1. This appeal is directed against the order of the Commissioner (Appeals) passed in appeal No. 3/BPT(A)/CIT-l of 1980-81 dated 17-10-1980. The assessment year involved is 1977-78.
2. The assessee-firm carried on business in manufacturing and sale of cashew kernel. For the assessment year 1977-78 the return was filed declaring a net income of Rs. 2,29,370 on 30-7-1977. A scrutiny of statements filed by the assessee revealed that the assessee-firm paid bonus of Rs. 555 on salaries of Rs. 2,220 in Palasa branch and a very huge amount of bonus to staff of Rs. 31,226 on salaries of Rs. 14,242 paid in Vetapalem head office. An amount of Rs. 5,633 was also paid as bonus to workers at Vetapalem head office. The ITO was of the view that the bonus paid to workers of Rs. 5,633 was reasonable in accordance with the provisions of the Bonus Act. According to the ITO the same cannot be said with reference to the bonus paid to the staff at Vetapalem head office and Palasa Branch. The ITO pointed out that the salary paid to the staff at Vetapalem is only Rs. 14,242 while the bonus paid to the staff is more than the double of this figure, viz., Rs. 31,226. According to the provisions of the Bonus Act minimum bonus to be paid is Rs. 8.33 per cent on the salaries paid to the workers.
The ITO also pointed out that no material was placed before him to justify the payment of such huge bonus to the staff members at Vetapalem. In view of these facts, the ITO was of the view that it is reasonable to allow the bonus at 8.33 per cent. Accordingly, he restricted the bonus to 8.33 percent on the salaries paid to the staff and the excess paid was disallowed and added back to the income returned. The excess amount paid worked put as under:Bonus paid Bonus allowable Salaries Excess bonus Rs. % Rs. Rs. 555 8.33 2,220 36031,225 8.33 14,242 30,040 ---------- 3. The ITO further found on the scrutiny of the account books produced that there are cash credits in the names of several persons. The genuineness of some of the creditors was enquired into. The Inspector was deputed to contact some of the creditors and after due enquiries he had given the report. The assessee-firm also produced some witnesses from whom sworn depositions were recorded. A credit of Rs. 10,500 was shown in the name of Shri Ponnuru Kasiviswanatha Rao. This person was contacted and the Inspector also enquired about the creditworthiness of this person. A statement was also obtained from the creditor by the Inspector. But, however, the ITO was not prepared to accept the credit in the name of this person as genuine. Therefore, the same was treated as representing the income of the assessee not disclosed and, hence, assessed under the head "Income from other sources". On appeal, the Commissioner (Appeals) with regard to the bonus issue held : I find from the records that the basis on which the bonus has been paid to the workers is not clearly available though the Income-tax Officer has treated it as in accordance with the Payment of Bonus Act. In the circumstances he is directed to enquire into the percentage of the salary that would have been payable as bonus during the accounting year in terms of the Payment of Bonus Act, 1965, and to restrict the allowance to that amount only having regard to the provisions of the first proviso to Section 36(1)(ii) of the Income-tax Act.
Similarly with regard to the addition of the sum of Rs. 10,500 claimed to have been advance received from Shri Ponnuru Kasiviswanatha Rao, the Commissioner (Appeals) came to the conclusion that the sources of the credit cannot be treated as satisfactorily explained. Accordingly, he confirmed the view taken by the ITO. Aggrieved, the appellant filed the present appeal before the Tribunal.
4. The learned counsel for the assessee contended that the Commissioner (Appeals) is not justified in directing the ITO to restrict the bonus under Section 36(1)(ii) of the Income-tax Act, 1961. It was further contended that the Commissioner failed to appreciate the fact that the bonus is paid as per the agreement entered into with the staff and the entire amount ought to have been allowed under commercial expediency even if it is not to be allowed under Section 36(1)(ii). Yet another contention made by the appellant was that the Commissioner (Appeals) is not justified in disallowing the advance made by Shri Ponnurv Kasiviswanatha Rao, who has given a sworn statement that he had advanced the amount to the assessee.
5. On the other hand, the learned departmental representative relied on the order passed by the Commissioner (Appeals).
6. We have heard the rival submissions made by the parties. With regard to the amount paid towards bonus to the staff, the appellant filed a copy of the agreement on 5-8-1976, with effect from 17-5-1976. It was submitted that the assessee was paying bonus to the staff since the assessment year 1976-77 as per the preceding agreement entered into with the employees and this payment has been accepted by the income-tax authorities for earlier years. Therefore, it was contended that without giving due regard to the terms of the agreement filed on 27-9-1976 the ITO added this amount. With regard to the payment of Rs. 555 as bonus to the staff at Palasa branch, it was stated that there is no agreement and, hence, the bonus was paid at 25 per cent of the salary and it is contended that it is the practice of the department to allow up to 25 per cent of the salary. The appellant further submitted that since salary is very low and it is the practice of the appellant to encourage devoted worker and to share profits with the staff, the entire bonus should be accepted as reasonable. According to Section 10(2A) of the Payment of Bonus Act, 1965, notwithstanding anything contained in Sub-section (1) every employer shall be bound to pay every employee a minimum bonus which shall be 8.33 per cent of the salary or wages earned by the employee during the accounting year or Rs. 100, whichever is higher, whether or not the employer has any allowable surplus in the accounting year. According to Section 36(1)(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 apply shall not exceed the amount of bonus payable under that Act. One of the contention put forward by the appellant was that in fact the bonus was paid in the present case as per the agreement entered into with the staff and the entire amount ought to have been allowed under commercial expediency even if it is not to be allowed under Section 36(1)(ii). In support of this contention the learned counsel appearing for the appellant has drawn our attention to the decision of the Supreme Court in the case of Hukumchand Jute Mills Ltd. v. Second Industrial Tribunal  3 Taxman 43. In the said case the Supreme Court held that- The Payment of Bonus Act, 1965 was a complete code but was confined to profit-oriented bonus only. It purports to provide for the payment of bonus "on the basis of profits or on the basis of production or productivity and for matters connected therewith.
The emphatic inference flows therefrom that the customary or contractual (or traditional) bonus goes beyond the pale of the Amending Act which modifies the previous one by bringing within its range bonus on the basis of production or productivity also. Section 17 of the Payment of Bonus Act has been left intact. Section 17 in express terms refers to puja bonus and other customary bonus as available for deduction from the bonus payable under the Act. It is, therefore, clear that the categories covered by the Act, as amended, did not deal with "customary bonus". In view of the above judgment, the inference is that the bonus paid in the present case in terms of the agreement between the employer and the employees goes beyond the purview of the Amending Act, which modifies the previous one by bringing within its range bonus on the basis of production or productivity. Accordingly, it will also go out of the purview of Section 36(1)(ii). This view was also adopted by the Appellate Tribunal, Calcutta Bench "B" camping at Hyderabad in IT Appeal No. 797 (Hyd.) of 1979 in the case of Ch. Yegniah & Sons v.ITO, Hyderabad dated 5-7-1981. In that view of the matter, we hold that the bonus paid by the appellant is allowable as deduction.
7. [This para is not reproduced here as it pertains to a minor issue not covered in the synopsis.]