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2008 Supreme(Bom) 1194
IN THE HIGH COURT OF BOMBAY
Before:
Dharmadhikari S.C. & Bora Santosh, JJ.
Commissioner of Income Tax- Appellant.
Versus
Maina Ore Transport Pvt. Ltd.- Respondent.
Reference Under Income Tax No. 1 of 2004
Decided on 22-8-2008.
S.R. Rivonkar, for appellant.
Sudin M.S. Usgaonkar, for respondent.
Ex gratia payments made to maintain industrial harmony and for the purpose of business could be allowed as business expenditure under the Income Tax Act.
Headnote:
Income Tax - Ex Gratia Payment - Income Tax Act, 1961, Section 36(1)(ii), Section 37(1) - The court discussed the provisions of the Income Tax Act, particularly sections 36(1)(ii) and 37(1), and their interpretation in relation to the allowance of ex gratia payments in excess of the limits prescribed under the Payment of Bonus Act. The court considered various decisions of High Courts and the Supreme Court to conclude that ex gratia payments made to maintain industrial harmony and for the purpose of business could be allowed as business expenditure under the Income Tax Act.
Fact of the Case:
The assessed company made ex gratia payments to its employees in excess of the limits prescribed under the Payment of Bonus Act. The Deputy Commissioner of Income Tax disallowed the claim for deduction of the excess amount, but the Commissioner of Income Tax (Appeals) allowed the appeal. The Income Tax Appeal Tribunal dismissed the Department's appeal, leading to the present reference to the High Court.
Finding of the Court:
The High Court found that the ex gratia payment made by the assessed company was allowable as business expenditure under the Income Tax Act, based on the decisions of the Bombay High Court and other High Courts. The court also referred to the Supreme Court's interpretation of the Payment of Bonus Act to support its finding.
Issues: The issues revolved around the allowance of ex gratia payments in excess of the limits prescribed under the Payment of Bonus Act as business expenditure under the Income Tax Act.
Ratio Decidendi: The court relied on the interpretation of sections 36(1)(ii) and 37(1) of the Income Tax Act, as well as various decisions of High Courts and the Supreme Court, to establish that ex gratia payments made to maintain industrial harmony and for the purpose of business could be allowed as business expenditure under the Income Tax Act.
Final Decision: The reference was answered in favor of the assessed company, and the same may be returned to the Tribunal.
By this refer- licence 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 f for the opinion of this Court at the instance r 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(I)(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 ex gratia 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 assesses, 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 Deputy Commissioner of Income Tax, the assessed/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 Deputy Commissioner of Income Tax (appeals) relied on the decision of Madras High Court in the case of (err vs. Sivananda Mills Ltd. 1956 I.T.R. 629 and the decision of (err, Kamatakam, Bangalore, in Revenue Petition No. 8/89/9/CIT-III for the assessment year 1985-86 in the assesses 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 assesses by a decision of the Bombay High Court in the case of (The Commissioner of Income Tax Vs. M/s. Raghuvansi Mills Ltd.j3, 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 assesses.
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 Vs. Shaw Wallace and Co. Ltd.)4,190 I.T.R. 455, (CIT Vs. Rahima Landa and Tea Co. Pvt. Ltd.)S, 197 I.T.R. 310 subsequent decision of Calcutta High Court on the issue. He also relied on the decision of (CIT Vs. Sree Kamakhya Tea Co. Pvt. Ltd.)6, 199 I.T.R. 714, (CIT Vs. National Engineering Industries Ltd., 208 I.T.R.1002, (CIT Vs. Ganges Rope Co. Ltd.)B, 252 I.T.R. 524, (CIT Vs. Rajasthan State Mineral Development Corporation) 9, 261 I.T.R. 479.
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
