Commissioner of Income Tax vs Lakshmi Mills Co. Ltd.

N.V. Balasubramanian, J.—At the instance of the Revenue, the Tribunal has stated the case and referred the following question of law for

the opinion of this Court, for the asst. yr. 1979-80 :

Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the payment of Rs. 22,54,136 in pursuance of the

settlement between the assessee-company and the workers under the Industrial Disputes Act, 1947 over and above the statutory bonus, is

allowable under s. 37 of the IT Act, 1961 ?

The assessee is a company. During the relevant asst. yr. 1979-80, the assessee paid a sum of Rs. 22,54,136 to its workers as incentive

payment in pursuance of the settlement between the management and the workers under the settlement arrived at under s. 12(3) of the Industrial

Disputes Act, 1947. The ITO disallowed the amount on the ground that the amount was in excess of the statutory bonus payable under the

Payment of Bonus Act, 1964, and the same should be regarded as a bonus payment. According to the officer, since the amount paid was bonus,

allowability of the same would be subject to the provisions of s. 36(1)(ii) of the Act. The CIT(A), disagreed with the views of ITO, and held that

what was paid was not the bonus at all, and it is allowable under s. 37 of the IT Act, 1961 (hereinafter referred to as the ""Act""). The Tribunal, on

appeal, also held that the amount was paid by virtue of the commercial expediency, and the amount cannot be regarded as a bonus. The Tribunal,

therefore, held that the entire amount paid as incentive payment is allowable as a business expenditure under s. 37 of the Act. This order is the

subject-matter of the tax case reference before this Court.

Mr. C. V. Rajan, learned counsel for the Revenue, submitted that the amount paid was only a bonus, and the allowance of the same is subject

to the assessment prescribed under s. 36(1)(ii) of the IT Act, 1961.

Mr. Philip George, learned counsel for the assessee, on the other hand submitted that the finding of the Tribunal is that the amount paid was not

a bonus and since it is not a bonus, it is allowable under s. 37 of the IT Act.

We have perused findings of the Tribunal. The Tribunal refers to the memorandum of settlement arrived at under s. 12(3) of the Industrial

Disputes Act between the assessee and the Trade Union of the assessee. In the memorandum of settlement, it mentions that in addition to the

bonus that is payable under the Bonus Act, the assessee has also agreed to pay certain additional amount shown in the annexures to the agreement.

Clause 2 of the settlement mentions that the additional amount shall be paid in consideration of the better performance and smooth working of the

mills during the relevant year. The Tribunal found that, if the amount was not paid, the workers would have gone on strike, and so the additional

amount can be regarded as paid by virtue of the commercial expediency. Once it is held that additional amount is not a bonus, then the provisions

under s. 36(1)(ii) the IT Act do not apply, and only provision that has to be satisfied for the allowance of the expenditure is s. 37 of the Act. It is

already seen that the payment was made on commercial considerations. If the amount was not paid which was due to be paid under the

agreement, the workers would have gone on strike. It would have created a seed of discontent in the minds affecting the smooth and proper

running of the assessee''s business. Therefore, we are of the view that the additional amount was paid on commercial principles and commercial

considerations, and is allowable under s. 37 of the Act. In Commissioner of Income Tax Vs. Sivanandha Mills Limited, this Court has held that s.

36(1)(ii) will apply only in the case of bonus paid under the Bonus Act, and the payments made as incentive bonus, attendance bonus or customary

bonus are allowable under s. 37 of the Act on the score that the expenditure was laid out wholly or exclusively for the purpose of the business.

Hence we hold that the Tribunal has come to a correct conclusion that the payment made in pursuance of the settlement between the assessee-

company and the workers under the Industrial Disputes Act over and above the statutory bonus, is allowable under s. 37 of the IT Act. We

therefore answer the question of law referred to us in the affirmative and against the Revenue. No costs.