TMI Blog1993 (2) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... al, the Commissioner of Income-tax (Appeals) deleted the addition on account of gratuity on the ground that the liability was certain and that the exceptions (sic) were insignificant in quantum. The addition made under that head was, therefore, found to be without justification. As regards ex gratia payment, it was held that the liability arose on account of the receipt of communication of the Government's decision and, in view of the practice followed by the assessee, that claim was allowed. The Revenue carried the matter to the Income-tax Appellate Tribunal which upheld the order of the Commissioner of Income-tax (Appeals) finding that the contribution was made in conformity with the rules and regulations and satisfying the requisite conditions for its recognition. The ex gratia payment being customary in nature was also held to be permissible deduction. The Appellate Tribunal having refused to refer the questions of law, the Revenue approached this court by O. P. No. 10093/83. By judgment dated January 24, 1985, this court directed the Income-tax Appellate Tribunal, Cochin Bench, to draw up a statement of case and refer the following questions of law to this court under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been payable to him as profits or dividend if it had not been paid as bonus or commission Provided that the deduction in respect of bonus paid to an employee employed in a factory or other establishment to which the provisions of the Payment of Bonus Act, 1965 (21 of 1965), apply shall not exceed the amount of bonus payable under that Act; Provided further that the amount of the bonus (not being bonus referred to in the first proviso) or commission is reasonable with reference to (a) the pay of the employee and the conditions of his service; (b) the profits of the business or profession for the previous year in question ; and (c) the general practice in similar business or profession." By the Payment of Bonus (Amendment) Act, 1976, section 36 of the Income-tax Act was amended by which the present first proviso was added and the original proviso was retained as second proviso with the additional words "not being bonus referred to in the first proviso". The position, therefore, is that where bonus has been paid in accordance with the requirements of the Bonus Act to an employee covered by the Act, the amount so paid is an allowable deduction. If bonus or commission is pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove the amount payable under the Payment of Bonus Act can be claimed as a deduction under section 36(1)(ii) of the Act provided the conditions stipulated in the second proviso to those sub-clauses are fulfilled. The position, therefore, is settled that any payment made over and above the sum payable under the Payment of Bonus Act is deductible provided the three conditions embodied in the second proviso to section 36(1)(ii) are fulfilled. The Supreme Court had occasion to consider the question whether certain commission paid by the assessee to two of his employees is an allowable expenditure in computing the profits of the assessee from business in Shahzada Nand and Sons v. CIT [1977] 108 ITR 358. The question for determination was whether this commission qualifies for deduction as an allowable expenditure under section 36(1)(ii). The High Court took the view that there must be correlation between the payment of commission and the services rendered and since commission was paid by the assessee for the first time during the relevant accounting year, there must be some extra services rendered by the employees in that year over and above the usual services rendered by them in the ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atter limb of the first proviso to section 36(1)(ii). He would also contend that, as regards employees who are not covered by the Payment of Bonus Act, anything in excess of what is reasonable, going by the criteria laid down in the second proviso to section 36(1)(ii), is not an allowable deduction. Ex gratia payment is seen to have been made on the basis of a Governmental order. That payment was made in view of the agitation by the employees which resulted in the Government order. It is contended that the theory of payment due to custom is inconsistent and baseless, and payment of bonus on the basis of a Governmental order or orders is the very negation of custom. It may be that ex gratia payment was made on the basis of negotiations which followed agitation by the employees. But the question to be considered is whether the payment is allowable under the second proviso to section 36(1)(ii) of the Act. Pooja bonus or customary bonus is distinct and different from profit-sharing bonus which has now been codified in the Payment of Bonus Act, 1965. Section 17(a) of the Act enables an employer to deduct any such bonus paid to an employee in a particular accounting year from the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayments were made for maintaining peace in the industrial concern. The Tribunal having found that the conditions embodied in section 36(1)(ii) had been fulfilled, the direction to deduct the ex gratia payment was properly made in the light of the decisions of this court and the principles enunciated by the Supreme Court in Shahzada Nand and Sons v. CIT [1977] 108 ITR 358. The ex gratia payment made as per the Government order was, therefore, rightly held to be allowable as a deductible expenditure under section 36(1)(ii) of the Income-tax Act, 1961. The Tribunal has also considered the admissibility of the deduction with reference to the provisions of section 37 of the Income-tax Act. It was found that the claim is admissible even under section 37(1) of the Act. This finding is assailed by counsel for the Revenue. Drawing attention to the provisions contained in section 37(1), it is contended that the subsection is not applicable to a case where the expenditure is one of the nature described in section 36 of the Act. Section 37(1) permits allowance of expenditure laid out or expended wholly and exclusively for the purpose of the business or profession not being expenditure of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service was also deleted by the assessing authority. The Commissioner of Income-tax (Appeals) on the other hand, deleted the addition for the reason that the liability is certain and the exceptions are insignificant in quantum. This view was approved by the Tribunal on second appeal. Assailing the finding of the Tribunal, learned counsel for the Revenue submitted that the contribution made towards the gratuity fund is not in conformity with rule 103 of the Income-tax Rules. That rule provides that the contribution shall not exceed 8 per cent. of the salary of each employee during each year. The calculation made by the assessing authority at that rate was correct, according to counsel. The deletion of the amount contributed towards the gratuity fund of employees who had not put in more than five years of service has also been properly done, argues counsel. Attention is also drawn to rule 104 which provides that the amount to be allowed as a deduction on account of an initial contribution which an employer may make in respect of the past services of an employee admitted to the benefits of a fund shall not exceed 8 1/3 per cent. of the employee's salary for each year of his past se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a survey of the decisions and an analysis of the position till the provisions of section 40A(7) were inserted in the Income-tax Act, by Finance Act, 1975, with effect from April 1, 1973, the Supreme Court noticed the intention of the Legislature in enacting the provision as revealed from the Notes on Clauses of the amendment. That note, inter alia, mentioned that the restriction imposed in the computation of profits and gains of business in respect of any reserve created or provision made for the payment of gratuity will not apply in relation to a provision made for the purpose of a sum by way of contribution towards an approved gratuity fund that has become payable during the relevant year or for the purpose of meeting actual liability in respect of payment of gratuity to the employees that has arisen during each year. The Supreme Court observed that, in interpreting or in trying to find out the meaning of that provision contained in section 40A(7) of the Act, one should, if possible, give effect to the intention and not to make a nonsense of that intention. It is stated that the expression "provision" has not been used in any artificial sense but in its ordinary meaning and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of law applicable is clause (b)(i) and not clause (b)(ii). The Tribunal has, therefore, committed an error in finding that the provision made by the assessee for the previous year is taken out of the bar in clause (a) of section 40A(7) by virtue of the provision contained in clause (b)(ii). The assessee is entitled to the deduction available to him under section 40A(7)(b)(i) of the Act. The question whether any incremental liability has been included and whether deduction in respect of that sum can be claimed does not, therefore, arise. The decision of this court in CIT v. Periya Karamalai Tea and Produce Co. Ltd. [1987] 167 ITR 32 has, therefore, no application. Deduction is claimed on the basis of the calculation of total liablity as on December 31, 1975. Fifteen days' emoluments per employee per year of service for the total number of years were calculated. It was on that basis that the total liability as on that date was estimated at Rs. 39,80,868.15. The funds available with the trustees on that date is only Rs. 31,67,793.65. The balance amount of Rs. 8,15,070 was contributed towards the fund in that year. According to the Revenue, the fifteen days' wages per employee pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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