The payment of bonus in whatever name it is called in excess of the amount of bonus prescribed under the Payment of Bonus Act, 1965, would be allowable even if such payment is reasonable and has been made having regard to the commercial and business expediency and to maintain the target of production through sustained industrial peace.

AJIT K. SENGUPTA, J.

( 1 ) IN this reference at the instance of the Revenue, the following question of law has been referred to this court for its opinion under Section 256 (1) of the Income-tax Act, 1961, for the assessment year 1976-77 :"whether, on the facts and in the circumstances of the case, the additional payment to the assessee's employees by way of ex gratia or puja or customary bonus in excess of the bonus payable under the Bonus Act, 1965, was an admissible deduction under Section 36 (1) (ii) of the Income-tax Act, 1961 ?"

( 2 ) THE facts leading to this reference are as under : the assessee company is engaged in the business of manufacturing pharmaceutical and industrial gelatine. During the relevant previous year, the assessee-company paid bonus to its employees at 8. 33%. In addition thereto, it also paid another sum of Rs. 74,206 to its employees by way of ex gratia payment calculated at 8. 17%. The Income-tax Officer did not allow deduction in respect of the said sum of Rs. 74,206 claimed as business expenditure on the ground that similar payment was disallowed in the immediately preceding year also.

( 3 ) ON further appeal, it was submitted on behalf of the assessee-company before the Commissioner of Income-tax (Appeals) that this additional payment by way of ex gratia was made to the employees with a view to avoid labour trouble which could have brought the production to a complete halt since the workers were not satisfied with the payment of statutory bonus calculated at 8. 33% payable under the Payment of Bonus Act, 1965. The Commissioner of Income-tax (Appeals), however, held that the payment of Rs. 74,206 was nothing but in the nature of bonus, although it was termed as ex gratia payment. Referring to the provisions of Section 36 (1) (ii), the Commissioner of Income-tax (Appeals) held that the additional payment of Rs. 74,206 being in excess of the amount of bonus payable under the Payment of Bonus Act, 1965, the same was not allowable as a business expenditure in computing the total income of the assessee-company for the assessment year 1976-77.

( 4 ) ON further appeal by the assessee-company before the Income-tax Appellate Tribunal, reference was made to a memorandum of settlement executed between the assessee-company and its employees whereunder, the aforesaid sum of Rs. 74,206 was agreed to be paid by way of ex gratia in addition to the minimum bonus payable at 8. 33% under the provisions of the Payment of Bonus Act, 1965. It was further submitted that the limit provided under the first proviso to Section 36 (1) (ii) was applicable only in respect of the bonus payable under the Payment of Bonus Act, 1965, and that it did not include customary and other kinds of payments. In any event, the additional payment by way of ex gratia having been made by the assessee company in business interests and on grounds of commercial expediency, the same was, in any event, allowable under Section 37 of the Income-tax Act, 1961. The Tribunal held and observed that, on a plain reading of Section 36 (1) (ii) read with the first proviso thereto, it was clear that if an employer pays bonus to its employees based upon profit and/or production, the amount so paid must not exceed the amount payable under the Payment of Bonus Act, 1965. Otherwise, the excess would be disallowed under the said section. But if the employer paid any other bonus to its employees, the restriction imposed by the first proviso to Section 36 (1) (ii) was not applicable and the assessee was entitled to full deduction in respect of such payment.

( 5 ) REFERRING to the memorandum of settlement reached between the assessee-company and its employees, the Tribunal further observed that the additional payment of Rs. 74,206 calculated at 8. 17% was made by the assessee-company to its employees only to keep good relations with its workers, to buy industrial peace and save the industry from strikes and lock-outs. This was customary and in consonance with th

Click Here to Read the rest of this document