Madras High Court
Commissioner Of Income Tax vs D. Mohamed Ismail on 2 March, 1996
Equivalent citations: [1997]227ITR211(MAD)
JUDGMENT Thanikkachalam, J.
1. In accordance with the direction given by this Court, dt. 23rd March, 1983, the Tribunal referred the following two questions for the opinion of this Court under s. 256(2) of the IT Act, 1961 hereinafter referred to as the 'Act' :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the bonus paid was treated as part of the remuneration and not as a bonus out of profits and, therefore, the payment of Bonus Act has no application to the assessee's case ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the ceiling prescribed under s. 36(1)(ii) was not attracted and, therefore, there was no case for disallowance of a part of the bonus payment ?"
2. The assessee is an individual carrying on business in tanning hides and skins. In the accounts of the previous year ended 31st March, 1978, corresponding to the asst. yr. 1978-79, the assessee had paid a sum of Rs. 20,900 to the workmen with the narration that it was bonus paid to them and debited to the wages account. The ITO noted that this bonus was in excess of 20 per cent. of the salary and assuming that the payment of Bonus Act did not authorise payment of bonus in excess of 20 per cent. of the salary, he disallowed a sum of Rs. 16,450 under s. 36(1)(ii) of the Act. On appeal, the CIT(A) found that the assessee was a Muslim and there was ample evidence of a custom common to Muslim-owned businesses to pay small salaries and relatively large amounts as bonus. He was of the view that such customary bonus did not fall within the provisions of payment of Bonus Act, as held by the Supreme Court in the case of Hukumchand Jute Mills Ltd. vs. Second Industrial Tribunal and he accordingly deleted the disallowance. Aggrieved, the Revenue filed an appeal before the Tribunal. The assessee filed a statement before the Tribunal showing that the total salary paid for the assessment year was Rs. 22,250 and the bonus Rs. 20,950 which was similar to the payment of salary of Rs. 24,760 and bonus of Rs. 24,800 for the asst. yr. 1977-78 and salary of Rs. 18,249 and bonus of Rs. 15,600 for the asst. yr. 1976-77. The Tribunal, therefore, found that the bonus paid was equivalent to the salary paid. According to the Tribunal the assessee treated the bonus paid as part of the remuneration and not as bonus out of the profits and that was the practice even in the past. The Tribunal also found that such a mode of payment of remuneration in the form of bonus was customary to the trade and therefore the ceiling prescribed under s. 36(1)(ii) of the Act was not attracted, since the payment itself was only a remuneration and not bonus at all. Therefore, the Tribunal came to the conclusion that the disallowance as deleted by the CIT is in order.
3. In the asst. yr. 1978-79, the assessee had paid a sum of Rs. 20,900 to the workmen as bonus and debited to the wages account. According to the Department, since it is bonus payment, it should be allowed as per the provisions contained in s. 36(1)(ii) of the Act. Even if this provision is applied, the excess amount of Rs. 16,450 over and above 20 per cent. of the salary has got to be disallowed. The assessee pleaded it is a customary bonus. The assessee filed a statement before the Tribunal showing that the total salary paid for this assessment year was Rs. 22,250 and the bonus was Rs. 20,950. So also in the asst. yr. 1977-78 salary was paid to the extent of Rs. 24,760 and the bonus was paid to the extent of Rs. 24,800.
4. In the asst. yr. 1976-77 the salary payment was Rs. 18,249 and the bonus was Rs. 15,600. According to the Tribunal the bonus was equivalent to the salary payment. If the bonus is not paid under the payment of Bonus Act, then the provisions of s. 36(1)(ii) of the Act would not apply. If the payment of bonus is customary bonus, then it will go out of the purview of s. 36(1)(ii) of the Act.
5. According to the AAC the assessee is a Muslim and there is a custom among the Muslim businessmen to pay less salary and higher bonus.
6. The Kerala High Court in CIT vs. P. Bala Krishna Pillai International Cashew Traders , held that all the three conditions prescribed by cls. (a) to (c) of the second proviso to s. 36(1)(ii) of the IT Act, 1961, must be satisfied, if the payment made in excess of amount allowed by the payment of Bonus Act, is to be regarded as reasonable within the meaning of s. 36(1)(ii) of the IT Act, 1961.
7. Again, the Kerala High Court in CIT vs. Alikunju, M. A. Nazir, Cashew Industries , held, that to say that the second proviso to cl. (ii) of s. 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 cls. (a) to (c) of the second proviso) is not deductible under s. 36, is to put an artificial construction upon a beneficial provision.
8. In Workman vs. Kettlewell Bullen & Co. Ltd. , the Supreme Court, while considering payment of customary bonus, held that since there was payment of an uniform rate of 10.5 per cent. of salary of wages for an unbroken period of nine years from 1965 to 1973, which was a sufficiently long period, the Tribunal could have reasonably drawn an inference that the said payment was customary or traditional bonus on the occasion of Puja festivals.
9. In the case of Mumbai Kamgar Sabha vs. Abdulbhai Faizulladin , the Supreme Court held that "the conclusion seems to be fairly clear, unless we strain judicial sympathy contrarywise, that the Bonus Act dealt with only profit bonus) and matters connected therewith and did not govern customary, traditional or contractual bonus.
10. In Hukumchand Jute Mills Ltd. vs. Second Industrial Tribunal (supra), wherein the Supreme Court held that the customary or contractual bonus were excluded from the provisions of the Act and it was laid down "The Bonus Act (1965) was a complete Code, but was confined to profit-oriented bonus only. Other kinds of bonus have flourished in Indian Industrial Law and have been left uncovered by the Bonus Act. The legislative universe spanned by the said statute cannot, therefore, affect the rights and obligations belonging to a different world or claims and conditions. In the abovesaid decision, it was further held that s. 17 of the Bonus Act in express terms refers to Pooja bonus and other customary bonus as available for deduction from the bonus payable under the Act, thus making a clear distinction between the bonus payable under the Act and Puja bonus or other customary bonus. So long as this section remains without amendment, the inference is clear that the categories covered by the Act, as amended, did not deal with customary bonus."
11. According to the learned standing counsel appearing for the Department, the Tribunal has not considered the second proviso to s. 36(1)(ii) of the IT Act, 1961. The second proviso prescribes three conditions in order to allow the bonus payment as customary bonus. In order to allow the bonus as customary bonus, we have to look into the pay of the employee and the condition of his service, the profits of the business or profession for the previous year in question and the general practice in similar business or profession. In the present case, the Tribunal recorded a finding that the assessee is a Muslim and the Muslim traders used to pay more bonus than the salary. It was also found that in the previous year the assessee was paying bonus almost equal to the salary. Therefore, there is practice in payment of customary bonus in the earlier years. The total bonus paid this assessment year was Rs. 20,950 and the salary paid was Rs. 22,250. Even if the provision of s. 36(1)(ii) of the Act is applied the excess comes to Rs. 16,450. Considering the nature of the business, the amount of bonus paid in the previous earlier year and the amount of bonus paid in the assessment year under consideration in relation to the salary paid, we are of the opinion that the assessee satisfied the conditions prescribed under the second proviso to s. 36(1)(ii) of the Act. Under such circumstances, we consider that there is no infirmity in the order passed by the Tribunal in allowing the excess amount of Rs. 16,450, treating the same as part of customary bonus. In that view of the matter, we answer the questions referred to us in the affirmative and against the Department. No costs.