JUDGMENT
K.S. Paripoornan , J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following two questions of law for the decision of this court :
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the disallowance of Rs. 17,13,893 being ex gratia payment made in excess of the statutory limit of 20% bonus as only a customary bonus ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs. 3,31,900 paid as production incentive was in the nature of additional wages and that even if it was treated as bonus it was only contractual bonus which was outside the provisions of the Bonus Act ?”
2. The respondent/assessee is a public limited company. We are concerned with the assessment year 1978-79, for which the previous year ended on December 31, 1977. For the relevant assessment year, the asses-see claimed deduction of a sum of Rs. 17,13,893 as payment by way of bonus. It also claimed deduction of a sum of Rs. 3,31,900 paid to the employees as cash award (production incentive). Both these claims were rejected by the Income-tax Officer, Regarding the sum of Rs. 17,13,893, the Income-tax Officer held that it was an expenditure relating to the prior period and so it was not allowable for the relevant assessment year. Regarding the sum of Rs. 3,31,900, the Income-tax Officer held that it was a payment in the nature of bonus and the assessee was paying the maximum amount of bonus payable under the Payment of Bonus Act and so the amount in excess of the amount payable under the Bonus Act was not allowable under Section 36(1)(ii) of the Income-tax Act. In appeal, the Commissioner of Income-tax (Appeals) held that the payment of
Rs. 17,13,893 was a customary payment not covered by the Payment of Bonus Act and the amount was paid by the assessee to the employees for the services rendered. He deleted the disallowance of Rs. 17,13,893. Regarding the payment of Rs. 3,31,900, the Commissioner of Income-tax (Appeals) held that the payment was in the nature of salary pursuant to an agreement entered into between the management and the employees’, and was not a payment in lieu of bonus. He directed the deletion of the disallowance of Rs. 3,31,900 also. The Revenue went up in appeal before the Income-tax Appellate Tribunal. Following its earlier order for the assessment years 1976-77 and 1977-78 dated December 16, 1982 in ITA Nos. 65 and 158(Coch.) of 1981, the Appellate Tribunal held that the sum of Rs. 17,13,893 was an ex gratia payment by the assessee to its employees in pursuance of an agreement and so it is entitled to deduction of the said sum. Regarding the sum of Rs. 3,31,900, the Appellate Tribunal held that the payment was made in commercial expediency to avoid industrial disputes and consequent loss and the payment was more in the nature of additional wages and it was not a payment of bonus to which the Payment of Bonus Act, 1965, will be applicable. Alternatively, the Appellate Tribunal held that even if it was to be treated as bonus, it was a contractual bonus and so outside the provisions of the Bonus Act. The said sum was allowed as a deduction. It is thereafter at the instance of the Revenue that the two questions of law formulated hereinabove have been referred for the decision of this court.
3. We heard counsel. To what extent the bonus paid to the employees is deductible as revenue expenditure in the light of the provisions of the Income-tax Act, particularly Section 36(1)(ii) of the Act, has been exhaustively dealt with by a Bench of this court in CIT v. P. Alikunju, M. A. Nazir, Cashew Industries [1987] 166 ITR 611. The said decision has been followed in subsequent cases, viz., CIT v. Kumar Industries [1990] 183 ITR 156 (Ker) and CIT v. Kerala Agro Industries Corporation [1990] 183 ITR 197 (Ker). This Bench had occasion to consider the matter in an unreported decision dated June 6, 1990, in I. T. R. No. 13 of 1987–since reported in CIT v. Travancore Titanium Products Ltd. [1990] 186 ITR 112 (Ker). The above decisions lay down that, ordinarily, a payment envisaged by the Payment of Bonus Act can be claimed as a deduction and amounts paid over and above the amount payable under the Payment of Bonus Act can be claimed as deduction under Section 36(1)(ii) of the Income-tax 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. Whatever may be the label that is given to a payment or the occasion when the payment was made, any
amount paid which represents bonus should stand the scrutiny of Section 36(1)(ii) of the Income-tax Act. The fact that the amount was paid as per an agreement entered into by the parties or the payment was made as ex gratia, are of no consequence. The Appellate Tribunal did not consider as to whether the sum of Rs. 17,13,893, the ex gratia payment, could be allowed as a deduction in the light of the principles laid down by this court in the above decisions. It seems that the said amount is in excess of the statutory limit of 20% bonus. If that be so, it should satisfy the conditions laid down in Section 36(1)00 of the Act and as laid down by this court in the various Bench decisions. In so far as this has not been done, the order of the Appellate Tribunal is erroneous in law.
4. Therefore, we answer question No. 1 in the negative–against the assessee and in favour of the Revenue. Similarly, we answer the second limb of question No. 2 also in the negative–against the assessee and in favour of the Revenue.
5. However, it is for the Tribunal to consider as to whether the amount of Rs. 17,13,893 paid in excess of the statutory limit of 20% bonus payable under the Payment of Bonus Act can be allowed taking into account all the facts and circumstances of the case, in the light of the provisions of Section 36(1)(ii) of the Income-tax Act, as explained by this court in the above Bench decisions. The Tribunal shall restore the appeal to file and consider this aspect afresh.
6. The first limb of question No. 2 concerns the payment of Rs. 3,31,900 paid as production incentive. The Appellate Tribunal held that it is in the nature of additional wages and so a permissible deduction. In paragraph 7.6 of the order of the Appellate Tribunal dated January 19, 1985, this matter has been dealt with. It is stated that the amount was paid as per an agreement dated May 9, 1977. But, the said agreement was not produced before the Tribunal. It is further stated that the minutes of the meeting held on March 7, 1978 will show that the amount was paid by way of incentive bonus. Under what count the amount of Rs. 3,31,900 was paid by the assessee to the employees is not clear. The relevant agreement should have been perused first in order to determine the nature of payment. That has not been done. Without doing so, the Appellate Tribunal held that the production incentive is more in the nature of additional wages. This finding is based on no material. It is purely a surmise. Moreover, Section 31A of the Payment of Bonus Act has not been considered to determine whether the sum of Rs. 3,31,900 could be claimed as additional wages. It does not appear from a perusal of the order of the Appellate Tribunal that the plea was ever raised that the amount was paid by way of additional wages (para 2.5).
7. In these circumstances, we hold that the Appellate Tribunal was in error in holding that the sum of Rs. 3,31,900 paid to the employees was production incentive and was in the nature of additional wages. We answer the first limb of question No. 2 against the assessee and in favour of the Revenue. However, it is for the Appellate Tribunal to evaluate the nature of payment of Rs. 3,31,900 and based on that further finding determine whether the said sum is a permissible deduction in the light of Section 36(1)(ii) of the Income-tax Act read with Section 31A of the Payment of Bonus Act.
8. The reference is answered as above.
9. 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.
