COMMISSIONER OF INCOME TAX Vs. KUMAR INDUSTRIES

JUDGEMENT

(1.) AT the instance of the Commissioner of Income-tax, Cochin, and as directed by this court, the Income-tax Appellate Tribunal, Cochin Bench, referred the following questions of law arising out of the order of the Tribunal dated June 18, 1982, in I. T. A. No. 48(Coch) of 1981 for our opinion :

(2.) THE matter arises out of the income-tax assessment for the assessment year 1977-78 for which the previous year ended on December 31, 1976. During the previous year, the assessee paid an amount of Rs. 97,664.87 as "goodwill bonus". This was over and above the regular and incentive bonus paid by the assessee to its employees for which allowable deduction was given by the Income-tax Officer. THE Income-tax Officer held that the bonus of Rs. 97,664.87 being in excess of the 20% limit imposed under the Bonus Act was not admissible under Section 36(1)(ii) of the Income-tax Act. On appeal by the assessee, the Commissioner of Income-tax (Appeals) held that the prohibition contained in the proviso to Section 36(1)(ii) of the Act had no relevance and the claim was admissible under the main clause itself. THE appeal by the Revenue before the Appellate Tribunal was not successful. THE Tribunal held that the payment has to be considered as in the nature of customary bonus granted by the assessee to conform to the standards of the previous years. It also considered the payment under Section 36(1)(ii) and held that the payment was bona fide made and the quantum was reasonable.

(3.) THE guidelines to be adopted while considering the payment of bonus in excess of 20% limit under Section 36(1)(ii) of the Act have been laid down in a Bench decision of this court in C1T v. P. Alikunju M. A. Nazir, Cashew Industries [1987] 166 ITR 611. This court held that all the three conditions postulated by Clauses (a) to (c) of the second proviso must be satisfied, if the payment made in excess of that stipulated by the Payment of Bonus Act is to be regarded as reasonable within the meaning of Section 36(1)(ii) of the Act. THE pay of the employee and the conditions of his service, the profits of the business or profession for the previous year in question and the general practice in similar business or profession, all will have to be examined. THE said decision has been followed by this court in Income-tax Reference No. 185 of 1985 (CIT v. P. Balakrishna Pillai, International Cashew Traders [1990] 182 ITR 449) and ITR No. 198 of 1985.