COMMISSIONER OF INCOME-TAX VS LAKSHMI MILLS CO. LTD.
2001 P T D 3034
[240 I T R 81]
[Madras High Court (India)]
Before Abdul Hadi and N. V. Balasubramanian, JJ
COMMISSIONER OF INCOME‑TAX
Versus
LAKSHMI MILLS CO. LTD.
Tax Case No.1188 of 1985 (Reference No.695 of 1985), decided on 04/03/1997.
Income‑tax‑‑
‑‑‑‑Business expenditure‑‑‑Bonus‑‑‑Additional amount paid as incentive in pursuance of settlement under Industrial Disputes Act‑‑‑Amount was deductible‑‑‑Income Tax Act, 1961, Ss.36 & 37.
During the accounting year relevant to the assessment year 1979‑80, the assessee paid a sum of Rs.22,54,136 to its workers as incentive payment in pursuance of a settlement between the management and the workers arrived at under section 12(3) of the Industrial Disputes Act, 1947. The Income‑tax Officer disallowed the amount on the ground that the amount was in excess of the statutory bonus payable under the Payment of Bonus Act, 1965, and the same should be regarded as a bonus payment. However, the Tribunal held that the amount was deductible. On a reference:
Held, that the Tribunal found that, if the amount was not paid, the workers would have gone on strike, and so the additional amount could be regarded as paid by virtue of commercial expediency. Once it is held that the additional amount is not a bonus, then the provisions under section 36(1)(ii) of the Income Tax Act, 1961, do not apply, and the only provision that has to be satisfied for the allowance of the expenditure is section 37. The additional amount was paid on commercial principles and commercial considerations, and was allowable under section 37.
CIT v. Sivanandha Mills Ltd. (1985) 156 ITR 629 (Mad.) fol.
C.V. Rajan for the Commissioner. Philip George for the Assessee.
JUDGMENT
N.V. BALASUBRAMANIAN, J.‑‑‑At the instance of the Revenue, the Appellate Tribunal, has stated the case and referred the following question of law, for the opinion of this Court 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 payment of Rs.22,54,136 in pursuance of the settlement between the assessee company and the workers under the Industrial Disputes Act, 1947, over and above the statutory bonus, is allowable under section 37 of the Income Tax Act, 1961?"
The assessee is a company. During the relevant assessment year 197 ‑80, the assessee paid a sum of Rs.22,54,136 to its workers as incentive payment in pursuance of the settlement between the management and the workers under the‑settlement arrived 'at under section 12(3) of the Industrial Disputes Act, 1947. The Income‑tax Officer disallowed the amount on the ground that the amount was in excess of the statutory bonus payable under the Payment of Bonus Act, 1965, and the same should be regarded as a bonus payment. According to the officer, since the amount paid was bonus, allowability of the same would be subject to the provisions of section 36(1)(ii) of the Act. The Commissioner of Income‑tax (Appeals), disagreed with the views of the Income‑tax Officer, and held that what was paid was not bonus at all, and it is allowable under section 37 of the Income Tax Act, 1961 (hereinafter referred to as the "Act"). The Appellate Tribunal, on appeal, also held that the amount was paid by virtue of commercial expediency, and the amount cannot be regarded as a bonus. The Appellate Tribunal, therefore, held that the entire amount paid as incentive payment is allowable as a business expenditure under section 37 of the Act. This order is the subject‑matter of the tax case reference before this Court.
Mr. C.V. Rajan learned counsel for the Revenue, submitted that the amount paid was only a bonus, and the allowance of the same is subject to the assessment prescribed under section 36(1)(ii) of the Income Tax Act, 1961.
Mr. Philip George learned counsel for the assessee, on the other hand, submitted that the. finding of the Appellate Tribunal is that the amount paid was not a bonus and since it is hot a bonus, it is allowable under section 37 of the Income‑tax Act.
We have perused the findings of the Appellate Tribunal. The Tribunal refers to the memorandum of settlement arrived at under section 12(3) of the Industrial Disputes Act between the assessee and the trade union of the assessee. In the memorandum of settlement, it mention that in addition to the bonus that is payable under the Bonus Act, the assessee has also agreed to pay certain additional amount shown in the Annexures to the agreement. Clause 2 of the settlement mentions that the additional amount shall be paid in consideration of the better performance and smooth working of the mills during the relevant year. The Appellate Tribunal found that if the amount was not paid, the workers would have gone on strike, and so the additional amount can be regarded as paid by virtue of commercial expediency. Once it is held that the additional amount is not a bonus, then the provisions under section 36(1)(ii) of the Income‑tax Act do not apply, and the only‑ provision that has to be satisfied for the allowance of the expenditure is section 37 of the Act. It is already seen that the payment was made on commercial consideration: If the amount was not paid which was due to be paid under the agreement, the workers would have gone on strike. It would‑have created a seed of discontent in the minds affecting the smooth and proper running of the assessee's business. Therefore, we are of the view that the additional amount was paid on commercial principles and commercial considerations, and is allowable under section 37 of the Act. In CIT v Sivanandha Mills Limited (1985) 156 ITR 629, this Court has held that section 36(1)(ii) will apply only in the case of bonus paid under the Bonus Act, and the payments made as incentive bonus, attendance bonus or customary bonus are allowable under section 37 of the Act on the score that the expenditure was laid out wholly or exclusively for the purpose of the business.
Hence, we hold that the Appellate Tribunal has come to the correct conclusion that the payment made in pursuance of the settlement between the assessee‑company and the workers under the Industrial Disputes Act over and above the statutory bonus, is allowable under section 37 of the Income‑tax Act. We, therefore, answer the question of law referred to us in the affirmative and against the Revenue. No costs.
M.B.A./300/FCOrder accordingly.