Additional payment made pursuant to a settlement under the Industrial Disputes Act is allowable as a deduction under section 37 of the Income-tax Act, 1961, and extra-shift depreciation is allowable on the basis of the number of days during which the workers had actually worked double shift and triple shift.

N.V. BALASUBRAMANIAN J.

At the instance of the assessee, the Tribunal has referred the following questions of law for our consideration in respect of the assessment year 1980-81.

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the additional payment made pursuant to a settlement under the Industrial Disputes Act in consideration of the assurance of the trade unions to extend their co-operation for the better productivity in future was bonus in nature, barred by the proviso to section 36(1)(ii) of the Income-tax Act, 1961, and consequently, would not qualify for deduction under section 37 of the Act ?

2. Whether, on the facts and circumstances of the case the Tribunal was right in confirming disallowance of extra-shift depreciation ignoring the Board's circular which is binding in law on the assessing authority ?"

As regards the first question it deals with the deduction under section 37 of the Income-tax Act, as regards an additional payment of bonus at the rate of 8.9 % of the wages amounting to Rs. 1, 71, 921, the assessee, in accordance with a settlement arrived between its employees and itself under section 18(1) of the Industrial Disputes Act, 1947, paid bonus at 13.48 % under the Payment of Bonus Act, 1965, and also made an additional payment at 8.09 % in consideration of the assurance of trade unions to extend their co-operation for the uninterrupted and smooth working and better productivity in the mills. The Income-tax Officer allowed the payment made under the Payment of Bonus Act, but disallowed the additional payment on the ground that under the proviso to section 36(1)(ii) of the Act, the assessee was not entitled to claim deduction for the additional payment as the amount paid exceeded the maximum limit prescribed under section 36(1)(ii) of the Act. The Commissioner of Income-tax (Appeals) held that the additional payments made were in effect and in the nature of the additional wages paid and, therefore, it was allowable under section 37(1) of the Act. The Commissioner of Income-tax also held that once the additional payment is treated as additional wages, the allowability of the expenditure was not prohibited by the proviso to section 36(1)(ii) of the Act and it is allowable under section 37(1) of the Act. The Tribunal however, held that the additional payment was only in the nature of bonus and under the proviso to section 36(1)(ii) of the Act, the amount paid was not allowable as a deductionIn so far as the second question is concerned, the assessee claimed extra-shift allowance on additions made to the machinery. The Income-tax Officer refused the extra-shift allowance on the basis of the decision of this court in the case of South India Viscose Ltd. v. CIT. On appeal the Commissioner (Appeals) allowed the entire claim of extra-shift allowance by relying on the Board's Circular No. F. 10/83/8/ITA-II, dated September 28, 1970. The Tribunal, on appeal, held that the assessee was not entitled to extra-shift allowance on the machineries in the factory. Challenging the order of the Tribunal, the assessee sought for a reference on the two questions of law set out earlier.

In so far as the first question of law is concerned, it is seen that the additional payment was made by the assessee under a settlement arrived at by the assessee with its own employees. As per the settlement under section 18(1) of the Industrial Disputes Act, 1947, the assessee paid 13.48 per cent. of wages towards bonus and an additional payment at 8.09 per cent. of wages in consideration of the assurance of the trade unions to extend their whole hearted co-operation for the uninterrupted and smooth working and better productivity in the mills. It is clear that the assessee made the payment on account of business considerations to secure the whole hearted co-operation from the employees and for the better production in the mills and after a valid settlement entered into with its own e