Sri Karunambikai Mills Ltd. vs Commissioner of Income Tax

N.V. Balasubramanian, J.—At the instance of the assessee, the Tribunal has referred the following"" questions of law for our consideration in

respect of the assessment year 1980-81 :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the additional payment made pursuant to a

settlement under the Industrial Disputes Act in consideration of the assurance of the trade unions to extend their co-operation for the better

productivity in future was bonus in nature, barred by the proviso to Section 36(1)(ii) of the Income Tax Act, 1961, and consequently, would not

qualify for deduction u/s 37 of the Act ?

Whether, on the facts and circumstances of the case the Tribunal was right in confirming disallowance of extra-shift depreciation ignoring the

Board''s circular which is binding in law on the assessing authority ?

As regards the first question it deals with the deduction u/s 37 of the Income Tax Act, as regards an additional payment of bonus at the rate of

8.9% of the wages amounting to Rs. 1,71,921, the assessee, in accordance with a settlement arrived between its employees and itself u/s 18(1) of

the Industrial Disputes Act, 1947, paid bonus at 13.48% under the Payment of Bonus Act, 1965, and also made an additional payment at 8.09%

in consideration of the assurance of trade unions to extend their cooperation for the uninterrupted and smooth working and better productivity in

the mills. The Income Tax Officer allowed the payment made under the Payment of Bonus Act, but disallowed the additional payment on the

ground that under the proviso to Section 36(1)(ii) of the Act, the assessee was not entitled to claim deduction for the additional payment as the

amount paid exceeded the maximum limit prescribed u/s 36(1)(ii) of the Act. The Commissioner of Income Tax (Appeals) held that the additional

payments made were in effect and in the nature of the additional wages paid and, therefore, it was allowable u/s 37(1) of the Act. The

Commissioner of Income Tax also held that once the additional payment is treated as additional wages, the allowability of the expenditure was not

prohibited by the proviso to Section 36(1)(ii) of the Act and it is allowable u/s 37(1) of the Act. The Tribunal however, held that the additional

payment was only in the nature of bonus and under the proviso to Section 36(1)(ii) of the Act, the amount paid was not allowable as a deduction.

In so far as the second question is concerned, the assessee claimed extra-shift allowance on additions made to the machinery. The Income Tax

Officer refused the extra-shift allowance on the basis of the decision of this court in the case of South India Viscose Ltd. Vs. Commissioner of

Income Tax, . On appeal the Commissioner (Appeals) allowed the entire claim of extra-shift allowance by relying on the Board''s Circular No. F.

10/83/8/ITA-II, dated September 28, 1970. The Tribunal, on appeal, held that the assessee was not entitled to extra-shift allowance on the

machineries in the factory. Challenging the order of the Tribunal, the assessee sought for a reference on the two questions of law set out earlier.

In so far as the first question of law is concerned, it is seen that the additional payment was made by the assessee under a settlement arrived at

by the assessee with its own employees, As per the settlement u/s 18(1) of the Industrial Disputes Act, 1947, the assessee paid 13.48 percent, of

wages towards bonus and an additional payment at 8.09 per cent, of wages in consideration of the assurance of the trade unions to extend their

whole hearted co-operation for the uninterrupted and smooth working and better productivity in the mills. It is clear that the assessee made the

payment on account of business considerations to secure the whole hearted co-operation from the employees and for the better production in the

mills and after a valid settlement entered into with its own employees, it will not be open to the assessee to go back upon its assurance made in the

agreement, and if it has done by it would have disturbed the normal working of the industries and forcing it to face labour problems. We are,

therefore, of the view that the payment though styled as additional payment was made on account of business considerations and the payment

though paid as a bonus, represents additional wages in addition to the bonus that was already paid under the Bonus Act. Therefore, if the reality

and nature of the expenditure is examined, it is clear that the additional wages were paid by the assessee for consideration and the claim is

allowable under the provisions of Section 37 of the Act and the claim of the assessee cannot be rejected on the ground of restrictive provision

found u/s 36(i)(ii) of the Act.

A similar question of law, whether the additional payment made under settlement can be allowed as a deduction was considered by this court in

T. C. No. 1188 of 1988, dated March 4, 1997, wherein it was held that the additional payment made pursuant to a settlement arrived under the

Industrial Disputes Act in consideration of the promise given by the employees to extend their commitment and co-operation for better production

in the mill would be allowable u/s 37 of the Act. Therefore, we are of the view that the Tribunal was not correct in holding that the claim of the

assessee should be decided only with reference to the proviso to Section 36(1)(ii) of the Act, on the other hand, the allowability of the same should

be examined with reference to the provisions of Section 37 of the Act. Accordingly, we hold that the Tribunal was not correct in holding that the

additional payment made pursuant to a settlement under the Industrial Disputes Act is not an allowable expenditure. Accordingly, we answer the

first question of law referred to us in the negative, in favour of the assessee and against the Revenue.

In so far as the second question of law is concerned, it is not disputed that the Tribunal decided the case on the basis of an earlier decision of

this court in the case of South India Viscose Ltd. v. CIT [1982] 155 ITR 206. Mr. C. V. Rajan, counsel appearing for the Revenue, submitted

that the correctness of the decision of this court was considered by the Supreme Court in the case of M/s. South India Viscose Ltd. Vs.

Commissioner of Inocme Tax, , and the apex court reversing the decision of this court, held that the extra-shift allowance has to be calculated on

the basis of the number of days during which the workers had actually worked double shift and triple shift and the said allowance is not required to

be restricted to be calculated on the basis of the number of days a particular item of machinery or plant had actually worked double shift or triple

shift. In view of the decision of the apex court, the view of the Tribunal that the extra-shift allowances should be restricted to the machinery or plant

which actually worked during double shift or triple shift is not sustainable in law. Accordingly, we answer the second question of law also in the

negative, in favour of the asses-see and against the Revenue. The assessee will be entitled to the costs of a sum of Rs. 500.