Commissioner of Income Tax vs India Radiators Ltd.

V. Ramaswami, J.—The assessee is a controlled company for the purpose of the Act. For the assessment year 1967-68 corresponding to

the year ending March 31, 1967, it had given perquisites in the shape of rent-free quarters, free conveyance and insurance premium to three of its

employees drawing salary in excess of Rs. 7,500 per annum in addition to certain payments of bonus. The Income Tax Officer in calculating

perquisites admissible u/s 40(c) of the Income Tax Act excluded the bonus paid, the value of the rent-free quarters and free conveyance, etc. On

an appeal, the Appellate Assistant Commissioner, while confirming the exclusion of the value of rent-free quarters, free conveyance and insurance

premium, directed the inclusion of the bonus in the salary paid for the purpose of calculating the value of the perquisites admissible. The revenue

preferred an appeal to the Tribunal against this order of the Appellate Assistant Commissioner contending that only salary proper could be taken

into account for the purpose of finding out the admissible and all other allowances and perquisites should be excluded. According to the

department, bonus is not salary or included in the salary and that it may be either an allowance or perquisite and that the order of the Appellate

Assistant Commissioner was wrong. The Tribunal referred to the relevant provisions and ultimately held that the bonus would be more or less in

the nature of a salary and in the absence of an express exclusion of bonus it had to be held that the Appellate Assistant Commissioner was justified

in holding that the salary would include bonus also. At the instance of the revenue the following question has been referred:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the term ''Salary'' for purposes

of Section 40(c)(iii) of the Income Tax Act, 1961, would include ''bonus'' also ?

Section 40 of the Income Tax Act, as it was in the relevant assessment year, provided that the amounts referred to in that provision shall not be

deducted in computing the income chargeable under the head ""Profits and gains of business or profession"". Section 40(c)(iii) of the Act, which is

the relevant provision on which the revenue relied for not excluding the bonus in calculating the disallowance, reads as follows :

(iii) any expenditure incurred after the 29th day of February, 1964, which results directly or indirectly in the provision of any benefit or amenity or

perquisite, whether convertible into money or not, to an employee (including any sum paid by the company in respect of any obligation which but

for such payment would have been payable by such employee), to the extent such expenditure exceeds one-fifth of the amount of salary payable to

the employee for any period of his employment after the aforesaid date ;...

Explanation 2.--In Sub-clause (iii), the word ''salary'' shall have the meaning assigned to it in Clause (h) of Rule 2 of Part A of the Fourth

Schedule"".

We have omitted the provisos, as they are not relevant for the purpose of considering the question. Salary is defined in Rule 2(h) of Part A to

the Fourth Schedule, which is as follows :

2(h) ''salary'' includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.

The question for consideration is whether the bonus paid is included in the . word ""salary"". Prior to the enactment of the Payment of Bonus Act,

1965, the payment of bonus was considered to be not a deferred wage and it is payable only out of profits. But the enactment changed the

character of the payment itself. While considering the validity of the Act, the Supreme Court in Jalan Trading Co. (Private Ltd.) Vs. Mill Mazdoor

Union, considered the bonus paid as additional wages. This court considering the question of attachability of bonus under the CPC held in

Ganapathia Pillai Vs. Swaminatha Pillai, , that bonus is included in the wage and payment of bonus is a method of payment of wages. This decision

was followed in another case in S.P. Krishna Rao Vs. Thimurshakhan and Another, , wherein also it was held that bonus forms part of the wages.

These two decisions were followed by the High Court of Kerala in Gopalan Vs. Angamali Chit Fund (P) Ltd., . The learned counsel for the

revenue pointed out that the definition of salary and wages in the Payment of Bonus Act excluded bonus from the salary and wages. But as pointed

out by the Keraia High Court that was because for the purpose of that Act bonus has to be distinguished from salary or Wages and has to be

determined in relation to the wages paid to the employees. In fact, the specific exclusion from the definition of salary or wages would signify that

but for such exclusion bonus would fall under the words ""salaries and wages"". Thus, after the Payment of Bonus Act, the bonus paid is part of the

salary or wages. It is true that the Payment of Bonus Act is applicable only to employees drawing salary or wage not exceeding Rs. 1,600 per

mensem. For employees, who are drawing more than Rs. 1,600 per mensem, the Act would not be applicable. But that does not mean that if an

amount is paid as bonus it will have to be understood in any way different from the payment made to an employee, who is drawing less than Rs.

1,600. The recent development relating to the labour laws showed a change in the understanding of the nature of payment of bonus. It is no longer

considered as a share of profits or gift or bounty made by an employer under his sweet will and pleasure. The employee by reason of his

contribution or participation in the business of the employer is considered to be entitled for payment of the same, though the exact amount payable

may depend on various circumstances Having regard to this development, we are of opinion that even in regard to payment of bonus to employees

drawing more than Rs. 1,600 the word ""bonus"" would have to receive the same interpretation as it means to an employee who is drawing less than

Rs. 1,600 per mensem. The learned counsellor the revenue contended that the word ""salary"" in Section 40(c)(m) read with Rule 2(h) of Part A of

the Fourth Schedule would have to be understood as only covering a periodical payment excluding all types of allowances and perquisites. He also

contended that bonus is in the nature of an allowance and that, therefore, for the purpose of Section 40(c)(iii) salary would not include bonus. We

are unable to agree with this contention of the learned counsel. The word ""salary"" would have to be understood, with reference to the development

of the law relating to bonus, especially when there was no definition of bonus in the Income Tax Act. We may also point out that Section 40(c)(iii),

as it stood at the relevant period, was substituted for the original provision with effect from April 1, 1964, on the day when the Payment of Bonus

Act itself came into force. We consider, therefore, that a reference to the bonus Act in understanding the words ''salary and bonus'' is permissible.

The learned counsel for the revenue referred to the original provision 40(c)(iii) which was inserted on April 1, 1963, and contended that at the time

when the original provision was inserted, the Payment of Bonus Act was not in force, and it will have to be understood with reference to the law

relating to bonus at the time when the provision was originally inserted. We are unable to agree with this contention of the learned counsel also, as

the original provision was different and was completely omitted and a new provision was substituted with effect from April 1, 1964. We are of the

view, therefore, that having regard to the general understanding of the word ''bonus'', payment of bonus should be treated as forming part of the

salary itself. The question referred to us is, therefore, answered in the affirmative and against the revenue. The assessee will be entitled to its costs.

Counsel''s fee Rs. 250.