Commissioner of Income Tax Vs. Lakshmi Mills Co. Ltd. - Court Judgment

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head note: income tax business expenditure--bonus--additional bonus paid to employees as performance bonus. ratio: tribunal was correct in holding that the additional amount paid by the assessee-company to its employees, in pursuance of the settlement under the industrial disputes act, 1947 in view of commercial expediency cannot be regarded as bonus under section 36(1)(ii) and therefore, it is liable to be treated as business expenditure under section 37(1). held: memorandum of settlement mentions that in addition to the bonus that is payable under the bonus act, the assessee has agreed to pay certain additional amount by way of performance bonus. clause 2 of the settlement mentions that the additional amount shall be paid in consideration of the better performance and smooth working of the mills during the relevant year. the tribunal found that, if the amount was not paid, the workers would have gone on strike, and so the additional amount can be regarded as paid by virtue of the commercial expediency. once it is held that additional amount is not a bonus, then the provisions under section 36(1)(ii) of the income tax act do not apply, and only provision that has to be satisified for the allowance of the expenditure is section 37. therefore, as the additional amount was paid on commercial principles and commercial considerations, same is allowable under section 37. case law analysis: cit v. sivanandha mills ltd. (1985) 156 itr 629 (mad) followed. application: also to current assessment year. a. y.: 1979-80 income tax act 1961 s.37(1) counsel :c. v. rajan, for the applicant. philip george, for the respondent - m. v. balasubramanian, j.at the instance of the revenue, the tribunal has stated the case and referred the following question of law for the opinion of this court, for the asst. yr. 1979-80 :whether, on the facts and in the circumstances of the case, the tribunal has rightly held that the payment of rs. 22,54,136 in pursuance of the settlement between the assessee-company and the workers under the industrial disputes act, 1947 over and above the statutory bonus, is allowable under s. 37 of the it act, 196l ?'2. the assessee is a company. during the relevant asst, yr. 1979-80, the assessee paid a sum of rs. 22,54,136 to its workers as incentive payment in pursuance of the settlement between the management and the workers under the settlement arrived at under s. 12(3) of the industrial disputes act, 1947. the ito disallowed the amount on the ground that the amount was in excess of the statutory bonus payable under the payment of bonus act, 1964, and the same should be regarded as a bonus payment. according to the officer, since the amount paid was bonus, allowability of the same would be subject to the provisions of s. 36(1)(ii) of the act. the cit(a), disagreed with the views of ito, and held that what was paid was not the bonus at all, and it is allowable under s. 37 of the it act, 1961 (hereinafter referred to as the 'act'). the tribunal, on appeal, also held that the amount was paid by virtue of the commercial expediency, and the amount cannot be regarded as a bonus. the tribunal, therefore, held that the entire amount paid as incentive payment is allowable as a business expenditure under s. 37 of the act. this order is the subject-matter of the tax case reference before this court.3. mr. c.v. rajan, learned counsel for the revenue, submitted that the amount paid was only a bonus, and the allowance of the same is subject to the assessment prescribed under s. 36(1)(ii) of the it act, 1961.4. mr. philip qeorge, learned counsel for the assessee, on the other hand submitted that the finding of the tribunal is that the amount paid was not a bonus and since it is not a bonus, it is allowable under s. 37 of the it act, 1961.4. mr. philip george, learned counsel for the assessee, on the other hand submitted that the finding of the tribunal is that the amount paid was to a bonus and since it is not a bonus, it is allowable under s. 37 of the it act.5. we have perused findings of the tribunal. the tribunal refers to the memorandum of settlement arrived at under s. 12(3) of the industrial disputes act between the assessee and the trade union of the assessee. in the memorandum of settlement, it mentions that in addition to the bonus that is payable under the bonus act, the assessee has also agreed to pay certain additional amount shown in the annexures to the agreement. clause 2 of the settlement mentions that the additional amount shall be paid in consideration of the better performance and smooth working of the mills during the relevant year. the tribunal found that, if the amount was not paid, the workers would have gone on strike, and so the additional amount can be regarded as paid by virtue of the commercial expediency. once it is held that additional amount is not a bonus, then the provisions under s. 36(1)(ii) the it act do not apply, and only provision that has to be satisfied for the allowance of the expenditure is s. 37 of the act. it is already seen that the payment was made on commercial considerations. if the amount was not paid which was due to be paid under the agreement, the workers would have gone on strike. it would have created a seed of discontent in-the minds affecting the smooth and proper running of the assessee's business. therefore, we are of the view that the additional amount was paid on commercial principles and commercial considerations, and is allowable under s. 37 of the act. in cit vs. sivanandha mills ltd. (1987) 63 ctr (mad) 11 : (1985) 156 itr 629, this court has held that s. 36(1)(ii) will apply only in the case of bonus paid under the bonus act, and the payments made as incentive bonus, attendance bonus or customary bonus are allowable under s. 37 of the act on the score that the expenditure was laid out wholly or exclusively for the purpose of the business.6. hence we hold that the tribunal has come to a correct conclusion that the payment made in pursuance of the settlement between the assessee- company and the workers under the industrial disputes act over and above the statutory bonus, is allowable under s. 37 of the it act. we therefore answer the question of law referred to us in the affirmative and against the revenue. no costs.