Income Tax Appellate Tribunal - Pune
Krishna Sahakari Sakhar Karkhana Ltd. vs Deputy Commissioner Of Income-Tax on 23 February, 1993
Equivalent citations: [1993]45ITD344(PUNE)
ORDER
T.A. Bukte, Judicial Member 1 and 2. [These paras are not reproduced here as they involve minor issues.]
3. Ground No. 4 is common in both these appeals. This pertains to the addition made on account of bonus. The appellant-sugar factory claimed a deduction of Rs. 52,08,022 for the assessment year 1986-87 and Rs. 63,27,390 for the assessment year 1987-88 under appeals as business expenditure. The ITO disallowed these claims on the ground of excess payment than 8.33 per cent allowable under the Payment of Bonus Act, 1965. The C1T (Appeals) agreed with the view taken by the Assessing Officer and confirmed the disallowance. Therefore, a question has arisen for our consideration whether the claim of bonus made in excess of 8.33 per cent is allowable deduction as a business expenditure. In this connection, we have heard the learned counsel for the assessee Shri K.A. Sathe as well as the learned departmental representative Shri Gautam Kar at length. Their arguments are taken into consideration.
4. The appellant filed the returns of income for the assessment years under appeals on 30-6-1986 and 30-7-1987 respectively. The appellant declared the total income at Rs. NIL for both the assessment years under appeals. There were no surplus funds for allocation. The unabsorbed investment allowance was to be carried forward amounting to Rs. 16,08,059 and Rs. 14,70,420 for the assessment years under appeals. Over and above, the unabsorbed investment allowance and the unabsorbed 80J relief was also allowed to be carried forward amounting to Rs. 15,48,000 for the assessment year 1980-81. The income showed and assessed remained at NIL even after allowing the carry forward of the unabsorbed investment allowance and the unabsorbed 80J relief. The Assessing Officer has already allowed as a deduction the payment of bonus at 8.33 per cent amounting to Rs. 17,62,451 and Rs. 17,16,833 as per para 9.5 of the assessment order for the assessment year 1986-87 and para 9 of the assessment order for the assessment year 1987-88. The unabsorbed investment allowance and unabsorbed 80J relief for the assessment year 1986-87 is Rs. 60,83,051 and Rs. 15,48,000 respectively. Thus, the total assessed income was also found at NIL.
5. The Assessing Officer disallowed the bonus payment and ex gratia payment of Rs. 69,70,473 for the assessment year 1986-87 and Rs. 63,27,399 for the assessment year 1987-88. The reasons given by the Assessing Officer are in para 9.5 and 9 of the respective orders of the Assessing Officer. There is no dispute for allowing the bonus at 8.33 per cent in both the assessment years. The assessee debited productivity bonus at 20 per cent and festival bonus at 10 per cent, including ex gratia payment. It was submitted on behalf of the appellant that the bonus was paid at 20 per cent up to the assessment year 1975-76 as per the settlement with the workers in accordance with the Payment of Bonus Act, 1965. The Payment of Bonus Act was amended with effect from 25-9-1975 by the Payment of Bonus (Amendment) Act, 1976 by introducing new Section 31A dealing with annual bonus linked with productivity in lieu of bonus payment on profits payable under the amended law. Thus, the production incentive bonus at the rate of 20 per cent and Diwali festival at 10 per cent and ex gratia totalling to 30 per cent has been claimed to have been paid. However, Shri Sathe submitted that it was 31.5 per cent. The ex gratia payment was paid to such employees to whom the provisions of Payment of Bonus Act, did not apply.
6. The appellant showed its inability to identify the contribution made by each worker in the manufacturing process of sugar. The attendance of each worker participating in the manufacturing activity was not established. The bonus was allowed to have been paid on the basis of manufacturing or production activity linked with incentive bonus. It is well known that a section of the workers or employees are employed in the sugar industry during the sugar cutting season only. This season starts from Dasera of every year and ends by the end of April every year. Several workmen from different places come to the vicinity of the factory to whom the factory engages to cut the sugarcane and to bring it to the factory premises. They are villagers and temporary workmen. It is not known whether the muster rolls of such workmen were maintained to find out the working days at their credit. It is also not known how the incentive bonus and exgratia was paid to them, except claiming that this was paid to them. If it is a bonus linked with the production or productivity, the details are required to be looked into by the fact finding authority. It would not be sufficient to say that the appellant has decided to pay the bonus according to the amended provisions of the Payment of Bonus Act, 1965. It also cannot be made out that how each worker contributed to the production and productivity and how much sugarcane was supplied by him for crushing.
7. It is necessary to look into the provisions of production or productivity linked with the incentive bonus and ex gratia payment. So far the production or productivity is concerned, the assessee has not shown that during the relevant accounting periods for the assessment years under appeals there was a much more production of sugar than the earlier years. There is also nothing on record that the temporary workers and regular employees threatened at any time to go on strike and to bring the manufacturing activity of sugar by the appellant at stand still. It is argued in the general sense that the employees and the workers threatened to go on strike and for that reason the incentive bonus or ex gratia payment was considered to be paid in accordance with the amended provisions of Payment of Bonus Act, 1965. The general pleadings were made without bringing a particular factum relating to each item of payment on record. The provisions of Section 17 of the Payment of Bonus Act, 1965 were tried to be interpreted with the customary or interim bonus or to be adjusted against the bonus payable under the provisions of the said Act. The Assessing Officer found that the ex gratia payment was made to the employees who were not entitled to payment under the Payment of Bonus Act, 1965 which being equivalent to the productivity bonus and Diwali festival bonus payable at 30 percent or 31.5 percent. Provision of Section 36(1)(ii) of the Income-tax Act, 1961 lays down three factors to determine the reasonableness of the amount of commission or incentive bonus. A share in the profit or commission cannot be considered to be payable to the employees or workmen. It is not in dispute that the appellant was not able to recover the current year's depreciation and carry forward unabsor-bed depreciation or investment allowance of the previous year. In these circumstances, whether the payment of bonus in excess of 8.33 per cent of the salary or wages earned by the employees would be a proper decision. In accordance with the provisions of Section 5 of the Payment of Bonus Act, 1965 there should be allocable surplus. The payment of bonus and ex gratia at 30 per cent cannot be considered as justifiable either under the Payment of Bonus Act, 1965 or the amended provisions of Section 36(1)(ii) of the Income-tax Act, 1961. The assessee incurred substantial losses in these years. Again a question arises that in spite of incurring a substantial loss whether the appellant's action of making payment at 30 per cent would have been a proper one. If such type of action of making the payment at 30 per cent is held to be allowable then there is every likelihood that the establishments would be closed in the near future. Of course, in accordance with the provisions of Payment of Bonus Act, 1965 whether the profits are made or losses are incurred the payment of bonus at 8.33 per cent is payable and such payments are allowable as deduction. The Assessing Officer allowed the payment of bonus made at 8.33 per cent and disallowed the excess payment of productivity bonus, Diwali bonus and ex gratia payment totalling to Rs. 69,70,473.
8. Similar is the case for the assessment year 1987-88 wherein the appellant debited Diwali bonus at 20 per cent and ex gratia payment at 10 per cent to the manufacturing account and profit and loss account. For this year also, the Assessing Officer took the same view as is taken for the assessment year 1986-87.
9. Shri Sathe argued that the labour union demands the bonus every year in excess of 8.33 per cent and therefore, the appellant was liable to pay the same. If there was any discussion between the appellant-company and its employees or labour union the terms and conditions of such discussions should have been reduced into writing and brought on record. The appellant has tried to file copies of the agreements entered into between the appellant sugar factory and the employees. The bonus is something given in addition to what is generally received or strictly due to the recipients.
Section 36(1)(ii) reads as follows :
(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 dividends it had not been paid as bonus or commission:
Provided that the deduction in respect of bonus paid to an employee employed in a factory or other establishment to which the provisions of Payment of Bonus Act, 1965 apply shall not exceed the amount of bonus payable under that Act:
Provided further that the amount of 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.
The requisite conditions to avail deduction of bonus or commission which are to be satisfied are as follows :
1. The bonus or commission shall be paid to employees for the services rendered;
2. The bonus/commission would not have been paid as profits and dividends.
According to Mr. Sathe, these conditions are satisfied. Unless these conditions are satisfied no bonus in excess of 8.33 per cent is allowable. Nothing is known about the pay of employees, their conditions and their services. The profits of business or profession for the previous year in question is in the negative as the appellant had incurred heavy losses. There is no doubt that the excess payment of bonus is neither payable nor allowable at the sweet will of the appellant unless the above referred factors are satisfied. Merely because there are written agreements between the appellant-sugar factory and the employees does not mean that the excess payment of bonus requires to be allowed without testing the factors mentioned above linked with production or productivity. It is argued that this is a contractual liability. The contractual liability cannot be undertaken by incurring heavy losses leading the factory itself to the closure.
10. Shri K.A. Sathe vehemently argued that it requires to decide whether the expenditure was incurred voluntarily on account of commercial expediency. In applying the test of commercial expediency it is not only necessary to see that the expenditure was wholly and exclusively laid for the purposes of business but it is also necessary to consider the reasonableness of expenditure from the point of view of businessman. By pleading commercial expediency it does not mean that the appellant factory is liable to pay any amount of bonus or exgralia in excess of 8.33 per cent in spite of incurring heavy losses. To do so, would not be a commercial expediency according to the business point of view of businessmen. Moreover, this payment has to be judged with reference to the requirement of the business. Those requirements are the pay of the employees, their conditions of services, profits of the business for the year in question and the amount so paid must be reasonable having regard to the actual service rendered by the employees. There are no such facts on record to arrive to a conclusion that either the incentive productivity bonus or the ex gratia payment was reasonable with reference to the pay of the employees, their service conditions and profits of the business for the years under consideration. In the absence of these necessary facts taking such a decision does not amount the fair and reasonable decision of normal and prudent business man. There must be large profits after providing for salary or remuneration to the employees and other prior charges such as interest on capital, depreciation reserve etc. In that event only, in all fairness the incentive productivity bonus or ex gratia payment and its allowability can be considered favourably. In the light of incurring heavy losses to pay in excess of 8.33 per cent cannot be considered as reasonable. All the above mentioned factors should be taken into consideration together to find out the reasonableness.
11. The conduct of the management in paying the excess payment of bonus must not only be fair but reasonable. The incentive productivity bonus and ex gratia payment was not considered as a compulsory payment under an award. It is not an accrued liability. Making the provision for bonus made in the balance-sheet and profit and loss account also does not entitle the appellant to claim as allowable deduction. Section 31A is regarding the special provisions with respect to payment of bonus linked with production or productivity. The said section reads as follows:
Notwithstanding anything contained in this Act,-
(i) where an agreement or a settlement has been entered into by the employees with their employer before the commencement of the Payment of Bonus (Amendment) Act, 1976; or
(ii) where the employees enter into any agreement or settlement with their employer after such commencement, for payment of an annual bonus linked with production or productivity in lieu of bonus based on profits payable under this Act, then such employees shall be entitled to receive bonus due to them under such agreement or settlement, as the case may be:
(Provided that any such agreement or settlement whereby the employees relinquish their right to receive the minimum bonus under Sub-section (2A) of Section 10 shall be null and void in so far as it purports to deprive them of such right:
(Provided further that) such employees shall not be entitled to be paid such bonus in excess of 20 per cent of the salary or wage earned by them during the relevant accounting year.
12. This section deals with the agreement or settlement linked with production or productivity arrived at between the parties for paying the payment of bonus prior to the amendment of the Act in 1976 or thereafter. The proviso to this section makes it clear that there can be no agreement or settlement even if it is linked with production or productivity for the payment of bonus which allows the bonus above 20 per cent of the salary or wages earned by them during the relevant accounting period. In our opinion, "to payment of bonus linked with production or productivity" means the excess payment of bonus than 8.33 per cent must be linked with production or productivity. That means the appellant must establish that the production or manufacturing the sugar was much more during the relevant accounting year than the earlier years and because of such production the profits earned were also much more and no losses were incurred or allowed to be carried forward. Such is not a case in the instant appeal. Alternatively a note to Section 31A as introduced by the Ordinance read to say special provision with respect to payment of bonus to certain employees. The appellant is expected to establish that the special provisions with respect to certain employees for payment of bonus was necessary. Neither the appellant established the special provisions nor certain employees for making the payment of bonus.
13. Shri K.A. Sathe also argued that for maintaining the industrial peace it was necessary to make the incentive productivity bonus. Agreement entered into between the employees and employer cannot be held to be binding on the department without examining the reasonableness of the terms and conditions mentioned therein. The factors related to maintain the industrial peace also have not been established but those factors must be that there was a compulsion on the appellant to accept the terms and conditions of the employees. The employees were creating unrest in smooth working or functioning of the manufacturing activity. If the agreement should not have been entered into, the great loss would have been caused to the appellant. There should have been a threat of strike by them to put the appellant to suffer the losses. Except alleging that the employees should have gone on a strike would not be sufficient to establish the fact. If the bonus is not paid within the statutoiy limit of 8.33 per cent then it is questionable. There is nothing to show that the appellant was compelled to close the manufacturing activities of sugar due to unavoidable circumstances created by the employees as happens in the textile industry. The manufacturing activity did not come to a stand still at any point of time to agree to the terms, forced by the employees. Firstly, there is nothing on record to show that the employees forced the appellant either to close the manufacturing activity of sugar or compelled to pay the excess bonus.
14. After examining the facts and considering the arguments advanced by both the parties, it appears that the appellant was not entitled to go out of the provisions of the Bonus Act. There are no allocable surpluses. The commercial expediency does not mean it should be acted upon unilaterally. The commercial expediency further includes that the appellant's financial position must be protected to enable it to work smoothly and to earn more and more profits. The commercial expediency does not mean to incur more and more losses and to agree the unforced terms and conditions of the employees. In this view of the matter even to allow the bonus up to 20 per cent just to claim the deduction does not appear reasonable. The learned departmental representative has pointed out and relied upon the commentary by N.A. Palkhivala on the Law and Practice of Income-tax under Section 36(1)(ii) under the head note Bonus and commission. The commentary is that There is a ceiling on the amount of bonus or commission deductible under this clause:
(i) as regards employees whose bonus is payable and quantified under the Payment of Bonus Act, 1965 bonus paid in excess of what is payable under the Act is not deductible;
(ii) as regards other employees, who are not covered by the Payment of Bonus Act, 1965 bonus in excess of what is reasonable under the second proviso to this clause is not deductible;
(iii) as regards commission payable to any employee, the test of reasonableness under the second proviso has to be satisfied in every case.
The second proviso requires that the amount should be reasonable, having regard to (a) the pay of the employee and the conditions of his service; (b) the profits of the business of the year; and (c) the general practice in similar business.
If the conditions of this clause are not fulfilled, the assessee would not be entitled to claim a deduction under the residuary section, Section 37 in respect of bonus or commission; otherwise the result would be nullification of the express conditions laid down by this clause.
The learned departmental representative contended that the payment of incentive bonus and exgratiain excess of 8.33 per cent is not reasonable and allowable as a deduction. The conditions laid down are not fulfilled.
15. The cumulative effect of the discussions made above, does not indicate to allow assessee's claim regarding the excess incentive productivity bonus and ex gratia payment. Therefore, there are no good reasons to interfere with the order of the CIT (Appeals) on the point of bonus and ex gratia payment. The appellant fails on this ground.
16 to 19. [These paras are not reproduced here as they involve minor issues.]