JUDGMENT
Ajit K. Sengupta, J.
1. At the instance of the Revenue, the following two questions of law have been referred to this court under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1981-82 :
” (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of annual special incentive, of Rs. 1,17,714 was production bonus and does not come under the purview of the Payment of Bonus Act, 1965 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the payment of monthly incentive bonus amounting to Rs. 5,56,963 was production bonus and does not come under the purview of the Payment of Bonus Act, 1965 ? ”
2. Shortly stated, the facts are that, for the assessment year under consideration, the assessee-company had allocable surplus of Rs. 3,35,766 within the meaning of the Payment of Bonus Act, 1965. Even then, the assessee paid profit-sharing bonus to the extent of Rs. 3,37,000. In addition to such profit-sharing bonus, the assessee-company paid monthly incentive bonus of Rs. 5,66,963 and special incentive bonus of Rs. 1,17,314. The Income-tax Officer disallowed Rs. 1,254 out of the profit sharing bonus of Rs. 3,37,000 as it was in excess of 8.33% of the salary and wages and the entire monthly incentive bonus and special incentive bonus. On appeal, the Commissioner of Income-tax (Appeals) held that the monthly incentive bonus was ” nothing but incentive wages” and, therefore, allowed this amount of monthly incentive bonus of Rs. 5,56,963. He, however, declined to accept the assessee’s claim in respect of the special incentive bonus
of Rs. 1,17,314. This disallowance was contested by the assessee in an appeal to the Tribunal. The Department also preferred an appeal against the finding relating to the monthly incentive bonus.
3. The Tribunal held that the annual special incentive bonus and monthly incentive bonus are production bonuses and as such additional or further emoluments which do not come under the provisions of the Payment of Bonus Act, 1965, and are allowable deductions. As such, it upheld the finding of the Commissioner of Income-tax (Appeals) relating to the monthly incentive bonus, but it deleted the said addition of Rs. 1,17,314.
4. At the hearing before us, the learned advocate for the Revenue has contended that the assessee is not entitled to the deductions claimed inasmuch as such bonus is not payable under the Payment of Bonus Act, 1965, as amended. It is also his contention that, if any particular type of bonus cannot be paid because of the prohibition under the Payment of Bonus Act, 1965, the employer, by making such payment, cannot claim deduction for such bonus. According to him, this will be contrary to public policy.
5. On the other hand, the contention of Dr. Debi Prasad Pal, the learned advocate for the assessee, is that bonus which has been paid in this case is incentive bonus linked to production and this has been paid not in lieu of the profit-sharing bonus but in addition to the aforesaid bonus. It is his contention that there is no bar against allowing deduction when such bonus in fact has been paid in terms of the agreement with the employees in addition to the profit-sharing bonus. He has drawn our attention to an unreported decision of a Division Bench of this court in the case of CIT v. Shaw Wallace Gelatines Ltd. (Income-tax Reference No. 35 of 1982) where judgment was delivered on August 22, 1989. It has been held in that case that the customary bonus in addition to the bonus payable under the Payment of Bonus Act, 1965, will be allowable as a deduction. Dr. Pal, therefore, contended that, if bonus paid beyond the statutory limit is allowable as deduction, there is no reason why bonus paid in addition to the profit-sharing bonus should not be allowed as a deduction either under Section 36(1)(ii) or Section 37 of the Act. He has drawn our attention to the agreement by and between the employer and the workmen regarding the payment of the incentive bonus to the employees.
6. We have considered the rival contentions. The Payment of Bonus (Amendment) Act, 1976 (preceded by an Ordinance in 1975) (hereinafter referred to as the “1975 Amendment”), has made significant changes in
the Bonus Act. Even the preamble to the Act was changed. Before the 1975 Amendment, the preamble read thus :
” An Act to provide for the payment of bonus to persons employed in certain establishments and for matters connected therewith.”
7. After the 1975 Amendment, the preamble reads as follows :
” An Act to provide for the payment of bonus to persons employed in certain establishments on the basis of profit or on the basis of production or productivity and for matters connected therewith.”
8. However, it is not correct to say that bonus will be paid only if there are profits or the bonus has to be linked to production or productivity.
9. Section 31A of the Payment of Bonus Act, 1965, stipulates that the provisions of the Act will not be applicable to those establishments where the employees enter into an agreement with the employer before the commencement of the 1975 Amendment for payment of bonus and also to those who enter into an agreement after commencement of the 1975 Amendment for payment of bonus linked to production or productivity. Even in these cases, the maximum bonus an employee can receive is limited to twenty per cent. of the salary or wages earned by him in the relevant accounting year.
10. The Supreme Court in Titaghur Paper Mills Co. Ltd. v. Its Workmen , has observed that payment of production bonus is in the nature of an incentive. The extra payment depends not on extra profits but on production. This payment is in addition to wages which is in the nature of incentive wages. The Supreme Court in Huhumchand Jute Mills Ltd. v. Second Industrial Tribunal, , has observed as follows (at page 878) :
“The Bonus Act, 1965, was a complete code but was confined to profit-oriented bonus only. Other kinds of bonus have flourished in Indian industrial law and have been left uncovered by the Bonus Act. The legislative universe spanned by the said statute cannot, therefore, affect the rights and obligations belonging to a different world of claims and conditions.”
11. The Supreme Court then considered the decision of the Supreme Court in Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai , and the following passage from Mumbai Kamgar Sabha’s case was quoted (at page 1467 of AIR 1976 SC) :
“It is clear further from the long title of the Bonus Act of 1965 that it seeks to provide for bonus to persons employed ‘in certain establishments’, not in all establishments. Moreover, customary bonus does not require calculation of profits or 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.
The end product of our study of the anatomy and other related factors is that the Bonus Act spreads the canvas wide to exhaust profit-based bonus but beyond its frontiers is not void but other cousin claims bearing the caste name ‘bonus’ flourish–miniatures of other colours. The Act is neither proscriptive nor predicative of other existences.”
12. The Supreme Court, thereafter, observed as follows :
“Counsel made his goal-oriented submissions by taking us through the new provisions. As we have stated earlier, many of the statutory modifications brought about in 1976 in the then wisdom of Parliament have been repealed and the original position restored in 1977 by the later wisdom of the new Parliament. However, we are concerned only with the import and effect of the few provisions incorporated by Act 23 of 1976. The fundamental fact which we must reiterate is that the Bonus Act, before the 1976 amendment, had nothing to say on bonus not oriented on profit. What then was the departure made ? Did it travel beyond the broad territory of the original statute and invade other forms of bonus ? Apart from the clauses which we will presently deal with, a key to the understanding of the changes is the long title. The long title of the Bonus Act was also amended in 1976 and the substituted one runs thus :
‘An Act to provide for the payment of bonus to persons employed in certain establishments on the basis of profits or on the basis of production or productivity and for matters connected therewith.’
The clear light that we glean from the new long title is contrary to the intent of Shri Pal’s argument. Specifically, the new long title purports to provide for the payment of bonus ‘on the basis of profits or on the basis of production or productivity and for matters connected therewith’. The emphatic inference flows therefrom that customary or
contractual bonus goes beyond the pale of the amending Act which modifies the previous one by bringing within its range bonus on the basis of production or productivity also. Nothing more–unless the text expressly states to the contrary. It is important to remember that Section 17 of the Bonus Act has been left intact. That section, in express terms, refers to puja bonus and other customary bonus as available for deduction from the bonus payable under the Act, thus making a clear distinction between the bonus payable under the Act and ‘puja bonus or other customary bonus’. So long as this section remains without amendment, the inference is clear that the categories covered by the Act, as amended, did not deal with customary bonus.”
13. We may now look into the nature of the incentive bonus paid in this case.
14. The agreement dated June 5, 1979, lays down the terms and conditions regarding special incentive bonus. The preamble to the agreement states that the purpose of the scheme is “to achieve required invoiced despatches during the current year ending on September 30, 1979”. Clauses 3, 4 and 5 of the terms of the settlement are relevant for determining the nature of payment. These run as follows :
” 3. It is agreed between the parties that all permanent workmen on the pay roll of the company on the date of signing of this memorandum of settlement shall receive in the month of October, 1979, the payable money as ‘ special incentive ‘ as mentioned in Clause (B)(1), which means that the aforesaid payment shall only be made when the current accounting year is over and the performance in terms of required invoiced despatches is known.
4. It is also agreed between the parties that, in the event of failure to achieve the required invoiced despatches of the current accounting year, the ‘special incentive’ as mentioned in Clause B(1) shall not be payable.
5. In view of the aforesaid payment by the company, the union assured to put its best endeavour to ensure high level of production and productivity among all the workmen and upkeep of effective discipline in the factory in all its aspects, to achieve the targets set out.”
15. The special incentive bonus is available to all permanent workmen on the pay-roll of the company on the date of signing of the said agreement. The said payment is made when the current accounting year is over and the performance in terms of the required invoiced dispatches
is known. The above clauses make it clear that the payment of special incentive depended on performance in terms of required invoiced despatches and was not payable in case of failure to achieve the required invoiced despatches. In view of the aforesaid payment by the company, the union assured to put its endeavour to ensure a high level of production and productivity among all the workmen and upkeeping of the effective discipline in the factory in all its aspects to achieve the target set out.
16. The terms regarding the monthly incentive bonus are contained in the agreements dated May 19, 1971, and April 8, 1974. Clauses 2 and 3 of the agreement dated May 19, 1971, run as follows :
“2. The parties to this agreement realise and appreciate the fairness of a certain amount of output in return for the guaranteed basic wage and dearness allowance. Taking the conditions of Holman-Climax Mfg. Ltd. in particular, the parties hereto agree to fix this limit at 50 per cent. productivity index beyond which the incentive scheme shall operate.
3. The parties hereto have observed that the productivity index of some groups of workmen in the immediate past has, however, been lower than 50 per cent. With a view to minimising their hardship and to enabling them to adjust, it is hereby agreed that the no-bonus index shall be reduced to 40 per cent. instead of 50 per cent. as recommended in the report of Messrs. Ibcon Pvt. Ltd., by way of concession, for a period of three months which shall expire on March 31, 1971, and the no-bonus index shall be only 50 per cent. from April 1, 1971.”
17. Clauses 1.2 and 1.3 of the agreement dated April 8, 1974, run as follows :
” 1.2. The parties to this agreement realise and appreciate the fairness of a certain amount of output in return for guaranteed basic wage and dearness allowance. Taking the conditions of Holman-Climax Manufacturing Ltd., in particular, the parties hereto agree to fix this limit at 50 per cent. productivity index beyond which the incentive scheme shall operate.
1.3. Since the no-bonus index had been maintained at 40 per cent. during the period of the scheme, the parties hereto agree that incentive bonus at the old rate shall be payable at productivity index of 40 per cent. to 49 per cent.”
18. It is evident from the said clauses that the monthly incentive depended on the productivity achieved by the workmen and not otherwise.
19. It is, therefore, clear that special incentive bonus and monthly incentive bonus are related to production and not to the profit earned by the company. The said two types of bonus are production bonus which are additional or further emoluments. Payment of production bonus depends upon production and is in addition to wages. In effect it is incentive to higher production and is in the nature of incentive wages.
20. Thereafter, the production bonus which is paid to the workmen does not come within the purview of the Payment of Bonus Act, 1965. Section 31A of the Payment of Bonus Act applies only where the employees enter into an agreement or settlement with their employer for the payment of an annual bonus linked to production or productivity in lieu of bonus based on profits payable under the Act. In the present case, admittedly, the monthly incentive bonus and special incentive bonus are 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 said two kinds of bonuses will not come within the purview of Section 31A of the Bonus Act. Mere use of the expression ” bonus” will not render it a bonus if it is otherwise clear that what is paid is not bonus but incentive wages.
21. In our view, Section 36(1)(ii) of the Act which has reference only to bonus paid under the Bonus Act has no application to incentive bonus. It is not paid under the. Bonus Act. It is an expenditure laid out wholly and exclusively for the purpose of the business of the assessee and, accordingly, it is an inadmissible deduction under Section 37.
22. As indicated earlier, this court in Shaw Wallace Gelatines Ltd., held that customary bonus paid in excess of the bonus payable under the Payment of Bonus Act is allowable as a deduction under Section 37 of the Act.
23. For the foregoing reasons, we are of the view that the monthly incentive bonus and the special incentive bonus are not covered under the Payment of Bonus Act and as such should be allowed as permissible deductions.
24. For the reasons aforesaid, we answer both the questions in this reference in the affirmative and in favour of the assessee.
25. There will be no order as to costs.
Shyamal Kumar Sen, J.
26. I agree.