Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income-Tax ... vs Kicha Sugar Co. Ltd. on 8 February, 1996
ORDER
T.V. Rajagopala Rao, President
1. In this case, the Full Bench is formed under the following circumstances :
The appeals are by the Department whereas the cross-objections are preferred by the assessee. They are for the assessment years 1983-84 and 1984-85, respectively. These matters came up for hearing before a Division Bench comprising the then President Shri Ch. G. Krishnamurthy and Shri J. P. Bengra, Judicial Member. During the course of hearing of these appeals, the Division Bench felt that there were conflicting decisions rendered by the Tribunal in this very case of the assessee while disposing of its appeals for the previous years and in order to resolve the said conflict of decisions, the formation of the Full Bench was felt necessary. In fact on June 4, 1992, the Division Bench recorded the following docket Note :
" In these appeals, the question is whether the bonus paid by the assessee was customary bonus or ex gratia. If it is the former, it is allowable as a deduction. For the assessment years 1979-80 and 1980-81, the Income-tax Appellate Tribunal held it to be customary bonus and hence allowable. Its decision did not travel beyond as the High Court rejected the application under Section 256(2). But for 1981-82, on an identical set of facts, another Bench without referring to earlier orders of the Tribunal took a contrary view. The Commissioner of Income-tax for these two years following 1979-80 and 1980-81 orders of the Tribunal, allowed the assessee's claim. The Department is in appeal urging that the Commissioner of Income-tax should have followed the later order of the Tribunal and disallowed the claim. Thus there are contrary decisions as to the same set of facts. To resolve this apparent controversy, it is necessary and expedient to constitute a larger Bench. The larger Bench is thus constituted by me consisting of Shri U. T. Shah, Senior Vice-President, Shri J. P. Bengra, Judicial Member and myself."
Thus it can be seen that during the course of a judicial proceeding the formation of the Full Bench was felt necessary and since the then President happened to be one of the Members of the Division Bench constituted the Full Bench under Section 255(3). The only question which is intended to crop up before the Full Bench was whether the payment made by the assessee to its employees in the accounting years relevant to the assessment years 1983-84 and 1984-85 was in the nature of bonus governed by the provisions of the Payment of Bonus Act, 1965, and consequently governed by Section 36(1)(ii) of the Income-tax Act or whether it is in the nature of an ex gratia customary bonus, festival bonus or any other type of bonus not governed by the provisions of the Payment of Bonus Act and, therefore, liable for deduction under Section 37 of the Income-tax Act. If it is the latter type whether the limits set out under the Payment of Bonus Act govern the allowance of deduction.
2. Shri Ch. G. Krishnamurthy retired on the expiry of extended tenure on August 8, 1994. Shri U. T. Shah was elevated to the Bombay High Court as a judge and later retired and Shri J. P. Bengra was transferred from Delhi. The constitution of the Full Bench was revised with the three of us (Shri T. V. Rajagopala Rao, the present President of the Tribunal, Shri Vimal Gandhi, learned Judicial Member and Shri N. S. Chopra, learned Accountant Member). We have heard the case on December 21, 1994, and December 23, 1994. Shri S. C. Gupta, learned Departmental Representative appeared for the Department, and Shri K. P. Bhatnagar, learned advocate for the assessee. The learned advocate for the assessee filed four paper books. We will be extracting the relevant pages of those paper books as and when it is necessary during the course of this order.
3. The assessee is a co-operative society, running and maintaining a sugar mill at Kichha in Nainital District, (U. P.). It is an undertaking of the U. P. State Government and is being run as a subsidiary of the U. P. State Sugar Corporation Ltd. and is engaged in the manufacture of sugar. Production in the assessee's co-operative sugar mill started in the accounting year/previous year 1973-74, relevant to the assessment year 1975-76. For the first time it closed its accounts on September 30, 1992. In none of the accounting years relevant to the assessment years 1975-76, 1976-77 and 1977-78, the assessee paid any bonus or customary bonus to its employees or workers. As per the directors report in the accounting year 1977-78, in the assessment year 1978-79, both the High Court as well as the Industrial Tribunal held that no bonus was payable to the workers/ employees of the assessee-co-operative sugar mill. Even the liability of minimum bonus was not there for the assessee as it started production only in the assessment year 1975-76 and in accordance with the provisions of Section 16(1A) of the Payment of Bonus Act, the employers were exempt from payment of bonus for five years subsequent to the start of its production.
4. Now, we come to survey the position obtaining in the assessment years 1979-80 and 1980-81. The Income-tax Officer allowed ex gratia payments of Rs. 3,17,399 for the assessment year 1979-80 and Rs. 15,27,850 for the assessment year 1980-81 without mentioning any reasons as to why they were being allowed. The Commissioner of Income-tax felt that allowing deduction of ex gratia payments made to the employees of the assessee-sugar mill was none other than the payments made towards bonus under the Payment of Bonus Act and thus they are restricted to the limits prescribed under Section 36(1)(ii) of the Income-tax Act and since the payments were made and deduction was allowed beyond the limits prescribed, he felt that the deduction ought not to have been allowed and hence he proposed revision of the orders of the Income-tax Officer under Section 263 both for the assessment years 1979-80 and 1980-81. A copy of the orders under Section 263 for the assessment years 1979-80 and 1980-81 dated August 18, 1984, was provided at pages 25 and 26 of the assessee's first paper book which is the same as the order provided at pages 21 and 22 of the assessee's paper book No. III. The learned Commissioner of Income-tax found that the amounts paid for these two years were claimed by the assessee to be comprising amounts paid towards bonus, provision for bonus, ex gratia payment and incentive wages to its employees. He held that these claims were not admissible deductions in view of the provisions of Section 36(1)(ii) of the Income-tax Act. However, on behalf of the assessee, it was claimed that the payments were in the nature of customary bonus and were admissible under Section 37(1). It was also contended on behalf of the assessee-sugar mill that the expenditure was incurred for reasons of commercial expediency and during the course of business and hence the Income-tax Officer rightly allowed the same. The learned Commissioner of Income-tax rejected the submissions advanced on behalf of the assessee and held that the deduction towards bonus is covered by the provisions of Section 36(1)(ii) and to such a case, the provisions of Section 36(1) do not apply. Since the facts came squarely to be covered by the provisions of Section 36(1)(ii) which are specific provisions and they exclude the general provisions under Section 37, it was the claim of the Commissioner of Income-tax that his revision order was in consonance with the Board's circular dated December 4, 1980. Further the learned Commissioner of Income-tax observed that the assessee has been incurring losses year after year including the relevant accounting years. The assessment order for 1979-80 was provided at pages 19 to 20B. The business loss computed for that assessment year was Rs. 1,00,83,421. For the assessment year 1980-81 for which the previous year ended by September 30, 1979, computed business loss was Rs. 48,01,495 as per the assessment order dated April 18, 1983, provided at pages 21 to 24 of the first paper book filed by the assessee. In the revisionary order passed by the Commissioner of Income-tax referred to above, he held that the assessments passed by the Income-tax Officer are erroneous and prejudicial to the interests of the Revenue and, therefore, he would order setting aside the assessments for 1979-80 and 1980-81 and direct the Income-tax Officer to make fresh assessments, according to law, after withdrawing the deductions allowed by him towards ex gratia payments (Rs. 3,17,399 for 1979-80 and Rs. 15,27,850 for the assessment year 1980-81).
5. Having been aggrieved against the revisionary order passed by the Commissioner of Income-tax, the assessee filed an appeal before this Tribunal which came up before the "C" Bench of the Tribunal in I. T. A. Nos, 5150 and 5151/(Del) of 1984. The order of the Tribunal dated April 21, 1985, a copy of which is provided at pages 27 to 29 of the assessee's first paper book, went in favour of the assessee.
6. After hearing both the sides, the Tribunal had recorded its reasons for its decision in paragraph 5 of its orders which are as follows :
"So far as bonus is concerned, the learned Commissioner has merely considered that question from the stand point of the Payment of Bonus Act, 1965. He has not considered at all the assessee's explanation that the incentives were paid from the assessment year 1978-79 as customary bonus. In the case of Mohata Industries Ltd. (supra) relied upon on behalf of the Department itself it was held that ex gratia payment to employees which was made otherwise than as a result of agreement/ settlement and without evidence that it was customarily made in the assessee's line of business was deductible. In the case of Egmore Benefit Society Ltd. (supra), the Appellate Tribunal had clearly held that, that payment of customary bonus was not covered by the Payment of Bonus Act, 1965, and that the customary bonus was allowable. In coming to that decision, the Appellate Tribunal considered a number of decisions including the decision of the Supreme Court in the case of Mumbai Kamgar Sabho, AIR 1976 SC 1455 ; [1976] 49 FJR 15. In the case of Chaitra Advertising Pvt. Ltd., Bombay (supra) also giving of ex gratia on the occasion of the fifth anniversary of the business was held to be customary bonus covered under the second proviso to Section 36(l)(ii) of the Income-tax Act, 1961. There also the Appellate Tribunal referred to the decision of the Supreme Court mentioned above and another decision of the Supreme Court in Hukumchand Jute Mills Ltd. v. Second Industrial Tribunal, AIR 1979 SC 876. We, therefore, find that the learned Commissioner was not justified in taking the view that bonus deductions in the assessment years in question had been erroneously allowed by the Income-tax Officer. The Income-tax Officer had completed the assessment under Section 143(3) for both the years."
7. For the above reasons they have cancelled the revisionary order under Section 263 for both the assessment years, namely, 1979-80 and 1980-81.
8. Now, let us examine what happened for the assessment year 1981-82 vis-a-vis, the allowance of bonus or ex gratia to the employees of the assessee-sugar mill. For the assessment year 1981-82, the previous year ended by September 30, 1980. The board of directors of the assessee-sugar mill passed a resolution on January 30, 1980, a copy of the text of the said resolution was made available at page 62 of the third paper book of the assesses. Item No. 2 in the resolution is with regard to the demands of workers for payment of bonus/ex gratia. The subject as well as the re'solu-tion passed thereon was the following :
" To consider the demands of Kichha Chini Mill Shramik Sangh.
The Executive Director further informed that the payment of bonus for the year 1978-79 had been started with effect from January 26, 1980, but some doubts had arisen about the eligibility of the factory for making such payment in view of letter No. 73(GI) 36/2/99 (54) HR/ dated April 12, 1979, from the Labour Department of the State Government although the J. L. R. and the Advocate-General have opined that the factory was liable to pay the bonus due to the specific provision of Section 10(2A) of the Payment of Bonus Act, 1965. After discussions, the board of directors decided that the amount being paid to the workers may be called 'ex gratia' in lieu of minimum bonus in case bonus was not payable for the year and its payment should be continued. Therefore, this amount of bonus may be amended as 'ex gratia' in lieu of minimum bonus equivalent to 8.33 per cent. of the wages of the workers. However, it was decided that the position should be handled very carefully."
9. The total amount paid under the resolution mentioned above was Rs. 8,62,511. It was paid in two parts, the first part of the payment comprised Rs. 3 lakhs which relates to the assessment year 1980-81 and the second part of the payment debited in the assessment year 1981-82 was Rs. 5,62,511. Thus it can be seen that the amount claimed as deduction for the assessment year 1981-82 was Rs. 5,62,511. This claim of the assessee was negatived by the Income-tax Officer by the assessment orders dated August 31, 1984, a copy of the said orders was provided at pages 30 to 33 of the third paper book filed by the assessee. The reasons for negativing the claim of the assessee are found in paragraph 4 of the assessment orders now obtaining at page 31 of the third paper book which are as follows :
" 4. The law governing the deductibility of bonus is laid down in Section 36(1)(ii) of the Income-tax Act, 1961. The first proviso of this Section lays down that the deduction in respect of bonus paid to an employee employed in a factory to which the provisions of the Payment of Bonus Act, 1965, apply should not exceed the amount of bonus payable under that Act. The assessee has not filed any evidence to show whether the payment of bonus was in accordance with the Payment of Bonus Act, 1965, and hence, allowable under Section 36(1)(ii). The assessee has also not given any details regarding calculation of 'allocable surplus' for distribution as bonus under the Bonus Act. During the accounting year October 1, 1978, to September 30, 1979 (assessment year 1980-81), to which the bonus relates the assessee had shown a loss of Rs. 8,02,740 in its return of income. It, therefore, appears on a perusal of account that there was no allocable surplus. Further, Section 16 of the Payment of Bonus Act lays down that where an establishment is newly set up in the first five accounting years following the accounting year in which the employer sells the goods produced by him, bonus shall be payable only in respect of the accounting year in which the employer derives profit from such establishment. It is, therefore, evident that as per Section 16(1A) of the Payment of Bonus Act; the assessee was not bound to pay bonus because the accounting period of the assessee (1978-79) was within the period of five years, following the year in which the company started production. It is, therefore, clear that the payment of bonus is not allowable under the provisions of Section 36(1)(ii) of the Income-tax Act, 1961."
10. Against the disallowance of Rs. 5,62,511, the assessee went in appeal before the Commissioner of Income-tax (Appeals) who by his orders dated April 6, 1985, a copy of which is provided at pages 34 and 35 of the paper book No. III, confirmed the disallowance. Against the Commissioner of Income-tax (Appeals) order mentioned above, the assessee-sugar mill brought the matter in appeal before this Tribunal in I. T. A. No. 3109/ (Del) of 1985. In the said appeal, the Tribunal passed its orders dated April 24, 1987, confirming the Commissioner of Income-tax (Appeals) order, a copy of the order is found provided at pages 36 to 39 of the third paper book filed by the assessee.
11. Before considering the reasoning adopted by the Tribunal for confirm-ing the Commissioner of Income-tax (Appeals) order for 1981-82, let us also examine the facts relating to next assessment year, namely, 1982-83 for which the previous year ended by September 30, 1981. During that year, the assessee claimed ex gratia payment of Rs. 8,98,646 to its employees/workers. The Income-tax Officer while framing the assessment by his assessment orders dated March 30, 1985, a copy of which is found provided at pages 40 to 42 of paper book No. III, following the learned Commissioner of Income-tax (Appeals) orders for the assessment year 1981-82, disallowed the ex gratia as lawful deduction to the assessee terming its true nature as bonus. Against the said Income-tax Officer's order, the assessee carried the matter in appeal to the Commissioner of Income-tax (Appeals), Bareilly, who by his orders dated July 29, 1985, deleted the disallowance and allowed the appeal of the assessee on this point. The copy of the Commissioner of Income-tax (Appeals) order is now found provided at pages 43 to 44A of the third paper book of the assessee. He preferred to follow the Income-tax Appellate Tribunal's decision dated April 21, 1985, passed in I. T. A. Nos. 5150 and 5151/(Del) of 1984 referred to supra.
12. For the assessment year 1981-82, a copy of the Commissioner of Income-tax (Appeals) order was provided at pages 34 and 35 of the third paper book filed by the assessee. The appeal was disposed of by orders dated April 6, 1985, the disallowance made by the Income-tax Officer was confirmed by the following reasoning found at paragraphs 2, 2a and 2b which is as follows :
"2. The first ground of appeal relates to the disallowance of a sum of Rs. 5,62,511 being ex gratia payment to workers. This payment was made by the company to the workers following an agreement. It was claimed during the assessment proceeding that this was not a bonus and should be allowed as a deduction under Section 37. The Income-tax Officer rejected the claim holding that the payment was in the nature of bonus and was covered by Section 36(1)(ii). Since as per the Payment of Bonus Act, no bonus was payable, the entire payment was liable to be disallowed.
2a. Before me the learned authorised representative has repeated the same arguments. It is submitted by me that the payment was made to maintain cordial relations with the workers and the payment was allowable under Section 37 of the Income-tax Act.
2b. On a consideration of the matter, I am unable to accept the arguments of the learned authorised representative. The Income-tax Officer had examined this matter very thoroughly and has quoted from the minutes of the board of directors meeting to show that the above payment was nothing but bonus. I uphold the finding that the deductibility of the amount was covered by Section 36 and since Section 37 excludes all claims which are governed by Section 30 to Section 36, it is clear that the admis-sibility of this amount under Section 37 cannot be considered. No interference is, therefore, required on this count."
Thus, for the assessment year 1981-82, the ex gratia was disallowed without reference to the Tribunal's order for the two immediately preceding assessment years, namely, 1979-80 and 1980-81.
13. However, for the assessment year 1982-83, the learned Commissioner of Income-tax (Appeals) had followed the earlier orders of the Tribunal dated, April 21, 1985, passed for the assessment years 1979-80 and 1980-81 and allowed the claim of the assessee for deduction. In the process he disregarded the Tribunal's order dated April 24, 1987, passed in I.T.A. No. 3109/Del. of 1985 for the assessment year 1981-82 which is provided at pages 36 to 39 of the paper book No. III. The finding of the Tribunal for the assessment year 1981-82 is found at paras 5 and 6 of the Tribunal's order now obtaining at page No. 38 of the paper book No. III as under :
"5. The assessee aggrieved by the above order of the Commissioner of Income-tax (Appeals) is in further appeal before the Appellate Tribunal. Learned counsel for the assessee did not make his claim for deduction under Section 36(1)(ii) of the Act. According to him, the claim was admissible under Section 37(1) being customary bonus. Reliance in this connection was placed on the judgment reported in Hukumchand Jute Mills Ltd. v. Second Industrial Tribunal AIR 1979 SC 876 and also the Calcutta Bench "A" of the Appellate Tribunal in the case of ITO v. Babcock and Vilco of India Ltd. for the assessment year 1976-77 in I.T.A. No. 730/Cal of 1982 placed at pages 5 to 7 of the paper book. It was, therefore, urged that the orders of the lower authorities were liable to be reversed.
6. The learned Departmental representative, on the other hand, has supported the orders of the lower authorities and contended that the liability in question was on account of bonus and since the Payment of Bonus Act was not applicable to the establishment during the accounting year ending September 30, 1979, the same was rightly disallowed by the lower authorities.
7. We have given our careful consideration to the rival submissions. The case-law relied upon by the learned counsel for the assessee in the case of Hukumchand Jute Mills Ltd. v. Second Industrial Tribunal, AIR 1979 SC 876, has referred to the customary bonus in excess of the bonus admissible under the Payment of Bonus Act, 1965. From the facts noted earlier, it is clear that the payment in question was not customary bonus but it was bonus as such as is clear from the decision of the board of directors who in order to avoid legal complications termed it as 'ex gratia'. It is undoubtedly bonus liability which was governed by the provisions of Section 56(1)(ii). The ratio of the judgment of the Supreme Court, in our opinion, is therefore, not applicable to the facts of the case before us. No interference with the order of the Commissioner of Income-tax (Appeals) on this account is, therefore, called for."
14. Now, let us deal with the case for the assessment years 1983-84 and 1984-85 which are now before us. The order of assessment for 1983-84 is dated March 21, 1986, and a copy of the said order is provided at pages 45 and 46 of the assessee's first paper book. Para No. 2 of the assessment order deals with the claim made by the assessee as well as the decision of the Income-tax Officer thereon which is as follows :
" During the year under consideration, the assessee-company had claimed ex gratia payment for 1980-81 amounting to Rs. 10,06,454 to its employees. Similarly, payments during the previous year relevant to the assessment:year 1981-82 were disallowed by the Income-tax Officer and also upheld in appeal by the learned Commissioner of Income-tax (Appeal's), Barreily. In the assessment order for the assessment year 1982-83 similar disallowance was made on similar facts and circumstances. Following the order of the learned Commissioner of Income-tax (Appeals) for the assessment year 1981-82 and after placing reliance on the reasons discussed in the body of assessment order for the assessment years 1981-82 and 1982-83 for disallowing payment of ex gratia payment, ex gratia payment of Rs. 10,06,454 for 1980-81 is disallowed this year also. Accordingly, a sum of Rs. 10,06,454 would be added to the total income of the assessee. Besides this ex gratia payment is not relevant to the year under consideration but to an earlier year and thus for this reason also is liable to be disallowed. The assessee is following the mercantile system of accounting, therefore, expenditure of an earlier year cannot be allowed in a succeeding year."
15. The assessment order for 1984-85 dated December 29, 1986, is provided at pages 47 and 47A of the assessee's first paper book. Following the above order of assessment for 1983-84, the Income-tax Officer disallowed the ex gratia bonus claim of the assessee of Rs. 6,89,656. Against the disallowances made, the assessee went in appeal before the Commissioner of Income-tax (Appeals), Bareilly, for each of the two assessment years, namely, 1983-84 and 1984-85. The learned Commissioner of Income-tax (Appeals) purporting to follow his predecessor's order for the assessment year-1982-83 and the Income-tax Appellate Tribunal's order for 1979-80 deleted the addition.
16. With regard to the second objection of the Income-tax Officer that the bonus payment relates to an earlier year and on that ground it is not allowable, the learned Commissioner of Income-tax (Appeals) states in para. 3 of his order for 1983-84 that the payment of customary bonus had been made in terms of the decision taken in the meeting of the board of directors held on June 30, 1982, which falls in the assessment year 1983-84, Therefore, under the circumstances of the case, he held that in his view the addition of Rs. 10,06,454 for 1983-84 cannot be sustained. Thus the alternative ground on which the disallowance was sought to be sustained by the Income-tax Officer was also not accepted as correct by the learned Commissioner of Income-tax (Appeals). For the assessment year 1984-85, following his order of even date relating to the assessment year 1983-84, he had cancelled the disallowance of Rs. 6,09,656.
17. Aggrieved against the cancellations of the disallowances of amounts paid towards ex gratia relating to the assessment years 1983-84 and 1984-85, the Department came up in second appeals before this Tribunal. The cross-objections for these very years were filed by the assessee only supporting the order of the learned Commissioner of Income-tax (Appeals). No specific relief was claimed in the cross-objections. The learned Departmental Representative arguing in support of these appeals brought to our notice page No. 30A of the paper book which represents the assessment order for 1981-82. According to him a specific query was made by the Income-tax Officer to the assessee whether the payment of ex gratia as claimed had been made under the Payment of Bonus Act, if so under what specific provision of the Bonus Act and according to the learned Departmental Representative this query was not specifically replied but was replied in a general way. He also invited our attention to page No. 34 which represents the Commissioner of Income-tax (Appeals) order for 1981-82 which contained his finding in para. 2b in which it is stated that having thoroughly examined the matter and having regard to the minutes of the board of directors meeting, he came to the conclusion that it was nothing but payment of bonus, the deductibility of which was covered by Section 36 and the general provision contained in Section 37 stands excluded if the case is governed by the specific provisions contained in Sections 30 to 36! Since he held that it is nothing but payment of bonus, the claim of the assessee cannot be considered under Section 37 and on that ground he had upheld the Income-tax Officer's disallowance.
18. The learned Departmental Representative also invited our attention to page No. 36 of the assessee's paper book representing the Tribunal's order for 1981-82. Our specific attention is invited to page No. 38. Before the learned Commissioner of Income-tax (Appeals), according to the learned Department Representative, it was conceded that the payment was, not covered under Section 36(1)(ii) but stressed the claim under Section 37. The Tribunal in para. No. 7 gave a definite finding that the payment is in the nature of bonus but in order to avoid legal complications, it was termed as ex gratia. He also brought to our notice that the reference under Section 256(1) was rejected for the assessment years 1979-80 and 1980-81. Thus, the learned Departmental Representative submitted though the Tribunal decided the appeals filed before it for the assessment years 1979-80 to 1982-83, the Tribunal gave two conflicting decisions. For the assessment years 1979-80 and 1980-81, it had allowed the amount as ex gratia or customary bonus whereas for the assessment year 1981-82, the same Tribunal held that the payment cannot be considered under Section 36(1)(ii) at all and it should only be considered as bonus governed by the provisions of the Payment of Bonus, Act.
19. However, for 1979-80 as well as 1980-81 only loss was computed. Similarly, for the assessment year 1981-82 loss only was computed.. The learned Departmental Representative submitted that under the Payment of Bonus Act, it is obligatory on the part of the assessee to pay bonus only when it earns profits but it is not obligatory on its part to pay bonus in the years of loss. It was especially so for a period of five years from the date when the factory of the assessee commenced production. Therefore, from the facts and circumstances of the case, the order of the Tribunal for the assessment year 1981-82 which had considered the case under the Payment of Bonus Act was correct and it should have been followed than the decision of the Tribunal for the assessment years 1979-80 and 1980-81.
20. Further, the assessment year 1981-82 is a later assessment year in which the Tribunal gave its decision. Therefore, in a case where there were diametrically opposite decisions given by the Tribunal over a span of years, it is only the later decision for the later assessment year which has to be followed. For this proposition, he relied upon the decision of the Bombay High Court in CIT v. Thana Electricity Supply Ltd. [1994] 206 ITR 727. At page 738 of the reported decision after surveying the several decisions of the Supreme Court as well as High Courts summing up the legal position, the Bombay High Court held, inter alia, the following :
" Where there are conflicting decisions of courts of co-ordinate jurisdiction, the latter decision is to be preferred if reached after full consideration of the earlier decisions."
21. The learned Departmental Representative contended that a precedent is an authority for what it actually decides and not for what logically follows from the said decision and in support of this, proposition, he relied upon CWT v. Gangadhar Sikaria [1983] 140 ITR 617 (Gauhati), at page 621 and 622 in which the following is held :
" An appeal cannot be decided on abstract law, severed from the facts of the case. A precedent is, an authority for the proposition as to what it decides and not what can be deduced from it. While applying the principles of law in a decided case, the authority applying the principles of law must cogitate the facts of the previous decision and also its ratio. If the facts, are the same or similar, the ratio of the prior decision may be applicable in a subsequent case. However, if the facts of the case are dissimilar or distinct, the principles of law enunciated in the proceeding cannot be made applicable in a later case. A decision is a precedent on its own facts."
22. The learned Departmental Representative also submitted that the Income-tax Appellate Tribunal shpuld not deviate from its earlier decision in a casual manner. In case it wants to deviate from its earlier decision, it* should give strong reasons to do the same. For this proposition, he relied upon the following decisions :
1. State of Andhra Pradesh v. CTO [1988] 169 ITR 564 (AP) at pages 568 and. 569.
2. Union of India v. Raghubir Singh [1989] 178 ITR 548 (SC).
23. In State of Andhra Pradesh v. CTO [1988] 169 ITR 564, the Andhra Pradesh High Court held that the Tribunals functioning in the State are bound to follow the decisions rendered by the High Court within its jurisdiction. Unless and until the stay of operation of the judgment was obtained from the Supreme Court against the judgment of any High Court, the Tribunals and lower authorities cannot ignore the decisions of the jurisdictional High Cqurt on the pretext that appeals are filed or are going to be filed against the judgment of the High Court in the Supreme Court.
24. In Union of India v. Raghubir Singh [1989] 178 ITR 548, their Lordships of the Supreme Court approvedly quoted the guidelines summarised in Dr. Alan Paterson's Law Lords in which the following propositions are laid down, as are npw found extracted at page 561 of the reported decision :
" 5. In the interest of certainty, a decision ought not to be overruled merely because the Law Lords consider that it was wrongly decided. There must be some additional reasons to justify such a step.
6. A decision ought to be overruled if it causes such great uncertainty in practice that the parties' advisers are unable to give any clear indication as to what the courts will hold the law to be.
7. A decision ought to be overruled if, in relation to some broad issue or principle, it is not considered just or in keeping with contemporary social conditions or modern conceptions of public policy."
25. The learned Departmental Representative by citing the above authority wanted to impress upon us that the subsequent Tribunal cannot deviate from the earlier Tribunal's decision in a casual manner without adverting to it or without giving, sufficient reasons for doing so. However, the learned Departmental Representative contended that in the impugned orders passed by the learned Commissioner of Income-tax (Appeals), no reasons were recorded as to why he was not able to follow the later Tribunal decision for the assessment year 1981-82.
26. Then he took us through the provisions of the Payment of Bonus Act as amended in 1977. He invited our attention to Sections 10 and 11. Under Section 10, the minimum bonus payable was 8.33 per cent, of the salary or wage earned by the employee during the accounting year or Rs. 100, whichever is higher. This payment of minimum bonus does not depend upon whether an employer has got any allocable surplus in the accounting year or not. Whether it is a year in which profit is earned or loss is incurred by the establishment, the employer is bound to pay to the employee bonus at 8.33 per cent. which is prescribed as minimum bonus under the Act. Section 11 of the Act prescribes that 20 per cent. of salary or wage earned by the employee during the accounting year was the maximum bonus which can be paid to an employee. The learned Departmental Representative contended that admittedly the accounting years relevant to both these years under consideration are loss years, however, the payment made to the employees is found to be over and above 8.33 per cent, of the salary or wage for each of the employees. The learned Departmental Representative contended that even if the payment can be termed as ex gratia or customary bonus, the conditions under the second proviso to Section 36(1)(ii) of the Income-tax Act were not fulfilled and so the assessee is not entitled to deduction. It was further contended by the learned Departmental Representative that the Assessing Officer in both these years allowed minimum bonus of 8.33 per cent. and he disallowed only the excess of the payment over and above 8.33 per cent. For instance for the assessment year 1983-84, the total bonus allowed was Rs. 5.73 lakhs. Next, he referred to Section 10 of the Payment of Bonus Act as amended by Act 66 of 1980 which came into effect from August 21, 1980. Under the said provision, whether the employer earns profits or incurs losses, the employees are entitled to get minimum bonus at 8.33 per cent. of the salaries or wages. Then our attention is drawn to Section 31A of the Payment of Bonus Act. This was a special provision with respect to payment of bonus linked with production or productivity. The learned Departmental Representative pointed out that there is nothing on record to show that the present payment is linked with either production or productivity. Then he invited our attention to Section 34 of the Payment of Bonus Act. It states that nothing contained in the Payment of Bonus Act shall be construed to preclude employees employed in any establishment or class of establishments from entering into agreement with their employer for granting them an amount of bonus under a formula which is different from the formula set out under the Payment of Bonus Act. Under this provision, the payment of bonus can be the subject-matter of an agreement between employees and employers. However, this provision is subjected to important limitations, namely, that every agreement should be entered into with the previous approval of the appropriate Government. The agreement should not deprive the employees of the right of minimum bonus which they are entitled to under Section 10. So also it should not exceed 20 per cent. of the salary or wage earned by the employees during the accounting year. According to the learned Departmental Representative, Section 34 takes care of all types of payments. He submits that when the payment cannot be said to be an incentive, customary bonus, attendance bonus, festival bonus and hence it should necessarily be considered only under the Payment of Bonus Act. In support of this proposition, he relies upon the Commentary on Law of Bonus by Shri Bugree at page 718 : "Every year during the festival season there is a rush of industrial disputes and under pressure of circumstances, ad hoc decisions are taken. There is urgent need to bring about stability in this matter, as was visualised by the Bonus Commission and was the objective behind enacting a law regarding bonus. In the interests of stability on determining bonus, Section 34 will be deleted. Deduction for purposes of the Income-tax Act will be allowed only for the amount of bonus paid in accordance with the provisions of the Bonus law," Section 34A of the Payment of Bonus Act is as under :
" Subject to the provisions of Sections 31A and 34, the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in the terms of any award, agreement, settlement or contract of service."
27. Therefore, the learned Departmental Representative contended that by virtue of Section 34 of the Payment of Bonus Act, the Legislature contemplated that the said Act is exhaustive of all the types of bonuses and every type of payment should be governed only under the Act. He further submitted that production bonus always envisages a prior scheme by the employer which is accepted by the employees. However, that sort of scheme is absent in this case. If there is no such scheme, the matter cannot be taken to an Industrial Tribunal and any dispute with regard to payment of bonus cannot also be termed as "industrial dispute". Then the learned Departmental Representative tried to analyse the true meaning of pooja bonus and customary bonus. If the bonus is given on festival occasions it is called festival bonus. However, in this case, the payment was not linked with any festival. He relied upon the commentary at page 277 of the Law of Industrial Disputes, 3rd edition, Vol. I, by O. P. Malhotra. The learned Departmental Representative contended that it cannot be said to be a customary bonus even. In the cases of customary bonus, the figures of payment would not be different in different years. However, in this case, the payment figures are different in each of the years if we see the history of payments from the assessment years 1979-80 to 1984-85. Further, including in the accounting years relevant to these assessment years under consideration, the assessee has been consistently sustaining losses only. The payment under consideration cannot also be termed as goodwill bonus as explained at page 282 of the Law of Industrial Disputes, 3rd edition, Vol. I, by O. P. Malhotra. According to the learned author, goodwill bonus means a bonus given out of free will of the employer without the compulsion of any industrial court. However, the same cannot be said to be the case with the present payment made in either of the two years. The learned Departmental Representative further cited the decision of the Kerala High Court in CIT v. P. Alikunju, M. A. Nazir, Cashew Industries [1987] 166 ITR 611 and contended that for allowing any type of bonus to be deducted, three factors enumerated in the said decision are to be considered. The three clauses are (i) that the payment is justifiable by reason of the pay of the employee or the conditions of his service ; (ii) it is justifiable having regard to the profits derived in the business or profession for the previous year in question ; and (iii) the payment is justifiable in view of the general practice in similar business or profession. Thus, the payment is not to be automatically allowed, without having regard to the fact that the payment is justifiable in view of the three conditions laid out above. In support of the same proposition, our attention is also invited to another Kerala High Court decision in CIT v. P. Balakrishna Pillai, International Cashew Traders [19901 182 ITR 449. To the same effect is another decision of the Kerala High Court in CIT v. Kerala Agro Industries Corporation [1990] 183 ITR 197. Reliance is placed upon the following three decisions also by the learned Departmental Representative :
CIT v. Shaw Wallace and Co, Ltd. [1991] 190 ITR 455 (Cal).
Vanaja Textiles Ltd. v. CIT [1994] 208 ITR 161 (Ker).
CIT v. Madras Spinners Ltd. [1994] 207 ITR 35 (Ker).
28. In the third of the cases cited above, it is held that even if it is bonus paid on festival of Onam, the three conditions laid down in CIT v. P. Alikunju, M. A. Nazir, Cashew Industries [1987] 166 ITR 611 (Ker) mentioned above are to be fulfilled. However, there is nothing on record in this case to show that the following three essential conditions are satisfied, namely :
(1) reasonableness of the payment with reference to the salary and service conditions, (2) reasonableness of the payment with reference to profit derived in the business, and, (3) the justification for payment having regard to the practice followed in similar businesses.
29. It is no doubt true that the assessee made certain attempts to show that similar payment of bonus was allowed in the case of Chandpur Sugar Co., Bijnor. In order to prove this fact, the assessee filed the assessment orders of Chandpur Sugar Co. Ltd. for the assessment year 1983-84 which is provided at pages 75 to 77 of paper book No. I and the assessment order for 1984-85 is provided at pages 78 to 85. The learned Departmental Representative contended that the case of Chandpur Sugar Co. Ltd., Bijnor, is quite different from, the case of the assessee. Messrs. Chandpur Sugar Co., as can be seen from the assessment orders for 1983-84 and 1984-85 had earned commercial profits and there is every justification for payment of bonus to its employees, whereas the assessee in this case did not earn any commercial profit. Thus, it is not a comparable case at all. The profit and loss account for 1983-84 of Chandpur Sugar Co. was provided at pages 93 and 94 of the first paper book. It is contended by the learned Departmental Representative that the assessee is obliged to prove many more factors than the factors which are already shown to prove that the business carried on- by the assessee is similar to the business carried on by Chandpur Sugar Co. The onus to. prove that the case of Chandpur Sugar Co. is similar to the case of the assessee is always on the assessee and the learned Departmental Representative submitted that the assessee failed to prove ultimately that the case of the assessee is similar to Chandpur Sugar Co., and, therefore, simply because the bonus is allowed in the case of Chandpur Sugar Co. does not help the assessee in any way to argue for the position that the case of the assessee as well as Chandpur Sugar Co. are similar to each other and on that ground the payment of bonus to the workers or employees is justifiable, just like in the case of Chandpur Sugar Co. Seriously opposing the plea of the assessee that though the claim of the assessee is not allowable under Section 36, it is perfectly allowable under Section 37(1) of the Income-tax Act, our attention is drawn to the Commentary of Chaturvedi and Pithisaria, Income-tax Law, 4th edition, Vol. II, page 1491, which is as follows :
" Not being expenditure of the nature described in Sections 30 to 36. -- Certain types of expenditure have been separately dealt with in Sections 30 to 36 (for the assessment years 1976-77 to 1985-86 and Section 80VV). Wherever any such expenditure detailed in or covered by any of the Sections 30 to 36 (for -the assessment years 1976-77 to 1985-86, and Section 80VV) is found to have been incurred, deduction or allowance therefor is to be claimed under that particular Section. Section 37(1) is the residuary Section so far as business expenditure is concerned, If any expenditure is not referable to any of the Sections 30 to 36 (for the assessment years 1976-77 to 1985-86, and Section 80W) and fulfils the conditions of this Section, it may be claimed hereunder. It follows that if any particular expenditure falls within the ambit of any of the Sections 30 to 36 (for the assessment years 1976-77 to 1985-86, and Section 80VV) and it is not found to be fulfilling the conditions for allowance as laid out in that section, it cannot be claimed under this residuary section."
30. Several case-laws were cited in support of this proposition by the learned authors out of which the learned Departmental Representative relied upon in Raja Ram Kumar Bhargava v. CIT [1963] 47 ITR 680 (All) at page 693. The learned Departmental Representative also contended that since the payment of bonus relates to the assessment years 1980-81 and 1981-82, in any view of the matter, the bonus claim cannot be considered in these assessment years. He also placed before us the Webster's Dictionary as to the correct meaning of the word "ex gratia", the meaning of which is given "as a favour". Ultimately, the learned Departmental Representative contended for the position that the claim for deduction is a claim which should have been considered only by applying the provisions of Section 36(1)(ii) of the Income-tax Act and not under Section 37 and in support of this contention, the learned Departmental Representative relied upon the following case-law :
CIT v. Amrit Banaspati Co. Ltd. [1966] 59 ITR 388 (All) at page 391.
CIT v. Swadeshi Cotton and Flour Mills Pvt. Ltd. [1964] 53 ITR 134 (SC).
31. He also relied upon CITv. Texmaco Lid. [1994] 209 ITR 620 (Cal) at page 629. At page 629, the Calcutta High Court was considering the case reported in CIT v. Bisra Stone Lime Co. Ltd. [1987] 164 ITR 693 (Cal), where the Calcutta High Court held that the statutory liability to pay bonus under the Payment of Bonus Act, 1965, is allowable in the assessment year 1971-72 even when it was finally adjusted and settled on October 15, 1971, i.e., long after the close of the relevant previous year. The Calcutta High Court took the view that the liability having accrued in a particular year, its subsequent quantification will not defer the liability to the year in which the quantification takes place. In the case before the Calcutta High Court, a sum of Rs. 22,49,424 was actually paid to the workers and employees in terms of the agreement reached with the workers' union on September 30, 1975. However, the amount in question was provided as bonus payable to the workers in the calendar year 1974 being the previous year relevant to the assessment year 1975-76 and claimed as business deduction. Thus, the Calcutta High Court held and took the view that having regard to the past practice, it was nothing unusual for the assessee-company to provide bonus liability at the rate of 10.5 per cent. in the calendar year 1974 and claim it as business deduction in the assessment for the year 1975-76. The learned Departmental Representative relied upon the Calcutta case cited above in support of his contention that the deduction cannot in any case be allowed in the assessment years 1983-84 and 1984-85 since the liability relates to the assessment year 1980-81.
32. Shri K. P. Bhatnagar, the learned advocate for the assessee, in his reply arguments submitted that it is no doubt true that under the provisions of Section 16 of the Payment of Bonus Act, the assessee is not obliged to pay any bonus for five years from the commencement of the business of the assessee but it does not prevent the assessee-company from paying bonus to its workers as maintenance of industrial peace and harmony is very essential for good industrial relationship with the workers and in fact the said consideration only forced the assessee to make the payment. He also submitted that ex gratia is over and above the limits set out under the Payment of Bonus Act. He further submitted that the payment was not in obedience with the provisions of the Payment of Bonus Act. Shri Bhatnagar, the learned advocate for the assessee, brought to our notice page No. 93 of the paper book No. I which represents the profit and loss account of Chandpur (Bijnor) Sugar Co. Ltd. for the year ending July 31, 1983. This Chandpur Sugar Factory is one of the units managed by the U. P. Sugar Corporation. It would prove that even though the assessment year 1984-85 was the third year of the commencement of the business, it had paid bonus. It is no doubt true that in that year, the unit derived commercial profits as can be seen from pages 74 and 75 of the paper book No. I. However, Bazpur Sugar Factory Ltd., Bazpur (Nainital), was only 25 kms. away from the assessee's mill. The assessee provided pages 1 to 6 of the paper book No. IV which represents the order dated October 24, 1994, rejecting the references sought in R. A. Nos. 457 to 459 and 490/ (Del) of 1992 in I. T. A. Nos. 1457 to 1460/(Del) of 1988 in the case of CIT v. Bazpur Co-op. Sugar Factory Ltd.--R. A. Nos. 458 and 459/(Del) of 1992 relates to the assessment years 1983-84 and 1984-85. The second question sought to be referred in those R. As. filed by the Revenue is the following :
" Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that the ex gratia bonus payments made by the assessee over and above the bonus payable in accordance with the provisions of the Bonus Act, 1965, were an allowable deduction ?"
33. The reasons for rejecting question No. 2 quoted above are found stated at paragraphs 6 and 7 of the order dated October 24, 1994. It is submitted by learned counsel for the assessee, Shri K. P. Bhatnagar, that the practice of giving ex gratia is prevalent in the assessee's factory as well as in the area near about the assessee's factory. The particulars of the ex gratia payment made to the workers in the assessee's factory were stated to have been furnished at pages 18 and 19 of the paper book No. IV. At page 67 onwards of the paper book No. III filed by the assessee, strike notices have been issued by the Mazdoor Union to which the majority of the workers and employees of the asses see-factory belonged. The board of directors meeting held on January 30, 1980, took a decision to pay ex gratia to the workers of the assessee-mill for the year 1978-79. The extract of the resolution passed by the board of directors of the asses see-company dated January 30, 1980, was furnished at page 62 of the assessee's paper book. A similar resolution passed in the board of directors meeting held on June 30, 1982, is furnished at page 63 of the paper book No. III and it is as follows :
" Excerpt from the minutes of meeting of the board of directors of Kichha Sugar Company Ltd. held on June 30, 1982, at 25-B, Ashok Marg, Lucknow.
Additional Item No ; Payment of ex gratia to workers.
____________ The board considered the note put up by the executive director on ex gratia and after discussions ratified the payment of ex gratia to the workers equal to 50 days' wages for the year 1980-81."
34. A similar resolution passed by the board of directors on April 18, 1983, the copy of which is furnished at page 64 of paper book No. III is as follows :
" Excerpt from the minutes of board meeting held on April 18, 1983, at 25-B, Ashok Marg, Lucknow.
Additional Item No. 3 : To consider the demand of Labour Union for payment of ex gratia for the year 1981-82.
___________ It was decided to refer the matter to the State Government regarding payment of ex gratia to the employees of the factory for the year 1981-82."
35. The above resolution is relevant to consider the deduction claimed for the assessment year 1984-85 and the amount claimed was Rs. 6,89,656, whereas the resolution dated June 30, 1982, which is already extracted above was relevant while considering the deduction for the assessment year 1983-84. The amount of payment of ex gratia in that year was Rs. 10,06,454.
36. On June 15, 1983, the executive director had passed the following order calling the attention of all the Heads of Department working in the assessee's company :
" Ex gratia for the season 1981-82 equivalent to 30 days' wages is hereby sanctioned and the accounts department is being directed to make the payment accordingly."
37. A copy of this order of the executive director dated June 15, 1983, was furnished at page 66 of the paper book No. III filed by the assessee.
38. Shri K. P. Bhatnagar further contended that for the assessment years 1979-80 and 1980-81, the Tribunal allowed the deduction of ex gratia payment made to the workers and the Tribunal decided in its favour. Therefore, the issue should be deemed to have been settled once for all. It is significant to note that references against the Tribunal's order were rejected and they were confirmed by the High Court also. For the assessment year 1982-83, the Commissioner of Income-tax (Appeals) allowed the deduction of ex gratia payment made to the workers and decided the issue in favour of the assessee. His orders became final since no second appeal was preferred by the Department to the Tribunal. However, curiously for the assessment year 1983-84 without referring to the earlier order of the Tribunal which had concluded the matter and without giving any importance whatsoever to the orders of reference under Sections 256(1) and 256(2) and without properly keeping in mind the order of the learned Commissioner of Income-tax (Appeals), passed for the assessment year 1982-83, followed the Tribunal's order for the assessment year 1981-82, and denied the deduction of the ex gratia amount paid to the workers. The charge of the learned Departmental Representative against the learned Commissioner of Income-tax (Appeals) who passed the impugned orders for these two years was that he had followed not the later order but an earlier order. When there is a series of orders passed one has to follow only the later order. However, this allegation is baseless if we analyse the facts of the case. For the assessment years 1979-80 and 1980-81, the Tribunal order is dated April 21, 1985. In that order the revisionary order under Section 263 was set aside. Against the order of the Tribunal, the Revenue tried to seek references and vide pages Nos. 26 to 28, these references were rejected on April 8, 1987. The Revenue did not stop there but had taken the matters in further reference under Section 256(2). Ultimately, as per the copy of the High Court's order obtaining at page 29 of the third paper book, the High Court rejected the reference under Section 256(2) as per its order dated January 25, 1988. As against this for the assessment year 1981-82, the Tribunal passed its orders on April 24, 1987. Therefore, the ultimate order or the order which became final in the hands of the High Court for the assessment years 1979-80 and 1980-81 was dated January 25, 1988. The Tribunal order for the assessment year 1981-82 was dated April 24, 1987 (see pages 36 to 39 of the third paper book). Therefore, when the Commissioner of Income-tax (Appeals), for the assessment years 1983-84 and 1984-85 followed the Tribunal's order for the assessment years 1979-80 and 1980-81, he was actually following the later order passed by the High Court dated January 25, 1988. Even according to the learned Departmental Representative, it is the correct order to be followed. Therefore, the learned Commissioner of Income-tax (Appeals) cannot be found fault with for not following the later order which should be deemed to be the correct order to be followed.
39. Nextly, it is contended by the learned advocate for the assessee that the payment made by the assessee is not under the Payment of Bonus Act but an ex gratia payment which falls under Section 37(1) of the Income-tax Act, as a payment necessitated wholly and exclusively for the purpose of the business. In such cases, reasonableness or otherwise only is to be seen. The quantum of the payment would take a back seat. The question for consideration should always be whether there is commercial expediency in making the payment and in support of his proposition that the payment is in the nature of ex gratia and not under the Payment of Bonus Act and that if it is found to have been paid for the purpose of business expediency and to maintain good relations with the labour force working in the factory, it should have been allowed. Reliance was placed upon the following case-law :
CIT v. Arcuttipore Tea Co. Ltd. [1992] 197 ITR 588 (Cal) ;
CIT v. Autopins (India) [1991] 192 ITR 161 (Delhi) ;
Shahzada Nand and Sons v. CIT [1977] 108 ITR 358 (SC) ; and CIT v. Sivanandha Mills Ltd. [1985] 156 ITR 629 (Mad).
40. Learned counsel for the assessee further contended that when we are considering the allowability of ex gratia payment made to the workers in the assessment years 1983-84 and 1984-85, we must not lose sight of the fact that the nature of the payment in those accounting years almost became the traditional payments or a customary payments since similar payment was being made over the years and if it is a customary payment or a traditional payment, it is allowable and in support of this proposition, learned counsel for the assessee relied upon :
CIT v. Arya Vaidya Pharmacy (CBE) Ltd. [1985] 156 ITR 630 (Mad) ;
CIT v. Babcock and Willcox of India Ltd. [1987] 165 ITR 105 (Cal) ;
CIT v. Orissa Industries Ltd. [1993] 203 ITR 449 (Orissa) ;
CIT v. Holman Climax Mfg. Ltd. [1992] 196 ITR 698 (Cal) ;
Baidyanath Ayurveda Bhawan Mazdoor Union v. Management of Shri Baidyanath Ayurveda Bhawan (P.) Ltd. [1984] 64 FJR 33 ; AIR 1984 SC 457 ; [1984] 17 Taxman 19 (SC) ;
Hukumchand Jute Mitts Ltd. v. Second Industrial Tribunal [1979] 54 FJR 391 ; AIR 1959 SC 876 ; and Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai [1976] 49 FJR 15 ; AIR 1976 SC 1455.
41. Ultimately, the learned advocate for the assessee contended that the payment is to be considered only under the provisions of Section 37 of the Income-tax Act. When so considered, it should be found that the payment is made wholly and exclusively for business expediency and to have a contented labour force working in the mill.
42. Then learned counsel for the assessee began distinguishing the following cases cited by the learned Departmental Representative :
CIT v. Amrit Banaspati Co. Ltd. [1966] 59 ITR 388 (All) ;
CIT v. Texmaco Ltd. [1994] 209 ITR 620 (Cal) at pages 627 and 629 ;
CIT v. Rajkumar Mills Ltd. [1971] 80 ITR 244 (Bom) ;
CIT v. Thana Electricity Supply Ltd. [1994] 206 ITR 727 (Bom) ;
CIT v. Gangadhar Sikaria [1983] 140 ITR 617 (Gauhati) ;
CIT v. Belpahar Refractories Ltd. [1981] 128 ITR 610 (Orissa) ;
State of Andhra Pradesh v. CTO [1988] 169 ITR 564 (AP) ;
Union of India v. Raghubir Singh [1989] 178 ITR 548 (SC) ;
Vanaja Textiles Ltd, v. CIT [1994] 208 ITR 161 (Ker) ;
CIT v. P. Balakrishna Pillai, International Cashew Traders [1990] 182 ITR 449 (Ker) ; and CIT v. Kerala Agro Industries Corporation [1990] 183 ITR 197 (Ker).
43. Now, having heard both sides completely and also having gone through the records of the case completely, let us examine the factual as well as legal position. Broadly, let us divide consideration of the case into two aspects. Firstly, let us consider what would be the position if the payment made to the workers of the assessee-mill for 1983-84 and 1984-85 were considered as payment of bonus under the Payment of Bonus Act, 1965. If it is considered to be exclusively payment of bonus which is to be governed by the Payment of Bonus Act, then, in our opinion, the case is to be considered in the light of Section 56(1)(ii), first proviso; However, if it is considered to be not exactly a payment of bonus, then the payment should be considered in two ways--firstly that the payment should be considered under Section 36(1)(ii), second proviso, and, secondly, it should be considered under Section 37 of the Income-tax Act. Section 36 of the Income-tax Act as far as is relevant for our purposes read as follows :
" 36. (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."
44. Originally, there used to be one proviso under Sub-section (1), which is as follows ;
" Provided that the amount of the bonus 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."
45. Section 29 of the Payment of Bonus (Amendment) Act, 1976, has inserted a new proviso to Section 36(l)(ii), Income-tax Act. The amendment came into effect from September 25, 1975, relevant to the assessment year 1976-77. Under the amendment the previously existing proviso quoted above became the second proviso and a new proviso was inserted as the first proviso. After the amendment introduced from September 25, 1975, the new proviso termed as first proviso and the amended second proviso read as under ;
" 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."
46. The position obtaining after the above amendment with effect from September 25, 1975, was clarified by the Central Board of Direct Taxes in Circular No. 206 dated August 9, 1976, published in [1976] 104 ITR (St.) 63, 64. The Central Board of Direct Taxes Circular is found extracted at page 2322, Sampath Iyengar's Law of Income Tax, Ninth edition, which is as follows :
" Section 29 of the Payment of Bonus (Amendment) Act, 1976, has inserted a new proviso to clause (ii) of Sub-section (1) of Section 36 of the Income-tax Act, 1961, and has made an amendment to the existing proviso to the said clause with !effect from 25th September, 1975. The newly inserted first proviso to clause (ii) of Section 36(1) will apply in relation to bonus paid to an employee employed in a factory or other establishment to which the provisions of the Payment of Bonus Act, 1965, apply. The term 'employee' has been defined in Section 2(13) of the Payment of Bonus Act to mean 'any person (other than an apprentice) employed on a salary or wage not exceeding Rs. 1,600 per month in any industry to do any skilled or unskilled, manual, supervisory, managerial, administrative, technical or clerical work for hire or reward, whether the terms of employment be express or implied'."
47. Therefore, it can be seen that the workers/employees drawing over and above Rs. 1,600 per month are not governed by either the Payment of Bonus Act or the first proviso to Section 36(l)(ii) and their cases should be considered only under the second proviso to Section 36(l)(ii) and the admissibility will be governed by the conditions spelt out in the said proviso.
48. The first proviso as inserted with effect from September 25, 1975, and the second proviso as amended were omitted by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989. The effect of their omission with effect from April 1, 1989, was clarified in the Board's Circular No. 551 dated January 23, 1990, published in [1990] 183 ITR (St.) 7, 36. Paragraph No. 6.4 of the Central Board of Direct Taxes' clarification was found extracted at page 2323 of Sampath Iyengar's Law of Income-tax, Ninth edition; which is as follows :
" 6.4. Instances have occurred where payments to employees governed by the Payment of Bonus Act were made in excess of the statutory amounts for reasons of business expediency. A claim for the balance amount in such cases was generally made under the provisions of Section 37(1) which allows all expenses incurred wholly or exclusively for the purposes of business. This led to litigation. The conditions laid down by the second proviso in case of payment of bonus to employees not governed by the Bonus Act or payment of commission also led to protracted litigation on the issue. In order to avoid litigation and uncertainty in the matter and also to bring rationality to the provisions, the Amending Act, 1987, has omitted both the provisos to Clause (ii) so that bonus or commission paid by the employer to the employees will be allowed without any restriction. Of course, if unreasonably excessive payments are made to relatives or connected persons, the same can be disallowed under the provisions of Section 40A(2)."
49. Now, we are concerned with the resultant legal position obtaining in law prior to April 1, 1989, and, it is in our understanding the following :
Employees or workers whose salary or wages exceed Rs. 1,600 per month are not governed by the provisions of the Payment of Bonus Act and the reasonableness or otherwise of any bonus, paid to such employees/ workers should be judged in view of the wording of the second proviso to Section 36(1)(ii) and in their case, the first proviso does not at all come into play. This position holds good from September 25, 1975, to March 31, 1989 : The accounting years for the assessment years 1983-84 and 1984-85 with which we are concerned fall in between the above two dates.
50. Now, let us see whether the impugned payments for each of these two assessment years under consideration should only be considered as payment of bonus under the Payment of Bonus Act. The amount of Rs. 10,06,454 for the assessment year 1983-84 and the amount of Rs. 6,86,715 for the assessment year 1984-85 are the two impugned amounts whose deducibility is under question before us. Admittedly, they have been paid to the employees/workers of the assessee-sugar mill. The first payment represents 50 days' wages relating to the year 1980-81 and the second payment of Rs. 6,86,715 represents 30 days' wages for the year 1981-82. It is a fact that the assessee-mill had sustained losses continuously over some years including the accounting years relevant to the assessment years 1983-84 and 1984-85. In the year 1975-76, there was trial production of sugar in the mill of the assessee. Right from 1976-77 to 1981-82, ex gratia bonus is paid to the assessee's workers/employees as shown in the Table given below :
Year Equivalent Rs.
Date of decision Assessment year 1976-77 1 1/2 months 5.17,399 1-7-1978 1979-80 1977-78 1 month 3,43,067 24-5-1979 1980-81 1978-79 2 months 8,62,511 30-1-1980 1981-82 1979-80 2 months 8,98,646 13-5-1981 1982-83 1980-81 50 days 10,06,454 30-6-1982 1983-84 1981-82 30 days 6,86,715 18-4-1984 1984-85 (Referred to Government)
51. Admittedly, the accounting years relevant to the assessment years 1983-84 and 1984-85 are loss years as can be evidenced by the assessments made against the assessee-mill for those two years. Under the Payment of Bonus Act, Section 2(13) defines an employee which is as follows :
" 'Employee' means any person (other than an apprentice) employed on a salary or wage not exceeding one thousand and six hundred rupees per mensem in any industry to do any skilled or unskilled, manual, supervisory, managerial, administrative, technical or clerical work for hire or reward, whether the terms of employment be express or implied."
52. Section 10 of the Payment of Bonus Act prescribes the payment of minimum bonus. It says that the bonus shall be paid at the rate of 8.33 per cent, of the salary or wage earned by the employee during the accounting year, whether or not the employer has any allocable surplus in the accounting year. Section 11 of the Payment of Bonus Act prescribes the maximum bonus which can be paid and it should not exceed 20 per cent. of salary or wages payable to the employees/workers. Section 16 of the Payment of Bonus Act deals with cases of certain new establishments. That Section states that where an establishment is newly set up whether before or after the commencement of the Act, the employees of such establishment shall be entitled to be paid bonus under this Act in accordance with Sub-sections (1A), (1B) and (1C). Sub-section (1A) states that in the first five accounting years following the year in which the employer began to sell the goods produced or manufactured by him from such establishment, bonus shall be payable only in respect of the accounting year in which the employer derives profit from such establishment and such bonus shall be calculated in accordance with the provisions of this Act in relation to that year but without applying the provisions of Section 15. Sub-section (1B) applies in the sixth or seventh year after the setting up of the new establishment. In the sixth accounting year, it is stated that set-on or set-off, as the case may be, shall be made in the manner illustrated in the Fourth Schedule taking into account the excess or deficiency, if any, as the case may be, of the allocable surplus set-on or set-off in respect of the fifth and sixth accounting years. In the seventh accounting year, it is said that set-on or set-off, as the case may be, shall be made in 'the manner illustrated in the Fourth Schedule taking into account the excess or deficiency, if any, as the case may be, of the allocable surplus set-on or set-off in respect of the fifth, sixth and seventh accounting years. According to Sub-section (1C) provided under Section 16, it is said that from the eighth accounting year following the accounting year in which the employer sells the goods produced or manufactured by him or renders services, as the case may be, from such establishment, the provisions of Section 15 shall apply in relation to such establishment as they apply in relation to any other establishment. Section 15 of the Payment of Bonus Act deals with set-on or set-off of allocable surplus and Sub-sections (1) to (3) of that section which are found relevant are the following :
"(1) Where for any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment under Section 11, then, the excess shall, subject to a limit of twenty per cent., of the total salary or wage of the employees employed in the establishment in that accounting year, be carried forward for being set-on in the succeeding accounting year and so on up to and inclusive of the fourth accounting year to be utilised for the purpose of payment of bonus in the manner illustrated in the Fourth Schedule.
(2) Where for any accounting year, there is no available surplus or the allocable surplus in respect of that year falls short of the amount of minimum bonus payable to the employees in the establishment under Section 10, and there is no amount or sufficient amount carried forward and set-on under Sub-section (1) which could be utilised for the purpose of payment of the minimum bonus, then, such minimum amount or the deficiency, as the case may be, shall be carried forward for being set-off in the succeeding accounting year and so on up to and inclusive of the fourth accounting year in the manner illustrated in the Fourth Schedule.
(3) The principle of set-on and set-off as illustrated in the Fourth Schedule shall apply to all other cases not covered by Sub-section (1) or Sub-section (2) for the purpose of payment of bonus under this Act."
53. Under Section 17 of the Payment of Bonus Act, the customary or interim bonus paid can he adjusted against the bonus payable under the Payment of Bonus Act. Therefore, the employer has got the liberty to adjust the interim bonus, or customary bonus or the pooja bonus, whichever he might have paid to the workers towards the statutory bonus payable by him under the Payment of Bonus Act. Section 31A of the Payment of Bonus Act is a special provision made with respect to payment of bonus linked with production or productivity. Section 34 of the Payment of Bonus Act is a provision under which the employees and employers are not precluded from entering into agreements for grant of bonus under a different formula than what was envisaged under the Payment pf Bonus Act. The said section is in the following terms :
" Nothing contained in this Act shall be construed to preclude employees employed in any establishment or class of establishments from entering into agreement with their employer for granting them an amount of bonus under a formula which is different from that under this Act :
Provided that no such agreement shall have effect unless it is entered into with the previous approval of the appropriate Government :
Provided further that any such agreement whereby the employees relinquish their rights to receive the minimum bonus under Sub-section (2A) of Section 10 shall be null and void in so far it purports to deprive them of such right :
Provided also that such employees shall not be entitled to be paid bonus in excess of -
(a) 8.33 per cent. of the salary or wage earned by them during the accounting year if the employer has no allocable surplus in the accounting year or the amount of such allocable surplus is only so much that, but for the provisions of Sub-section (2A) of Section 10, it would entitle the employees only to receive an amount of bonus which is less than the aforesaid percentage, or
(b) 20 per cent. of the salary or wage earned by them during the accounting year."
54. The trial manufacture or production commenced in the year 1975-76. Now, we are considering the payment of amounts relating to years 1980-81 and 1981-82. For 1980-81, the five years from the date of the first production or manufacture was not complete. Therefore, the Payment of Bonus Act provisions themselves do not apply to the impugned payments. Further, the Payment of Bonus Act applies only in cases where the workers or employees draw less than Rs. 1,600 per month as salary or wage. However, we were told that not all the employees/workers draw less than Rs. 1,600 per month towards wages or salaries. The majority of them draw more salary than what is prescribed under the Payment of Bonus Act. For this reason also, the payment is not governed by the Payment of Bonus act. In our considered opinion and according to the decided case law rendered by the highest court of the land, the Payment of Bonus Act does not exhaust all kinds of payment of bonus to the employees/workers.
55. The question whether the Payment of Bonus Act is exhaustive of all the kinds of bonuses or ex gratia amounts payable to employees or workers of an establishment is thoroughly and exhaustively considered by the Supreme Court in the Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai [1976] 49 FJR 15 ; AIR 1976 SC 1455. Shri V. R. Krishna lyer in his landmark judgment in that case had laid down that Sections 17 and 34 of the Payment of Bonus Act deal only with profit bonus and connected matters. They did not cover customary bonus and the customary bonus is not annihilated by the provisions of the Payment of Bonus Act. At page 1466 of the reported decision, paragraph 33, the Supreme Court held the following (page 30 of 49 FJR) :
" 33. The Objects and Reasons of the Bonus Act indicate that the subject-matter of the statute is 'the question of payment of bonus based on profit to employees employed in establishments'. The Report of the Commission is also referred to in the Objects and Reasons and the tenor is the same. The long title of the Act is non-committal, but the concept of 'profit' as the basis for bonus oozes through the various provisions. For instance, the idea of accounting year, gross profit and the computation thereof, the methodology of arriving at the available surplus and the items deductible from gross profits, have intimate relevance to profit bonus --and may even be irrelevant to customary or traditional bonus or contractual bonus. Similarly, the provision for set-on and set-off of allocable surplus and the like are pertinent to profit-based bonus. Schematically speaking, statutory bonus is profit bonus. Nevertheless, there is provision for avoidance of unduly heavy burden under different heads of bonus. For this reason, it is provided in Section 17 that where an employer has paid any puja bonus or other customary bonus, he will be entitled to deduct the amount of bonus so paid from the amount of bonus payable by him under the Act. Of course, if the customary bonus is thus recognised statutorily and, if in any instance it happens to be much higher than the bonus payable under the Act, there is no provision totally cutting off the customary bonus. The provision for deduction in Section 17 on the other hand, indicates the independent existence of customary bonus although to some extent, its quantum is adjustable towards statutory bonus. Again, Section 34 provides for giving effect to the Bonus Act, thus -
'Notwithstanding anything inconsistent therewith contained in any other law .... or in the terms of any award, agreement, settlement or contract of service made before 29th May, 1965.' This does not mean that there cannot be contractual bonus or other species of bonus. This provision only emphasises the importance of the obligation of the employer, in every case, to pay the statutory bonus. The other Sub-sections of Section 34 also do not destroy the survival of other types of bonus than provided by the Bonus Act."
56. At paragraph 35, their Lordships explaining the nature of the customary bonus had the following to say (page 1467) (page 32 of 49 FJR):
" Moreover, customary bonus does not require calculation of profits, available surplus because it is a payment founded on long usage and justified often by spending on festivals and the Act gives no guidance to fix the quantum of festival bonus ; nor does it expressly wish such a usage. The conclusion seems to be fairly clear, unless we strain judicial sympathy contrariwise, that the Bonus Act dealt with only profit bonus and matters connected therewith and did not govern customary, traditional or contractual bonus."
57. At the close of paragraph 37 at page 1467 of the reported decision, their Lordships held the following (page 32 of 49 FJR) :
" We hold that the Bonus Act speaks, and speaks as a whole Code, on the sole subject of profit-based bonus, but is silent on, and cannot, therefore, annihilate by implication, other distinct and different kinds of bonus such as the one oriented on custom. We confess that the gravitational pull on judicial construction of Part IV of the Constitution, has, to some extent, influenced our choice."
58. At paragraph 41, which is the last paragraph of the judgment at page 1470 of the reported decision, summing up their findings, their Lordships of the Supreme Court held the following (see page 37 of 49 FJR) :
" The findings we have reached may now be formally set down. We hold that the Bonus Act (as it stood in 1965) does not bar claims to customary bonus or those based on conditions of service."
59. Under what circumstances ex gratia payment is to be made to the workers and whether any limitation is placed over the payment of ex gratia is the subject touched upon by the Supreme Court in the case of Coffee Board Employees' Association v. A. C. Shive Gowda [1992] 80 FJR 136 ; [1992] 1 Comp. Law Journal 175 (SC). The main question considered by the Supreme Court in that case was whether the provisions of the Bonus Act were applicable to the Coffee Board or not. The second question which was taken up for consideration was whether the ex gratia payment made to the employees of the assessee in the case from the Pool Fund can be valid. In that connection, the nature of ex gratia payment and the consideration which should weigh for payment of ex gratia was considered as follows (page 139 of 80 FJR) :
" All legitimate payments made to the staff would constitute the cost of labour engaged in the said activities. An ex gratia payment to the staff is a well-recognised legitimate mode of incentive payment. Incentives are necessary for securing from the workmen co-operation and efficient work. In the absence of efficiency, the cost of the work undertaken is bound to increase. In the long-term, such payment helps to keep down the costs and acts in the interests of the industry. The decision to make the payment has, therefore, to be left entirely to the discretion of the management."
60. From the above, it is clear that payment of ex gratia is entirely within the discretion of the management and there are no shackles placed on the management to make the payment. The discretion of the management to get co-operation of labour working under it by making ex gratia payment or incentive is not justiciable. In this connection, the minutes of the meeting of the board of directors and the resolution passed in the said meeting on June 30, 1982, resolving to pay ex gratia for the year 1980-81 (assessment year 1982-83) and a similar resolution dated April 18, 1983, considered ex gratia for the year 1981-82 (assessment year 1983-84), copies of which are furnished at pages 63 and 64 of the third paper book were already extracted above. Similarly, copy of the minutes of the meeting dated April 18, 1983, passed by the board of directors declaring ex gratia for the year 1981-82 (assessment year 1983-84) referring the matter to the State Government was already furnished at page 65 of the third paper book. The order of the executive director dated June 15, 1983, sanctioning ex gratia for the season 1981-82 equivalent to 30 days wages and directing the accounts department to make payment accordingly was furnished at page 66 of the third paper book which is already extracted above.
61. Now, in this case, the assesses was an undertaking of the U. P. State Government and a subsidiary of the U- P. State Sugar Corporation Ltd. which is engaged in the manufacture of sugar, It was the case of the assessee that a practice prevailed in the sugar industries for payment of ex gratia to the labour force working in it and in pursuance of that practice it had paid ex gratia for its labour/employees for the year ending September, 1981. The claim was made on the basis of approval given by the board of directors to give ex gratia. It was claimed on payment basis in the year when the amount was paid as per the practice followed in earlier years. This type of payment was also made by other sugar mills governed by the U. P. State Sugar Corporation Ltd. like Sehkari Chini Mills, Majhola, Kisan Sehkari Chini Mills Ltd., Bazpur, Chandpur Sugar Co. Ltd., Chandpur District, Bijnor. In this connection, the minutes of the meeting held by the board of directors of the U. P. State. Sugar Corporation Ltd. dated January 30 and 31, 1985, regarding the demand of ex gratia made by the unions of Kicha Sugar Co. Ltd. (assessee-company) is as follows : A copy of the said resolution is placed at page 1 of paper book No. II :
"Minutes of the meeting held on 30th and 31st January, 1985, regarding the demand of ex gratia made by the unions of Kicha Sugar Co. Ltd.
On 22-1-1985, the executive director, Kicha Sugar Co. Ltd., Kicha, apprised the managing director, joint managing director and chief technical adviser about the demand of ex gratia/production incentive by the workers of Kicha factory. The amounts of wages sanctioned during the past seven years are given below :
Sl. No. Year Amount equivalent to wages of Particulars
1.
1976-77 1 1/2 months Ex gratia
2. 1977-78 1 month "
3. 1978-79
2 months "
4. 1979-80 2 months "
5. 1980-81 50 days "
6. 1981-82 30 days "
7. 1982-83 25 days + 5 days Incentive All the officers appreciated the performance achieved by the Kicha factory during the season 1984-85 for which workers certainly deserve appreciation. The factory has already exceeded the highest norms of production incentive scheme of the Corporation during the month of December, 1984, and also expects same for the month of January, 1985. This year as reported by the executive director, Kicha Factory is saving bagasse which is being supplied to the different units and private parties. So far the value of the bagasse disposed of is more than Rs. 5 lakhs. In order to maintain the tempo of the workers which is one of the major driving force in achieving highest norms of efficiency it was decided to agree for payment of 35 days wages and accordingly the executive director was asked to negotiate with the representatives of the labour unions on the above lines.
There are four labour unions. All of them have placed their demands in the range of 75 to 90 days. The executive director was also asked to call the representatives of all the four unions before the managing director on January 30, 1985. During the various meetings held with them demands of labour unions remained for 60 days wages (ex gratia).
On 30th January, 1985, the representatives of labour union agreed to clinch the issue on 45 days but the managing director asked them to settle it on 35 days. Therefore, the executive director was asked to pursue it with the unions to settle the issue up to 40 days.
Joint Managing Director."
62. This document would clearly show that it was customary for the assessee-mill to pay ex gratia to its employees represented by their unions in order to derive the maximum work and co-operation from the workmen in a labour incentive industry like a sugar mill.
63. Invariably the ex gratia was settled in agreement with the labour unions and this is the practice which is being followed year after year. For 1980-81, as can be seen from the Table given in the minutes of the meeting held by the board of directors of the U, P. State Sugar Corporation Ltd., dated January 30 and 31, 1985, the ex gratia was settled as equivalent to 50 days wages. Similarly, for 1981-82, the ex gratia was settled at 30 days of wages. The payment was made on June 30, 1982, as per the agreement and the amount thus paid to the workers towards ex gratia was Rs. 10,06,454. Similar payment made on April 18, 1983, was Rs. 6,89,656. When we take the dates of payments of ex gratia, they fall in the assessment years 1983-84 and 1984-85 and as is the case of the assessee all through it had claimed deduction of the payment of ex gratia to its workers/ employees based on the dates of payment which fall in the assessment years 1985-84 and 1984-85. We have already seen that all through the assessee-mill was sustaining losses and since the Payment of Bonus Act concerns itself only with profit bonus and it does not concern itself with the payment of customary bonus or ex gratia, the question is under which provision, the payment is allowable as deduction. For the immediately preceding assessment year of 1982-83, the ex gratia paid was Rs. 8,98,646. It was allowed as a deduction in the hands of the assessee-mill by the Commissioner of Income-tax (Appeals). Such order was accepted by the Department as no appeal was filed before the Income-tax Appellate Tribunal. For better appreciation of the improvement in working of the assessee-company over the years, a comparative chart is furnished as follows : (Refer to written submissions filed on behalf of the assessee which is now found to be part of paper book III, page 21) :
Season Date of start Date of close Days work Cane crushed Production Workers employed Days of ex gratia 1975-74 20-3-1974 15-6-1974 87 7,01,549 58,907 1,394 Nil 1974-75 29-11-1974 11-6-1975 194 27,16,914 2,53,226 105 Nil 1975-76 28-11-1975 15-4-1976 138 21,64,458 2,22,405 1,105 Nil 1976-77 12-11-1976 24-4-1977 163 27,11.423 2,79,800 1,106 Nil 1977-78 17-11-1977 15-7-1978 240 38.41,486 3,61,960 1,356 45 1978-79 17-11-1978 3-6-1979 198 29,28,216 2,85,790 1,356 30 1979-80 16-11-1979 10-4-1980 145 21,90,213 2,21,960 1,333 60 1980-81 18-11-1980 28-4-1982 160 25,51,450 2,52,260 1,288 60 1981-82 25-11-1981 18-7-1982 235 36,53,265 3,36,705 1,329 50 From the above chart, it is sought to be explained to us that in the seasons 1980-81 and 1981-82, there was record crushing and record production, therefore, the demand made by the workers was genuine demand and it was a legitimate business consideration to grant ex gratia to remunerate workers in order to maintain industrial peace and harmony.
64. Now the assessee contends that firstly its claim may be considered as falling under Section 36(1)(ii), second proviso, or in the alternative under Section 37 of the Income-tax Act,and in support of this contention, learned counsel for the assessee relies upon the Delhi High Court decision in (CIT v. Rama Krishna Steel Rolling Mills [1974] 95 ITR 97) and CIT v. Shaw Wallace and Co. Ltd. [1991] 190 ITR 455 ; [1992] 62 Taxman 352-360 (Cal) and CIT v. Kelvinator India Ltd.-S. L. P. (Civil) Nos. 15305-15307 of 1987-[1988] 171 ITR (St.) 256 (SC), wherein the Supreme Court rejected the special leave petition on the following ground :
" The Supreme Court has rejected the special leave petition filed by the Department against the order dated July 23, 1987, of the Delhi High Court declining to call for a statement of the case on the question whether production incentive paid to employees was bonus and, therefore, hit by the limits prescribed by Section 36(1)(ii) of the Income-tax Act, 1961. "
65. The learned advocate for the assessee thus conceded that there are some Kerala High Court decisions which had taken the view that in order to get the payment allowed which falls outside the purview of the Payment of Bonus Act still all the three conditions laid down under the second proviso to Section 56(1)(ii) should be fulfilled and even if one of the conditions was not fulfilled or remained unfulfilled then also the payment cannot be allowed as deduction. The following decisions of the Kerala High Court appear to have taken the above view :
CIT v. P. Alikunju, M. A. Nair, Cashew Industries [1987] 166 ITR 611 (Ker);
CIT v. Balakrishna Pillai (P.), International Cashew Traders [1990] 182 ITR 449 (Ker) ;
CIT v. Kerala Agro Industries Corporation [1990] 183 ITR 197 (Ker) ;
CIT v. Kerala Spinners Ltd. [1990] 184 ITR 383 (Ker) ; and CIT v. K. Ravindranathan Nair [1990] 186 ITR 709.
66. However, it is contended by learned counsel for the assessee that the view held by the Kerala High Court in all the above cases was contrary to the view of the Supreme Court in Shahzada Nand and Sons v. CIT [1977] 108 ITR 358 in which the judgment of the Punjab and Haryana High Court in Shahzada Nand and Sons v. CIT [1973] 90 ITR 91 was reversed. The Punjab and Haryana High Court in [1973] 90 ITR 91 have taken the view similar to a view taken by the Kerala High Court in the above decisions saying that all the three conditions mentioned in the second proviso to Section 36(1)(ii) should be fulfilled and the subjective satisfaction of those conditions was necessary and a must before allowing deduction of ex gratia/customary bonus. The headnote of the decision of the Supreme Court clearly reflects its ratio and it is as follows :
" Section 36(1)(ii) of the Income-tax Act, 1961, does not postulate that there should be any extra services rendered by an employee before payment of commission to him can be justified as an allowable expenditure. If services were in fact rendered by the employee it is immaterial that the services rendered by the employee was in no way greater or more onerous than the services rendered by him in the earlier years. Of course, the circumstance that no additional services were rendered by the employee would undoubtedly be of some relevance in determining the reasonableness of the amount of commission but it would have to be considered along with other circumstances.
67. The three factors laid down by the proviso to Section 36{l)(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 ahy 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.
It is not necessary, Tor commission paid to an employee to be allowable under Section 36(1)(ii) that it should be paid under a contractual obligation.
It is now well-settled that the mere fact that the commission is paid ex gratia would not necessarily mean that it is unreasonable.
Held, on the facts, that the commission paid to the two employees of the assessee was reasonable having regard to all the circumstances of the case and w.as allowable as a deductible expenditure under Section 36(1)(ii)."
68. There are several later decisions of several High Courts which had taken the view that if an amount representing the payment of customary bonus does not fall within the precincts of Payment of Bonus Act, then the allowability of it can be considered not only under Section 36(l)(ii) but also under Section 37. The following later decision of the High Courts are cited for this purpose :
In CIT v. Orissa Industries Ltd. [1993] 203 ITR 449 (Orissa), the sums paid were described as production bonus and maintenance bonus. The Income-tax Officer took the view that they were not allowable as expenditure as they were in excess of 20 per cent. of the salary of the workmen which was the maximum bonus allowable under the terms of Section 36(1)(ii) read with Section 31A of the Payment of Bonus Act, 1965. The Commissioner of Income-tax (Appeals) in appeal held that though these sums were captioned as production bonus and maintenance bonus in essence they were in the nature of incentive wages and, therefore, the disallowance was not in order. This conclusion was affirmed by the Tribunal and on a reference the High Court upheld the conclusion. The High Court held that these payments not being annual bonus, linked with production or productivity in lieu of bonus based on profits payable under the Payment of Bonus Act, 1965, as envisaged under Section 31A, the restriction of 20 per cent, laid down by the provisions of the Bonus Act will not be applicable to them and though not deductible in computing the total income of the assessee under Section 36(1)(ii), they were allowable as deduction under Section 37 of the Income-tax Act, 1961.
69. In Baidyanath Ayurveda Bhawan Mazdoor Union's case [1984] 64 FJR 33 ; [1984] 17 Taxman 19 (SC), the Supreme Court clearly ruled that the Payment of Bonus Act deals only with profit bonus and does not govern customary, traditional or contractual bonus as per the headnote of the decision, the following is what is held :
It is well-settled that the Payment of Bonus Act deals with only profit bonus and matters connected therewith and does not govern customary, traditional or contractual bonus. There is no categorical provision in the Payment of Bonus Act nullifying all other kinds of bonus nor does such a conclusion arise by necessary implication.
70. In CIT v. Holman Climax Mfg. Ltd, [1992] 196 ITR 698 (Cal), the question was whether special incentive bonus and lawful incentive bonus paid to employees in pursuance of agreement for higher productivity fall within the purview of the Payment of Bonus Act and whether the payment is or is not admissible for deduction. Their Lordships held that looking to the nature of the agreement under which the special incentive bonus was paid by the assessee to its employees, it cannot be said that the special incentive bonus and monthly incentive bonus were not related to production and the payment does not relate itself to the profit earned by the company. The said two types of bonus were production bonus which were additional or further emoluments. Section 31A of the Payment of Bonus Act applies only where the employees entered into an agreement or settlement with their employer for the payment of annual bonus linked to production or productivity in lieu of bonus based on profits payable under the Act. The monthly incentive bonus and the special incentive bonus were not in lieu of the profit-sharing bonus but the said two kinds of bonus had been paid in addition to what has been paid in accordance with the Payment of Bonus Act. Hence, the two kinds of bonus do not come within the purview of Section 31A of the Payment of Bonus Act. Section 36(l)(ii) of the Income-tax Act, 1961, which had reference only to bonus paid under the Payment of Bonus Act had no application to incentive bonus. Incentive bonus was an expenditure laid out wholly and exclusively for the purpose of the business and accordingly it was an admissible deduction under Section 37 of the Act. Ultimately, the Calcutta High Court permitted the deductions.
71. One of the decisions relied upon by the learned Departmental Representative was the latest Kerala High Court decision in Vanaja Textiles Ltd. v. CIT [1994] 208 ITR 161. One of the questions referred, inter alia, in Income-tax Reference No. 87 of 1986, to the Kerala High Court was "Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee is entitled to claim deduction towards bonus paid in excess of the statutory bonus." The Kerala High Court while answering the reference, following its earlier decisions in Kerala Agro Industries Corporation's case [1990] 183 ITR 197 ; P. Alikunju, M. A. Nazir, Cashew Industries' case [1987] 166 ITR 611 ; Kumar Industries' case [1990] 183 ITR 156 and P. Balakrishna Pillai, International Cashew Traders' case [1990] 182 ITR 449, held that bonus paid to an employee in a factory or other establishment to which the provisions of the Payment of Bonus Act do not apply can be claimed as a deduction under Section 36(1)(ii) of the Income-tax Act, 1961, only if the conditions required under that provision are satisfied. The conditions are :
(a) the amount of bonus should be reasonable with reference to 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.
72. All the three conditions enumerated in Clauses (a) to (c) of the second proviso to Section 36(1)(ii) must be satisfied in order that the payment which is not required by the Bonus Act is regarded as reasonable so as to warrant the deduction under Section 36(1)(ii). These three decisions of the Kerala High Court can be distinguished inasmuch as they did not follow the ratio of the Supreme Court decision in Shahzada Nand and Sons v. CIT [1977] 108 ITR 358 in which a similar view taken by the Kerala High Court was also taken by the Punjab and Haryana High Court and it was overruled by the Supreme Court. The learned Departmental Representative relied upon the Calcutta High Court decision in CIT v. Texmaco Ltd. [1994] 209 ITR 620 (Cal). At page 629, the question what is the correct assessment year in which the bonus claim was allowable came for consideration. In that connection, the Calcutta High Court was considering an earlier decision of its own reported in CIT v. Bisra Stone Lime. Co. Ltd. [1987] 164 ITR 693, wherein it was held that the statutory liability to pay bonus under the Payment of Bonus Act is allowable in the assessment year 1971-72 even when it was finally adjusted and settled on October 15, 1971, i.e., long after the close of the relevant previous year. In that case, the Calcutta High Court held that the liability having accrued in a particular year, its subsequent quantification will not defer the liability to the year in which the quantification takes place. But, in the facts of the case before them an amount of Rs. 22,49,424 was actually paid to the workers and employees in terms of the agreement reached with the workers' union on September 30, 1975. The said amount was provided as bonus payable to the workers in the calendar year 1974 being the previous year relevant to the assessment year 1975-76 and claimed as a business deduction. The High Court found that the amount of advance was adjusted against bonus liability provided in the year 1974 or treated by way of ex gratia payment in the calendar year 1977. However, in the facts of that case, the High Court recorded a finding that the assessee-company had been paying bonus even in the earlier years calculated at the rate of 10 per cent. to 12 per cent. of the salary/wages. Therefore, having regard to the past practice, the High Court held that it was nothing unusual for the assessee-company to provide for bonus liability at the rate of 10.5 per cent. in the calendar year 1974 and claim it as business deduction in the assessment year 1975-76. The learned Departmental Representative attempted to persuade us to believe that the facts of the present case are similar to the facts obtaining in the Calcutta case cited above and, therefore, the ratio of the Calcutta case is to be applied to the facts of the present case before us also. The claim of the assessee was that it had paid ex gratia for the years 1980-81 and 1981-82. The learned Departmental Representative argued for the position that if the liability arose even under Section 56(1)(ii), second proviso, since it was a liability coming under the Payment of Bonus Act, it should be claimed only in those assessment years in which the liability arose and not in the subsequent years. However, in this case the liability arose under the minutes of the meeting dated June 30, 1982, for the assessment year 1983-84 and under the minutes of the board meeting April 18, 1983, read with the direction of the executive director dated June 15, 1983, for the assessment year 1984-85. The payments were also made immediately following the resolutions and the order of the executive director above stated. Those dates of resolutions, orders as well as payments of amounts were made in the accounting year relevant to the assessment years 1983-84 and 1984-85. The learned Departmental Representative argued that in view of Texmaco's case [1994] 209 ITR 620 (Cal) adverted to above, the assessee's claim should not be allowed in the assessment years 1983-84 and 1984-85. We are unable to agree with the contention of the learned Departmental Representative. In the case before the Calcutta High Court in Texmaco's case [1994] 209 ITR 620 referred to above, the payment was due under the provisions of the Payment of Bonus Act, and, therefore, it is a statutory liability which the assessee has to discharge. However, the same cannot be the case with the present payment of ex gratia before us for the two assessment year under consideration. They are only customary bonus or ex gratia not governed by the Payment of Bonus Act. The claim is allowable only under Section 37 of the Income-tax Act and the liability of the assessee to pay the ex gratia amount arose from out of the agreement or under the resolutions passed by the board of directors. We have already extracted the text of the resolutions at pages 63, 64 as well as 66 of the third paper book in the earlier paragraphs. The relevant resolution for the assessment year 1983-84 was passed on June 30, 1982. It is no doubt true that under the agreement, the ex gratia amount was quantified with reference to 50 days' of wages for the year 1980-81. That by itself does not transform the liability itself to be the liability of the accounting year of 1980-81. Similar is the case with the resolution passed on April 18, 1983, relevant for the assessment year 1984-85. Even here 30 days' wages for the crushing season 1981-82 was taken for the purpose of quantification of the ex gratia amount. That by itself does not transform the liability itself to be relating to the year 1981-82. Unless and until the resolutions are passed, the claim for ex gratia does not arise. Therefore, till June 30, 1982, the claim for ex gratia relating to the assessment year 1983-84 of Rs. 10,06,454 did not arise. So also till June 15, 1983, when it was decided to pay ex gratia for the crushing season 1981-82 equivalent to 30 days' wages is sanctioned to all the workmen/employees working under the assessee-mill, the obligation to pay the ex gratia did not arise. Therefore, the date of payment and the date of contract should be the deciding factors to determine the dates when the liability to pay ex gratia arose in these appeals. When the dates for payment and the dates of agreement are taken into consideration for the assessment year 1983-84, the date of the agreement as well as the date of payment remained the same, namely, June 30, 1982, and it clearly fell in the assessment year 1983-84. So also the liability to pay ex gratia for the assessment year 1984-85 arose on April 18, 1983, when it was put for the consideration of the board of directors and ultimately on June 15, 1983, when a decision was taken that ex gratia equivalent to 30 days' wages for the crushing season 1981-82 was sanctioned to the employees/workers working under the assessee-mill. These two dates, namely, April 18, 1983, and June 15, 1983, on which the actual payment is made both of them fall in the accounting year relevant to the assessment year 1984-85. Thus, we hold that the Calcutta decision in Texmaco's case [1994] 209 ITR 620 does not help the Revenue.
73. The learned Departmental Representative also relied upon a decision of the Allahabad High Court in CIT v. Amrit Banaspati Co. Ltd. [1966] 59 ITR 388. This decision was sought to be relied upon only to show that in any view of the matter, the claim of the assessee cannot be made for deduction in the assessment years 1983-84 and 1984-85 as is sought to be done by the assessee. The facts as well as the decision were given correctly in the headnote of the decision which is as follows :
" On the 17th January, 1955, the Labour Appellate Tribunal raised the amount of dearness allowance determined by the Industrial Court as payable to the labourers of the assessee-company by five per cent. for the years ending 31st March, 1953, and 31st March, 1954, corresponding to the assessment years 1953-54 and 1954-55, and the extra amount payable by the assessee amounted to Rs. 1,08,884 and Rs. 3,43,278, respectively. The assessee claimed before the Income-tax Officer, that the aforesaid amounts were permissible deductions, as the assessment proceedings for the two years 1953-54 and 1954-55 were pending before the officer when the Labour Appellate Tribunal made the order. The Income-tax Officer disallowed the claim but the Appellate Tribunal allowed the deduction relying on the decision in CIT v. Nagri Mills Co. Ltd. [1958] 33 ITR 681 (Bom). On a reference :
Held, that as the employer followed the mercantile system of accounting, the liability of the employer towards the allowance arose only when it was finally settled amicably or by industrial adjudication, and the claim to deduction was admissible only in the year when the liability under the award was finally determined. The Nagri Mills' case [1958] 33 ITR 681 must be taken to have been overruled by the Swadeshi Cotton and Flour Mills' case [1964] 53 ITR 134 (SC)."
74. A fair reading of the Allahabad High Court judgment noted above would clearly show that so long as the dispute does not settle either under an agreement or by industrial adjudication, the deduction was not admissible and it would be admissible only in the year when the liability under the award was finally determined. In fact the ratio of the decision would support the case of the assessee rather than that of the Department.
75. The learned Departmental Representative heavily relied upon the decision of the Bombay High Court reported in CIT v. Thana Electricity Supply Ltd. [1994] 206 ITR 727 for the proposition that where there were conflicting decisions of courts of co-ordinate jurisdiction, the later decision is to be preferred if reached after full consideration of the earlier decisions. There cannot be any quarrel with this proposition but the important condition while applying the proposition is that the later decision should have considered all the earlier decisions and the reasons for not applying the ratios of the earlier decisions are duly recorded. If the earlier decisions are either not overruled or are not discussed and no reasons are, given as to why the ratio of the earlier decisions was not adopted in a later decision, the later decision cannot be claimed as worthy to be followed. Reliance is placed upon the Andhra Pradesh High Court decision in State of Andhra Pradesh v. CTO [1988] 169 ITR 564, wherein it was held that the Tribunals functioning within the jurisdiction of a particular High Court in respect of whom the High Court-has got the power of superintendence under article 227 are bound to follow the decisions of the High Court unless, on an appeal to the Supreme Court, the operation of the judgment is stayed. It is not permissible for the authorities and the Tribunals to ignore the decisions of the High Court or to refuse to follow the decisions of the High Court on the pretext that an appeal has been filed before the Supreme Court which is pending or that the steps are being taken to file an appeal. Nobody is interested to quarrel with this proposition and it is not known how the learned Depart-mental Representative wants to use the proposition. Now, in the facts of this case there was a Tribunal decision relating to the assessment years 1979-80 and 1980-81. It became final after the reference over the said order was rejected under Section 256(2) by the High Court ultimately in 1968. Simply stated the payment of ex gratia amounts to the workmen/ employees working in the assessee's mill were allowable as admissible deductions for these two assessment years was the gist of the final order passed by the High Court while rejecting the reference under Section 256(2). However, for the assessment year 1981-82, which is the immediate succeeding assessment year for 1980-81, the same type of ex gratia paid was disallowed all through right from the Income-tax Officer, the Commissioner of Income-tax as well as the Tribunal. The Tribunal passed its orders in I. T. a. No. 3109/(Del) of 1985, dated April 24, 1987, whereas the earlier order of the Tribunal for 1979-80 and 1980-81 was in I. T. A. Nos. 5150 and 5151/(Del) of 1984, dated April 21, 1985. Now the earlier orders dated April 21, 1985, passed in I. T. A. Nos. 5150 and 5l51/(Del) of 1984 were neither referred to nor discussed in any detail whatsoever by the later Tribunal decision rendered in I. T. A. No. 3109/(Del) of 1985, dated April 24, 1987. As per the Bombay High Court decision in CIT v. Thana Electricity Supply Ltd. [1994] 206 ITR 727, the general principle to be followed is that a later decision is to be preferred over the earlier one if reached after full consideration of the earlier decision. If a later decision does not consider the earlier decision at all nor did it mention it in its orders, the general rule laid down by the Bombay High Court in our opinion need not be followed, since the later decision lost its value as a stare deeisis.
76. Another decision relied upon by the learned Departmental Representative was CIT v. Rajkumar Mitts Ltd. [1971] 80 ITR 244 (Bom). Jn that case, their Lordships were considering the question of the correct assess-ment year in which the deduction can be allowed. The facts as well as the decision are stated in the headnote of the decision which is as follows :
" It is only when the claim to provide bonus, if made, is settled amicably or by industrial adjudication that a liability is incurred by the employer, who follows the mercantile system of accounting, within Section 10(2)(x) read with Section 10(5) of the Act.
For the first time, the liability in respect of the bonus for the year 1948 in the sum of Rs. 4,16,604 was settled by an award dated November 5, 1949, and payment in respect of this liability was made by two equal amounts on December 25, 1949, and January 25, 1950, held that the claim for deduction in respect of the sum of Rs. 4,16,604 was liable to be allowed for the accounting year 1949."
77. Virtually the above decision instead of destroying the case of the assessee supports it. It is significant to note that the above Bombay case is a case where the Payment of Bonus Act clearly applies even in such a case when there is a dispute with regard to the payment of bonus unless the dispute is amicably settled and a final understanding was reached, the liability was held not to have arisen. Here in this case, we have already discussed the facts of the case threadbare and came to the conclusion that the liability did not arise under the Payment of Bonus Act, that there is no question of any statutory liability and, therefore, there is no question of the liability having arisen in the accounting years 1980-81 and 1981-82 and since the liability crystallised or agreed upon or reached finality by way of passing resolutions and also by making payments of ex gratia amounts to the workers/employees in the accounting years relevant to the assessment years 1983-84 and 1984-85, the amounts are fully deductible under Section 37 of the Income-tax Act only in the assessment years 1983-84 and 1984-85, respectively. We hold that the Income-tax Appellate Tribunal while deciding the issue for 1981-82 did not bear in mind the necessary principles and also keep the ratio of important Supreme Court decisions in view and it is vitiated by error of law as well as misappreciation of facts and, therefore, it is liable to be set aside. We further hold that the Tribunal while deciding this very issue for the assessment years 1979-80 and 1980-81 not only had got the approval of the High Court since the reference against the same was dismissed by the High Court under Section 256(1) and (2), but was also found as a decision fully supportable under law as well as the facts of the case.
78. In the result, we hold that the decision of the Tribunal in I. T. A. No. 5150 and 5151/(Del) of 1984 for the assessment years 1979-80 and 1980-81 is correctly decided and should be followed.
79. Since this is the only "issue on which the reference is made to the Full Bench and since this issue is answered in favour of the assessee and against the Department, the matter should go hack to the Division Bench for consideration of other issues, if any, and pass necessary orders, according to law.