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

S. Sankarasubban J.

This Income Tax appeal is preferred by the Revenue against the order of the Income Tax Appellate Tribunal, Cochin Bench, in I.T.., No. 843 (Cochin) of 1990 dated December 8, 2000. The relevant assessment year is 1992-93. The assessee, M/s. Chackolas Spinning and Weaving Mills Ltd., is a public limited company engaged in the manufacture and sale of yarn. For the assessment year 1992-93, the assessee claimed a sum of Rs. 23,46,558 towards payment of bonus which includes a sum of Rs. 12.81,108 a liability as per the agreement for payment of bonus entered into on December 22, 1992. In the assessment the Assessing Officer allowed deduction for a sum of Rs. 10,65,450 only which was the provision created in the accounts during the previous year and disallowed the balance of Rs. 12,81,108.

The assessee challenged the above order in appeal before the Commissioner of Income Tax (Appeals). The Commissioner (Appeals) allowed the claim of the assessee for deduction of the total sum of Rs. 23,46,558 as the assessee has made the payment before the due date for filing the return u/s 139(1) read with the first proviso to Section 43B. The Revenue challenged the order of the Commissioner of Income Tax (Appeals) before the Tribunal. The Tribunal by the impugned order dismissed the appeal for the same reason given by the Commissioner (Appeals). It is this order that is challenged before us.

The substantial question of law for consideration in the appeal is on an interpretation of Section 36(1)(ii) read with Section 43B of the Income Tax Act, the assessee is entitled to claim deduction of Rs. 12,81,108 also towards payment of bonus for the assessment year 1992-93.

We heard learned counsel for the Revenue, Sri P. K. Raveendranatha Menon, and learned counsel for the assessee, Sri P. Balachandran.

Learned counsel for the Revenue submitted that the assessee was following the mercantile system and in the account an amount of Rs. 12,81,108 was not included. The agreement for bonus was made only in December, 1992, much after the previous year and the liability arise only when the agreement was executed and hence, the entire amount of bonus paid could not be included for the year 1991-92. On the other hand, learned counsel for the assessee submitted that the amount was paid before the return was filed and the agreement shows that the bonus was for the period 1991-92 and hence, the Tribunal was correct in excluding the entire amount paid as bonus.

During the course of hearing, a copy of memorandum of settlement entered into between employer and workmen was produced before us. Condition No. 1 in the terms of settlement is as follows : "The management agrees to pay all eligible employees, staff permanent, badli, casuals and trainee casuals and above daily during the bonus period from April 1, 1991, to March 31, 1992, at the rate of 8.33 - 10.67 per cent. as incentive bonus for production and attendance as an ex gratia payment based on their total earnings (basic + DA) for the accounting year 1991-92 ending on March 31, 1992, in full and final settlement of the demand for bonus and ex gratia for all the above six trade unions." In the order of the Tribunal, it was held as follows : "As held by the Supreme Court in The Kedarnath Jute Mfg. Co. Ltd. Vs. The Commissioner of Income Tax, (Central), Calcutta, , whether the assessee is entitled to a particular deduction or not will not depend on the existence or absence of entries in the books of account. There is nothing to show that for the assessment year 1992-93 the assessee had the liability to pay the minimum bonus of 81/3 per cent... We have already noted the fact that there was no evidence to show that the liability that had arisen in respect of the previous year was for payment of the minimum bonus of 8 1/3 per cent. only in the above circumstances, we hold that the Commissioner of Income Tax (Appeals) was justified in allowing deduction for the sum of Rs. 12,81,108 under the proviso to Section 43B on payment basis as the balance amount of bonus for the previous year relevant to the assessment year 1992-93."

Many decisions were cited before us by both sides. The decision of the Rajasthan High Court reported in Commissioner of Income Tax Vs. Premier Vegetable Products, is apt so far as this case is concerned. In the above decision, it was held as follows (headnote) : "The assessee made provision for payment of bonus at the rate of 24 per cent., on the basis of an agreement dated April 2, 1974. The Income Tax Officer took the view that the liability for payment of increased rate of bonus arose during the next year and not for the assessment year 1974-75 and since there was no liability for payment of bonus in excess of the maximum payable under the Payment of Bonus Act, 1965, he rejected the claim of the assessee for deduction of Rs. 15,003 on account of provision for bonus. On appeal, the Appellate Assistant Commissioner found that though the agreement was made on April 2, 1974, i.e., in the next year, it related to the year under appeal and, therefore, held that the liability to pay bonus at 24 per cent., as per agreement arrived at should have been taken into consideration to arrive at the correct profit or loss for the year ending March 31, 1974." Upholding the judgment of the Tribunal, the High Court held as follows (headnote): "the provision for bonus in excess of what was stipulated under the Bonus Act was for business considerations so that there might not be any labour unrest and the unit might peacefully work. The bonus agreement dated April 2, 1974, fixed the liability for the accounting year ending March 31, 1974, i.e., the assessment year 1974-75 and merely because the agreement was executed two days after the close of the accounting year, it could not be considered to be detrimental to the case of the assessee. Therefore, the Tribunal was justified in deleting the disallowance of Rs. 15,003 on account of provision for bonus." The facts of the above are similar to the facts of the present case.

In the above view of the matter, we are of the view that the Tribunal was correct in upholding the order of the appellate authority in allowing the deduction on the basis of the agreement. Appeal is dismissed.