(a) Income Tax Ordinance (XXXI of 1979)-----

----S. 23---Deductions---Golden Hand Shake Scheme expenses ---Re employment of such employees---Disallowance of expenses ---Validity-- Assessing Officer had made a factual mistake while making a disallowance regarding eight employees---Only four employees had been re-employed, the disallowance if any should have to be restricted 'to the payment of only to such employees---Appellate Tribunal set aside the order with the, direction that the copy of Golden Hand Shake Scheme might be obtained and if the Scheme was available to all the employees then total claim may be allowed and in the case of Scheme not available to all the employees then the addition under, the head of Golden Hand Shake Scheme may be restricted to the payment made to the four employees on account of the Scheme.

(b) Income Tax Ordinance (XXXI of 1979)---

----S. 23 (1)(viii)(b)---Industrial Relations Ordinance (XXIII of 1969), Ss.30(4) & 54---Sindh Industrial Relations Rules, 1973, R.69---Bonus-- Bonus paid up to 60.1 % of the profit, in compliance with the provisions of Industrial Relations Ordinance, 1969, was considered by Assessing Officer as unreasonable and he allowed the bonus up to 30% of the profits and disallowed half of the claim---Validity---Assessing Officer was not justified in disallowing the claim of bonus, both for the factory workers and office employees as it was paid in accordance with the terms of Settlement with Collective Bargaining Agent (CBA) under S.30(4) of the Industrial Relations Ordinance, 1969 read with R.69 of the Sindh Industrial Relations Rules, 1973, the payment being statutory obligation and the assessee in case of failure to pay was punishable with penalty and imprisonment under S.54 of the Industrial Relations Ordinance, 1969 meaning thereby that the failure to make payment would have resulted in the closure of business due to strike by the labour---Regarding co-relation of bonus with profit, the three conditions as laid down in S.23(1)(viii)(b) of the Income Tax Ordinance, 1979 were cumulative and were to be considered together---"Profit" referred in law was the profit before charge of depreciation and payment of bonus-- Payment of bonus as contractual liability was admissible expenditure without reference to the profits, as the assessee had no option in respect of payment of such bonus---Such was an expenditure wholly and solely incurred for the purposes of business---Bonus paid was -in accordance with the past practice of the company and had been allowed in full in previous assessment years---Departmental appeal was dismissed by the Appellate Tribunal.

1973 PTD 2381 rel.

(c) Income Tax Ordinance (XXXI of 1979)-----

----S. 23(1)(iii)(b)---Word "and"---In condition `b' word "and" had been used which clearly indicates the intention of the Legislature for all the three conditions being cumulative.

Zaki Ahmad, D.R. for Appellant (in I.T.A. No.2738/KB of 1993-94).

Jan-e-Alam, C.A. and Javed Zakaria for Respondent (in I.T.A. No.2738/KB of 1993-94).

Jan-e-Alam, C.A. and Javed Zakaria for Appellant (in I.T.A. No.2764/KB of 1993-94).

Zaki. Ahmad, D.R. for Respondent (in I.T.A. No.2764/KB of 1993-94).

Date of hearing: 1st December, 2000.

ORDER

JAWAID MASOOD TAHIR BHATTI (JUDICIAL MEMBER).- --These two cross-appeals have been filed against the order of the learned CIT(A), dated 29-1-1994 for the assessment year 1992-93. Mr. Jan-e- Alam C.A. learned representative of the assessee has at the very outset requested permission for withdrawal of the appeal filed by the assessee. Learned D.R. has no objection. Permission is allowed and the appeal filed by the assessee is dismissed as withdrawn.

2. The Department in his appeal has objected the deletion of disallowance of amount paid as Golden Hand Shake at Rs.6,38,232 and deletion of disallowance of bonus.

3. Mr. Zaki Ahmed, learned representative of the Department has contended that the Assessing Officer noted from the details filed by the assessee that one hundred sixty five (165) persons of the assessee's firm took advantage of the Golden Hand Shake Scheme and left services of Company but later on, out of these persons eight people who have already taken the benefit of the Golden Hand Shake Scheme were re engaged by the assessee-Company. According to him, Assessing Officer has, therefore, rightly observed that the payments to these persons does not appear to be genuine and admissible because it appears that the assessee-Company for the reasons best known to it has tried to oblige these persons. According to him, the Assessing Officer has, therefore, treated the payments to these persons as expenditure not incurred wholly and solely for the purpose of business and has disallowed Rs.6,38,232 but the learned CIT(A) has deleted, the disallowance without any justification. Regarding the bonus, learned D.R. has submitted that in the previous years i.e. 1990-91 & 1991-92, the bonus was disallowed by the Assessing Officer but the CIT(A) deleted the disallowance for the assessment year 1990-91 and set aside the disallowance for reconsideration for the assessment year 1991-92. Against both the orders, the Department has already filed appeals before this Tribunal. Learned D,R. has contended that for the year under consideration, assessee has declared net profit as per accounts at Rs.6,88,374 and after adding accounting depreciation amounting to Rs.3,00,624 and bonus paid amounting to Rs.13,39,052 the total profits comes to Rs.22,28,050. The bonus paid in this way works out to 60.1 % which in no way can be considered reasonable, therefore, the Assessing Officer allowed the bonus up. to 30% of the profits and disallowed half of the claim which works out to Rs.6,69,526 as the assessee could not adduce any evidence regarding general practice in similar business but the learned CIT(A) without any justification has deleted the additions:

4. On the other hand; Mr. Jawaid Zakaria, Advocate, assisted by Mr. Jan-e-Alam has contended that the CIT(A) has rightly deleted both the disallowances. According to him, Assessing Officer has wrongly observed that eight, persons were re-employed by the assessee's Company. In fact, only four among the 165 were re-employed by the Company and other four were re-employed by the other Companies of the Group. The details of the persons re-employed by the assessee and the amount paid to them under Golden Hand Shake Scheme is. as under:--

1.Mr. Mashooq Ali.Rs. 62,000

2.Mr. Abdul Hameed.Rs. 46,000

3.Mr. Shaukat Mian.Rs. 50,000

4.Mr. Muhammad Zafar.Rs. 46,000

TotalRs.2,04,000

Learned counsel has further contended that the Golden Hand Shake Scheme was offered to all the employees under agreement with C.B.A. and the assessee's Company has no method to stop the useful employees from taking benefit of the Scheme. The assessee Company was, therefore, justified to re-employee four of the useful skilled persons, as the Company needed the services of these persons on commercial expediency and their re-employment was with new service and they are not entitled to any benefits of the previous service. According to the learned counsel if the department has any doubt of collusion, it is to be restricted to payment of Rs.2,04,000 to these persons and the disallowance of Rs.6,38,231 is in any way unjustified and can be restricted to the payment of Rs.2,04,000 made to the four employees under Golden Hand Shake Scheme. Regarding the bonus, Mr. Javed Zakaria has argued that the bonus was paid under the agreement with C.B.A. and was contractual liability. According to him, the agreement arrived with C.B.A. by the assessee's Company under section 30 of the Industrial Relations Ordinance, 1969 is binding and its incontravention is punishable under section 54 of the Industrial Relations Ordinance, 1969 and the assessee had no option in respect of the payment of the bonus. Regarding co-relation of bonus with profit of the Company, the learned counsel has submitted that all the three conditions provided in section 23(1) (viii) (b) of the Income Tax Ordinance are cumulative and are to be considered together. He has in this respect placed reliance on the case of CIT v. Paracha Textile Mills reported as (1973) 28 Tax 155 (H.C. Karachi). The learned counsel has also filed statement showing bonus paid during the year under assessment as compared with the previous three assessment years and has submitted that the bonus paid during the year under consideration is in accordance with the history of the case. The statement filed by the assessee is reproduced hereunder:---

1992-931991-921990-911989-90

Profit23,28,0504,16,594(30,45,487)7,75,341

Bonus paid13,39,05214,08,10813,69,662.14,39,464

Bonus allowed6,69,526Allowed inAllowed inAllowed in

fullfullfull

5. We have heard the learned representatives of both the parties and have also perused the impugned order of the learned CIT(A), the assessment order, the case-law referred by the learned counsel for the assessee and the other relevant documents placed before us by both the learned representatives. Regarding the issue of Golden Hand Shake Scheme, we have observed that the Assessing Officer has made a factual mistake while making a disallowance of Rs.6,38,231 regarding the eight employees and as the learned counsel for the assessee has contended that only four employees have been re-employed, therefore, the disallowance if any should have to be only restricted to the payment of Rs.2,04,000 and the learned CIT(A) has deleted the disallowance without any justification. We, therefore, find it reasonable to vacate the impugned order of the learned CIT(A) on this issue and the assessment order is set aside on this issue with the direction that the copy of the Golden Hand Shake Scheme may be obtained and if the Scheme was available to all the employees then total claim may be allowed and in the case of scheme not available to all the employees then the addition under this head may be restricted to Rs.2,04,000, the payment made to the four employees on, account of Golden Hand Shake Scheme.

6. Regarding the issue of bonus, we are of the view that the CIT(A) has rightly observed that the Assessing Authority was not justified in disallowing the claim of bonus, both for the factory workers and office employees as it was paid in accordance with the terms of settlement with C.B.A., dated 22-10-1998 under section 30(4) of the Industrial Relations Ordinance, 1969 read with Rule 69 "of the Industrial Relations Rules, 1973 the payment being statutory obligations and the assessee in case of failure to pay was punishable with penalty and imprisonment under section 54 of the said Ordinance meaning thereby that- the failure to make payment would result. in the closure of business due to strike by the labour. Regarding the co-relation of bonus with profit,-we find force in the arguments of the learned counsel that the three conditions as laid down in section 23(1) (viii) (b) of the Income Tax Ordinance are cumulative and are to be considered together. For the facility provision of section 23(1) (viii) (b) are reproduced hereunder:---

"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:

Provided that the amount of the bonus or commission is a reasonable amount with reference to:---

(a)the pay of the employee and tile conditions of his service;

(b)the profits of the business, or profession for the year in question; and

(c)the general practice in similar business or profession".

It is evident from the above section that in condition `b' word "and" has been used which clearly indicate the intention of the Legislature for all the three conditions being cumulative.

We have also perused the judgment of the Hon'ble High Court of Sindh referred by the learned counsel for the assessee reported as 1973 PTD 238 wherein, it has been held as follows:---

"Held, that the existence of the profits is not the only factor to be considered in coming to the conclusion whether or not bonus paid was a deductible item of expenditure and it is the cumulative effect of all. the three considerations which should govern the determination of reasonableness under that clause and, therefore, the test of commercial expediency is strictly germane to the consideration of the reasonableness of the deduction claimed for the amount paid out as bonus .

We are of the view that the profit referred in law is the profit before charge of depreciation and payment of bonus. Even otherwise, it is a trite that payment of bonus as contractual liability is admissible expenditure without reference to the profits, as the assessee has no option in respect of payment of such bonus. It is an expenditure wholly and solely incurred for the purposes of business. We have further found that the bonus paid is in accordance With the past practice of the company and have been allowed in full in the previous assessment years 1989-90 to 1991-92. We, therefore, find no exception with the findings given by the learned CIT(A) in this respect, which are upheld and .the departmental appeal on this issue is dismissed.

7. The departmental appeal is partially allowed in the manner and to the extent discussed above.

C.M.A./617/Tax (Trib.)Appeal partly allowed.