Judgment:
Santosh Bora, J.
1. By this reference under Section 256(1) of the Income Tax Act 1961, the Income Tax Appellate Tribunal, Panaji Bench, Goa, (Tribunal for short) has referred the following questions of law for the opinion of this Court at the instance of the Revenue:
(1) Whether the I.T.A.T. Was justified in holding that the ex-gratia payment in excess of the limits prescribed under the Payment of Bonus Act either under Section 36(1)(ii) or Section 37(1) of the Act, is allowable as business expenditure.
(2) Whether the I.T.A.T. was justified in holding that exgratia amount paid over and above the amount paid as per Bonus Act was an allowable expenditure although the payment did not cover contractual payment or customary payment.
2. Factual factors:
The assessee, a company earns income from hiring of trucks, dumpers and barge. The assessment year is 1993-94. The respondent has made payment of ex-gratia in the sum of Rs. 2,37,702/- to its employees (in excess of the limits of 8.33% under the payment of Bonus Act). The respondent claims the deduction of the said amount in computing its total income. The Deputy Commissioner of Income Tax (assessment), Special Range-II, Panaji disallowed the said claim on the ground that it is an excess payment than permissible limits as per the Act. The Deputy Commissioner of Income Tax held that the payment of only 8.33% was in accordance with the Bonus Act and therefore, the payment of Rs. 2,37,702/- which was in excess of 8.33% -maximum statutory limit under the Act could not be allowed.
3. Feeling aggrieved by the order passed by the The Deputy Commissioner of Income Tax, the assessee/respondent filed an appeal be before the Commissioner of Income Tax (Appeals). The Deputy Commissioner of Income Tax vide his order dated 2.9.1994 allowed the appeal thereby holding that the amount of Rs. 2,37,702/- being the ex-gratia was made to the employees in order to maintain healthy relations and industrial peace. The The Deputy Commissioner of Income Tax (appeals) relied on the decision of Madras High Court in the case of CIT v. Sivananda Mills Ltd. 156 ITR 629 and the decision of CIT Karnataka-III, Bangalore in Revenue Petition No. 8/89/9/CIT-III for the assessment year 1985-86 in the assessee's own case. Dissatisfied with the order of Commissioner of Income Tax (appeals), Department preferred appeal before Income Tax Appeal Tribunal.
4. The Income Tax Appeal Tribunal, Pune Bench, Pune dismissed the Department's appeal observing that the issue was concluded in favour of the assessee by a decision of the Bombay High Court in the case of The Commissioner of Income Tax v. Raghuvansi Mills Ltd. Income Tax Reference No. 169/1987 dated 25.10.1993.
5. At the behest of the Revenue, Income Tax Appeal Tribunal made the present reference under Section 256(1) for opinion on points mentioned in paragraph 1 above.
6. Heard the learned Counsel Shri S.R. Rivonkar for the appellant/Revenue and Shri Sudin M.S. Usgaonkar learned Counsel for the respondent assessee.
7. Shri Usgaonkar for the respondent submits that apart from the decision of this Court in the case of M/s Raghuvansi Mills Ltd., there are decisions of other High Courts too taking the same view. The learned Counsel placed reliance on the following decisions:
CIT v. Shaw Wallace and Co. Ltd. : [1991]190ITR455(Cal) , CIT v. Rahima Landa and Tea Co. Pvt. Ltd. : [1992]197ITR310(Cal) subsequent decision of Calcutta High Court on the issue. He also relied on the decision of CIT v. Sree Kamakhya Tea Co. Pvt. Ltd. : [1993]199ITR714(Cal) , CIT v. National Engineering Industries Ltd. : [1994]208ITR1002(Cal) , CIT v. Ganges Rope Co. Ltd. : [2001]252ITR524(Cal) , CIT v. Rajasthan State Mineral Development Corporation .
8. Perusal of the aforesaid decisions of the Calcutta and Rajasthan High Courts shows that the object of the proviso to Section 36(1)(ii) of Income Tax Act was to encourage the management to pay bonus in excess of what is statutorily bound to be paid to the employees provided the payment is justifiable as 'reasonable payment.' It was observed that any other construction of the said provision would be artificial and may not be in keeping with such a benovelent provision. The decision in the case of Rajasthan State Mineral Development Corporation cited supra is somewhat similar to the facts of the instant case. The assessee company in the said case claimed deduction of ex-gratia payment to its employees, the assessing officer negatived the claim on the ground that the assessee had suffered a loss and no outstanding performance has been shown. The appellate authority also confirmed the order of the assessing officer. The Rajasthan High Court held that the payment could be allowed under Section 37 since it has been incurred wholly or exclusively for the purpose of business. It further held that the payment has been made to maintain industrial harmony and in order to run the business.
9. We may usefully refer to the decision of the Apex Court in the case of The Mumbai Kamgar Sabha Bombay v. Abdulbhai Faizullabhai and Ors. reported in : (1976)IILLJ186SC . (Hon'ble Justice V. R. Krishna Iyer and N.L. Untwalia, JJ) The Apex Court considered the provisions of payment of Bonus Act 1965 particularly, the preamble - Section 17 which pertains to adjustment of customary or interim bonus and Section 34 in respect of effect of laws and claims inconsistent with the said Act. It is observed as below:
The Bonus Act speaks, and speaks as a whole Code, on the sole subject of profit based bonus but is silent on and cannot therefore annihilate by implication, other distinct and different kinds of bonus such as the one oriented on custom. The gravitational pull on judicial construction of Part IV of Constitution has to some extent influenced this conclusion. Thus it can be held that the Bonus Act (as it stood in 1965) does not bar claims to customary bonus or those based on conditions of services....
Schematically speaking, statutory bonus is profit bonus. Nevertheless, there is provisions for avoidance of unduly heavy burden under different heads of bonus. For this reason it is provided in Section 17 that where an employer has paid any puja bonus or other customary bonus, he will be entitled to deduct the amount of bonus so paid from the amount of bonus payable by him under the Act. Of course, if the customary bonus is thus recognized statutorily and, if in any instance it happens to be much higher than the bonus payable under the Act, there is no provision totally cutting off the customary bonus. The provision for deduction in Section 17, on the other hand, indicates the independent existence of customary bonus although, to some extent, its quantum is adjustable towards statutory bonus. Again Section 34 only emphasizes the importance of the obligation of the employer, in every case, to pay the statutory bonus. The other sub sections of Section 34 also do not destroy the survival of other types of bonus than provided by the Bonus Act....
Further it is clear from the long title of the Bonus Act of 1965 that it seeks to provide for bonus to persons employed 'in certain establishments' not in all establishments. Moreover, customary bonus does not require calculation of profits, available surplus because it is a payment founded on long usage and justified often by spending on festivals and the Act gives no guidance to fix the quantum of festival bonus; nor does it expressly wish such a usage. The conclusion seems to be fairly clear, unless the court strains judicial sympathy contraraywise, that the Bonus Act dealt with only profit bonus and matters connected therewith and did not govern customary traditional or contractual bonus. The omission to mention the name of a festival as a matter of pleading does not detract from the claim of customary bonus....
10. Learned Counsel for the appellant Shri S.R. Rivonkar with his usual fairness brought to out notice the decision of this Court (Division Bench Coram: Dr. B. P. Saraf and Dr. Mrs. Praibha Upasani, JJ) in Commissioner of Income Tax v. Rajaram Bandekar and Sons (Shipping) Pvt. Ltd. : [1999]237ITR628(Bom) .
11. In the said case reference was made for the opinion of the High Court as regards to the payment of ex-gratia to the tune of Rs. 1,58,828 to the employees and whether such payment can be deducted as business expenditure by the assessee. This Court held that the Tribunal in the said case was not right in holding that the payment of ex-gratia amount of Rs. 1,58,828/- to the employees was by way of bonus for the service rendered and accordingly not allowable as deduction under Section 37 of the Act. The High Court remitted the matter back to the Tribunal for deciding the point afresh thereby giving reasonable opportunity of hearing to the assessee to satisfy the Tribunal that the conditions set out in the second proviso to Section 36(1)(ii) are fulfilled. It also directed that the Tribunal if satisfied may allow the deduction under Section 36(1)(ii) of the Act.
12. In the instant case, there is no dispute that the amount of Rs. 2,37,703/- was paid by the assessee to its employees as ex-gratia payment. Such payment was over and above the prescribed limits of 8.33%. There is also no dispute that the Commissioner of Income Tax, Panaji as well as the Income Tax Tribunal have verified that such ex-gratia payment was made by the assessee. There is also no dispute that Commissioner of Income Tax, Panaji and the Income Tax Tribunal allowed consequential deductions from the assessee's income.
13. In the case of M/s Raghuvansi Mills Ltd. the Division Bench of this Court (Coram: Dr. B. P. Saraf and D. R. Dhanuka, JJ) while deciding Income Tax Reference No. 169 of 1987 answered the following issues in the affirmative.
1. Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that Bonus of Rs. 5,26,767/- was paid by the assessee company in excess of 8.33% was allowable as a deduction under Section 36(1)(ii) and that the restriction imposed by first proviso to Section 36(1)(ii) applied to profit or productions linked Bonus and not to other payments ?
2. Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the additional bonus of Rs. 5,26,767/- is allowable as a deduction under Section 37(1) inspite of specific restrictions imposed by proviso to Section 36(1)(ii)
14. For the reasons stated above, we are of the view that the points for reference framed in paragraph 1 above deserved to be answered in the affirmative as the same are covered by the decisions of this Court in the case of Commissioner of Income Tax v. Rajaram Bandekar and Sons (Shipping) Pvt. Ltd. : [1999]237ITR628(Bom) Bom and The Commissioner of Income Tax v. Raghuvansi Mills Ltd. Income Tax Reference No. 169/1987. Accordingly the reference is answered and the same may be returned to the Tribunal.