section 36(1)(iv)/income-tax act

[2004] 138 taxman 143 (bom.)

HIGH COURT OF BOMBAY

Commissioner of Income-tax

v.

Mafatlal Fine Spg. & Mfg. Co. Ltd.

S.H. KAPADIA AND J.P. DEVADHAR, JJ.

IT REFERENCE NO. 597 OF 1987

FEBRUARY 5, 2003

Section 36(1)(iv) of the Income-tax Act, 1961 - Recognised provident fund - Contributions towards - Whether initial contribution towards superannuation fund is deductible under section 36(1)(iv) - Held, yes

Section 36(1)(ii) of the Income-tax Act, 1961 - Bonus or Commission - Tribunal allowed claim of assessee for deduction of ex gratia payment as additional bonus on ground that said payment was made on account of agreement between mills owner’s association and employee’s union - Whether in absence of any evidence to show that agreement was binding on assessee or to show that ex gratia payment was reasonable or in accordance with any practice prevailing at relevant time, assessee was not entitled to deduction of bonus, which was paid over and above bonus payable und\er Payment of Bonus Act - Held, yes

Section 80G of the Income-tax Act, 1961 - Deductions - Donation to certain funds, charitable institutions, etc. - Whether ceiling limit specified in section 80G(4) applies to aggregate of sum in respect of which deduction is claimed, and not to amount of deduction allowed under section 80G(1) - Held, yes

Cases referred to

CIT v. Sirpur Paper Mills [1999] 237 ITR 41/103 Taxman 352 (SC) [Para 2], CIT v. Rajaram Bandekar & Sons (Shipping) (P.) Ltd. [1999] 237 ITR 628 (Bom.) [Para 4], CIT v. New Shorrock Spg. & Mfg. Co. Ltd. [1995] 212 ITR 355/80 Taxman 10 (Bom.) [Para 5] and Hyderabad Race Club v. Addl. CIT [1979] 120 ITR 185 (AP) [Para 6].

R.V. Desai, P.S. Jetly and K.B. Rao for the Applicant.

Judgment

J.P. Devadhar, J. - At the instance of the Commissioner of Income-tax, Bombay City-II, Bombay, the Income-tax Appellate Tribunal has referred following questions for the opinion of this Court under section 256(1) of the Income-tax Act, 1961.

Assessment year 1978-79 :

1. ‘Whether, on the facts and circumstances of the case, initial contribution by the assessee-company of Rs. 1,28,228 to superannuation fund was a allowable deduction for the assessment year 1978-79?’

Assessment year 1979-80 :

2. ‘Whether, on the facts and circumstances of the case, the assessee was entitled to deduction of Rs. 22,81,847 which paid by the assessee-company to its employees over and above the bonus payable under the Payment of Bonus Act for the Assessment year 1979-80 ?’

Assessment years 1978-79 and 1979-80 :

3. ‘Whether, on the facts and circumstances of the case, the limit prescribed under section 80G(4) was not confined to 55 per cent (50 per cent) of 10 per cent of gross total income and the said section only prescribed the ceiling for deduction for the assessment years 1978-79 and 1979-80 ?’

Though served, none have appeared for the assessee-respondent.

2. As regards question No. 1 is concerned, learned counsel appearing for the Revenue, fairly stated that the issue is covered by the decision of the Apex Court in the case of CIT v. Sirpur Paper Mills [1999] 237 ITR 411  in favour of the assessee. Accordingly, we answer question No. 1 in the affirmative and in favour of the assessee.

3. As regards question No. 2 is concerned the assessee had made ex gratia payment of Rs. 22,81,847 as additional bonus to the employees who were covered by the Payment of Bonus Act. The Income-tax Officer held that in view of the first proviso to section 36(1)(ii) liability of the assessee was only to the extent admissible under the Payment of Bonus Act, 1965, and, therefore, the said amount of Rs. 22,81,847 given to the textile mill workers over and above the statutory bonus was not liable either under section 36(1)(ii) or under section 37(1) of the Income-tax Act. On appeal, the Commissioner of Income-tax (Appeals) held that the said amount was liable to be deducted as necessary business expenditure incurred in the interest of business expediency and for coming to terms with the Rashtriya Mazdoor Sangh. On further appeal, the Tribunal held that the additional payment of bonus was on account of the agreement between the Mills Owner’s Association and the employees union and hence, deductible under section 36(1)(ii). The Tribunal further held that the assessee’s case was not covered by the second proviso to section 36(1)(ii).

4. Mr. Desai, learned senior counsel appearing on behalf of the Revenue, relied upon judgment of this Court in the case of CIT v. Rajaram Bandekar and Sons (Shipping) (P.) Ltd. [1999] 237 ITR 628, and submitted that ex gratia payment to the employees by way of bonus for services rendered is not allowable under the general provisions of section 37 of the Income-tax Act, 1961; however, if the assessee was able to satisfy the conditions laid down in the second proviso to section 36(1)(ii), it might be allowed as deduction under that section. In the instant case, there is no material to establish that the conditions set out in the second proviso to section 36(1)(ii) were satisfied. The assessee has merely produced an agreement dated October 17, 1978, between the Mill Owner’s Association, Bombay, and the employees union. There is nothing on record to show that the said agreement was binding on the assessee or to show that the ex gratia payment was reasonable or in accordance with any practice prevailing at the relevant time. In this view of the matter, we answer question No. 2 in the negative and in favour of the Revenue.

5. As regards question No. 3 is concerned, Mr. R.V. Desai, learned senior counsel appearing on behalf of the Revenue, relied upon the decision of this Court in the case of CIT v. New Shorrock Spg. and Mfg. Co. Ltd. [1995] 212 ITR 3551  wherein it is held that the ceiling specified in sub-section (4) of section 80G applies to the aggregate of the sums in respect of which deduction is claimed and not to the amount of deduction allowed under sub-section (1) of section 80G of the Income-tax Act.

6. In the present case, the Tribunal following the decision of the Andhra Pradesh High Court in the case of Hyderabad Race Club v. Addl. CIT [1979] 120 ITR 185; held that the ceiling laid down by sub-section (4) was applicable not to the aggregate amount in respect of which the deduction was claimed but to the amount deductible under sub-section (1) of section 80G. However, this Court in the case of New Shorrock Spg. & Mfg. Co. Ltd. (supra) has disagreed with the decision of the Andhra Pradesh High Court in the case of Hyderabad Race Club (supra) and held that the ceiling specified in sub-section (4) applies to the aggregate of the sums in respect of which deduction is claimed and not to the amount of deduction allowed under sub-section (1) which has to be computed in the manner specified therein. In this view of the matter, we answer question No. 3 in the negative and in favour of the Revenue.

To sum up, we answer :

Question No. 1 : In the affirmative and in favour of the assessee.

Question No. 2 : In the negative and in favour of the Revenue.

Question No. 3 : In the negative and in favour of the Revenue.

Accordingly, the reference is disposed of in above terms, with no order as to costs.

nn

 

 [S1]1. 103 Taxman 352.

 [S2]1. 80 Taxman 10.