KUMARAN MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference at the instance of the assessee and the following question of law has been referred under section 256(1) of the Income-tax Act, 1961

(2.) THE assessee is a company in which the public are not substantially interested. It is engaged in the business of manufacture and sale of yarn. For the assessment year 1980-81 for which the accounting year ended on December 31, 1979, the assessee filed a return of income admitting the income of Rs. 60,53,060 and the assessee claimed deduction towards the provision made for bonus at 32 per cent. of the wages for the year 1979 amounting to Rs. 9,81,483. THE provision was made by debiting the amount to the profit and loss account. THE Income-tax Officer restricted the provision to 20 per cent. of the wages being the maximum permissible under the Payment of Bonus Act, 1965, and disallowed the rest of the amount on the ground that both the payments were made simultaneously and partook of the character of the bonus. He, therefore, held that the excess amount over and above 20 per cent. of the wages is liable to be disallowed under section 36of the Act. THE officer also held that the additional amount cannot be deducted under section 37 of the Act on the ground that it was specifically excluded as the expenditure described in sections 30 to 36. For the same reason, he has disallowed deduction of Rs. 2,91,766 and another sum of Rs. 54,019 pertaining to the other years. In effect, the Income-tax Officer disallowed the total sum of Rs. 3,68,056. But the reference with which we are concerned is with respect to the provision made towards the sum of Rs. 2,91,766.

(3.) WE have carefully considered the submissions of learned counsel for the parties. It is seen that there was a settlement arrived at under section 18(1) of the Industrial Disputes Act between the management of certain mills associations in Coimbatore and the workers' union. Under the settlement arrived at on October 12, 1979, and October 15, 1979, a settlement was arrived at regarding the bonus for the years 1978, 1979 and 1980. Under the settlement it was agreed that apart from the bonus payable under the Payment of Bonus Act, the managements have also agreed to pay an additional amount towards bonus. The agreement indicated that there were nearly 40 cotton mills which were parties to the said agreement and in consideration of the assurance of the trade unions that they would extend their co-operation for uninterrupted better productivity in the mills, the managements covered under the agreement agreed to make additional payment towards the bonus for the said years. The assessee undertook to make additional payments towards bonus on the basis of commercial expediency as the workers have assured to extend their full-hearted co-operation in the smooth working of the mills and for better production of the products in the mills. Though the additional amount agreed to be paid was in excess of the maximum ceiling limit prescribed under the Payment of Bonus Act, the assessee agreed to pay the said additional sum because of business considerations. The result of entering into the agreement with the union was that there was an enforceable obligation against the assessee to pay an additional sum towards the bonus and if for any reason, the assessee commits a default in making the payment agreed to under the section 18 settlement, the assessee would be facing unrest in the organisation and its production would also be seriously affected. Taking into account all these aspects, the assessee made a provision of a sum of Rs. 2,91,766 in its account. Since the amount was agreed to be paid on the basis of commercial expediency and on business considerations it would not fall within the parameters of the Payment of Bonus Act, we are of the view that the said sum is allowable as a business deduction under section 37 of the Income-tax Act, 1961. A similar question came up for consideration before us in CIT v. Lakshmi Mills Co. Ltd. [1999] 240 ITR 81 (T.C. No. 1188 of 1985), and this court by judgment dated March 4, 1997, held that the provisions of section 36(1)(ii)will apply only in the case of bonus paid under the Bonus Act and where the bonuses such as incentive bonus, attendance bonus or customary bonus are paid they are allowable under section 37 of the Act on the score that the expenditure was laid out wholly or exclusively for the purpose of the business.