Commissioner Of Income-Tax v. Orissa Industries Ltd.

A. Pasayat, J.:— On being moved by an application under section 256(2) of the Income-tax Act, 1961 (in short, “the Act”), this court had directed the Income-tax Appellate Tribunal, Cuttack Bench, Cuttack (in short, “the Tribunal”), to refer the following question for opinion:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the production bonus and maintenance bonus amounting to Rs. 1,96,299 under section 37 of the Income-tax Act, 1961, which was paid over and above the limits of the statutory bonus as prescribed under section 36 of the Income-tax Act, 1961?”

2. Pursuant to the direction, a statement of case has been drawn up and the aforesaid question has been referred by the Tribunal. The background facts so far as they are relevant for the purpose of answering the question are as follows:

Messrs. Orissa Industries Limited, a company incorporated under the Companies Act, 1956 (hereinafter referred to as “the assessee”), claimed a total amount of Rs. 14,92,036 towards bonus, ex gratia, salary and wages during the assessment year 1981–82. The Income-tax Officer was of the view that a sum of Rs. 1,96,299, aggregating the production bonus of Rs. 1,69,699 and maintenance bonus of Rs. 26,600, was not allowable as expenditure, since it was in excess of 20 per cent, of the salary, which is the maximum bonus allowable in terms of section 36(1)(ii) of the Act. According to him, the amount was paid in addition to the maximum of 20 per cent, bonus paid as per the Bonus Act. In appeal, the Commissioner of Income-tax (Appeals), Orissa, held that though nomen-clatured as “production bonus” and “maintenance bonus”, in essence, the payments were in the nature of incentive wages and, therefore, the disallowance was not in order. On appeal by the Revenue, the Tribunal affirmed this conclusion. An application under section 256(1) of the Act was rejected and subsequently, on being moved under section 256(2), this court had directed the afore-indicated question to be referred for opinion.

3. The primary stand of the Revenue as canvassed by learned standing counsel is that the deductions which are to be allowed while computing income referred to in section 28 have been laid down in section 36. Section 37 deals with expenditure in general. Sub-section (1) thereof lays down that any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. With reference to section 36(1)(ii), it is submitted that any amount in excess of 20 per cent, of the profits is not allowable as a deduction. Learned counsel for the assessee, on the other hand, contended that the nomenclature has been rightly held to be inconsequential by the Commissioner of Income-tax (Appeals) and the Tribunal, and the latter has recorded a positive finding that the amounts paid did not partake of the character of bonus. The provision at the relevant time read as follows:

“36. (1) Other deductions.—……….

(ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission:

Provided that the deduction in respect of bonus paid to an employee employed in a factory or other establishment to which the provisions of the Payment of Bonus Act, 1965 (21 of 1965), apply shall not exceed the amount of bonus payable under that Act:

Provided further that the amount of the bonus (not being bonus referred to in the first proviso) or commission is reasonable with reference to

(a) the pay of the employee and the conditions of his service;

(b) the profits of the business or profession for the previous year in question; and

(c) the general practice in similar business or profession;….”

4. The two provisos to clause (ii) have been omitted by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988), with effect from April 1, 1989. The first proviso was inserted in consonance with the Payment of Bonus (Amendment) Act, 1976, operating with retrospective effect from September 25, 1975, i.e, for and from the assessment year 1976–77. As a result of the omission of the first proviso to clause (ii), the ceiling laid down therein as to the allowability of the bonus is no more operative for and from the assessment year 1989–90.

5. It cannot be gainsaid that, if an allowance is granted specifically by any of sections 30 to 36, subject to certain express or implied conditions, the assessee would not be entitled to claim a deduction under the residuary section 37; otherwise, the result would be nullification of the express conditions laid down in section 36(1)(ii). The controversy centres round the question whether the amount paid was relatable to “bonus” as held by the Income-tax Officer or “incentive wages” as observed by the Commissioner of Income-tax (Appeals) and the Tribunal. Subject to a specified condition, bonus or commission paid to an employee is allowable under this clause. The condition is that the sum paid to the employee as bonus or commission should not have been payable to him as profits or dividend if it had not been paid as bonus or commission. The Revenue's stand was that nothing beyond the ceiling limit prescribed by the Payment of Bonus Act, 1965 (in short, “the Bonus Act”), is to be treated as payment under section 36(1)(ii). The Tribunal, in essence, has affirmed the view of the Commissioner of Income-tax (Appeals) and held that the scheme under which the assessee paid production bonus and maintenance bonus to the workers was in existence since the year 1968. So far as maintenance bonus is concerned, payment is made to the workers at different rates for each month, if the breakdown, shutdown and idle hours are less than 25 per cent, up to 0 per cent, of the total running hours of the month. The incentive under the scheme is not payable if the production bonus payable exceeds the incentive; if it is less than production bonus, the difference alone was payable. So far as production bonus is concerned, it is payable to specified categories of workmen for production of saleable materials in a month for graded slabs of production over and above the agreed quantity at varying rates. This is distributed to the workmen proportionately on the basis of their wages earned in each month. The schemes which were formulated under agreements with the recognised union of workers have undergone changes from time to time depending upon the exigencies of work and the demand of the workers. Whenever disputes arose regarding service matters of the workers including the production and maintenance bonus payable to them, those were settled bilaterally or through conciliation proceedings before the Conciliation Officer, Department of Labour, Government of Orissa. As far back as on April 10, 1978, the management had reached a settlement regarding the annual bonus, production bonus, dearness allowance, etc., payable to workers for a period of three years, but even before the period covered by the settlement expired, the workers started agitating for increased payments due to increased cost of living and various other factors. The management again reached a settlement on April 15, 1980, with the workers' union through conciliation proceedings which was effective from April 1, 1980. The production and maintenance bonus claimed by the assessee for the year under consideration was paid in terms of the said settlement. Though the Income-tax Officer observed that the production and maintenance bonus was in addition to the maximum of 20 per cent, bonus paid under the Bonus Act, no details were on record to establish this conclusion. Even otherwise, the production and maintenance bonus for the year under consideration have been paid on monthly basis and this being not a substitute for bonus based on profits, but a payment in addition to the profit-based bonus, it is not a bonus as prescribed under section 31A of the Bonus Act. In other words, the amount paid being not an annual bonus linked with production or productivity in lieu of bonus based on profits payable under the Bonus Act as envisaged in section 31A, the restriction of 20 per cent, laid down by the provisions of the Bonus Act will not be applicable at all. The Commissioner of Income-tax (Appeals) observed that the production and maintenance bonus for the year under consideration was paid by way of incentive wages from month to month which were mere customary payments even though these were quantified by agreements entered into from time to time. These monthly payments were not an alternative or substitute for the bonus payable under the Bonus Act, and, therefore, did not come under the purview of the provisions of the Bonus Act. It was concluded that though it was not deductible in computing the total income of the assessee under section 36(1)(ii), it was allowable as deduction under section 37. The Tribunal accepted the contention of the assessee that the payments were in the nature of incentive wages and, therefore, the same are allowable as deductions.

6. At this juncture, it is necessary to refer to section 31A of the Bonus Act, which reads as follows:

“31A. Special provision with respect to payment of bonus linked with production or productivity.— Notwithstanding anything contained in this Act,—

(i) where an agreement or a settlement has been entered into by the employees with their employer before the commencement of the Payment of Bonus (Amendment) Act, 1976 (23 of 1976), or

(ii) where the employees enter into any agreement or settlement with their employer after such commencement,

for payment of an annual bonus linked with production or productivity in lieu of bonus based on profits payable under this Act, then, such employees shall be entitled to receive bonus due to them under such agreement or settlement, as the case may be:

Provided that any such agreement or settlement whereby the employees relinquish their right to receive the minimum bonus under section 10 shall be null and void in so far as it purports to deprive them of such rights:

Provided further that such employees shall not be entitled to be paid such bonus in excess of twenty per cent, of the salary or wage earned by them during the relevant accounting year.”

7. The said provision was inserted in the year 1976 by the Payment of Bonus (Amendment) Act, 1976, with effect from September 25, 1975. With reference to the use of the expression “bonus”, many times it has been contended that payment of bonus under the scheme is envisaged under section 31A of the Bonus Act. In New India Industries Employees' Association, Bombay v. New India Industries Ltd., Bombay, [1976] 1 LLJ 528, it has been observed that what is paid under the scheme is not bonus, but incentive wage. The determining factor is the nature of payment made. In Hukumchand Jute Mills Ltd. v. Second Industrial Tribunal, [1979] 54 FJR 391 : (1979) 3 SCC 261 : AIR 1979 SC 876, it was observed that section 31A relates to bonus linked with production or productivity in lieu of bonus based on profits. In regard to productivity bonus, section 31A shall have operation, but it speaks nothing about the other kinds of bonus and cannot, therefore, be said to have the spin-off benefits claimed. The submission in that case to the effect that all agreements inconsistent with the Bonus Act become inoperative was held to be without any substance, vis-a-vis, customary bonus. It was observed that the fallacy is simple and it is incontestable that the Bonus Act does not deal with the customary bonus and is confined to profit-based or productivity-based bonus. The provisions of the Act have no say on customary bonus, and cannot, therefore, be inconsistent therewith. Conceptually, statutory bonus and customary bonus operate in two fields and do not clash with each other. A similar view was expressed by the apex court in Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai, [1976] 49 FJR 15 : (1976) 3 SCC 832 : AIR 1976 SC 1455. In Titaghur Paper Mills Co., Ltd. v. Workmen Etc, [1959–60] 16 FJR 323 : [1959] Suppl. (2) SCR 1012, it was observed that payment of production bonus was in the nature of an incentive wage. The extra payment depends not on extra profits but on extra production. In contrast to profit bonus, production bonus is linked to the quantity of production, it is payment of further emoluments in addition to regular wages or salaries depending upon production, as an incentive to the employees to put in more than the standard performance. In Workmen of Bata Shoe Co. (P.) Ltd. v. Bata Shoe Co. (P.) Ltd., [1972] 42 FJR 516 : (1972) 3 SCC 627 : AIR 1972 SC 1436 : [1972] 24 FLR 359, the apex court held that an amount paid as an incentive to production is paid as production bonus or as a wage incentive.

8. In several cases, it has been held that customary or festival bonus is separate from and independent of profit bonus. Section 17 of the Bonus Act permits adjustment by the employer if he so desires. If, however, the employer does not adjust the amount, the first proviso to section 36(1)(ii) of the Act cannot be invoked. Attendance bonus (Baidyanath Ayurveda Bhawan Mazdoor Union v. Management of Shri Baidyanath Ayurveda Bhawan (P.) Ltd., [1984] 64 FJR 33 (SC) : (1984) 1 SCC 279 : AIR 1984 SC 457) or incentive bonus or customary bonus (CIT v. Sivanandha Mills Ltd., [1985] 156 ITR 629 (Mad)) have been held to be outside the purview of the Bonus Act.

9. A factual conclusion has been recorded by the Commissioner of Income-tax (Appeals) and the Tribunal that the payments did not amount to “bonus” notwithstanding the use of the said expression and were in the nature of incentive wages. For coming to this conclusion, copious reference has been made to the agreements and settlements entered into between the assessee and the union of workmen. It is essentially a conclusion of fact. We are in agreement with the view. In CIT v. Rahimia Lands and Tea Co. (P.) Ltd., [1992] 197 ITR 310, a similar view was expressed by the Calcutta High Court and it was observed that the nomenclature is not the determinative factor. In view of the above analysis made by us, it is clear that the payments were allowable as deductions in terms of section 37 of the Act. Accordingly, we answer the question referred to us for opinion in the affirmative, in favour of the assessee and against the Revenue. No costs.

D.M Patnaik, J.:— I agree.