JUDGMENT
K.S. Paripoornan, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following questions of law, for the decision of this court, in the above two referred cases :
“Income-tax Reference No. 143 of 1987 :
(1) Whether the Tribunal was right in holding that the provisions of the Payment of Bonus Act were not applicable to the goodwill bonus paid by the assessee to its employees and the managing director on the basis of agreement with the employees and on the basis of terms and conditions of the services of the managing director ?
(2) Whether the Tribunal was right in holding that the aforesaid payment was made on grounds of business expediency and, therefore, was an allowable deduction even under Section 37 of the Income-tax Act, 1961 ?”
Income-tax Reference No. 147 of 1987 :
“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 of the bonus paid in excess of the minimum and in holding that the customary bonus paid will not attract the provisions of Section 36(1)(ii) of the Income-tax Act, 1961 ?”
2. The respondents are different public limited companies. In Income-tax Reference No. 143 of 1987, we are concerned with the assessment year 1979-80. In Income-tax Reference No. 147 of 1987, we are concerned with the assessment year 1980-81.
3. In Income-tax Reference No. 143 of 1987, the assessee’s previous year ended on March 31, 1979. The assessee claimed a sum of Rs. 2,06,027 representing goodwill bonus paid by it to its employees over and above the bonus at the rate of 8 1/3-%. This plea was rejected by the assessing authority. Similarly, a sum of Rs. 3,229 paid to the managing director as goodwill bonus was also rejected. In appeal, the Commissioner of Income-tax (Appeals) held that bonus was paid as per an agreement dated September 12, 1978. The said agreement was entered into by the assessee with the employees in order to avoid labour unrest. In order to maintain cordial relations, the said sum was expended. It was for the purpose of business The conditions of service of the managing director entitled him to receive the bonus declared by the company. On these premises, the Commissioner of Income-tax (Appeals) deleted the disallowance made. The Revenue filed an appeal before the Appellate Tribunal and objected to the deletion of the disallowance. The Appellate Tribunal held that the payment of bonus was
made on the basis of an agreement between the assessee and its employees. Similarly, bonus was paid to the managing director on the basis of the terms and conditions of service entered into with him. These are contractual bonuses to which the provisions of the Payment of Bonus Act will not apply. Even if the said amount paid was not an allowable deduction as “bonus”, it should be allowed under Section 37 of the Act on the ground of business expediency. Thereafter, at the instance of the Revenue, the two questions of law formulated hereinabove have been referred for the decision of this court in the said referred case.
4. Regarding the facts in Income-tax Reference No. 147 of 1987, the assessee claimed a sum of Rs. 4,05,000 as bonus paid during the relevant year in terms of the settlement arrived at with the employees. Admittedly, the said payment exceeded the maximum of 20% allowable under the Payment of Bonus Act. The Income-tax Officer disallowed the excess payment of Rs. 1,51,875. In appeal, the Commissioner of Income-tax (Appeals) held that the payment in the instant case was by way of customary bonus outside the purview of the Payment of Bonus Act. So, the entire claim is admissible. This was affirmed by the Appellate Tribunal in the appeal filed by the Revenue. It is thereafter, at the instance of the Revenue, that the question of law formulated hereinabove has been referred for the decision of this court.
5. We heard counsel. The short question that arises for consideration, in both the cases, is whether the payment made by way of bonus in excess of the amount permissible or postulated by the Payment of Bonus Act can be allowed as a deduction for the purpose of the Income-tax Act. In other words, to what extent is the bonus paid to the employees deductible as revenue expenditure in the light of the provisions in the Income-tax Act, calls for consideration. Section 36(1)(ii) of the Income-tax Act deals with this situation. The said section has been interpreted by a Bench of this court in CIT v. P. Alikunju, M. A. Nazir, Cashew Industries [1987] 166 ITR 611 and subsequent cases, viz., CIT v. Kumar Industries [1990] 183 ITR 156 (Ker) and CIT v. Kerala Agro Industries Corporation [1990] 183 ITR 197 (Ker). Ordinarily, a payment envisaged by the Payment of Bonus Act can be claimed as a deduction. It is a revenue expenditure. But the amounts paid over and above the amount payable under the Payment of Bonus Act can be claimed as a deduction under Section 36(1)(ii) of the Act provided the following conditions are fulfilled : The amount should be reasonable with reference to (a) the pay of the employee and the conditions of his service ; (b) the profits of the business or profession for the previous year in question ; and (c) the general practice in similar business or profession. In the two cases on hand, the guidelines stated above, which have been exhaustively dealt with in Alikunju’s case [1987] 166 ITR 611, have not been followed. The Appellate Tribunal stated that the payment of
bonus, over and above the limit prescribed by the Payment of Bonus Act, is a permissible deduction in both the cases. In Income-tax Reference No. 143 of 1987, the Appellate Tribunal said that the amount was paid on the basis of an agreement between the assessee and its employees and to the managing director in view of the terms and conditions of his service. In Income-tax Reference No. 147 of 1987, the Appellate Tribunal stated that the payment of amounts in excess of the amount payable under the Payment of Bonus Act was a customary bonus. Whatever may be the occasion or character of the bonus paid, whether it be under an agreement or as a customary bonus, if the amount paid is in excess of the amount payable under the Payment of Bonus Act, it can be claimed as a deduction only if the conditions envisaged by Section 36(1)(ii) of the Act are satisfied. That has been exhaustively dealt with by this court in Alikunju’s case [1987] 166 ITR 611, and by the latest decision rendered by this court in Income-tax Reference No. 13 of 1987 (CIT v. Travancore Titanium Products Ltd. [1990] 186 ITR 112). This crucial aspect has not been borne in mind in both these cases by the Appellate Tribunal when it allowed the payment of amounts in excess of the amount payable under the Payment of Bonus Act as a permissible deduction. We are of the view that the Appellate Tribunal has failed to act in accordance with law and has also further failed to apply Section 36(1)(ii) of the Income-tax Act, as interpreted by this court in P. Aiikunju’s case [1987] 166 ITR 611.
6. Therefore, we decline to answer the questions referred to us, in both the cases. But we direct the Appellate Tribunal to restore the appeals to file and dispose of them in accordance with law and in the light of the observations contained hereinabove. It is open to the Income-tax Appellate Tribunal to order a remit of the matter to the Income-tax Officer, if it deems it necessary.
7. The references are disposed of as above.
8. A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal Cochin Bench.