Income-tax--

----Business expenditure---Amount paid in pursuance of settlement under Industrial Disputes Act---Finding by Tribunal that payment was made for purposes of commercial expediency and did not constitute bonus---Amount was deductible---Indian Income Tax Act, 1961, S. 37.

The assessee was a company engaged in the manufacture of cotton yarn. In the return of income filed by the assessee for the assessment year 1979-80, the assessee claimed deduction of a sum of Rs.6,74,086 on the ground that the sum represented bonus as well as certain additional payments made to the, employees as production incentive. The Income-tax Officer determined the allocable surplus as per the provisions of the Payment of Bonus Act at Rs.4,68,886 and allowed the same in computing the business income of the assessee. He disallowed the balance of the amount on the ground that the sum represented bonus and the excess amount paid was in contravention of the Payment of Bonus Act. The Commissioner of Income tax (Appeals) allowed the deduction. The Tribunal noticed the me Memorandum of settlement arrived at between the employer. and employees under section 12(3) of the Industrial Disputes Act, 1947, and found that under the agreement, the assessee had agreed to pay bonus as well as six percent. As conditional payment in consideration of the better performance and smooth working of the mills in the relevant year. The Appellate Tribunal, therefore, held that the additional payment of 6 per cent was trot bonus and it was paid out of commercial expediency. The Tribunal, therefore, held that since it was not bonus, it was deductible under section 37 of the Income Tax Act, 1961, and the entire amount was deductible. On a reference:

Held, that the memorandum of settlement made it clear that the additional payment was not bonus and the distinction between the bonus payment and the additional payment was maintained throughout the agreement under which the composite payment was made to the employees.

The Appellate Tribunal found that the additional payment was made out of commercial expediency and once it was paid on the basis of commercial consideration, the sum paid was allowable under section 37 of the Act.

C.V. Ranjan for the Commissioner.

P. P. S. Janarthana Raja for the Assessee.

JUDGMENT

N. V. BALASUBRAMANIAN, J.---Mr. Janarthana Raja undertakes to file vakalath on behalf of the respondent.

The Appellate Tribunal under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), has referred the following question of law for our opinion for the assessment year 1979-80:

Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly held that the additional amount of Rs.2,05,201 paid by the assessee company to its workers ' to pursuance of a settlement under the Industrial Disputes Act, 1947, is allowable under section 37 of the Income Tax Act, 1961?"

The assessee is a company engaged in the manufacture of cotton yarn. In the return of income filed by the assessee for the assessment year 1979-80, the assessee claimed deduction of a sum of Rs.6,74,086 on the ground that the sum represented bonus as well as certain additional payments made to the employees as production incentive. The Income-tax Officer determined the allocable surplus as per the provisions of the payment of Bonus Act at Rs.4,68,886 and allowed the same in computing the business income of the assessee. He disallowed the balance of the amount on the ground that the sum represented the bonus and the excess amount paid was in contravention of the Payment of Bonus Act and it is not liable to be allowed under section 36(l)(ii) of the Act.

The assessee filed an appeal before the Commissioner of Income-tax (Appeals) against the order. of assessment disallowing the sum of Rs.2,05,201 and the Commissioner (Appeals) held that the additional wages cannot be regarded as bonus and the payment was made out of commercial consideration. He, therefore, held that the entire payment is an expenditure allowable under section 37 of the Act. The Revenue filed an appeal before the Income-tax Appellate Tribunal. The Tribunal noticed the memorandum of settlement arrived at between the employer and employees under section 12(3) of the Industrial Disputes Act, 1947, and found that under the agreement, the assessee had agreed to pay bonus as well as six per cent, as conditional payment in consideration of the better performance and smooth working of the mills in the relevant year. The Appellate Tribunal, therefore held that the additional payment of 6 per cent was not bonus and it was paid out of commercial expediency. The Tribunal, therefore, held that since it is not bonus, it is deductible under section 37 of the Act and the entire amount is deductible in the computation of the business income.

Mr. C. V. Rajan, learned counsel appearing for the Department, submitted that six percent. additional income should also be regarded as bonus payment and the provisions of section 36 of the Act would apply. On the other hand, 'Mr. Janathana Raja, learned counsel for the assessee, submitted that six percent. of the wages paid was not bonus at all and is allowable.

We have carefully considered the submissions of learned counsel for the Department and the assessee. The memorandum of settlement arrived at under section 12(3) of the Industrial Disputes Act, 1947, clearly shows that it consists of two payments, one is bonus, which was to be paid at the rate of 13.71 percent. and another is additional amount which was mentioned in Annexure-II of the said agreement and the additional amount was paid to employees in consideration of the better performance and smooth working of the mills during the relevant previous year. Though the obligation to pay the money arose out of the same contract, we are of the view that the employees were paid something in addition to the statutory bonus and the money that was paid in excess of the statutory obligation cannot be regarded as bonus at all. There might have been collective bargaining by the employees which made the assessee to make additional payment. But, on that account, it cannot be regarded as bonus at all. The Appellate Tribunal found that the additional payment was made out of commercial expediency and once it is paid on the basis of commercial consideration, the sum paid is allowable under section 37 of the Act. The memorandum of settlement also makes it clear that the additional payment is not bonus and the distinction between the bonus payment and the additional payment is maintained throughout the agreement under which the composite payment was made to the employees. Once it is held that it is not bonus, then the provisions of section 36 of the Act are not attracted aced, the provisions of section 37 of the Act alone would apply. We are of the opinion that the expenditure was incurred wholly and exclusively for the assessee's business and the additional payment would fall within the scope of section 37 of the Act. In this matter, we are of the opinion that the Tribunal has come to the correct conclusion that - the additional amount of Rs.2,05,201 paid by the assessee-company, in pursuance of the settlement under the Industrial Disputes Act, 1947, cannot be regarded as bonus and it is liable to be treated as business expenditure under section 37 of the Act. In this view of the matter, we answer the question referred to us in the affirmative and against the Department. No costs.

M.B.A./4017/FC Reference answered: