A M ARUMUGHAM Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee in this case is a dealer in paper. During the assessment year 1960-61 he paid a bonus of Rs. 39, 541 to his employees and claimed it as allowance under section 10(2)(x) of the Income-tax Act, 1922. THE Income-tax Officer took the view that the bonus paid by the assessee which is equivalent to 13 months' salary was excessive and not justified by the profits derived by him in the assessment year, and disallowed a sum of Rs. 19, 000 from and out of the total claim of the assessee on the ground that the bonus equivalent to six months' salary can alone be justified THE assessee preferred an appeal before the Appellate AssistantCommissioner against the disallowance of a portion of his claim. THE Appellate Assistant Commissioner, however, confirmed the disallowance of Rs. 19, 000 from the assessee's total claim. THEre was a further appeal by the assessee to the Tribunal, and the Tribunal held that the claim of deduction for Rs. 39, 541 which is equivalent to about 13 months' salary was excessive and that the bonus could be allowed at 10 months' salary. At the instance of the assessee the Tribunal has referred the following question for our decision"Whether, on the facts and in the circumstances of the case, the dis- allowance of the claim for deduction of bonus paid to the employees to the extent of three months' salary is lawful ?" *In the preceding two years and the assessment year in question, the profits as well as the salaries and bonus paid by the assessee to the employees were as underAssessment year Profits as Salary paid Bonus paidassessed Rs. Rs. Rs1958-59 2, 03, 660 35, 358 32, 5871959-60 2, 99, 513 41, 544 38, 6781960-61 1, 06, 719 46, 368 39, 541Though the net profit as assessed for the year 1960-61 was only Rs. 1, 06, 719, the assessee stated that the fall in the profits was due to the valuation of the closing stock at the controlled prices unlike in the preceding years when the market value of the closing stock was taken, and that the real profits earned by him during that assessment year would come to Rs. 2, 06, 719 if the stock had been valued at the proper rates. He also urged that his turnover had increased to Rs. 39, 90, 312 during the assessment year as against Rs. 33, 61, 721 in the prior year, that this had resulted in more work for the staff and that, therefore, the payment of 13 months' salary by way of bonus is justified by business expediency. He also pointed out that in all the earlier years he had consistently paid bonus amounting to 12 months' salary, as most of his employees are getting a salary of less than Rs. 100 and that he had to pay 13 months' salary as bonus during the assessment year in view of the increased work turned out by his staff as a result of the increased business turnoverTHE Income-tax Officer, the Appellate Assistant Commissioner as well as the Tribunal have not doubted the genuineness of the payment by the assessee of a sum of Rs. 39, 541 as bonus to his employees during the assessment year. But, what they have stated is that the payment of bonus is excessive having regard to the lesser profits earned by the assessee as compared with the earlier years.

(2.) THE Tribunal had observed as follows"No doubt, for a long time, bonus equal to 12 months' pay had been paid and allowed by the department. But, there is no res judicata or estoppel in income-tax law. We cannot ignore the fact that in the year of account, the profits were low compared to the previous years, which has formed the basis for the assessee giving the bonus as before. THE idea of justice inevitably suggests the notion of certain equality. This equality is lacking so far as the profits are concerned, even though there is some valid reasons for the fall in profits ...... So whatever might be the yard-stick by which the assessee measures the bonus which he has got to pay, it has to confirm to certain standards laid down in the law obtaining in the business and in the locality. By these standards, it seems to us the claim for 13 months' salary is excessive and we would allow ten months." *THE fact that the assessee paid a bonus of 12 months' salary to his employees for a long time and successfully claimed it as allowance under section 10(2)(x) is not disputed. We are, therefore, at a loss to know how the Income-tax Officer fixed six months' salary as the proper bonus for the assess- see's employees. We are equally at a loss to know how the Tribunal came to the conclusion that a bonus equivalent to 10 months' salary is allowable.

(3.) IN this case, the genuineness of the payment of bonus to the extent of Rs. 39, 541 had not been challenged at any time, and the only ground on which the revenue authorities disallowed part of the bonus was that the assessee has earned comparatively lesser profit than the preceding years, and, is such, he was not justified in paying the bonus equivalent to 13 months' salary. It is not claimed by the revenue that all the employees to whom the bonus was paid were related to or personally connected with the assessee. It is, therefore, difficult to believe that the assessee would part with a sum of Rs. 39, 541 as bonus to the workers unless he found that it was absolutely necessary to do so in the interest of his business. The fact that the payment has been genuinely made to the employees, who are not in any way related to or personally connected with the assessee, would, prima facie, show that the payment has been made because the assessee considered that it was necessary to do so from the point of view of commercial expediencyThe learned counsel for the revenue would, however, contend that this court cannot set aside the findings of the Tribunal and reappraise the evidence with reference to the question of reasonableness of the quantum of the bonus paid and rely on the decision of the Supreme Court in Commissioner of Excess Profits Tax v. N. M. Rayaloo Iyer & Sons. It has been expressed in that case that, in considering whether the deduction claimed under section 10(2)(x) of the INcome-tax Act and clause 12 of Schedule I of the Excess Profits Tax Act was proper, the primary duty was vested by the legislature in the Excess Profits Tax Officer and it was for him, subject to review by the Tribunal, to decide whether the deduction was reasonable and necessary having regard to the requirements of the business, that the jurisdiction which the High Court exercised on questions referred to it under the Excess Profits Tax Act was merely advisory, and that if the taxing authorities, having regard to the circumstances, had come to a conclusion that expenditure claimed as a deduction was not reasonable and necessary, it was not open to the High Court to substitute its own view as to what might be regarded as reasonable and necessary.