those decisions and especially the orders where deductions of similar amounts have been claimed and allowed in respect of the other assessees, who are parties to the same agreement under which additional amounts were allowed to be paid apart from the bonus payable under the Payment of Bonus Act. In the circumstances, we confirm the order of the Commissioner (Appeals) allowing the deduction of the additional amount under Section 36(1)(ii).
6. There was another agreement dated 24-1-1980 by which it was agreed that the amounts paid by the management to the workmen as advance pending the adjudication of the dispute shall not be recovered but will be treated as paid according to the settlement of the dispute. By this agreement, the assessee had to write off a sum of Rs. 3,23,159. The Commissioner (Appeals) has allowed the deduction of this amount for the same reasons as discussed above. The objections of the revenue are the same as considered above which we have already overruled. The additional objection taken is that since the payments were made in the earlier accounting years, the deduction cannot be allowed in the previous year relating to this assessment year. But, it is well settled that wherever a liability occurs under a settlement, the deduction has to be given only in the year in which the settlement was made even though the payment might have been made earlier because the liability occurs only on the settlement of the dispute and the payment earlier was only an amount advanced and not appropriated to any particular accrued liability --CIT v. Amrit Banaspati Co. Ltd. [1966] 59 ITR 388 (All.). Therefore, the order of the Commissioner (Appeals) allowing this deduction was correct and must be upheld.
7. The next item in dispute relates to the claim for deduction of Rs. 11,333 towards repairs of certain buildings which have been given as rent-free quarters to the officers of the company. The Commissioner (Appeals) has found that the disallowance of this amount was unjustified because though there may be some indirect benefit to the employees, the expenditure was intended primarily to protect the assets of the assessee. We agree with this finding of the Commissioner (Appeals) and we, therefore, uphold his order deleting this disallowance.
8. The next item in dispute relates to the disallowance made under Section 40A(5) of the Act with regard to the salary and perquisites paid to the managing director. The significant point is that the accounting period for this assessment year 1980-81 was a period of fifteen months ending on 31-3-1980. Under Section 40A(5), the ceiling prescribed is Rs. 5,000 per month whereas under Section 40(c) of the Act it would be only Rs. 72,000 for the entire previous year. Therefore, the contention of the revenue is that the disallowance should be made by applying Section 40(c) only. We do not know why such an unfair reading of the section should be made in a case where clearly a larger amount is being taxed by taking the previous year as the period of fifteen months and not the normal period of twelve months. The Commissioner (Appeals) has rightly referred to the proviso to Section 40(c) which states that where the director is also an employee, the expenditure must be decided with reference to Section 40A(5). It is not in dispute that the managing director in this case was also an employee and, hence, we see nothing wrong in the Commissioner (Appeals) applying the ceiling prescribed by Section 40A(5) and limiting the disallowance to that extent.
9. The last point in dispute relates to the computation of the extra shift allowance in calculating the depreciation. The Commissioner has directed the ITO to follow the circular of the CBDT which requires that the computation should be made with reference to the working of the concern as such and not with reference to each individual machinery. This direction is in accordance with the decision of the Supreme Court holding that the circular is binding on the revenue and, hence, this ground is itself untenable and cannot be entertained. In the result, the order of the Commissioner (Appeals) is confirmed. The appeal is dismissed.