COMMISSIONER OF INCOME-TAX VS EGYNORE BENEFITS SOCIETY LTD, 2000 PTD-MADRAS-HIGH-COURT-INDIA 2493 (1996)

Income-tax---

----Business expenditure---Bonus---Bonus in excess of amount allowable under S.36(1)(ii)---Finding by Tribunal that amount paid was customary and that it- was reasonable---Amount was deductible---Indian Income Tax Act, 1961, S.37.

Held, that as per the decision of the Supreme Court in Mumbai Kamgar Sabha v. Abdulbhai AIR 1976 SC 1455 if the bonus is paid customarily and the payment of bonus is reasonable, it should not be hit by the provisions of section 36(1)(ii) of the Income Tax Act, 1961. Inasmuch as the Tribunal came to the conclusion on appraisal of the facts that the bonus paid was reasonable and customary, such payment was deductible.

Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai (1976) 49 FJR 15; AIR 1976 SC 1455 fol.

CIT v. Alikunju (P.), M. A. Nazir, Cashew Industries (1987) 166 ITR 611; (1987) 70 FJR 412 (Ker.); CIT v. Mohamed Ismail (D.) (1997) 227 ITR 211 (Mad.) and Grahams Trading Co. (India) Ltd. v. Their Workmen (1959-60) 17 FJR 130 (SC) ref.

C. V. Rajan for J. Jayaraman for the Commissioner.

Aravind R. Pandian for the Assessee.

JUDGMENT

K. A. THANIKKACHALAM, J.---In compliance with the directions of this Court in Tax Case Petition No. 519 of 1980, dated March 9, 1981, the Tribunal referred the following question for the opinion of this Court under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as the "Act"):

"Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 36(1)(ii) of the Income Tax Act, 1961, the Appellate Tribunal was right in deleting the disallowance of Rs.1,93,419 being bonus paid to the employees in excess of 20 percent. of the salary made in the assessment for the year 1976-77?"

The assessee is a non-banking financial institution and it carries on business in money-lending on pledges. During the previous year relevant to the assessment year 1976-77, it has paid a sum of Rs.3,79,204 as bonus to its employees and claimed the same as deduction. The assessee contended that it was uniformly paying bonus to its employees at the rate of five months salary from 1969 onwards and that they were paying three months' and four months" salary as bonus in the earlier years, and, therefore, the payment being customary bonus was outside the purview of the Payment of Bonus Act. The Income Tax Officer held that according to the provisions of section 36(l)(ii) of the Act, any bonus paid in excess of 20 percent. of the salary of the employees could not be allowed and in this view, he disallowed a sum of Rs.1,93,419 as excess bonus paid by the assessee. According to the Income-tax Officer, the Payment of Bonus Act and the amendment of section 36(l)(ii) came into effect from September 25, 1975, and therefore, they are applicable to the assessment year under consideration and the excess payment could not be allowed as a deduction.

On appeal, the Appellate Tribunal Assistant Commissioner relying on the decision of the Supreme Court in Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai (1976) 49 FJR 15; AIR 1976 SC 1455, held that the Bonus Act, 1965, as amended in 1975 will not apply to the customary bonus and hence the amendment to section 36(1)(ii) would not apply to the assessee's case and relying on the tests formulated by the Supreme Court in Grahams Trading Company (India) Ltd. v. Their Workman (1959-60) 17 FJR 130; (1959) 11 ILJ 393, the Appellate Assistant Commissioner deleted the disallowance of Rs.1,93,419.

Aggrieved, the Department went on appeal before the Appellate Tribunal. The Appellate Tribunal relying on its earlier order in I.T.A. No.936 (Mds.) of 1977-78, dated August 11, 1978, in the case of Madurai Ramnad Transport (Private) Ltd. held that the customary bonus paid would not be hit by the first proviso to section 36(l)(ii) of the Act and that, therefore, the entire payment of bonus should be allowed as a deduction.

Before us, learned counsel standing counsel appearing for the Department submitted that inasmuch as the bonus paid by the assessee was in excess of the quantum, as determined under the Payment of Bonus Act, the excess amount should not be allowed as a deduction according to learned standing counsel appearing for the Department, the provisions of section 36(1)(ii) which came into effect from September 25, 1975, would be applicable to the facts of this case and in order to ascertain the quantum of bonus allowable and in view of the decision of the Kerala High Court in CIT v. Alikunju (P.) M. A. Nazir, Cashew Industries (1987) 166 ITR 611, the matter should go back to the Assessing Officer in re-determining the allowable bonus.

We have heard learned standing counsel appearing for the Department and we have also perused the records carefully. The fact remains that the excess bonus paid over and above the limit prescribed under the Payment of Bonus Act was allowed as a deduction by the Tribunal, inasmuch as the said bonus is customary bonus, in view of the decision of this Supreme Court in Mumbai Kamgar Sabha v. Abdulbhai Faizullahai (1976) 49 FJR 15,; AIR 1976 SC 1455. On the facts, the Tribunal came to the conclusion that the quantum of bonus paid in the assessment year under consideration is a reasonable one. It was also found that such payment of bonus was made in the earlier year. Therefore, it is under the customary practice of the assessee to pay bonus every year, in accordance with the profit earned by the assessee. As per the decision of the Supreme Court in Mumbai Kamgar Sabha's case (1976) 49 FJR 15; AIR 1976 SC 1453, if the bonus is paid customarily and the payment of bonus is reasonable, it should not be hit by the provisions of section 36(l)(ii) of the Act. Inasmuch as the Tribunal came to the conclusion on appraisal of Acts that the bonus paid was reasonable and customary, we are of the opinion that such payment of bonus is allowable as' a deduction and the matter need not be remitted back for re-determination of the allowable bonus, as requested by the Department. A similar view was also taken by this Court in CIT v. Muhammad Ismail (D.) (1997) 227 ITR 211, by judgment, dated July 2, 1996.

Accordingly, we answer the question referred to us in the affirmative and against the Department. No costs.

M.B.A./4238/FC???????????????????????????????????????????????????????????????????????????????? Reference answered.