COMMISSIONER OF INCOME-TAX VS PREMIER VEGETABLE PRODUCTS
1999 P T D 2369
[227 I. T R 931]
[Rajasthan High Court (India)]
Before V. K. Singhal and M. A. A. Khan, JJ
COMMISSIONER OF INCOME-TAX
Versus
PREMIER VEGETABLE PRODUCTS
D. B. Income-tax Reference No.43 of 1985, decided on 01/05/1996.
(a) Income-tax---
----Business expenditure---Bonus---Bonus in excess of what was stipulated under Payment of Bonus Act, 1965---Provision made for payment of bonus as a result of agreement, dated 2-4-1974, relating to year ending 31-3-1974- Liability known when balance-sheet was made---Provision made to discharge liability under agreement for maintaining industrial peace---Though agreement executed two days after close of accounting year, provision made is allowable deduction in assessment year 1974-75---Indian Income Tax Act, 1961, S.36(1)(ii), proviso.
(b) Income-tax---
----Business expenditure ---Assessee appointing distributors for sale of its products---Distributors making security deposit---In case of failure of assessee to supply required quantity of ghee to distributors, assessee to pay non-lifting commission to distributors---Payment made for commercial considerations---Is allowable deduction.
The assessee made provision for payment of bonus at the rate of 24 per cent on the basis of an agreement dated April 2, 1974. The Income-tax Officer took the view that the liability for payment of increased rate of bonus arose during the next year and not for the assessment year 1974-75 and since there was no liability for payment of bonus in excess of the maximum payable under the Payment of Bonus Act, 1965, he rejected the claim of the assessee for deduction of Rs.15,003 on account of provision for bonus. On appeal, the Appellate Assistant Commissioner found that though the agreement was made on April 2, 1974, i.e., in the next year, it related to the year under appeal and, therefore, held that the liability to pay bonus at 24 per cent. as per agreement arrived at should have been taken into consideration to arrive at the correct profit or loss for the year ending March 31, 1974. On further appeal, the Tribunal found that the restriction imposed by the proviso inserted in section 36(1)(ii) with effect from September 25, 1975, to the effect that deduction in respect of bonus paid to an employee shall not exceed the maximum amount of bonus payable under the Bonus Act, was not applicable to the assessment year 1974-75, that though the agreement for payment of bonus was made after the end of the accounting year, it could not be considered to be detrimental to the case of the assessee, as it pertained to the year under appeal and that the liability was known to the assessee at the time of preparing the balance-sheet. The Tribunal therefore, confirmed the order of the Appellate Assistant Commissioner. On a reference:
Held, affirming the order of the Tribunal, that the provision for bonus in excess of what was stipulated under the Bonus Act was for business considerations so that there might not be any labour unrest and the unit might peacefully work. The bonus agreement dated April, 2, 1974, fixed the liability for the accounting year ending March 31, 1974, i.e. the assessment year 1974-75, and merely because the agreement was executed two days after the close of the accounting year, it could not be considered to be detrimental to the case of the assessee. Therefore, the Tribunal was justified in deleting the disallowance of Rs.15,003 on account of provision for bonus.
The assessee under an agreement appointed distributors for sale of its products of vegetable ghee in various parts of the country and the distributors had deposited with the assessee certain amounts as security deposit per tin of vegetable ghee. The agreement stipulated the quantity of vegetable ghee which was to be supplied by the assessee to its distributors and in case of failure of the assessee to supply the products to some of the distributors, the assessee had to pay non-lifting commission to the distributors. On the question whether the non-lifting commission paid to the distributors was an allowable deduction:
Held, that the liability to pay non-lifting commission had arisen because of the agreement entered into between the assessee and the distributors and the expenditure was actually incurred. The payment made was for commercial considerations based on commercial expediency. The payment made, in consideration of security deposits received, was an allowable deduction. Therefore, the Tribunal was justified in deleting the disallowance of non-lifting commission.
CIT v. Arcuttipore Tea Go. Ltd. (1992) 197 ITR 588 (Cal.) and
C.I.T. v. National Engineering Industries Ltd. (1994) 208 ITR 1002 (Cal.) ref.
K. S. Gupta for G. S. Rapna for the Commissioner
JUDGMENT
The Income-tax Appellate Tribunal has referred the following two questions of law arising out of its order, dated November 28, 1980, in respect of the assessment year 1974-75:
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Appellate Assistant Commissioner was right in deleting the disallowance of non-lifting commission of Rs.78, 501?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the Appellate Assistant Commissioner deleting the disallowance of Rs.15,003 on account of provision for bonus?"
It was found by the Tribunal that the assessee made a provision for payment of bonus at the rate of 24 per cent on the basis of agreement with the employees association. The agreement was dated April 2, 1974, and the assessment proceedings ended on March 31, 1974. Therefore, the Income-tax Officer was of the view that the liability for payment of the increased rate of bonus arose during the next year and not for the assessment year 1974-75.
Since there was no liability for payment of bonus in excess of the maximum payable under the Bonus Act, the Income-tax Officer rejected the claim of the assessee.
In appeal before the Appellate Assistant Commissioner, it was found that though the agreement was made on April 2, 1974, i.e., in the next following year, it related to the year under appeal. Therefore, it was observed that the liability of 24 per cent. as per agreement arrived at should have been taken into consideration to arrive at the correct profit or loss for the year ending on March 31, 1974.
In second appeal before the Tribunal it was found that the workers demanded the bonus and liability was known to the assessee when the balance-sheet was made. Under the proviso to section 36(1)(ii) the deduction in respect of bonus paid to an employee shall not exceed the amount of bonus payable under that Act. The proviso was inserted in the Act with effect from September 25, 1975. The restriction imposed by the proviso is not applicable to the year under appeal. The proviso was held not applicable to the assessment year 1974-75. The Tribunal was of the view that since the agreement was made after the end of the year, it cannot be considered to be detrimental to the case of the assessee, as it pertained to the year under appeal and that was known at the time of preparing the balance-sheet. The order of the Appellate Assistant Commissioner was confirmed.
In respect of non-lifting commission the Tribunal found that the facts of this assessment year also are similar to those for the year 1972-73 wherein it was pointed out that the distributors were appointed for the sale of its products in various parts of the country in April, 1971, and the distributors had deposited with the assessee amounts running between Rs.25,000 and Rs.2,00,000 at Rs.5 per tin. The agreement was entered into which stipulated the quantity of the vegetable ghee, which was to be supplied by the assessee-company to the distributors. The assessee failed to supply the products to some of the distributors with the result that non-lifting commission had to be paid.
In respect of bonus, it was found that the copy of the agreement, dated April 2, 1974, was submitted before the Income-tax Officer where the employees association entered into an agreement. The demand of the association was for 30 per cent bonus for the year 1973-74 and the agreement in respect of the assessment year 1974-75 was not produced, but according to the Income-tax Officer the liability to pay bonus arose from the assessment year 1975-76 only. The maximum rate of bonus was 20 per cent which was allowed and the amount of Rs.15,003 was disallowed. The case of the assessee was that the company is maintaining its accounts on the mercantile system and the liability which is known to exist on the date of the balance-sheet has got to be provided for to arrive at the true and correct profit of the current year. It was not in dispute before the Appellate Assistant Commissioner that the agreement was executed on April 2, 1974, which related to the year ending on March 31, 1974, though executed two days after the close of the accounting year and as such the provision for payment of bonus in accordance with the agreement was allowed by the Appellate Assistant Commissioner. The Tribunal took note of the provisions of section 36(1)(ii) which were inserted on September 25, 1975, and came to the conclusion that the restriction 'imposed by the proviso is not applicable to the year under appeal since the liability was known and pertained to the year under appeal. It was held that the Appellate Assistant Commissioner was justified in allowing the claim.
In respect of disallowance of non-lifting commission, it was found that the company failed to supply the products to some of the distributors and, therefore, the non-lifting commission was to be paid at the rate of 50 paisa per tin. Since the option was to be exercised by the distributors twice in a year to invoke clause IV of the agreement, payment was considered under the agreement for business considerations. It was also explained that the work of the company was divided in different zones and freight was to be borne by the company and, therefore, it was more profitable to supply the commodity to certain zones which are nearby as a result of which distributors of other zones could not be supplied vanaspati. The price of vanaspati was found to be lower than the price fixed by the Government. The Tribunal found that under the agreement if the company fails to supply the products to the distributors, it would be liable to pay non-lifting commission and option was given to the distributors to choose. The commission so paid for the failure of the company to supply the products because of non-availability of the products was to save freight charges. Even for failure of distributors to lift the goods the commission was paid under the agreement. It was not for extra-commercial considerations and it was found that there is no material on record to show that extra-commercial considerations were there to appoint distributors.
We have considered the matter. Section 36(1)(ii) provides that 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, is to be allowed as deduction while computing the income under section 28 of the Income-tax Act. The proviso was added with effect from September 25, 1975, and was to apply for the assessment year 1975-76 and subsequent years. The bonus is an extra payment to the workmen for the services rendered by them, which they expect from the employer. This ex gratia payment is in recognition of the services rendered by the employee as a result of which the unit is benefited. The bonus to the extent it was permitted by the Bonus Act was allowed by the Income-tax Officer. The extra benefit was also for business considerations so that there may not be labour unrest and the unit may peacefully work. It is not disputed that the agreement, dated April 2, 1974, fixes the liability for the accounting year ending on March 31, 1974, i.e., the assessment year 1974-75, and as such simply because it was executed only two days later from the end of the year, it cannot be considered that the deduction was not permissible. The finding which has been recorded by the Tribunal is that the agreement, dated April 2, 1974, fastened the liability for extra bonus for the assessment year 1974-75 and, therefore, it was allowed. The Calcutta High Court in the case of C.I.T. v. Arcuttipore Tea Co. Ltd. (1992) 197 ITR 588 found that the payment of extra bonus as a result of bipartite agreement over and above the minimum bonus payable under the Payment of Bonus Act, 1965, to maintain industrial peace without which the business would have come to a standstill, is payment wholly, necessarily and exclusively laid out for the purposes of business and commercial expediency and is deductible as business expenditure under section 37(1) of the Income tax Act. A similar view has been taken in the case of C.I.T. v. National Engineering Industries Ltd. (1994) 208 ITR 1002 (Cal.).
In respect of non-lifting commission it is not disputed that the liability has arisen because of the agreement and the expenditure was actually incurred. It was for commercial considerations based on commercial expediency. The payment, in consideration of security deposits received, was allowable deduction.
The provision which has been made by the company in view of the agreement entered into can only be considered as a legal obligation of the company to discharge its liability under the agreement, which was for maintaining industrial peace.
In these circumstances, we are of the view that the Tribunal was justified in holding that the Appellate Assistant Commissioner was right in deleting the disallowance of non-lifting commission of Rs.78,501. We are further of the view that the Tribunal was justified in upholding the order of the Appellate Assistant Commissioner deleting the disallowance of Rs.15,003 on account of provision for bonus.
Consequently, the reference is answered in favour of the assessee and against the Revenue. No order as to costs.
M.B.A./2072/FCReference answered.