Income Tax Appellate Tribunal - Ahmedabad
Deputy Commissioner Of Income Tax vs Chem Contract Pvt. Ltd. on 21 August, 1996
ORDER
Phool Singh, J. M.
1. In this appeal of Revenue only two grounds are agitated out of which the first ground is as under :
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition made on account of ex gratia payment paid to the employees over and above the payment under Bonus Act."
2. Relevant facts are that during assessment proceedings the AO observed that the assessee-company had claimed bonus payment @ 8.33 per cent for Rs. 27,721 under the Payment of Bonus Act but further claimed an amount of Rs. 67,361 as ex gratia payment. The AO noted that the said amount which was contended to be ex gratia payment by the assessee is neither in the nature of bonus nor in the nature of salary and the same was not allowable under s. 37(1) of the Act. The assessee was called upon as to how the same was allowable; then it was asserted that it was just like ex gratia payment to give an incentive to the supervisory staff who were not covered under the Payment of Bonus Act. The assessee's claim was not found allowable and the amount of Rs. 67,361 was disallowed. The assessee appealed and the same were the pleas before the CIT(A). It was pleaded that amount was paid as ex gratia and not in lieu of bonus. It was paid to supervisory staff who were not entitled to overtime for the extra efforts put up by them during the shut down or other fast jobs required to be executed by the appellant company as business of the assessee was with public sector undertakings like IPCL, CACL, CSFC, etc. The amount was given as extra remuneration in the shape of ex gratia payment for excellent jobs down by supervisory staff in the best interests of the business. The CIT(A) did find force in this contention of assessee and held that payment was allowable under s. 37 of the Act but he further noted that though the AO disallowed the claim of the assessee but did not add back the amount of Rs. 67,361 in the total income and thus there was no necessity of deducting the same from the total income as the same remained unadded. The Revenue is in appeal.
3. The learned Departmental Representative placed reliance on the order of AO and it was also pointed out by him that the amount was nothing but bonus and as the bonus was not allowable as the same was not reasonable. Reliance has been placed on the decisions of the Tribunal Ahmedabad Bench 'A' in ITA No. 3922/Ahd/1919, asst. yr. 1986-87 in the case of ITO vs. Pankaj Kumar Mahesh Kumar & Co., decided on 31st May, 1996, in which one of us (JM) was Member and it was contended that the Tribunal had gone through the provision of s. 36(1)(ii) of IT Act in detail and disallowed the claim of the assessee. Following the same, the contention of learned Departmental Representative is that this claim of assessee should be disallowed.
4. As against it, the learned counsel for the assessee supported the view of the learned CIT(A) and took us to the copy of note given by assessee before CIT(A) regarding ex gratia payment. It has been mentioned that the learned AO has wrongly treated the payment as ex gratia payment while as a matter of fact the amount was paid to its supervisory staff and senior employees in the nature of incentive for hard and devoted work done by them during the year and at the most the same can be termed as establishment/salary type nature and should be allowed as a whole. He also pointed out the details of ex gratia payment made to employees which were appearing at pp. 4 and 5 of the paper book and further pointed out that payment of these amounts have not been disputed by the AO. He further placed reliance on the decision of Hon'ble Supreme Court in the case of Shahzada Nand & Sons vs. CIT (1977) 108 ITR 358 (SC) in which commission paid to employees by the assessee in token of extra services rendered by them was found reasonable and allowable expenses. The learned counsel pointed out that the Tribunal Ahmedabad Benches have been following this analogy laid down by the apex Court and the nature of payment involved in this ground is alike the amount and its nature which was before the Hon'ble Supreme Court and the CIT(A) has rightly allowed the claim of assessee.
5. We have considered the rival submissions. The facts of the case of Pankajkumar Maheshkumar & Co. (supra) relied by the learned Departmental Representative are quite separate. In that case provisions of Payment of Bonus Act were applicable to the employees and the Tribunal held that amount of Rs. 6,000 paid to employee as bonus was unreasonable as it was 66% of his salary which was Rs. 9,000 per annum. The facts before us are quite separate. Here the amount has been paid to those persons to whom Payment of Bonus Act are not applicable and even (sic - if) applicable, the plea of Department is not that amount was in any way unreasonable. The amount actually paid to the employees was in the nature of incentive for work done for the assessee-company and thus rightly held as allowable. No interference is called for and this ground is rejected.
6. The other ground relates to addition of Rs. 18,168 by AO by applying the provisions of s. 40A(5) of the Act. AO noted that the assessee-company had made different types of payments including salary, perks, etc. to two of its Directors, namely, (i) Shri Tejrai, and (ii) Shri G. B. Singh. Applying the provisions of s. 40A(5) of the Act total disallowance was worked out by him at Rs. 18,168. The assessee went in appeal and the main contention was that provisions of s. 40(c) of the Act were applicable in the case of director(s) and not the provisions of s. 40A(5). This contention was upheld by the CIT(A) who deleted the said disallowance.
7. The learned Departmental Representative supported the view of the AO and contended that provisions of s. 40A(5) are applicable to the employees of the assessee and admittedly both the directors were employees of the assessee - company and thus disallowance was rightly worked out by AO after applying the provisions of s. 40A(5) which is the only section for that. As against it, the learned counsel for the assessee has taken the same pleas as were before the CIT(A). According to him the provisions of s. 40A(5) refer to expenditure relating directly to the payment of salary and perquisites to an employee whereas expenditure referred in the assessment order pertains to the perks granted to the directors and not to employees. Reference to the decision of jurisdictional High Court in the case of Addl. CIT vs. Tarun Commercial Mills Ltd. (1978) 113 ITR 745 (Guj) is made in which their Lordships laid down that provisions of s. 40(c) are particular provisions applicable to the director(s) of a company who are also employees of the company and provisions of s. 40(a)(v) (as was the case at that time). On the basis of this, the contention of learned counsel is that provisions of s. 40(c) were alone applicable and rightly made applicable by CIT(A).
8. We have considered the submissions of both parties and we conclude that the view of CIT(A) is justified. Provisions of s. 40(A)(5) are of general nature applicable to employees while the provisions of s. 40(c) of the Act are applicable to the Director(s) of a company. In view of the law laid down in the case of Addl. CIT vs. Tarun Commercial Mills Ltd. (supra) the special provisions of s. 40(c) alone will be applicable in the case of directors of the company and not that of s. 40A(5) and thus no force in this ground.
9. The result is that the appeal is dismissed.