Calcutta High Court
Empire Plantations (India) Ltd. vs Commissioner Of Income-Tax on 9 July, 1992
Equivalent citations: [1992(65)FLR923], [1992]197ITR698(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following question of law has been referred to this court :
"Whether, on the facts and in the circumstances of the case, the provision of Rs. 5,52,000 made in the accounts for the year ended March 31, 1976, and described as 'provision for bonus to staff and workmen' is an allowable deduction under the Income-tax Act, 1961?"
2. The facts in brief are that the assessee, a limited company, debited a sum of Rs. 5,52,000 in the profit & loss account for the year ended March 31, 1976, under the head 'Provision for bonus to staff and workmen'. The plea of the assessee before the Income-tax Officer was that though no bonus was payable by it under the Payment of Bonus Act, 1965, the company decided to pay some amount to its staff and workmen on the ground of commercial expediency. Since the assessee maintains accounts on the mercantile basis, the provision of Rs. 5,52,000 was made in the accounts. The claim was rejected by the Income-tax Officer as well as by the Commissioner of Income-tax (Appeals). The assessee's plea before the Tribunal also failed. The Tribunal held as follows :
"Whatever be the effect of the amendment of the Payment of Bonus Act, the provisions of Section 36(1)(ii) are quite clear in this behalf. According to the first proviso, the deduction in respect of the bonus paid to an employee employed in a factory or other establishment to which the provisions of the Payment of Bonus Act, 1965, apply cannot exceed the amount of bonus payable under that Act. Now, it is the admitted case of the assessee that it had no allocable surplus and, therefore, no bonus could be paid under the provisions of the Payment of Bonus Act. The argument of the representative of the assessee, however, was that the present provision was made under the second proviso to this clause according to which the bonus is receivable with reference to the pay of the employee, the conditions of his service, the profits of the business and the general practice in similar business or profession. We are afraid that this argument would not help him. In the portion within the brackets of this later proviso, it has been clearly mentioned that the bonus referred to in the first proviso would not at all fall within this proviso. Therefore, even though the Supreme Court may have directed the management to pay customary bonus to its employees, it cannot be allowed as a deduction under the amended provisions of Section 36(1)(ii) as applicable during the relevant accounting year. Secondly, there is no evidence to indicate that the payment was customary. Of course, the representative of the assessee has produced a chart showing that similar payments had been made in the earlier years but it was conceded by him that all these were under the Payment of Bonus Act itself ; in fact, customary payment of bonus was not the plea of the assessee before the assessing authorities where the claim was stated to be on the ground of commercial expediency. However, no evidence has been brought forward in support of the allegation that the workers had demanded any bonus and not even a resolution of the assessee-company is forthcoming from which we could have found out as to how far the payment was for commercial expediency or deductible with reference to Section 28 or Section 37(1) or the second proviso to Section 36(1)(ii) of the Income-tax Act."
3. Before us, the learned advocates for the parties reiterated the arguments which were urged before the Tribunal. We have considered the contentions.
4. By the amendment of Section 36 of the Income-tax Act, 1961, with effect from September 25, 1975, the first proviso was added and the original proviso was retained as the second proviso with the addition of the words "not being bonus referred to in the first proviso" in brackets. The altered position of law 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 unquestionably an allowable deduction. However, the provision does not rule out the scope of payment of bonus outside the provisions of the Bonus Act. If such payment is made to an employee in excess of, or otherwise than, what is required to be paid under the Bonus Act or, if any commission is paid to any employee not covered by the Bonus Act, the amount so paid is not automatically allowable but will be allowable only upon the satisfaction of the Officer that it is a reasonable payment when considered in the light of the Clauses (a) to (c) of the second proviso. These clauses require that such payment not warranted by the Bonus Act will be regarded as reasonable when it is supportable having regard 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 three conditions must be satisfied before payment not required by the Bonus Act is regarded as reasonable and deductible under Section 36(1)(ii). 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. In fact, the legislative intent underlying the amendment is to encourage the management to pay bonus not only to the extent statutorlly fixed as payable but also in excess of that limit, provided the payment is otherwise justifiable as a reasonable payment.
5. To say that the second proviso to Clause (ii) of Section 36(1) has no application in respect of employees covered by the Bonus Act and that bonus paid outside the statutory provisions for bonus is not deductible is an unduly narrow and constrictive view of a beneficial provision. The Supreme Court in Hukumchand Jute Mills Ltd. v. Second Industrial Tribunal , held that customary bonus or contractual bonus goes beyond the pale of the Payment of Bonus Act.
6. In this case, the Tribunal has rejected the assessee's claim for deduction on the ground that the commercial expediency of the payment has not been proved nor could the assessee make out a case that the payment is of the character of a customary bonus. Further, the assessee's profits left no allocable surplus thereby postulating that the assessee's profit was on a low key. In this context, the Tribunal found that the profitwise payment of bonus in excess of the statutory requirement is not justifiable. The Tribunal has held that the bonus paid is not in the nature of customary bonus because, in the past, the bonus was paid within the limits of the Payment of Bonus Act. But, in our view, the factors that should be the yardstick for judging the reasonableness of the payment under the second proviso cannot be taken as cumulative because that will amount to taking an unreasonable view of the reality that creates a compulsion on the employer to pay bonus. The prime factor in the three tests laid down is the general practice in similar business or profession. Thus, even where the company is not running quite profitably, yet an employer may have to pay bonus further straining its finances by reason merely of the general practice in the particular trade or business. The assesses here is engaged in plantation, growing and manufacturing of tea. Tea plantation labour is highly organised labour and the tea grower and manufacturer has to go by the general treaty which the planters enter into with the plantation workers. This aspect has not been gone into by the Tribunal. We consider that, profit or no profit, if the other planters have paid their workers and employees bonus at a particular rale, it becomes a compulsion on every planter to pay bonus at a comparable rate. That factor alone may justify the payment or provision therefor as reasonable. Accordingly, we decline to answer the question and remit the matter to the Tribunal to ask the Assessing Officer to make a fresh enquiry in the light of our observations and decide the issue accordingly.
7. There will be no order as to costs.
K.M. Yusuf, J.
8. I agree.