Kerala High Court
Commissioner Of Income-Tax vs P. Alikunju, M.A. Nazir, Cashew ... on 11 February, 1987
Equivalent citations: [1987]166ITR611(KER)
Author: T. Kochu Thommen
Bench: T. Kochu Thommen
JUDGMENT T. Kochu Thommen, J.
1. The following three questions have been, at the instance of the Revenue, referred to us by the Income-tax Appellate Tribunal, Cochin Bench :
"1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction under Clauses (i) and (ii) of Section 35B(1)(b) of the Income-tax Act, 1961?
2. Whether, on the facts, and in the circumstances of the case, and also in view of the limit provided under Section 36(1)(ii) of the Income-tax Act, the Tribunal is right in law and fact in confirming the finding of the Appellate Assistant Commissioner that festival bonus payments are not governed by the Payment of Bonus Act ?
3. Whether, on the facts and in the circumstances of the case, if the answer to the above question is in the negative, the Tribunal is right in remitting the case to the Income-tax Officer ?"
2. In the light of our decision in ITR Nos. 7 and 8 of 1982--CIT v. Tharian & Sons [1987] 166 ITR 607, question No. 1 has to be answered in the negative, that is, in favour of the Revenue and against the assessee. We do so.
3. In the accounting year relevant to the assessment year 1976-77, the assessee claimed deduction under Section 36(1)(ii) of the Income-tax Act, 1961 ("the Act"), in the sum of Rs. 59,545 as bonus paid to his employees. The Income-tax Officer disallowed Rs. 12,525 and allowed only Rs. 47,020 being what he found to be the amount that was payable under the Payment of Bonus Act, 1965 ("the Bonus Act"). Aggrieved by the disallowance of Rs. 12,525, the assessee appealed. The Appellate Assistant Commissioner, allowing the appeal, held that what was paid in excess of what was payable under the Bonus Act was customary bonus and was, therefore, allowable under the section. On appeal by the Revenue, the Tribunal held that, if what was paid was in fact customary bonus, such amount would be an allowable deduction under Section 36, even if it was in excess of what was payable under the Bonus Act. The Tribunal, however, found that there was paucity of material to ascertain whether what was paid as customary bonus did in fact qualify as customary bonus. To ascertain the relevant facts, the Tribunal remitted the matter to the Income-tax Officer with a direction to allow the claim in the event of his finding that the facts so warranted.
4. Section 36 of the Act in so far as it is material reads :
"36. Other deductions.--(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 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:
Provided further that the amount of the bonus (not being bonus referred to in the first proviso) 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. " In computing the income referred to in Section 28, the deduction provided for under Clause (ii) in respect of bonus or commission is allowable only where an amount has been paid to an employee as bonus or commission for services rendered and such sum, if not so paid, would not have been payable to him as profits or dividend. If what was paid as bonus or commission was an amount which could have been distributed as profits or dividend, payment of such amount would not qualify for the deduction under Section 36(1)(ii). The Revenue has no contention in the present case that what was paid as bonus was an amount which could have been distributed as profits or dividend. Their contention, however, is that what was paid was paid in excess of what is required to be paid under the Bonus Act. The employees in question are admittedly persons covered by the Bonus Act. They were entitled to claim bonus and the management was bound to pay it in terms of the Bonus Act. It is, however, contended on behalf of the Revenue that, since the so called customary bonus was not bonus payable under Section 17 of the Bonus Act, but adjustable against bonus, if already paid, payment of such amount to persons already covered under the Bonus Act would not qualify for deduction under Section 36(1)(ii). According to counsel for the Revenue, the second proviso to Clause (ii) has no application to employees covered under the Bonus Act. If such employees receive bonus in excess of what is payable under the Bonus Act, the excess amount, counsel says, cannot be claimed as deduction under Section 36(1)(ii) of the Act.
5. It must be noticed at this stage that Section 36 of the Act was amended by the Payment of Bonus (Amendment) Act, 1976, with effect from September 25, 1975, as a result of which, the present first proviso was added and the original proviso was retained as the second proviso with the addition of words "not being bonus referred to in the first proviso" in brackets. As a result of this amendment, the position is that where bonus has been paid in accordance with the requirements of the Bonus Act to an employee covered by that Act, the amount so paid is without doubt an allowable deduction. On the other hand, if bonus or commission is paid to such an employee in excess of, or otherwise than, what is required to be paid under the Bonus Act, or, if bonus or commission is paid to any employee not covered by the Bonus Act, the amount so paid is not automatically allowable as a deduction, but it will be allowed only upon the satisfaction of the officer that it is a reasonable payment when considered in the light of Clauses (a) to (c) of the second proviso. These clauses show that such payment which is not warranted by the Bjnus Act will be regarded as reasonable only when it is justifiable by reason of the pay of the employee and the conditions 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. If what is paid as customary bonus is not justifiable by reason of the pay of the employee and the conditions of his service and the profits of the business or profession, even if it is in accord with the general practice in similar business or profession, such amount would not be deductible. All the three conditions postulated under Clauses (a) to (c) of the second proviso must be satisfied in order that the payment which is not required by the Bonus Act is to be regarded as reasonable so as to warrant the deduction under Section 36(1)(ii) of the Act.
6. 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(i) 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.
7. In the circumstances, since questions Nos. 2 and 3 referred to us are not sufficiently clear to highlight the point in issue, we recast them in the following words:
" 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to claim deduction of bonus paid to employees covered under the Payment of Bonus Act, 1965, in excess of the amount of bonus payable under that Act?
3. If the answer to the above question is in the affirmative, should not the Tribunal have remitted the case to the Income-tax Officer to consider the excess payment specifically in terms of the second proviso to Section 36(1)(ii)?"
8. The second question, so recast, is answered in the affirmative, that is, in favour of the assessee and against the Revenue. In the light of what we have stated above, we answer question No. 3 in the affirmative, that is, in favour of the Revenue and against the assessee.
9. We direct the parties to bear their respective costs in this tax referred case.
10. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.