1. This is a departmental appeal, challenging the order of the Commissioner (Appeals) on the following points: That the learned Commissioner (Appeals) was not justified on facts and in law in holding that the payment made under contractual obligation would not be bonus under the Payment of Bonus Act, 1965.
That the learned Commissioner (Appeals) erred in law in his finding that the amount of Rs. 75,588 paid to the employees was an allowable expenditure on commercial expediency.
The facts giving rise to the above controversy are in a narrow compass and may be noted.
2. The assessee is a company, whose accounting period for the assessment year 1979-80 ended on 31-12-1978. During the aforesaid previous year, the assessee-company paid bonus amounting to Rs. 5,18,505. The aforesaid bonus was paid in terms of an agreement of settlement arrived at between the assessee-company on the one hand and its workmen on the other, represented by various unions with the help of Conciliation Officer, Shri R.K. Saha, representing the Directorate of Labour of the Government of West Bengal. The recital of the case in the said memorandum of settlement reads, inter alia, as follows: The above-mentioned management vide their letter, dated 21-9-1978, sought the intervention of this Directorate when a dispute arose over the quantum of bonus payable to the workers for the accounting year 1977. The unions demanded 20 per cent bonus, whereas the management was agreeable to pay 15.41 per cent as per the computation formula of the Bonus Act. This dispute resulted in agitation by the workers and thus production was hampered. After protracted discussion, the issue of bonus is settled as per the following terms and conditions: (a) That in the interest of good labour/management relation and for the sake of uninterrupted production in the garden, the management will pay the workers bonus at the rate of 19.15 per cent on their total earnings during the year as eligible under the Act.
(b) That out of the percentage mentioned in Clause (a) above, 3.74 per cent of the wages will be paid pending approval of the Government.
(c) That the above payment in terms of Clause (a) above will be made on or before 1-10-1978.
(d) That in view of the above settlement, the workers and the unions assured their full co-operation to the management in running the estate peacefully.
(e) Subject to the approval of the Government, this agreement is made under the provision of Section 34 of the Payment of Bonus Act as amended by the Ordinance of 1978.
3. On the basis of the aforesaid settlement, the assessee claimed deduction from its total income of the aforesaid amount of Rs. 5,18,505. The ITO, however, pointed out that the allocable surplus available for the year in question for distribution of bonus as per the Payment of Bonus Act, 1965, was Rs. 4,42,917 and that the minimum bonus payable by the company at the rate of 8.33 per cent came to a figure that is less than Rs. 4,42,917. Thus, according to him, the excess amount of bonus paid over the surplus available worked out to Rs. 75,588 (Rs. 5,18,505 minus Rs. 4,42,917). The above surplus was, according to him, paid against the provisions of the Payment of Bonus Act and was, therefore, not allowable under Section 36(1)07) of the Income-tax Act, 1961 ('the Act').
4. The assessee appealed against the aforesaid order to the Commissioner (Appeals), who accepted the assessee's contention by observing, inter alia, as follows: It is further stated that the appellant company follows mercantile system of accounting. The provisions of the Bonus Act would apply to the amount paid voluntarily and unilaterally by a company and provided for in the accounts with reference to its profits. The amount paid here represented actual payments in accordance with an agreement arrived at with the union in the presence of the representative of the Tea Association and the State Government, about which the assessee had no option. As the payment represented actual payment in terms of an agreement in respect of an earlier year, it does not come in the scope of the Bonus Act, or Section 36(1)(ii) of the Income-tax Act. Accordingly, disallowance of Rs. 75,588 is deleted.
He also pointed out that customary or contractual bonus did not come in the ambit of the Payment of Bonus Act and for this, he relied on the following authorities--Hukumchand Jute Mills Ltd. v. Second Industrial Tribunal [1980] 3 Taxman 43 (SC) and Garware Synthetics (P.) Ltd. v.ITO 14 ITJ 628.
5. The department assails the above finding as incorrect and points out that any contract or agreement which is not in accordance with the terms and conditions of the Payment of Bonus Act would not be enforceable in law and, therefore, the amount paid in excess of the allocable surplus could not be allowed as deduction under Section 36(1)(ii). In support of the above proposition, the learned departmental representative relied on the decision of the Tribunal in the case of Tinplate Co. of India Ltd. v. ITO [IT Appeal No. 1155 (Cal.) of 1982, dated 30-12-1983].
6. On behalf of the assessee, reliance is placed on the order of the learned Commissioner (Appeals) and on the decision of the Tribunal in IT Appeal Nos. 2124, 2125 and 2126 (Cal.) of 1982, dated 27-7-1984.
7. We have given careful consideration to the rival submissions. That the present payment of bonus is in terms of the Payment of Bonus Act, is not in doubt. In fact, the memorandum of settlement makes this position abundantly clear. This being so, the question of making reference to the decision of Hukumchand Jute Mills Ltd.'s case (supra) does not arise, for it is nobody's case in the present appeal that the payment in question is not of bonus out of profits but of customary bonus. The Commissioner (Appeals) had, therefore, clearly erred in referring to the aforesaid decision and in presuming that the ratio of the said decision would apply to the facts of the present case.
8. The short point for decision in the present appeal is whether the payment made by the assessee-company is in accordance with various provisions of the Payment of Bonus Act, as amended by the Ordinance of 1978, to which pointed reference has been made in Sub-clause (e) of Clause 5 of the memorandum of settlement. Section 10 of the Payment of Bonus Act provides for payment of minimum bonus. Section 11 of the Payment of Bonus Act provides for the maximum bonus payable which, according to the said section, would not exceed 20 per cent of the salary and wages of the employees [prior to the amendment of 1980, provisions of Section 11 were part of the provisions of Sub-section (1) of Section 10]. The provisions about maximum bonus were similar in Section 10, as those are now under Section 11. The minimum bonus payable was 8.33 per cent in respect of any accounting year commencing on any day in the year 1976, whether or not there was allocable surplus available for distribution amongst the employees. Section 34 of the Payment of Bonus Act, as it originally stood, provided that employers and employees could enter into an agreement with regard to the payment of bonus on the basis of a formula other than that contemplated in the Payment of Bonus Act. Sub-section (3) of Section 34, which dealt with this subject-matter, reads as follows: Nothing contained in this Act shall be construed to preclude employees employed in any establishment or class of establishments from entering into agreement with their employer for granting them an amount of bonus under a formula which is different from that under this Act: 9. The aforesaid provisions of Section 34 were modified by the Ordinance, namely, the Payment of Bonus (Amendment) Ordinance, 1975, with effect from 25-9-1975. In terms of this Ordinance, provisions of Sub-section 3 of Section 34 were omitted and a new cast Section 34 was brought on the statute book, which reads as follows: Effect of laws and agreements inconsistent with the Act.--Subject to the provisions of Section 31 A, the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in the terms of any award, agreement, settlement or contract of service.
10. The result of the aforesaid amendment was that the liberty granted by Section 34(3) earlier to the employees and employers to enter into an agreement for granting to the employees bonus under the formula which was different from that under the Payment of Bonus Act, was taken away. The aforesaid amendment was modified again by the Payment of Bonus (Amendment) Act, 1977, and the amended Section 34, effective from 3-9-1977, reads as below: 34. Employees and employers not to be precluded from entering into agreements for grant of bonus under a different formula.--Nothing contained in this Act shall be construed to preclude employees employed in any establishment or class of establishments from entering into agreement with their employer for granting them an amount of bonus under a formula which is different from that under this Act: Provided that no such agreement shall have effect unless it. is entered into with the previous approval of the appropriate Government: Provided further that any such agreement whereby the employees relinquish their rights to receive the minimum bonus under Sub-section (2A) of Section 10 shall be null and void in so far as it purports to deprive them of such right: Provided also that such employees shall not be entitled to be paid bonus in excess of-- (a) 8.33 per cent of the salary or wage earned by them during the accounting year if the employer has no allocable surplus in the accounting year or the amount of such allocable surplus is only so much that, but for the provisions of Sub-section (2A) of Section 10, it would entitle the employees only to receive an amount of bonus which is less than the aforesaid percentage ; or (b) twenty per cent of the salary or wage earned by them during the accounting year.
11. It is the aforesaid amended provisions of Section 34, which are applicable to the accounting period presently under consideration. The ITO was guided by the law as it obtained approval prior to the aforesaid amendment Act. In this respect, the ITO had obviously committed a mistake. The question of the assessee's claim for deduction of bonus has to be examined in the light of the aforesaid amended provisions of Section 34, which restored the right of the employer and the employee to come to an agreement with regard to the amount of bonus to be given to the employees. Such an agreement would be valid if it is entered into with the previous approval of the appropriate Government.
In the present case, it would be the Government of West Bengal. From the copy of the memorandum of settlement, it is not clear as to whether the approval of the State Government to the aforesaid memorandum of settlement was given and if so, when. Sub-clause (e) of Clause 5 made it clear that the agreement in question was subject to the approval of the Government. As to when the said approval was given, is not clear from any material on record. It would, therefore, be necessary to find out as to whether the Government of West Bengal granted its approval to the aforesaid agreement between the employer and the employees. If such agreement had received approval of the Government it would be enforceable in law and the bonus paid in terms of the aforesaid agreement would be in accordance with the provisions of the Payment of Bonus Act, provided the provisions of Clause (a) of the third proviso to Section 34 of the Payment of Bonus Act stand fulfilled. The ITO will, therefore, have to further find out, whether the payment of bonus in the present case, in any manner, offended the provisions of Clause (a) of the third proviso. If so, the amount paid in excess of 8.33 per cent would have to be disallowed. If not, the entire amount paid by the assessee to its employees in terms of the agreement entered into with the employees and duly approved (if at all) by the Government of West Bengal will be allowed as deduction under Section 36(1)(a). It would not be possible to say, in such a situation, that the payment of bonus was not in terms of the Payment of Bonus Act and that so it was hit by the provisions of Clause (ii) of Sub-section (1) of Section 36. For ascertaining the correct facts to which the aforesaid provisions of the Payment of Bonus Act may be applied, the matter will have to be restored to the ITO and, accordingly, we restore it. The ITO will redetermine the question after ascertaining the facts as indicated above.
12. We are not referring to the orders of the Tribunal relied on by either sides because the present appeal is being disposed of in accordance with the law as it obtained in the accounting period presently under consideration.
13. For statistical purposes, we will treat the departmental appeal as partly allowed.