TMI Blog2005 (5) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances of the case, the Tribunal was correct in law in ignoring the fact that the assessee had not established the genuineness and nature of the payment and, as such, had failed to discharge the onus for deduction of the payment in computing the business income? 2. Whether, on the facts (sic) and in the circumstances of the case, the Tribunal was correct in law in admitting the claim for payment of incentive bonus over and above the admissible bonus under the Payment of Bonus Act? 3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in stating that if a particular payment does not fall within the first proviso it can still be considered under the second proviso to section 36(1)(ii) of the Act, or even under section 37(1) of the Act? 4. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the assessee is entitled to the deduction of the entire incentive bonus of Rs. 22,23,518.?" The present reference relates to the assessment year 1981-82. The brief facts of the case are as follows: The assessee-respondent (hereinafter referred to as "t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he incentive bonus account. It was further clarified that the above payments were exempt from provident fund and E.S.I., as the payment related only for attendance, efficiency and production. It was also explained that the payment was equal to single wages for extra time put in by the workers. It was further clarified that there was considerable increase in the payment in the month of December, 1980, because of the extra payments made to loyal workers, who had stayed within the mill premises during the period of strike. It was also stated that as a consequence the wages had gone down in the above month. Certain vouchers for payments were also produced before the Commissioner of Income-tax (Appeals). It was found that the thumb impressions of the recipients were similar against several payments. This matter was, therefore, enquired into through the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner reported that the finger-print expert had confirmed that thumb impressions on the documents had been forged. As a clarification, it was pointed out to him that sometimes the workers used to authorise their colleagues to receive the payments and that explained the sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowing the assessee's claim by the Inspecting Assistant Commissioner was that the amount had been debited to 'workers loan account' and, therefore, it could not be treated as an expenditure deductible under the provisions of the Act. We do not find any substance in this ground. It is not disputed that the amount had finally been debited under the head 'Incentive bonus account' in the wages and salaries. Merely because, at first, an advance was made to the workers and subsequently it was transferred to 'incentive bonus account' is no ground to hold that either the payment had not been made or the expenditure had not been incurred. In this connection, reliance was placed by counsel for the assessee on the decision of the Orissa High Court in Kalinga Tubes Ltd. v. CIT [1974] 96 ITR 20. It was held in this case that the bonus may be paid in cash or it may be adjusted against the pre-existing loan. The nature and character of bonus was not, in any way, affected merely because the same was not paid in cash but was given by way of adjustment. It was for the management to decide for maintaining peace in an industrial concern whether to pay bonus to the workmen to keep them contented fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mills Ltd. v. Second Industrial Tribunal [1979] 54 FJR 391; [1979] 3 SCR 644. It was held in this case that the Bonus Act, 1965 does not deal with customary bonus and is confined to profit based on productivity based bonus. The provisions of that Act have no say on customary bonus and cannot, therefore, be inconsistent therewith. Consequently statutory bonus and customary bonus operate in two fields and do not clash with each other. In the case of Baidyanath Ayurveda Bhawan Mazdoor Union v. Management of Shri Baidyanath Ayurveda Bhawan (P.) Ltd. [1984] 64 FJR 33; [1984] 17 Taxman 19 the hon'ble Supreme Court held that it was settled that the Payment of Bonus Act deals only with profit bonus and matters connected therewith and does not govern customary, traditional or contractual bonus. There is no categorical provision in the Payment of Bonus Act nullifying all other kinds of bonus, nor does such a conclusion arise by necessary implication. It was held in this case that on the finding of the Tribunal as also the High Court attendance bonus was being paid from before and it being outside the purview of the Payment of Bonus Act, the High Court was right in vacating the award. In vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expedience. What is the requirement of commercial expediency must be judged, not in the light of the 19th century laissez faire doctrine which regarded man as an economic being only to protect and advance his self-interest, but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges, part of it should in all fairness go to the employees. This principle, in our opinion, squarely applies to the present case. The above principle is also supported by another decision of the Supreme Court in Sassoon f. David and Co. (P.) Ltd. v. CIT [1979] 118 ITR 261. 12. Even if the case can be treated as not covered by the second proviso to section 36(1)(ii) of the Act, the allowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay their employees for additional work achieved/done during additional or standard time. This is a normal procedure. The nomenclature of such payment may differ and is known to be termed as over time, extra time, productivity payment, incentive bonus, production incentive, ex gratia payment etc. However, the nature of the payment is the same and it forms a part of the cost of production/operation.' If we look at the matter from this angle, the doubt expressed by the Commissioner of Income-tax (Appeals) will disappear. It was also in the nature of customary bonus as similar payments have been made by the assessee to its workers in the earlier years. 14. A word about the analysis of the actual payment will also be necessary. The details of the payments are given in a chart, which we were told, was submitted to the lower authorities also. This chart gives monthwise details of the payments. In the assessment year 1980-81, the total payment amounted to Rs. 12,68,682. In the year under appeal, on the other hand, it amounted to Rs. 22,23,518. This included Rs. 8,69,440 in the month of December, 1980 alone. In the earlier year, the payment for December was Rs. 1,57,650. Details for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19,466 --------- 9,54,835 --------- ---------------------------------------------------- The assessee has, therefore, explained the increase in the payment. 15. We will now deal with the second doubt of the Commissioner of Income-tax (Appeals) regarding the actual disbursement of the amount. There is overwhelming evidence on record to justify the stand of the assessee that the entire payment had, in fact, been made to the workers. The first is the report of the Chartered Accountant, Price Water House and Co. We quote below from this report. 'We carried out tests to assess the system of internal control in respect of salaries and wages (inclusive of incentive bonus) to determine whether they are reliable and according to such tests and the information and explanations given to us, we are of the opinion that the company only pays for employees' services which it requires and has received and no fictitious employees are introduced on the payroll and the amounts disbursed to the employees properly relate to the business of the company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les, it is difficult to hold that the assessee is not entitled to the deduction of the entire incentive bonus of Rs. 22,23,518. We direct the Inspecting Assistant Commissioner to allow it in full." Heard learned standing counsel appearing on behalf of the Revenue. Learned standing counsel submitted that in view of the provisions of section 36(1)(ii) incentive bonus was admissible only to the limit of the bonus payable under the Payment of Bonus Act and the incentive bonus at Rs. 22,23,518 which was paid over and above the bonus payable under the Payment of Bonus Act is not allowable and the Tribunal has erred in allowing the deduction of such incentive bonus. In our opinion, the submission is devoid of any merit. We have perused the order of the Tribunal. The Tribunal, on the consideration of the entire facts and circumstances of the case, held that workers were allowed to put in extra time and increase the production by their labour and efficiency and for this extra time or overtime, they were paid extra single wages. It was this payment, which was treated as incentive bonus by the assessee. A question for consideration is whether the bonus of the above nature, which is cal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal [1979] 54 FJR 391; AIR 1979 SC 876; Baidyanath Ayurveda Bhawan Mazdoor Union v. Management of Shri Baidyanath Ayurveda Bhawan (P.) Ltd. [1984] 64 FJR 33; AIR 1984 SC 457; CIT v. Sivanandha Mills Ltd. [1985] 156 ITR 629 (Mad); CIT v. Arya Vaidya Pharmacy (CBE) Ltd. [1985] 156 ITR 630 (Mad); CIT v. Babcock and Willcox of India Ltd. [1987] 165 ITR 105 (Cal). In the case of CIT v. Bhavani Mills Ltd. [1999] 237 ITR 855 (Mad). Tests for determination of customary or festival bonus have been laid down by the apex court in Vegetable Products Ltd. v. Their Workmen reported in [1964-65] 27 FJR 302; AIR 1965 SC 1499 and Upendra Chandra Chakraborty v. United Bank of India reported in [1985] 67 FJR 79; AIR 1985 SC 1010 as follows: "(1) that the payment has been made over an unbroken series of years; (2) that it has been paid for a sufficiently long period-the period has to be longer than in the case of an implied term of employment; (3) that it has been paid even in years of loss and did not depend on the earning of profits; and (4) that the payment has been made at a uniform rate throughout." In the case of CIT v. Mettur Chemicals and Industrial Corporation Ltd. reported in [ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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