Commissioner of Income Tax vs Chackola Spinning and Weaving Mills Ltd.

K.S. Paripoornan, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following four questions of law for the decision of this court :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in confirming the deletion of disallowance of Rs. 1,79,286 ?

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in directing that a payment will be an admissible deduction in the assessment year 1981-82 in an order relating to the assessment year 1980-81 ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the limit under the proviso to Clause (ii) of Section 36(1) of the Act does not apply to the deduction in respect of customary bonus paid to the employees ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in finding that such customary bonus does not fall under the purview of the Bonus Act and does not get merged or absorbed by the statutory bonus ?"

The respondent/assessee is a public limited company. We are concerned with the assessment year 1980-81 and the relevant accounting period for the said assessment year ended on June 30, 1979. The assessee put forward the plea that, under the terms of two settlements which the assessee-company entered into with its employees on September 5, 1978, and September 8, 1979, it had to pay a sum of Rs. 1,79,826 over and above the ex gratia payment of 8-1/3% of the total earnings for the year 1977-78 and an amount of Rs. 2,08,336 as ex gratia in addition to the annual bonus (20% of the earnings) for the year 1978-79. There was no dispute that, for the year 1978-79, the liability to make the excess payment arose only under the terms of the agreement dated September 8, 1979. The accounting period for the assessment year with which we are concerned, namely, 1980-81, ended on June 30, 1979. Plainly, the liability arose only after the close of the accounting year. The Income Tax Appellate Tribunal held that the payments made on the basis of the settlement dated September 8, 1979, are not an admissible deduction in computing the income for the assessment year 1980-81. But, the liability for the excess payment for the year 1977-78 arose on September 5, 1978, which was, admittedly, during the accounting period relevant for the assessment year 1980-81. The Income Tax Appellate Tribunal held that the payment made for the year 1977-78 under the terms of the settlement dated September 5, 1978, is a permissible deduction and the deletion of the disallowance by the Commissioner of Income Tax (Appeals) was justified. The Tribunal also made an observation regarding the other payment for the year 1978-79, that it is properly deductible only for the assessment year 1981-82. The Revenue feeling aggrieved (a) by confirmation of the deletion of disallowance made by the Commissioner of Income Tax (Appeals) in the sum of Rs. 1,79,286 relating to the year 1977-78 under the settlement deed dated September 5, 1978, and (b) the observation of the Tribunal that the other payment for the year 1978-79 is properly deductible only for the assessment year 1981-82, formulated certain questions of law for the decision of this court and that is how the above four questions have been referred to this court.

We heard counsel for the Revenue, Mr. P.K.R. Menon, as also counsel for the assessee, Mr. P. Balachandran. Questions Nos. 1, 3 and 4 would go together. In brief, they deal with the amount claimed by way of deduction as payment towards bonus. A sum of Rs. 1,79,286 claimed as payment for the year 1977-78 under the terms of the settlement dated September 5, 1978, was disallowed by the assessing authority. The disallowance was directed to be deleted by the Commissioner of Income Tax (Appeals) and the direction of the Commissioner of Income Tax (Appeals) was affirmed by the Appellate Tribunal. It cannot admit of any doubt that the liability for the excess payment made towards bonus for the year 1977-78 arose on September 5, 1978, well within the accounting period relating to the assessment year 1980-81. But, the question still is, what is the amount that is deductible under the provisions of the Act on the said account ? The Appellate Tribunal took the view that, by and large, the payment made is customary bonus. In that view, the entire amount claimed was held to be a permissible deduction. It does not appear that the Appellate Tribunal applied its mind as to how far the claim for bonus payment is hit by the provisions of Section 36(1)(ii) of the Act as explained by this court in Commissioner of Income Tax Vs. P. Alikunju, M.A. Nazir, Cashew Industries, . To what extent the bonus paid to the employees is deductible as revenue expenditure in the light of Section 36(1)(ii) of the Income Tax Act has been exhaustively dealt with by a Bench of this court in Commissioner of Income Tax Vs. P. Alikunju, M.A. Nazir, Cashew Industries, . The said decision has been followed subsequently i Commissioner of Income Tax Vs. Kumar Industries, ; Commissioner of Income Tax Vs. Kerala Agro Industries Corporation, and an un-reported decision in I. T. R. No. 13 of 1987--since reported in Commissioner of Income Tax Vs. Travancore Titanium Products Ltd., . Ordinarily, a payment envisaged by the Payment of Bonus Act can be claimed as deduction. Amounts paid over and above the amount payable under the Payment of Bonus Act can be claimed as deduction u/s 36(1)(ii) of the Act, provided the following conditions are fulfilled : The amount should be reasonable with reference to (a) the pay of the employee and the conditions of his service ; (b) the profits of the business or profession for the previous year in question ; and (c) the general practice in similar business or profession. These aspects have not been evaluated and the Appellate Tribunal has not found that the deletion of disallowance of Rs. 1,79,286 will stand scrutiny in the light of the above tests. The Appellate Tribunal committed an error of law in sustaining the deletion of the entire disallowance of Rs. 1,79,286 ordered by the Commissioner of Income Tax (Appeals) without a proper scrutiny of the aspects stated hereinabove.

Therefore, we answer questions Nos. 1, 3 and 4, referred to us, in the following manner :

We are of the view that the Appellate Tribunal was right in confirming the deletion of disallowance. Regarding the quantum, it is a matter which should be evaluated and determined with reference to Section 36(1)(ii) of the Income Tax Act in the light of the guiding principles stated by this court in Commissioner of Income Tax Vs. P. Alikunju, M.A. Nazir, Cashew Industries, . We decline to answer questions Nos. 3 and 4. At the same time, we direct the Income Tax Appellate Tribunal to restore the appeal to file and decide the matter afresh, in the light of the Bench decision of this court in Commissioner of Income Tax Vs. P. Alikunju, M.A. Nazir, Cashew Industries, and the subsequent decisions up to Income Tax Reference No. 13 of 1987--since reported in Commissioner of Income Tax Vs. Travancore Titanium Products Ltd., . It will be open to the Tribunal to remit the matter to the assessing authority if it is of the view that a re-evaluation and reappraisal by the assessing authority is required.

The Appellate Tribunal also observed that the payment for the year 1978-79 in pursuance to the settlement deed dated September 5, 1978, is one properly deductible only for the assessment year 1981-82. It is only a casual observation towards the close of paragraph 6 of the appellate order dated May 20, 1983. We are of the view that, in considering the quantum of deduction available for the assessment year 1980-81 for which the accounting period ended on June 30, 1979, any observation to the effect that it is deductible in the subsequent year 1981-82 was unauthorised and uncalled for. The Appellate Tribunal was not justified in deciding matters which were not relevant for the assessment year in question. We hold so.

We answer question No. 2 to this effect : The observation that the payment will be deductible for the assessment year 1981-82, while disposing of the appeal for the assessment year 1980-81, was only an incidental one ; such a matter never arose for consideration. The observation was unauthorised and uncalled for. It is true that there is no finding in the strict sense. Even so, the observation aforesaid is illegal and unjustified. We are fortified in this view by the following, among other decisions : Income Tax Officer, A-Ward, Sitapur Vs. Murlidhar Bhagwandas, Lakhimpur Kheri, ; P. J. UDANI Vs. COMMISSIONER OF Income Tax, ANDHRA PRADESH., and Bakshish Singh Vs. Income Tax Officer, "B" Ward and Others, . In this connection, it should be remembered that the Tribunal was disposing of the appeal filed by the Revenue before it for the year 1980-81, and not an appeal filed by the assessee. And there is no material or even a whisper to show that an alternate plea or approach was mooted by the assessee for the claim made by it when the Tribunal adjudicated the appeal, namely, that the amount is claimable for the subsequent year 1981-82 and that the alternate plea necessitated the observations made, in which case, the ratio of the decision in Motilal Bawalal v. CIT [1903 ] 50 ITR 249 may call for application. Such is not the case here.

The reference is answered as above.

A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal. Cochin Bench.