G.K. Misra, C.J.
1. The petitioner is a public limited company having its registered office and factory at Chowdwar in the district of Cuttack.The petitioner used to manufacture and sell and is still manufacturing and selling G. I, pipes of different sizes.
2. The assessment year in question is from April 1, 1959, to March 31, 1960, and the accounting year is from April 1, 1958, to March 31, 1959.
3. Petitioner's case is that during the accounting year 1958-59 amounts equal to one month's salary were paid to the workmen of the company by way of loan. There were some agitations by the workmen who tried to put pressure upon the petitioner by adopting go-slow tactics in production. A dispute arose between the workmen and the management relating to payment of bonus for the accounting year 1957-58. The managing director of the petitioner thought it to be in the best interests of the petitioner's business to pay one month's wages as bonus for the year 1957-58, and issued an order that the said loan, equal to one month's wages already paid to the workmen, should be adjusted as bonus for the year 1957-58 Bonus was actually provided in the accounts for the year 1957-58, but the same was written back during the next year 1958-59, and the said payment of bonus amounting to Rs. 79,447 was charged in the accounts under the head 'ex gratia' in order to obviate a possible contention of the workmen of a vested right or precedent.
4. For the assessment year 1959-60, the petitioner claimed a deduction of Rs. 68,186 as legal expenses. Out of that sum, the Income-tax Officer disallowed a sum of Rs. 61,490 which includes a sum of Rs. 47,879 spent by the petitioner towards legal expenses on litigation with one S. P. Jain. The petitioner was in urgent need of money with a view to release certain bill of lading. In that connection, the petitioner floated new share capital of about thirty-nine lakhs of rupees and proposed to allot certain shares. When the allotment was about to be made, one group of shareholders headed by S. P. Jain brought a suit against the petitioner and the directors of the petitioner, and obtained an order of injunction restraining the directors from issuing those new shares. As the business of the petitioner was greatly affected due to the said injunction and litigation the petitioner had to fight out the case as a result whereof a sum of Rs. 47,879 was spent as litigation expenses.
5. For the same assessment year, the petitioner claimed a sum of Rs. 1,28,830 on account of development rebate on railway sidings which were erected for purposes of business of the petitioner. The said railway sidings were needed for transport of the goods manufactured by the petitioner's factory and for that reason it was an essential part of the plant or equipment or machinery in relation to the business of the petitioner.
6. The petitioner was not given allowance in respect of each of the aforesaid three items right up to the Tribunal. The petitioner asked for a reference which was rejected. On an application being filed in this courtto call upon the Tribunal to make a statement of the case under Section 256(2) of the Income-tax Act, 1961, a statement of the case has been submitted by the Tribunal on the following questions :
'(1) Whether, on the facts and in the circumstances of the case, the amount of Rs. 79,447 paid to the workmen as bonus during the assessment year 1959-60 were expenditure laid out wholly and exclusively for the purpose of business
(2) Whether, on the facts and in the circumstances of the case, the amount of Rs. 47,879 paid towards the legal charges during the assessment year 1959-60 were expenditure laid out wholly and exclusively for the purpose of business
(3) Whether the assessees are entitled to claim development rebate on railway sidings used by them for transporting their raw materials and finished goods ?'
7. In paragraph 3 of the appellate order the Tribunal extracts the case of the petitioners as presented before him. It runs thus :
'According to the assessee's own statement : Apart from the bonus due and payable under the law certain amounts were paid to the workers by way of loan. Bonus was provided in the previous assessment year, i.e., financial year 1957-58, which was written back in the financial year 1958-59 relevant to the assessment year which is now under appeal. The case of the assessee is that on account of agitation and the pressure and the go-slow tactics adopted by the workmen a dispute arose between the workmen and management. The managing director, therefore, thought that it was in the interest of the company to treat this loan as payment by way of bonus and settle the dispute. Accordingly, he issued an office order that this loan should be adjusted towards payment of bonus and it was done so. But, in the books of accounts, in order to obviate possible contention of a vested right or a precedent, the term 'ex gratia' was used.'
8. In paragraph 4 of its order the Tribunal records its own conclusion thus:
'We have understood the case of the assessee, but we cannot accept this contention that the claim is admissible. There is no material on record to show that there was necessity for making the payments as stated. Nor is it shown that it is bonus in fact. It is one of those types of payments which are made by persons in authority to keep one group satisfied but unless it is shown that the payment was made for business necessity or commercial expediency it cannot be allowed. No interference.'
9. Before examining the correctness of the Tribunal's conclusion in paragraph 4 of its order, it is necessary to state that this allowance is claimedunder Section 10(2)(x) of the Indian Income-tax Act, 1922 (hereinafter to be referred to as ' the Act ').
10. Section 10(1) and Section 10(2)(x) run thus :
'10. (1) The tax shall be payable by an assessee under the head profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him.
(2) Such profits or gains shall be computed after making the following allowances, namely :--......
(x) 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 of a reasonable amount with reference to--
(a) the pay of the employee and the conditions of his service;
(b) the profits of the business, profession or vocation for the year in question ; and
(c) the general practice in similar businesses, professions or vocations.'
11. As this is an allowance which would be deducted from the income of the petitioner, the onus is on him to establish that the allowance claimed comes within the ambit of Section 10(2)(x) of the Act.
12. The petitioner shall have to prove, in the first instance, that the sum of Rs. 79,447 paid to its employees was a bonus. After it establishes that it was 'bonus' it has further to prove that the conditions prescribed in the proviso have been fulfilled.
13. The Tribunal rejected the claim of the petitioner on a finding that it was not 'bonus' and did not examine further whether the conditions prescribed in the proviso had been fulfilled. The reasoning given by the Tribunal is contrary to law, and is a question of law arising out of the appellate order. Even though the sum had been advanced by the petitioner to its employees by way of a loan, nothing prevented the petitioner from adjusting the same as bonus by not realising the loan. Bonus may be paid in cash or it may be adjusted against the pre-existing loan. The nature and character of bonus is not in any way affected merely because the same was not paid in cash, but was given by way of adjustment. The petitioner made it clear that it decided to pay bonus to the employees as they created some trouble in running the industry. It is for the management to decide for maintaining peace in an industrial concern whether to pay bonus to the workmen to keep them contended for better production, even though bonus had not been statutorily prescribed. It is not for the income-tax department to control the management's conduct in paying bonus. It is, however, open to the department to reject the same if the conditions prescribed in the proviso had not been fulfilled. Rs. 79,447were initially advanced to workmen on October 17, 1958. It was quite competent for the managing director to issue an order on September 1, 1959, saying that the advance would be treated as bonus The fact that in the books of account this payment was described as 'ex gratia' payment, does not, in any manner, affect the nature and character of the adjustment being termed as 'bonus'. At the material time, bonus had not been statutorily prescribed. In the books of account, the management had to describe the bonus as an 'ex gratia' payment to see that the workmen for the subsequent years do not claim a right on the basis of an entry that it was a ' bonus '.
14. The word 'ex gratia' means 'act of grace'. As 'bonus' had not been statutorily prescribed, the management was of opinion that the payment was not compulsory under any statute and as it was paid to keep the workers contented, the payment of bonus was an 'act of grace'. Thus, the entry in the books of account showing the payment as 'ex gratia' does not negative its character being bonus as it was stated in the order issued by the managing director on January 1, 1959.
15. With great respect, we disagree with the conclusion of the Tribunal that the payment was not bonus. The conclusion is contrary to law.
16. Our aforesaid view does not, however, resolve the difficulty. The Tribunal has not specifically gone into an examination of various elements to be fulfilled under the proviso and whether the petitioner has been able to discharge the onus.
17. On this point, this court, in a reference jurisdiction, cannot record a finding of fact and the case must go back to the Tribunal to determine whether allowance is to be given under Section 10(2)(x) in respect of Rs. 79,447 which were paid as bonus. That means the Tribunal would now examine whether the conditions prescribed in the proviso have been fulfilled.
18. We would answer this question in the following way :
(1) In the facts and circumstances of the case the amount of Rs. 79,447 paid to the workmen during the assessment year 1959-60 was bonus.
(2) The Tribunal would, however, re-examine and decide whether allowance for this payment of bonus would be given by recording its conclusion whether the conditions of the proviso to Section 10(2)(x) have been fulfilled.
19. Rs. 47,879 was disallowed as legal expenses. There is no dispute between the parties that this amount was spent in litigation between the petitioner and Sri S. P. Jain in relation to the affairs of the company. S. P. Jain succeeded before a single judge of this court as would be foundfrom Shanti Prasad Jain v. Kalinga Tubes Ltd., A.I.R. 1962 Orissa 202 The petitioner came up in appeal and in Kalinga Tubes Ltd. v. Shanti Prasad Jain, A.I.R. 1963 Orissa 189 a Division Bench of this court allowed the appeal and set aside the judgment of the learned single judge. The Division Bench decision was confirmed by the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd., [1965] 35 Comp. Cas. 351 (S.C.) The point that arose in that case for determination has been enumerated in paragraph 7 in Kalinga Tubes Ltd. v, Shanti Prasad Jain, A.I.R. 1963 Orissa, 189. Ultimately, the petitioner succeeded. It was a fairly contentious litigation. The defence by the petitioner was well founded and the petitioner could, not avoid such a litigation brought at the instance of Sri S. P. Jain.
20. The question for consideration is whether allowance should be given to such a claim under Section 10(2)(xv) of the Act which runs thus :
' Section 10. (2) Such profits or gains shall be computed after making the following allowances, namely :--......
(xv) any expenditure (not being an allowance of the nature described in any of the Clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. '
21. As has been said already, a bare perusal of the aforesaid dicisions would show that the litigation, which was ultimately settled in the Supreme Court, involved an expenditure laid out or expended wholly and exclusively for the purpose of the business of the petitioner.
22. The allowance of the aforesaid amount must, therefore, be given under this head.
23. In paragraphs 5 and 6 of the appellate order, the Tribunal dealt with this part of the case. We have no difficulty in observing that the Tribunal misconceived the scope of the litigation, it did not refer to the aforesaid decisions and was wrong in observing that the expenditure was incurred in connection with the issue of shares and was a capital expenditure. A point of law thus arises out of the appellate order.
24. We would, accordingly, answer the question in the positive, and say that in the facts and circumstances of this case the amount of Rs. 47,879 paid towards the legal charges during the assessment year 1959-60 was an expenditure laid out wholly and exclusively for the purpose of business.
25. The next question for consideration is whether the petitioner is entitled to development rebate as claimed. In paragraph 8 of the judgment the Tribunal notices the case of the petitioner as follows :
' It was urged on behalf of the assessee-company that the assessee-company was entitled to development rebate on railway sidings which wereerected for the purpose of business, because railway sidings had to be provided for the purpose of transport of the goods manufactured by the factory, and for that reason it was an essential part of the plant or equipment in relation to the business. The assessee-company relied upon the judgment in Ajodhya Prasad Tara Chand v. Commissioner of Income-tax, [1967] 66 I.T.R. 576 (All) and Taj Mahal Hotel v. Commissioner of Income-tax, [1968] 68 I.T.R. (Sh. N.) 28-fully reported in [1968] 70 I.T.R. 366 (A.P.). These judgments are of no immediate application because the question whether railway sidings form part of the building, plant or equipment was neither proposed nor solved therein.'
26. In paragraph 9 of the judgment the Tribunal disposed of the question by the following observation :
' We have to find out whether the term ' plant, machinery or equipment ' includes railway sidings. After careful consideration, we are of the opinion that the railway siding is not a part of the plant or equipment or machinery. We, therefore, feel that the department was justified in refusing the claim of development rebate.'
27. It would thus appear that the Tribunal did not critically examine the matter and assigned no valid reasons for rejecting the claim.
28. The rebate is claimed on the basis of Section 10(2)(vib) which runs thus:
' (2) Such profits or gains shall be computed after making the following allowances, namely :--......
(vib) in respect of machinery or plant being new, which has been installed after the 31st day of March, 1954, and which is wholly used for the purposes of the business carried on by the assessee, a sum by way of development rebate in respect of the year of installation equivalent to twenty-five per cent. of the actual cost of such machinery or plant to the assessee :
Provided that no allowance under this clause shall be made unless the particulars prescribed for the purpose of Clause (vi) have been furnished by the assessee in respect of such machinery or plant.'
29. It is to be noted that the income-tax department did not record any finding that the conditions prescribed in the proviso have not been satisfied ; in other words, the assessee furnished particulars prescribed for the purpose of Clause (vi).
30. The question for consideration is whether the railway sidings constructed by the petitioner constitute machinery or plant which has been installed and which is wholly used for the purpose of business carried on by the petitioner.
31. The petitioner's case is that the railway sidings are used for the purpose of transport of goods manufactured by the factory. There is norebutting evidence. The petitioner's case is also in consonance with the normal purpose of the business, and the railway sidings are essential for transport of goods.
32. Rule 8 of the Indian Income-tax Rules made under Section 59 of the Act runs thus:
'8. The allowance under Section 10(2)(vi) of the Act in respect of depreciation of buildings, machinery, plant or furniture shall be at percentages of the written down value or original cost, as the case may be, equal to one-twelfth the number shown in the corresponding entry in the second column of the following statement:
Provided that if the buildings, machinery, plant or furniture have been used by the assessee in his business for not less than two months during the previous year, the percentage shall be increased proportionately according to the number of complete months of user by the assessee :
Provided further that in the case of a seasonal factory worked by the assessee during all the working seasons of the previous year, the percentage shall be increased as if the buildings, machinery, plant or furniture had been in use throughout the period the assessee was the owner thereof during the previous year.'
33. Item S, in the first column of the statement referred to in Rule 8, under the heading 'III-Machinery and Plant', shows that railway sidings (N.E.S.A.) are included within machinery and plant. The construction of the railway sidings meant that they had been installed.
34. In Commissioner of Income-tax v. Taj Mahal Hotel, [1971] 82 I.T.R. 44(S.C.) the meaning of the word 'plant' was considered. In Section 10(5), ' plant' has been defined. Plant includes vehicles, books, scientific apparatus and surgical equipment purchased for the purpose of business, profession or vocation. By applying this definition, sanitary fittings and pipe lines installed in a hotel were said to be coming within the definition of plant in Section 10(2)(vib).
35. In this case, the very fact that the Indian Income-tax Rules enumerate railway sidings as coming within the definition of plant and machinery obviates the necessity of examining the question whether it would come within the definition of plant. As has been said already, the aforesaid Supreme Court decision makes it clear that it would come within such definition even if it had not been clearly enumerated under Rule 8.
36. We are satisfied that the conclusion of the Tribunal is contrary to law and a question of law arises out of the appellate order.
37. We would answer the question in the positive by saying that the petitioner is entitled to claim development rebate on the railway sidings installed by the petitioner for transport of raw materials and finished goods.
38. In the result, the reference is accepted with costs and the questions are answered as indicated already.
39. Hearing fee rupees three hundred.
Acharya, J.
40. I agree.