ORDER
M.K. Chaturvedi, V.P.
These three appeals by the revenue rotate around the identical issue. For the sake of convenience, these appeals are consolidated and disposed of by a common order.
2. The only issue raised in these appeals relates to the allowability of ex gratia payments to the employees.
3. Assessing officer observed that the assessee paid ex gratia bonus in excess of 8.33 per cent. As such he disallowed a sum of Rs. 4,81,660 for the assessment year 1986-87, Rs. 16,80,717 for the assessment year 1987-88 and Rs. 24,60,294 for the assessment year 1988-89. It was explained before the Commissioner (Appeals) that these payments were made to the employees as per the agreement. The purpose was to buy industrial peace. It was stated before the Commissioner (Appeals) that the expenditure incurred on ex gratia payments are to be allowed under section 37(1) of the Income Tax Act, 1961 (hereinafter called the Act). It was further stated that as the amount did not exceed 20 per cent of the salary, this is also allowable under section 36(1)(ii) of the Act. Commissioner (Appeals) held that the amounts were paid as per the agreement for maintaining harmonious business relationship with the employees. As such, he allowed the expenditure.
4. The learned Departmental Representative relied on the decision of the jurisdictional High Court rendered in the case of CIT v. Rajaram Bandekar & Sons (Shipping) (P) Ltd. (1999) 237 ITR 628 (Bom). In this case, the issue before the Hon’ble High Court was that whether the assessee could claim deduction of ex gratia payment made by way of bonus to the workmen, The Tribunal allowed the claim under section 37 of the Act. It was contended on behalf of the revenue that in case of expenditure in the nature of bonus paid to the employees for services rendered, section 36(1)(ii) of the Act would apply and the allowability of the expenditure as a deduction in computing the income of the assessee can only be determined by the test laid down in that provision. It is not permissible to the assessee to claim deduction under the general provision for deduction contained in section 37 of the Act. Hon’ble High Court has held that deduction in respect of bonus cannot be claimed under section 37(1) of the Act. The claim of the assessee in this regard should be considered by applying the test laid down in the second proviso to section 36(1)(ii) of the Act. If the assessee complies with the conditions set out in the second proviso to section 36(1)(ii) of the Act, the deduction on account of ex gratia bonus may be allowed.
5. Shri D.P. Bapat, learned counsel for the assessee submitted that the payment in the present case is covered under section 36(1)(ii) of the Act. As such, it is to be allowed, in conformity with the decision of the jurisdictional High Court. Without prejudice to the above, it was further contended that the payment made by the assessee was ex gratia payment. As such, it can also be allowed under section 37M of the Act. It was further argued that the decision of the Apex Court rendered in the case of Shahzada Nand & Sons v. CIT (1977) 108 ITR 358 (SC) was not brought to the notice of Hon’ble Bombay High Court.
6. We have heard the rival submissions in the light of material placed before us and precedents relied upon. It is a trite law canonized in the dictum : 11 generalia specialibus non derogant’ (General things will not derogate from special things). Sec. 37(1) of the Act reads as under :
“37(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ‘Profits and gains of business or profession’.”
From the analysis of section 37(1) of the Act, it appears that this section refers to the allowability of the expenditure of only those expenses, which are not described in sections 30 to 36 of the Act. It is a general provision. If some expenditure is described in sections 30 to 36 of the Act, the same can not be considered under section 37(1). This is a residuary provision. If the Act has prescribed any special provision for the allowability of such expenditure, that special provision will prevail over the general provision. This is in conformity with the principle enunciated in the dictum : “Generalia specialibus non derogant”. Hon’ble Bombay High Court upheld this principle in the case of CIT v. Rajaram Bandekar & Sons (Shipping) (P) Ltd. (supra). Hon’ble High Court has held that the claim of the assessee can be considered under section 36(1)(ii) of the Act. Section 36(1)(ii) reads as under :
“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 :
(i) …………..
(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;
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 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.”
It is pertinent to note that the first proviso and second proviso were omitted by the Direct Tax Laws (Amendment) Act, 1987, with effect from 1-4-1989. We are concerned with the assessment years 1986-87, 1987-88 and 1988-89. As such, the matter is to be decided in the light of these provisos.
7. The assessee had two establishments. One at Bombay, the other at Pune. Employees Union representing the Bombay Unit demanded the same quantum of ex gratia, which they had received in the previous year. Their contention was that they had been in receipt of payment of ex gratia, which was always In excess of Rs. 3,600, hence, for all practical purposes it was a part of their wages and they should not be deprived of that. It was also contended that the management should not take only one bad year so seriously and the assessee-company should consider the workmen’s demand for bonus in the larger perspective of harmonious industrial relations and continued co-operation of the workmen. The management initially objected to the demand raised by the workers. Subsequently, payment was made in conformity with the settlement dated 3-7-1985. Memorandum of settlement was prepared and the payments were made in terms of the agreement contained in the memorandum of Settlement.
8. Reasonableness of the bonus was stressed with reference to the pay of the employees and the conditions of their services. It was stated that the amount of bonus together with ex gratia did not exceed 20 per cent of the salary. The ex gratia amount was payable as per the terms of agreement with workers union dated 3-7-1985. The agreement was executed during the assessment year 1986-87. The amount paid was stated to be reasonable with reference to the profits of the business. It was also stated that similar payments were allowed by the Commissioner (Appeals) in the assessment year 1985-86, following the Tribunal’s order for the assessment year 1980-81.
9. Hon’ble Supreme Court in the case of Shahzada Nand & Sons v. CIT (supra) has held that the three factors laid down by the proviso to section 36(1)(ii) are not really conditions on the fulfilment of which alone the amount 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 payment. It may be noted 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 such payment to an employee, but, yet having regard to the other circumstances, the amount paid to the employee may be regarded as reasonable. What the proviso requires is merely the reasonableness of the amount. This reasonableness is to be determined with reference to the three factors. These factors are to be considered from the view point of a normal, prudent businessman. The reasonableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency. On the commercial expediency, the Hon’ble Supreme Court has commented as under :
“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.”
The Apex Court has further observed that it is not necessary, for payment made to an employee to be allowable under section 36(1)(ii), that it should be paid under a contractual obligation. Merely because the amount is paid ex gratia, it would not necessarily mean that it is unreasonable.
10. In the present case, we find that the payment was made under a contractual obligation. The amount was paid in the interest of business.
11. The Apex Court in the case of Baidyanath Ayurveda Bhawan Mazdoor Union v. Management of Shri Baidyanath Ayurveda Bhawan (P) Ltd. (1984) 17 Taxman 19 (SC) has held that attendance bonus paid to workers is outside the purview of Payment of Bonus Act, so that payment of such bonus over and above bonus admissible under that Act is permissible. Therefore, it cannot be contended as a general rule that the deduction is not permissible in respect of an employee covered by the Payment of Bonus Act, 1965, if what is paid as bonus is in excess of, or otherwise than, what is payable under that Act, even if the payment of the excess amount as bonus is justifiable when considered with reference to the clauses (a) to (c) of second proviso to section 36(1)(ii) of the Act. The two provisos to section 36(1)(ii) must be read together to correctly understand the permissible deduction in terms of section 36(1)(ii) of the Act. The object of that clause is to encourage the management to pay bonus not only to the extent to which it is statutorily bound to pay to the employee, but also in excess of that limit, provided the payment is justifiable as a reasonable payment. To say that second proviso to section 36(1)(ii) of the Act has no application in respect of employees covered under the Bonus Act, and that bonus paid to them in excess of, or otherwise than, what is statutorily required is not deductible under section 36, put an artificial construction upon a beneficial provision.
12. We have considered the admissibility of the claim on the touch stone of the ratio laid down by the jurisdictional High Court in the case of CIT v. Rajaram Bandekar & Sons (Shipping) (P) Ltd. (supra). The claim of the assessee is not admissible under section 37(1) of the Act. Special provision contained in section 36(1)(ii) prevails over the general provision referred under section 37(1) of the Act. The prescription of section 36(1)(ii) of the Act is to be construed ex viceribus actus, that is construction within the four corners of the Act. Nebulous concept of the legislative intent cannot be used to curtail the explicit provision in a statute.
13. We have taken into consideration the entire conspectus of the case. We have examined the factual details. In our opinion, the amount of bonus was reasonable with reference to the pay of the employees and the conditions of their services. It was also reasonable with reference to the profits of the business. It was established with reference to the records that there was general practice of making such ex gratia bonus to the employees. As such, in our opinion, assessee complied with the conditions contained in section 36(1)(ii) of the Act. We have also perused the reasonings adduced in the impugned order.
In our opinion, the Commissioner (Appeals) took a correct view in the matter and his order cans for no interference. We accordingly uphold the same.
14. In the result, appeals of he revenue stand dismissed.