1. The departmental appeal relates to the assessment year 1977-78. The question is whether a sum of Rs. 36,826 paid by the assessee to its employees is bonus which can be disallowed under Section 36(1)(ii) of the Income-tax Act, 1961 ("the Act"), which provides that deduction for bonus shall not exceed the amount payable under the Payment of Bonus Act.
2. The ITO stated that the assessee had paid bonus which works out to 25 per cent and that he will restrict it to 20 per cent and disallow the excess which came to Rs. 36,826. The Commissioner (Appeals) held that this 5 per cent is incentive wages falling outside the provisions of the Payment of Bonus Act, 1965 and hence allowed it as a deduction.
The department appeals.
2. The CIT (Appeals) has erred in holding that the bonus in excess of 20 per cent of basic emoluments of the employees was incentive wage. The term 'incentive wage' is used only to circumvent the Payment of Bonus Act.
To understand the controversy, the circumstances under which these amounts had been paid have also to be borne in mind. There was an agreement between the assessee and the employees, represented by the trade union. The full text is as follows : MEMORANDUM OF SETTLEMENT UNDER SECTION 18(1) OF THE INDUSTRIAL DISPUTES ACT, 1947 ARRIVED AT BETWEEN THE MANAGEMENT OF THE ARYA VAIDYA PHARMACY (COIMBATORE) LTD., COIMBATORE, AND THE WORKMEN DULY REPRESENTED BY THE SECRETARY, THE ARYA VAIDYA PHARMACY EMPLOYEES UNION, KANHKODE.Representing the employer : Sri P. V. Chandrasekara Varier, Managing Director, The Arya Vaidya Pharmacy (Cbe.) Ltd., Coimbatore 641018 (Representing the management).Representing the Workmen : Sri A.N Yusuf, Secretary, The Arya Vaidya Phar- macy Employees Union, Kanjikode.Total number of workmen and : About 213 ; All categories including clerical staff In terms of Clause 2 of the Agreement between the Management and the Arya Vaidya Pharmacy Employees Union signed on 15-6-1977, further discussions were held on the bonus issue and taking into account the profit and loss account and also cordial good relationship with the workers, it was agreed to pay the maximum bonus of 20 percent allowed under the Bonus Act for the three years 1976-77,1977-78 and 1978-79 to all eligible workmen in accordance with the provisions contained in the bonus Act, and it was also decided to pay an ex gratia payment of 5 per cent as an incentive to increased production and full co-operation of all workmen. The bonus and ex gratia payment together shall not exceed 25 per cent of the employees' gross earnings.Sd/- Managing Director Sd/- SecretaryManagement's Representative The Arya Vaidya Pharmacy Employees Union, Kanjikode 4. The submission of the departmental representative, based on the grounds that there is in fact no difference between bonus and incentive wages, that what is paid in excess of 20 per cent is also bonus and that incentive wages is used only to circumvent the Payment of Bonus Act, is not acceptable to us. There is ample, real and substantial difference between bonus and incentives. There is a clear cut demarcation between the two. Bonus is the right of the employees. For that payment the employees need not depend upon the sweetwill and pleasure of the employer. The Government have enacted legislation for that matter. The Payment of Bonus Act safeguards the rights of the workers regarding the bonus. The employees need only keep quiet. The bonus will be put into his pocket along with the wage bill. It automatically and without any special effort on the part of the employees accrues to the employees at the end of the accounting year to the extent of the amount provided in the Bonus Act. If the employer defaults, there is a machinery provided in the legislation to ensure its payment, and what is paid is deductible under Section 36(1)(ii) and the ITO in this case has allowed it also.
5. It may be noted that the Payment of Bonus Act does not prohibit any other ex gratia payment to employees. It only ensures the payment of bonus. Ad hoc ex gratia payments to employees are by now, because of various trade union activities, well recognised in trade circles and merchant community. It has become a trade practice. It has almost acquired the status of law merchant. As regards incentives, it may require special efforts on the part of the employees. The employer may sometimes voluntarily give it to the employees. But these are rare cases. In this case as the agreement shows it was not certainly a voluntary donation by the employer. Trade union activities may be necessary to earn these incentives. It may require considerable amount of bargaining, diplomacy and wrangling, negotiations and settlements.
The payment and the amount to be paid are based on no principles, except commercial expediency. It is an ad hoc ex gratia payment depending on the sweet will and pleasure of the employer. It may be that such sweet will and pleasure is induced in his, mind by force of compelling circumstances. We state all this to show that bonus and ex gratia payments are different in character. In this case the 5 per cent was granted because it was a price paid by the employer for settlement of an industrial dispute. There are absolutely no material in this case to show that this 5 per cent incentive wage is a camouflage for bonus.
It is also not a sound general proposition to state that in all cases incentive wage is a camouflage for bonus and that incentive wage is used only to circumvent the Payment of Bonus Act. As we stated earlier, incentive wage is a fact now well recognised in trade circles. So this is a payment deductible not under Section 36(1)(ii) but only under Section 37(1) of the Act. It cannot be said that it is not laid out or expended wholly or exclusively for the purposes of business, because it is a price paid to settle the industrial dispute. So it is well supported by commercial expediency. But for this payment of 5 per cent, it may be that the whole business activity of the assessee would have come to a standstill. If the income-tax authorities had kept in mind this vital difference that bonus is deductible under Section 36(1)(ii) and that other ex gratia payments are deductible only under Section 37(1), then this controversy might not have arisen at all. So we hold that this 5 per cent payment disallowed by the ITO is an incentive wage and an ad hoc ex gratia payment deductible under Section 37 because it is well supported by commercial expediency. Therefore, we uphold the decision of the Commissioner (Appeals),