Income-tax---

----Business expenditure---Bonus---Assessee paying five months' salary as bonus from 1967 onwards---Assessee subsequently restricting bonus to 20% of salary in accordance with Payment of Bonus Act for Assessment year 1977-78---Unrest among workers and agreement, in October, 1977, and assessee making provision for further amount in its accounts---Amount paid as arrears of bonus in Assessment year 1978-79---Liability to bonus arose as 4 result of agreement in October, 1977---Amount was paid for purposes of business---Amount was deductible in Assessment year 1978-79---Amount paid in excess of 20% of salary and wages in Assessment year 1978-79 is allowable as it was for commercial expediency---Indian Income Tax Act, 1961, S.37---Indian Payment of Bonus Act, 1965.

The assessee had been paying five months' salary as bonus. The Income-tax Officer disallowed the claim for deduction of the bonus paid in excess of the statutory limit of 20 per cent of the salary or wages in earlier years and the Tribunal in the appeals preferred by the assessee for these years allowed the entire provision on the ground that it was a customary bonus: In the year 1977-78, the assessee made a provision only to the extent of 20 percent. of the salary of wages which created unrest among the workers -in the organisation and negotiations and discussions took place between the employees' union and the assessee, ultimately, in October, 1977, an agreement was reached to pay bonus to the employees. The assessee thereafter made a provision for a sum of Rs.1,84,575 in the account maintained for the previous year relevant to the assessment year 1978-79. The assessee claimed as deduction a sum of Rs.1,84,575 in the assessment proceedings for the assessment year 1978-79, relevant previous year ending on December 31, 1977, on account of arrears of bonus payable for the period from January 1, 1976 to December 31, 1976. That apart, the assessee also claimed deduction of a sum of Rs.3,55,221 as bonus payable in respect of the relevant previous year, namely, January 1, 1977 to December 31, 1977. The Income-tax Officer disallowed the claim of the assessee for a sum of Rs.1,84,575 on the ground that it represented arrears of bonus and therefore, it did not relate to the year of account. As for the claim of the assessee for a deduction of Rs.3,55,221, the Income-tax Officer disallowed a sum of Rs.1,84,815 on the ground that the amount was in excess of 20 percent. of the pay. The Commissioner of Income-tax. (Appeals) held that the assessee was entitled to deduction of Rs.3,55,221 in toto as the liability accrued in the year of account and it was based on commercial expediency. In so far as the arrears of bonus amounting to Rs.1,84,575 was concerned, the Commissioner of Income-tax (Appeals) upheld the order of the Income tax Officer. The Tribunal found that the liability to pay bonus did not accrue by virtue of a statute and the liability to pay bonus accrued only by virtue of the agreement made in 1977, and therefore, the Tribunal held that it must be regarded as an outgoing for the previous year relevant to the accounting year 1978-79. The Tribunal also noticed that the payment of b6nus in excess of 20 percent. of salary or wages could be brought within section 37 of the Income Tax Act,- 1961, as it was paid for purposes of commercial expediency and what' was really paid was not bonus but a payment made to ward off the unrest in the organisation. In this view of the matter, the Tribunal held that the sum of Rs.1,84,815 was deductible in the computation of the income for the assessment year 1978-79. On a reference:

Held, that there were no materials to indicate that the earlier customary bonus was in any way connected with festival or Pooja and in the absence of any material those principles could not be extended. to cases unconnected with Pooja or festival bonuses. Only by the agreement entered into subsequently between the assessee-company and the employees' union, the liability to pay bonus had accrued. The amount paid in excess of 20 percent. of the salary. or wages in the assessment year 1978-79 was allowable on the basis of commercial expediency. It was seen from the records that there was unrest among the employees because they had not obtained the bonus which they would have obtained, due to the unilateral decision of the assessee in the assessment year 1977-78. The decision to pay enhanced bonus for the assessment year 1977-78 was arrived at on business considerations to ward off the labour unrest among the employees' and to keep them content and for smooth and efficient functioning of the business organisation. The liability to pay bonus of Rs.1,84,575 accrued during the previous year relevant to the assessment year 1978-79 and the assessee was entitled to deduction of the said amount.

B.N. Elias & Co. Ltd. Employees' Union v. 'B. N. Elias & Co. Ltd. (1960-61) 19 FJR 293; AIR 1960 SC 886; CIT v. `Bisra Stone Lime Co. Ltd. (1987) 164 ITR 693 (Cal.); CIT v. Mohammed Ismail (D.) (1997) 227 ITR 211 (Mad.); Graham Trading Company (India) Ltd. v. Their Workmen (1959-60) 17 FJR 130; (1959) 2 LLJ 393; Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai (1976) 49 FJR 15 and AIR 1976 SC 1455 ref.

C. V. Rajan for the Commissioner.

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

JUDGMENT

N. V. BALASUBRAMANIAN, J.---The assessee is assessed in the status of a company in which the public are not substantially interested and the assessee claimed as deduction a sum of Rs.1,84,575 in the assessment proceedings for the assessment year 1978-79, relevant previous year ended on December 31, 1977, on account of arrears of bonus payable for the period from January 1, 1976 to December 31, 1976. That apart, the assessee also claimed deduction of a sum of Rs.3,55,221 as bonus payable in respect of the relevant previous year, namely January 1, 1977, to December 31, 1977. The Income-tax Officer disallowed the claim of the assessee of a sum of Rs.1,84,575 on the ground that it represented arrears of bonus and, therefore, it did not relate to the year of account. As for the claim of the assessee for a deduction of Rs.3,55,221, the Income-tax Officer disallowed a sum of Rs.1,84,815 on the ground that the amount is in excess of 20 percent. of the pay and in this view of the matter, he completed the assessment disallowing the claim of the assessee towards bonus. The assessee preferred an appeal against the order of the assessment made by the Income-tax Officer to the Commissioner of Income-tax (Appeals). The Commissioner of Income tax (Appeals) held that the assessee was entitled to deduction of Rs.3,55,221 in toto as the liability accrued in the year of account and it was based on commercial expediency. In so far as the arrears of bonus amount of Rs.1,84,515 is concerned, the Commissioner (Appeals) upheld the order of the Income-tax Officer. According to the Commissioner (Appeals), the bonus based on the custom had accrued in the year ending on December 31, 1976, and the whole of the bonus paid at the rate of five months' salary must be deemed to have accrued during the year ending on December 31, 1976, and the fact that the Income-tax Officer in the assessment of the company for earlier years allowed bonus only to the extent of 20 percent. of the bonus paid would not be a sufficient ground to show that the entire customary bonus accrued on December 31, 1976. 14e relied upon a decision of, the Supreme Court in Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai, AIR 1976 SC 1455; (19761 FJR 15, and held that the custom followed by the assessee-company for computing bonus from the year 1949 and the practice adopted of paying five months' salary which started from the year 1967 clearly showed that a right to bonus in the employees can be predicated with a corresponding obligation on the part of the assessee to pay the bonus at five months' salary accrued at the end of the year. He, therefore, held that the Income-tax Officer was justified in disallowing the claim of the assessee for Rs.1,84,515. lie also referred to the correspondence exchanged between the employees' union and the assessee and held that though in October, 1977, , the company had agreed to pay five months' bonus and also arrears of bonus. the representations have no relevance in deciding the question when the liability accrued in paying 5/12 of annual emoluments as bonus. According to the' Commissioner (Appeals), because of the decision of the Income-tax Department, the accrued liability did not get postponed till the next accounting year and in this view of the matter, he upheld the order of the Income-tax Officer.

The assessee carried the matter in appeal before the Appellate Tribunal. The Appellate Tribunal found that the liability to pay bonus did not accrue by virtue of a statute and the liability to pay bonus accrued only by virtue of the agreement made in 1977 and, therefore, the Tribunal held that it must be regarded as an outgoing for the previous year relevant to the accounting year 1978-79. The Tribunal also noticed that the payment of bonus in excess of 20 percent. of salary or wages can be brought within section 37 of the Act as it was paid on commercial expediency and what was really paid was not the bonus but a payment made to ward off the unrest in the organisation. In this view of the matter, the Appellate Tribunal held that the sum of Rs.1,84,815 is deductible in the computation of the income for the assessment year 1978-79:

Aggrieved by the order of the Appellate Tribunal, the Revenue has obtained a reference and the Tribunal has referred the following questions of law for our consideration:

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability to pay bonus of Rs.1,84,575 relating to the period January 1, 1976 to December 31, 1976, relevant to the assessment year 1977-78 accrued only in the previous year relevant to the assessment year 1978-79, and, therefore, the assessee is entitled to deduction of the said amount?

(2) Whether the Tribunal's view that the assessee is entitled to deduction of bonus in excess of 20 percent. of the salary is sustainable in law?'

Mr. C. V. Rajan, learned counsel for the Revenue, submitted that the liability in so far as the claim made for the provision of Rs.1,84,515 is concerned, accrued to the assessee at the end of the year ending on December 31, 1976, as the assessee was paying customary bonus and the customary bonus would ripen into liability at least at the end of the accounting year. The further submission of learned counsel for the Revenue is that though the Income-tax Officer has taken a view that the amount of bonus should be restricted to 20 percent. of the salary or wages that would not prevent the accrual of the liability for the balance of the amount and, therefore, the Tribunal was not correct in holding that the liability accrued only by virtue of the agreement. He strongly placed reliance on a decision of the Calcutta High Court in CIT v. Bisra Stone Lime Co. Ltd. (1987) 164 ITR 693, and a decision of this Court in CIT v. D. Muhammad Ismail (1997) 227 ITR 211.

Mr. Janarthana Raja, learned counsel for the assessee, on the other hand, submitted that the liability had accrued to the assessee only by virtue of the agreement and, therefore, it is a properly deductible item in the computation of the assessee's income. He also submitted that the payment was made by virtue of the commercial expediency and if the amount is not paid, it would create labour unrest and, therefore, the amount is liable to be deducted in the computation of the income of the assessee for the assessment year 1977-78.

We have carefully considered the submissions of learned counsel for the respective parties. The fact remains that the assessee has been in the practice of paying five months' bonus in excess of the statutory limit of 20 percent. of salary or wages. The Income-tax Officer disallowed the claim for deduction of the bonus paid in excess of the statutory limit of 20 per cent of the salary or wages in earlier years and the Tribunal in the appeals preferred by the assessee for these years allowed the entire provision on the ground that it was a customary bonus. In the year 1977-78, the assessee made a provision only to the extent of 20 per cent of the salary or wages which created unrest among the workers in the organisation and negotiations and discussions took place between the employees' union and the assessee and ultimately in October 1977, an agreement was reached to pay bonus to the employee. The assessee thereafter made a provision for a sum of Rs.1,84,515 in the account maintained for the previous year relevant to the assessment year 1978-79. The facts clearly show that by virtue of the agreement entered into between the assessee and the employees' union in October, 1977, the assessee made a provision in its account and the agreement, in our opinion, created an obligation on the part of the assessee to pay the amount that was provided for and a corresponding enforceable right accrued in favour of the employees of the amount provided for. It was an enforceable settlement between the workers and the 'assessee-company, and, therefore, the liability to pay bonus, in our view, accrued only during the previous year relevant to the assessment year 1978-79.

We are unable to accept the contention of learned counsel for the Revenue that the liability to pay bonus accrued during the earlier year for the reason that when the assessee was claiming the deduction in the earlier years for the provision made towards bonus of an amount equivalent to five months' salary, the Revenue disallowed the amount on the ground that it was in excess of the maximum limit of 20 per cent of the salary or wages and it led to litigation between the assessee and the Department and, finally, the Tribunal allowed the claim of the assessee on the ground that the amount provided for was towards bonus and, therefore, the entire amount was liable to be deducted. But, during the previous year relevant to the earlier assessment year 1977-78, the assessee, consistent with the stand of the Department made a provision only to the extent of 20 percent. of the wages -or salary. It is not clear what had happened to the assessment result of the assessee for the year 1977-78, but, the provision made for 20 per cent of the bonus created unrest among the employees. Therefore, it cannot be stated that the assessee-company accepted its liability to pay bonus at the rate of five months' salary in the earlier years: No doubt, it is open to the assessee to have made provision for the entire five months' salary in the earlier years, but when the assessee has not accepted the claim of the employees and rejected the claim of the employees to pay anything in excess of 20 percent of the salary or wages, it cannot be stated, that the liability had accrued during the earlier year. The liability to pay bonus may arise either by virtue of a statute or by virtue of a custom or by virtue of an agreement. It is easy to visualise the situation when the assessee had not accepted the claim of the workers to pay bonus anything in excess of maximum limit of 20 percent of the salary or wages and the matter was referred to industrial adjudication and, ultimately, the Tribunal adjudicated the claim against the employer and in such a situation, it can easily be said that by virtue of the award of the Tribunal, the liability to pay bonus had arisen. Similarly, where by virtue of an agreement, the assessee-company had accepted or agreed to pay in excess of 20 percent. of the bonus in the previous year relevant to the assessment year 1978-79, in our view, by the terms of the agreement, the liability to pad bonus had accrued to the assessee. Therefore, we are unable to accept the contention of learned counsel for the Revenue that the liability had accrued in an earlier year prior to the assessment year 1978-79.

The decision relied upon by learned counsel for the Revenue in CIT v. Bisra Stone Lime Co. Ltd. (1987) 164 ITR 693 (Cal.), is distinguishable as the liability to pay bonus in that case arose by virtue of the Payment of Bonus Act and there was a statutory liability. But, the question that is raised before us, viz., whether it is still open to the assessee to claim deduction in the subsequent year when an agreement was arrived at between the parties was not the subject-matter of consideration before the Calcutta High Court and according to the Calcutta High Court, it is permissible for the assesses to claim the deduction in the year of accrual of liability even though, there was a dispute with reference to the additional lability and the liability was quantified later. The decision of the Calcutta High Court is not of much help to the Revenue and, therefore, we cannot accept the contention of learned counsel for the Revenue that the liability to pay bonus had accrued during an earlier year, when it was not accepted by the assessee to pay bonus in excess of 20 percent of the salary or wages and, hence we are not in a position to hold that the liability to bonus had accrued in the earlier year, particularly where it is a case of customary bonus.

The decision of this Court in CIT v. D. Mohammed Ismail (1997) 227 ITR 211, is an authority for the proposition that the Payment of Bonus Act is a complete code and is confined to profit oriented bonus and the Payment of Bonus Act is not applicable to customary bonus. This decision only establishes the proposition that it is open to the assessee to claim bonus in excess of the amount prescribed under clause (ii) of subsection (1) of section 36 of the Act, provided the assessee satisfied that it was. a customary bonus. But, in that case, this Court has not decided when the liability to pay customary bonus would accrue.

It is also relevant to notice that the amount paid in the instant case was not Pooja bonus or festival bonus, and it was claimed only as a customary bonus. It is no doubt true that right from the year 1947 the assessee was paying bonus and from the year 1967, the assessee was paying five months' salary at a uniform rate to justify the inference that the payment of bonus has become customary. No doubt, there is some justification in the stand of the Revenue that the action of the assessee-company to pay bonus at the rate of 20 percent. of the wages was not in accordance with the earlier decision or practice adopted, but, when the assessee during the earlier year had denied its liability to pay bonus because of the view taken by the Revenue that the amount allowable would be limited to the maximum extent indicated by the Payment of Bonus Act, it cannot be stated that the decision arrived at by the assessee was not bona fide and was done on certain extraneous circumstances. The assessee night have been under the bona fide impression that it was liable to pay only to the extent of 20 percent of the salary towards the bonus and that decision was arrived at on the basis of the applicability of the Payment of Bonus Act and- on the basis of the action of the Income-tax Officer in disallowing the excess of the amount on the ground that the payment was not towards business purposes of the assessee. Therefore, after the assessee toad taken the decision to pay the bonus to the extent of 20 per cent of the salary or wages, it cannot be said that for the balance of the amount a liability was created against the assessee. In our view, only by the agreement entered into subsequently between the assessee company and the employee's union, the liability to pay bonus had accrued. The decision of the Supreme Court in the case of Graham Trading Company (India) Ltd. v. Their Workmen (1959-60) 17 FJR 130; (1960) 1 SCR 107; (1959) 2 LLJ 393, explains the difference between festival and contractual bonuses. The decision in Graham Trading Co. India Ltd. v. Their Workmen (1959-60) 17 FJR 130, was applied in the case of B. N. Elias & Co. Ltd. Employees' Union v. B. N. Elias & Co. Ltd. (1960-61) 19 FJR 293; AIR 1960 SC 886, 888 and the relevant passage reads as under (297 of 19 FJR):

"It is difficult to introduce a customary payment of bonus between employer and employee where terms of service are governed by contract, express or implied, except where the bonus may be connected with a festival whether Pooja in Bengal or some other equally important festival in any other part of the country. The principles laid down in that case for governing customary and traditional bonus connected with a festival cannot in our opinion be extended to what may be called a customary bonus unconnected with any festival.

Therefore, the above decisions make it clear that the principles of payment of bonus connected with the festival cannot be extended to the bonus unconnected with the festival. There are no- materials to indicate that earlier customary bonus was in any way connected with festival or Pooja and in the absence of any material, we are of the opinion that those principles cannot be extended to cases unconnected with Pooja a or festival bonuses.

We also hold that the Tribunal was right that the amount paid ir. excess of 20 percent. of the salary or wages is allowable. on the basis of commercial expediency, and it is seen from the records that there was unrest among the employees because they had not obtained the bonus which then would have obtained, due to the unilateral decision of the assessee which led to negotiations and discussions and, finally, the assessee-company in the year 1977 accepted the claim of the employees' union to pay the bonus. The decision was arrived at on business consideration to ward off the labour unrest among the employees and to keep them content and for smooth and efficient functioning of the business organisation. In this view of the matter, the amount paid over and above the twenty percent of the wages or salary is allowable in the computation of the income of the assessee. In this view, we hold that there is no infirmity in the order of the Appellate Tribunal in holding that the liability to pay bonus of Rs.1,84,575 accrued during the previous year relevant to the assessment year 1978-79 and the assessee is entitled to deduction of the said amount.

In so far as the second question of law is concerned, the assessee is entitled to deduction of bonus in excess of 20 percent. as the amount was paid on the basis of commercial expediency. Viewed in any manner, we hold that the Tribunal-has come to the correct conclusion.

In fine, we answer both the questions of law in the affirmative and against the Revenue. There will be no order as to costs, in the circumstances of the case.

M.B.A./45/FC Reference answered.