Commissioner of Income Tax vs K. Ravindranathan Nair

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

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provision made for purchase tax by the assessee is allowable as business expenditure ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal had any material to come to the conclusion that the payment of bonus was customary bonus and that the ban under the first proviso to Section 36(1)(ii) does not apply in allowing such expenditure ? "

The respondent is an assessee to Income Tax. We are concerned with the assessment year 1976-77. The accounting period ended on September 30, 1975. The respondent is also an assessee to sales tax. He claimed deduction of purchase tax payable by him under the Kerala General Sales Tax Act in respect of kernels purchased by him for the purpose of export in the course of export business, in the sum of Rs. 3,39,133. This plea was disallowed by the Income Tax Officer. The Appellate Tribunal, following the decision of this court in Hindustan Cashew Products (P.) Ltd. v. STO [1971] 28 STC 730, held that the purchase of kernels by the respondent/ assessee cannot be said to be one in the course of export and so the assessee was justified in making the provision for payment of purchase tax. It can be considered to be a legitimate business expenditure. The order in that behalf passed by the Commissioner of Income Tax (Appeals) was upheld. Similarly, the Income Tax Officer also made disallowance of Rs. 23,450 out of the bonus paid on the ground that the payment is in excess of 20% of the salary of the employees. In appeal, the Commissioner of Income Tax (Appeals) held that the payment was made as a result of the tripartite agreement among the workers, the assessee and the Labour-Commissioner and that the bonus paid was a customary festival bonus governed by an ad hoc agreement and the provisions of the Payment of Bonus Act will not apply. The Commissioner of Income Tax (Appeals) as well as the Appellate Tribunal held that what was paid by the assessee was a customary bonus on the basis of a settlement and so the first proviso to Section 36(1)(ii) of the Act will not apply. From a commercial point of view, the payment of bonus was considered to be expedient and cannot be said to be unreasonable. So stating, the Appellate Tribunal confirmed the action of the Commissioner of Income Tax (Appeals) in deleting the disallowance in that behalf. Thereafter, at the instance of the Revenue, the Income Tax Appellate Tribunal has referred the questions of law, formulated hereinabove, for the decision of this court.

We heard counsel for the Revenue, Mr. P. K. R, Menon, as also counsel for the assessee, Mr. P. Balachandran. It appears that, in the light of the decision of this court in Hindustan Cashew Products (P.) Ltd.''s case [1971] 28 STC 730, the assessee will not be entitled to exemption under the Kerala General Sales Tax Act on the purchase of cashew kernels and so the provision made by the assessee for payment of purchase tax is allowable as a business expenditure. The reasoning and conclusion of the Appellate Tribunal, in that behalf, contained in paragraphs 12 and 13 of its order dated December 17, 1982, are entitled to acceptance. But it is brought to our notice that the assessee is contesting the matter before the Sales Tax authorities, evidenced by Original Petition No. 2085 of 1988, etc, Counsel for the Revenue submitted that, if the assessee succeeds in the sales tax proceedings, the provision made in that behalf will be a surplusage and cannot be considered to be proper. It appears to be so. As it is in view of the decision of this court in Hindustan Cashew Products (P.) Ltd.''s case [1971] 28 STC 730, the assessee will not be entitled to exemption from purchase tax in respect of the purchase of cashew kernels. If that be so, the provision made by the assessee for payment of purchase tax seems to be justified. We do not think that the Appellate Tribunal was in error in holding so. But, we do feel that there should be an appropriate direction or safeguard in favour of the Central Revenue, if the assessee succeeds in the sales tax proceedings. Therefore, while holding that the Appellate Tribunal was justified in stating that the provision made for payment of purchase tax is allowable as a business expenditure, for this year, we should add that, if the assessee succeeds in the sales tax proceedings in getting exemption from purchase tax in respect of the purchase of cashew kernels, the Central Revenue will be at liberty to cancel or otherwise rectify the assessment order for this year by giving effect to the assessments ultimately sustained in sales tax proceedings. We answer question No. 1, referred to us, in the affirmative, in favour of the assessee and against the Revenue, but with a rider that it will be open to the Revenue to negative or otherwise cancel the benefit afforded, if the assessee succeeds in the sales tax proceedings ultimately.

It has been found that the bonus paid in this case is a customary festival bonus. It was paid on the basis of a settlement The first proviso to Section 36(1)(ii) of the Act will not apply. Even so, the payment, in order to qualify for deduction, should satisfy the test laid down by the second proviso to Section 36(1)(ii) of the Act. From a perusal of the order of the Tribunal, paragraph 14 thereof, it does not appear that the Tribunal has evaluated all the three conditions specified in Clauses (a) to (c) of the second proviso to Section 36(1)(ii) of the Act before holding that the bonus paid is reasonable. That it is necessary has been held by this court in Commissioner of Income Tax Vs. P. Alikunju, M.A. Nazir, Cashew Industries, . The subsequent decisions of this court in Income Tax Reference No, 185 of 1985 ( Commissioner of Income Tax Vs. P. Balakrishna Pillai, International Cashew Traders, ), Income Tax Reference No. 198 of 1985 and Income Tax Reference No. 399 of 1985 ( Commissioner of Income Tax Vs. Kumar Industries, ), have also taken the same view.

In the light of the above Bench decisions, we decline to answer question No. 2 referred to us by the Appellate Tribunal. We are of the view that, even if the payment of bonus is customary, it should stand the scrutiny, as envisaged by the second proviso to Section 36(1)(ii) of the Income Tax Act. The Appellate Tribunal should consider whether all the three conditions prescribed by Clauses (a) to (c) of the second proviso to Section 36(1)(ii) of the Act are satisfied as held by the aforesaid Bench decisions of this court. While we decline to answer question No. 2, we direct the Income Tax Appellate Tribunal to restore the appeal to file, for this limited purpose, and adjudicate on the question afresh in the light of the observations contained hereinabove.

The reference is answered accordingly.

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.