Kerala High Court
Sree Bhagavathi Textiles Ltd. vs Commissioner Of Income-Tax on 11 February, 2000
Equivalent citations: [2000]244ITR496(KER)
Author: Arijit Pasayat
Bench: Arijit Pasayat, K.S. Radhakrishnan
JUDGMENT Arijit Pasayat, C.J.
1. At the assessee's instance, the following questions have been referred to this court for opinion under Section 256(1) of the Income-tax Act, 1961 (in short "the Act"), by the Income-tax Appellate Tribunal, Cochin Bench (in short "the Tribunal") :
"1. Whether, on the facts and in the circumstances of the case having in mind the decision of the Supreme Court in the matter, whether the Tribunal was right in holding that the ex-gratia payment paid on the basis of a memorandum of settlement entered with the workers was unreasonable having regard to the pay and allowances of the workers and hence not allowable under Section 36(1)(ii) ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that in spite of the decision of the Supreme Court, the conditions mentioned in the second proviso to Section 36(1)(ii) are cumulative in nature ?"
A brief reference to the factual position would suffice : I. T. A. Nos. 618 and 619 of 1984 were disposed of on November 29, 1985, in favour of the assessee, for the relevant assessment year 1980-81. A reference was sought for by the Revenue before this court. One of the questions referred was whether the Tribunal was justified in accepting" the assessee's entitlement to claim deduction towards bonus paid in excess of the statutory limits. In the judgment in I. T. R. Nos. 54 and 55 of 1987 (CITv. Sree Bhagavathi Textiles Ltd, [1994] 207 ITR 826), this court declined to answer the question but directed the Tribunal to restore the appeal and decide afresh the issue in the light of the decision of this court in CIT v. P. Alikunju, M. A. Nazir, Cashew Industries [1987] 166 ITR 611, and some other cases. The Tribunal, accordingly, reheard the case and decided the matter against the assessee.
2. Before the Tribunal the stand of the assessee was that there was no case for disallowance of five per cent, of the bonus payment. Such plea was taken by placing reliance on the decision of the apex court in Shahzada Nand and Sons v. CIT [1977] 108 ITR 358. It was submitted that the Tribunal in later orders had followed the aforesaid decision. Reference was also made to the decision of this court in Jayasree Cashew Co. in O. P. No. 10393 of 1984 disposed of on January 17, 1989. The Revenue's stand was that when there was a specific direction given by the High Court in a restored appeal, the Tribunal could not travel beyond the specific direction. It is to be noted that in P. Alikunju's case [1987] 166 ITR 611 (Ker), the following observation was made (page 615) :
"We do not agree with the argument urged on behalf of the Revenue that the deduction is not permissible in respect of an employee covered by the Bonus Act if what is paid as bonus, or as commission, is in excess of, or otherwise than, what is payable under that Act, even if the payment of the excess amount, whether as bonus or commission, is justifiable when considered with reference to Clauses (a) to (c) of the second proviso. In our view, the two provisos must be read together to correctly understand the permissible deduction in terms of Clause (ii) of Sub-section (1) of Section 36. The object of that clause is to encourage the management to pay bonus not only to the extent to which it is statutorily bound to pay to the employee, but also in excess of that limit, provided the payment is justifiable as a reasonable payment. To say that the second proviso to Clause (ii) of Section 36(1) of the Act has no application in respect of employees covered under the Bonus Act, and that bonus or commission paid to them in excess of, or otherwise than, what is statutorily required (although reasonable when considered with reference to Clauses (a) to (c) of the second proviso) is not deductible under Section 36, is to put an artificial construction upon a beneficial provision."
In other words, it was held by this court that the requirements set out are cumulative. The Tribunal followed the directions of this court and dismissed the assessee's appeal. However reference was made for opinion as prayed for by the assessee.
3. There was no appearance on behalf of the assessee when the matter is called. Learned counsel for the Revenue submitted that if at all the assessee had any grievance about the legality of the conclusions of this court in earlier cases, it could have taken the matter before the apex court. It has not been so done. The Tribunal which was acting in terms of Section 260(1) of the Act was bound by the directions of this court.
4. The logic of the argument made by learned counsel for the Revenue cannot be diluted. But, at the same time, we are confronted with a peculiar situation when we notice that the apex court in Shahzada Nand and Sons v. CIT [1977] 108 ITR 358, categorically observed as follows (headnote) :, "The three factors laid down by the proviso to Section 56(1)(ii) are not really conditions on the fulfilment of which alone the amount of commission paid to an employee can be regarded as reasonable. They are merely factors to be taken into account by the Revenue authorities in determining the reasonableness of the amount of commission. It may be that one of these factors yields a negative response. To take an example, there may be no general practice in similar business or profession to give commission to an employee, but, yet, having regard to the other circumstances, the amount of commission paid to the employee may be regarded as reasonable. What the proviso requires is merely that the reasonableness of the amount of commission shall be determined with reference to the three factors. But, it is well-settled that these factors are to be considered from the point of view of a normal, prudent businessman. The reasonableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency. What is the requirement of commercial expediency must be judged, not in the light of the 19th century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self-interest, but in the context of current socio-economic thinking which places 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 such as interest on capital, depreciation, reserves, etc., a part of it should in all fairness go to the employees."
5. The decision of the apex court has a binding effect in terms of article 141 of the Constitution of India, 1950 (in short "the Constitution"). Now, the net result is that even though a consideration could have been made in the light of the decision of the apex court, because of non-challenge to the order passed by this court, a different conclusion has been arrived at which is at variance with the view expressed by the apex court. What is binding under Article 141 is the ratio of the decision and not any finding on facts. It is the principle underlying a decision which is binding. It is to be read in the context of the questions which arose for consideration. Judged in that background, the Tribunal's conclusions cannot be maintained.
6. In the circumstances, we think it proper to direct the Tribunal to rehear the matter and examine the acceptability of the assessee's case in the light of the decision rendered by the apex court in Shahzada Nand and Sons' case [1977] 108 ITR 358. As indicated above, the fact situation is somewhat peculiar and, therefore, we have adopted this course.
7. Reference is disposed of accordingly.