Judgment:
These two appeals have been preferred by the assessee relating to asst.
yrs. 1987-88 and 1988-89. Since the issues raised are common, these appeals are being disclosed of by this common order for the sake of convenience.
In ITA No. 4873/A/91, the first ground relates to disallowance of excess perquisite of Rs. 11,940. The AO observed that the perquisites provided to Shri S. K. Behal, Managing Director of the assessee-company exceeded 1/5th of the salary by an amount of Rs. 11,940 and the same was disallowed under s. 40(c) r/w s. 40A(5) of the IT Act. In further appeal, the CIT(A) has confirmed the action of the AO. According to the CIT(A) the ceiling on perquisites under s. 40A(5) is 1/5th of the salary and the excess over 20 per cent. of the salary which comes to Rs. 11,940 has rightly been disallowed by the AO.2. Before us, Shri M. K. Patel, Advocate, the learned counsel for the assessee while relying upon the decision of Honble Gujarat High Court in the case of Addl. CIT vs. Tarun Commercial Mills Ltd. 1977 CTR (Guj) 141 submitted that the provisions of s. 40A(5) are of general nature applicable to employees while the provisions of s. 40(c) are applicable to the Director(s) of a company and therefore, special provisions of s.
40(c) alone will be applicable in the case of directors of the company and not that of s. 40A(5). He, therefore, submitted that the CIT(A) was not justified in sustaining the addition by applying the provisions of s. 40A(5) in the case of Shri S. K. Behal, managing director of the assessee-company.
3. On the other hand, Shri V. K. Mathur, the learned Departmental Representative strongly supported the orders of the authorities below : 4. We have considered the rival submissions and have also perused the orders of the authorities below. We find considerable force in the submissions of the learned counsel for the assessee that in view of the judgment of Honble Gujarat High Court in the case of Addl. CIT vs.
Tarun Commercial Mills Ltd. (supra), the CIT(A) was not justified in sustaining the addition of Rs. 11,940. The provisions of s. 40A(5) are of general nature applicable to employees while the provisions of s.
40(c) are applicable in the case of director of the company. We also find substance in the submissions of the learned counsel for the assessee that keeping in view the legitimate business needs of the assessee-company and the benefit derived by it, the expenditure in question was neither excessive or unreasonable. Moreover, there is no such finding of the authorities below that as per the provisions of s.
40(c), the amount in question was excessive or unreasonable. In our view, the authorities below were not justified in applying the provisions of s. 40A(5) of the IT Act, 1961 in the case of Shri S. K.Behal who is admittedly the managing director of the assessee-company and hence, the disallowance is liable to be deleted. We accordingly delete the same.
5. The next ground relates to deduction under s. 80-I of the IT Act.
During the assessment year under consideration, the AO allowed deduction under s. 80-I of the Act at Rs. 89,490 as against the assessees claim of Rs. 1,11,863. From the gross total income of Rs. 4,47,451, the AO has first allowed deduction under s. 80HH at 20 per cent. of the profit which comes to Rs. 89,470 and from the resultant amount of (4,47,451-Rs. 89,470) Rs. 3,57,961. Deduction under s. 80-I has been allowed at the admissible rate of 25 per cent. which works out to Rs. 89,470. The assessees claim was that the deduction under s. 80-I should have been allowed at 25 per cent. of the gross total income of Rs. 4,47,451 which comes to Rs. 1,11,863. The assessees contention before the authorities below was that the basis on which the deduction is to be calculated is profits derived from an industrial undertaking.
The basic figure for ss. 80HH & 80-I should be the same.
6. We have considered the rival submissions and have also gone through the orders of the authorities below. We find substance in the submissions of the learned counsel for the assessee that the deduction under s. 80-I should be allowed at 25 per cent. of the gross total income of Rs. 4,47,451 without deduction of relief under s. 80HH. The basis on which the deduction is to be calculated is profits derived from an Industrial undertaking. While deducting the reliefs under ss.
80HH and 80-I the basic figure should be the same.
7. In the case of Digchem Industries vs. ITO (1987) 27 TTJ (JP) 593 the Tribunal Bench, Jaipur has observed as under : "Sec. 80HH(1) and s. 80-I(1) lay emphasis on amount to be allowed as a deduction in computing the total income of the assessee from such profits and gains of the undertaking of amount equal to 20 per cent.
thereof. The sections do not anywhere mention that the deduction to be allowed is 20 per cent. of the income computed in accordance with the provisions of the Act after the relief contained upto Chapter VIA. The s. 80HH(9) only provides that when a concern is entitled to deduction under s. 80HH, s. 80-I and or s. 80J then the first of the deduction that would have to be allowed is a deduction under s. 80HH. This only is a clarification in case of such successive reliefs that the relief in respect of earlier section would have to be allowed in full. This is amply made clear by the provisions that is contained in s. 80A(2) which provides that the aggregate amount of the deductions under this Chapter shall not in any case exceed the gross total income of the assessee. If the legislature intended to give the deduction on the basis of residual income after providing of relief under each of the sections they would have provided clearly in that fashion. The section as it stands and as it is worded clearly lays emphasis on the calculation of the reduction as a percentage of the profits and gains of the undertaking which would mean only the commercial profits. Therefore the assessee is entitled to relief under s. 80-I to the tune of 20 per cent. of the profits as per its P&L a/c without taking into account the depreciation and excluding the provision for income-tax as well as the investment allowance. The ITO is directed to recompute the claim in accordance with the observations made above." 8. In the case of Samir Diamonds Mfg. (P) Ltd. vs. CIT in ITA Nos. 302 & 303/A/94 decided on 16th May, 1996, the facts before the Tribunal were that the assessee was entitled to deductions under both under the ss. 80HHA and 80-I. In the said order, the Tribunal Bench-B, Ahmedabad has held that the authority below was not justified in allowing the relief under s. 80-I of the Act after deducting the relief under s.
80HHA from the gross total income. The Tribunal further observed that the provisions of s. 80HH & s. 80-I are independent provisions referring to gross total income and the IT Act, 1961, nowhere provided that the deduction under s. 80HH was to be deducted from gross total income for the purpose of working out deduction admissible under s.
80-I. In this view of the matter, the assessee should be entitled to relief under s. 80-I of the Act at the admissible rate of 25 per cent.
of the gross total income of Rs. 4,47,451, which would work out to Rs. 1,11,863. Consequently, we allow this ground raised by the assessee.
In ITA No. 4874/A/91, the first ground relates to disallowance of Rs. 21,237 out of bonus payment. The AO found that the aforesaid amount was paid to the workers of the assessee-company on the occasion of Diwali festival. According to the AO, the said payment was made over and above the bonus paid of Rs. 69,734. The AO further observed that the disputed payment was in excess of the maximum bonus payable under the payment of Bonus Act and, therefore, the same was not allowable either under s.
36(1)(ii) or under s. 37 of the IT Act, 1961. The said action of the AO was confirmed by the CIT(A). The assessees explanation was that there was some discontent amongst the workers and agitation on their part, therefore one month salary was paid to each of them even through the Bonus Act was not applicable.
2. We have heard the learned representatives of both the parties. From the records of the case, it is evident that the bonus paid to the workers has not been doubted by the authorities below. We find substance in the submissions of the learned counsel for the assessee that the additional bonus paid to the workers on the occasion of Diwali festival was business expenditure incurred with a view to maintain cordial relations with the workers and as such bonus payments are not covered by the provisions of s. 36(1)(ii) of the Act. The same is, therefore, clearly allowable as business expenditure under s. 37(1) of the IT Act, 1961. The said payment was made with a view to ensure that the workers did not resort to strike interrupting production. Now, it is well settled that if an amount representing the payment of customary bonus does not fall within the precinct of the payment of Bonus Act, then the allowability of it can be considered not only under s.
36(1)(ii) but also under s. 37 of the IT Act.
3. In the case of CIT vs. Holmah Climax Mfg. Ltd. (1992) 196 ITR 698 (Cal), the Honble Calcutta High Court has decided that incentive bonus was an expenditure laid out wholly and exclusively for the purpose of the business and accordingly, it was an admissible deduction under s.
37 of the IT Act. Ultimately, the Calcutta High Court allowed the deductions. In this view of the matter, we hold that payment in question has been made for the purpose of business expediency and to maintain good relations with the workers and hence it should have been allowed under s. 37(1) of the IT Act. Consequently, we allow this ground and delete the disallowance.
"In the facts and circumstances of the case, the learned CIT(A)-I, Baroda has further erred in confirming the disallowance of Rs. 12,435 being the perquisites paid to Shri S. K. Behal, managing director of the company, on the ground that the ceiling for perquisites under s.
40A(5) is 1/5th of the salary and the excess of 20 per cent. of the salary has been rightly disallowed under s. 40A(5)." In view of our findings given in ITA No. 4873/A/91 for the asst. yr.
1987-88 (supra), we allow this ground also and consequently, delete the disallowance of Rs. 12,435.
5. The next ground raised by the assessee in this appeal reads as under : "In the facts and circumstances of the case, the learned Dy. CIT(A)-I, Baroda has again erred in confirming the working of s. 80-I deduction made by the learned Dy. CIT (Asstt.) Spl. Range-2, Baroda, to the tune of Rs. 159100." 5.1 In view of our findings given in ITA No. 4873/A/91 for the asst.
yr. 1987-88 (supra), we allow this ground also. The relief under s.
80-I of the Act at the admissible rate of 25 per cent. of gross income of Rs. 7,95,509 which would work out to Rs. 1,98,877.