1. The assessee is a limited company which manufactures pharmaceutical and industrial gelatine. The assessee during the year under appeal paid bonus to its employees at 8.33 per cent. In addition, it paid Rs. 74,206 at 8.17 per cent. The additional payment of Rs. 74,206 was not allowed by the ITO on the ground that similar amount was disallowed in the previous year and, moreover, the same was not allowable according to the Income-tax Act, 1961 ('the Act'). He, therefore, disallowed Rs. 74,206.
2. The assessee came in appeal before the Commissioner (Appeals) and the Commissioner (Appeals) found that the disallowance made by the ITO for the assessment year 1975-76 was deleted by the Commissioner (Appeals) on the ground that provisions of Section 36(1)(ii) of the Act came into force after 25-9-1975 and, therefore, that provision was not applicable for the assessment year 1975-76. However, he found that according to the provisions of Section 36(1)(ii), deduction on the account of bonus shall not exceed the amount of bonus payable under the Payment of Bonus Act, 1965 ('the Bonus Act'). During the year under appeal, the assessee had paid bonus at 8.33 per cent but the workers were not satisfied with the payment and with a view to avert labour trouble which would have brought the production to a complete halt, the company made a further payment of Rs. 74,206.
On the above argument of the assessee, the Commissioner (Appeals) has stated that whatever may be the reason for making the additional payment of Rs. 74,206, the fact remains that the payment is in the nature of bonus, although it may be called by the name of 'ex gratia payment'. The payment is not allowable according to the provisions of Section 36(1)(ii) and he, therefore, confirmed the disallowance.
3. Dr. D. Pal, the counsel for the assessee, referred to the provisions of Section 36(1)(ii) and stated that the payment made by the assessee is not hit by the above provision. He filed a copy of the settlement by which the additional payment of Rs. 74,206 was made to the workers. He stated that the limit provided under the first proviso to Section 36(1)(ii) is only in respect of the bonus payable under the Bonus Act and it did not include customary and other kinds of payments. Dr. Pal in this connection referred to the decision of the Supreme Court in AIR 1979 SC 876. He relied upon paragraphs 9, 10 and 11 of the judgment and stated that the puja, customary and other kinds of bonus paid by the assessee is allowable even under Section 36(1)(ii). The alternative argument of Dr. Pal was that the workers were not satisfied with the payment of 8.33 per cent under the Bonus Act and consequently, the matter was taken up with the labour to buy industrial peace and the additional payment at 8.17 per cent was made. The payment made by the assessee was incidental to its business and, therefore, the payment was allowable under Section 37 of the Act. Dr. Pal in this connection relied on the decision in Calcutta Co. Ltd. v. CIT  37 ITR 1 (SC) and CIT v. Kalyanji Mavji & Co.  122 ITR 49 (SC). It was stated by Dr. Pal that the payment was made in the business interest of the company and the commercial expediency necessitated the payment of the above amount.
4. Shri B.G. Gupta, the senior departmental representative, on the other hand, very strongly supported the order of the Commissioner (Appeals) and stated that a limit has been imposed on the payment of bonus by Section 36(1)(ii).The assessee cannot pay bonus exceeding the amount payable under the Bonus Act. The assessee has given the name to the payment as 'ex gratia payment' but, in effect, it was only a bonus which was not allowable under Section 36(1)(ii). Hence, the disallowance was proper. The senior departmental representative, Shri Gupta, specially urged that there is a special provision which will override the general provision and, therefore, once the amount was disallowable under Section 36(1)(ii), the same cannot be allowed under Section 37. Shri Gupta further distinguished the cases relied upon by the assessee's counsel and further stated that the judgment of the Supreme Court in AIR 1979 SC 876 was in a different context. He, therefore, urged that the order of the Commissioner (Appeals) should be maintained.
5. The assessee during the year under appeal has made the ex gratia payment of Rs. 74,206 to its labour. The labour has been paid bonus at 8.33 per cent under the Bonus Act. It appears that the labour was not satisfied with the payment of bonus at 8.33 per cent and demanded bonus at 20 per cent. The management was not in favour of the demand of the labour but, however, in order to have the industrial peace, the management subsequently agreed for the additional payment at 8.17 per cent and accordingly the sum of Rs. 74,206 had been paid to the workers. Necessary settlement to this effect was arrived at between the management and the labour on 10-10-1975.
The Shaw Leiner Gelatine Factory Employees Union Jabalpur demaded that the workmen of the factory be paid 20 per cent bonus for the accounting year 1974. The management informed the Union that the factory has not made profits which entitle the workmen for the payment of 20 per cent bonus. The Union fully appreciated the contentions of the management but represented that for the sake of cordial industrial relations, the Management should give favourable consideration to the demand of the Union to the extent it is possible for them even though the employees are entitled for minimum bonus of 8.33 per cent. The management keeping the said representations of the Union in view settled the dispute with them as under : 1. The Union agreed with the contention of the management that the employees are not entitled to more than 8.33 per cent bonus under the Payment of Bonus Act, 1965 and they cannot claim more than 8.33 per cent as a matter of right.
2. The management without prejudice to their abovesaid contention agreed to pay to the permanent employees an additional amount of 8.17 per cent of the wages earned by them during the accounting year 1974 as ex gratia payment in addition to the minimum bonus payable at 8.33 per cent as per the provisions of the Payment of Bonus Act, 1965 on or before 1st of November, 1975.
3. It is agreed that this settlement shall be binding on both the parties . and the Workmen or Union shall not raise any demands in respect of issues embodied in this agreement in future.General Secretary, General ManagerShaw Leiner Gelatine Factory 6. The disallowance has been made by the Commissioner (Appeals) only on the ground that the payment as claimed by the assessee was not allowable under Section 36(1)(ii). It would be proper to quote Section 36(1)(ii) with first proviso which was introduced with effect from 25-9-1975.
36 Other deductions.-(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28- (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.
7. The assessee's case comes under Section 36(1)(ii). The assessee has paid the amount to its workers employed in a factory or establishment to which the provisions of the Bonus Act was applicable. The assessee has paid bonus during the year under appeal at 8.33 per cent. Now, the question is whether the assessee can make payment of the additional amount of Rs. 74,206 which could be allowed as deduction from the profits of the company. It is clear in the first proviso to Section 36(1)(ii) that the bonus payable by the assessee to the employees in a factory or establishment to which the provisions of the Bonus Act was applicable, should not exceed the amount of the bonus payable under that Act. The contention of the assessee is that the proviso restricts only that amount of bonus which is paid under the Bonus Act. But if the customary or puja bonus is paid to the workers, the Bonus Act is not applicable and, hence, that amount was allowable to the assessee. The departmental representative, on the other hand, has argued that whatever name may be given, the amount paid by the assessee was bonus and the bonus paid by the assessee should not exceed the bonus payable under the provisions of the Bonus Act. A question arose before the Supreme Court about the nature of bonus payable under the Bonus Act, in Hukumchand Jute Mills Ltd. v. Second Industrial Tribunal  3 Taxman 43 (SC). The workers of Hukumchand Jute Mills Ltd. damanded customary bonus. The claim was denied under the Bonus Act. The conflict led to a reference by the State Government to the Industrial Tribunal.
The matter was decided in favour of the workers but, however, the management took the case to the Supreme Court. The Supreme Court considered the meaning of 'bonus' under the Bonus Act and came to the conclusion that the 'bonus' referred to in the Bonus Act, related to the payment of bonus which was based on the profit or production. It did not include puja or customary bonus.
In this connection, the judgment of the Supreme Court as appearing in paragraphs 7 and 9 is quoted below : 7. The clear light that we glean from the new long title is contrary to the intent of Shri Pai's argument. Specifically, the new long title 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 customary or contractual 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. Nothing more, unless the text expressly states to the contrary. It is important, to remember that Section 17 of the Bonus Act has been left intact. That section in express terms refers to puja bonus and other customary bonus as available for deduction from the bonus payable under the Act, thus making a clear distinction between the bonus payable under the Act and 'puja bonus or other customary bonus'. So long as this section remains without amendment, the inference is clear that the categories covered by the Act, as amended, did not deal with customary bonus.
9. We may straightway dispose of the argument based on Section 31A. That relates to bonus linked with production or productivity in lieu of bonus based on profits. We are not concerned with such a situation and we agree that 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 by the appellant. Similarly, the submission that all agreements inconsistent with the Bonus Act shall become inoperative also has no substance vis-a-vis customary bonus. The fallacy is simple. Once we agree and this is incontestable now that the Bonus Act, 1965 does not deal with 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.
It is clear from the quotation that the 'bonus' referred to in the Bonus Act only relates to the bonus which is based upon profit or production, but it excludes puja, customary and other bonus.
8. The bonus is deductible under Section 36(1)(ii). The restriction is imposed by first proviso. The deduction shall not exceed the amount payable under the Bonus Act. Therefore, if the proviso is read as it is, it is clear that the bonus paid by an employer, which is a bonus under the Bonus Act, should not exceed the payment, as payable under the Bonus Act. In other words, if an employee is paid bonus which is based upon profit and for production and the amount so payable by an employer exceeds the amount payable under the Bonus Act deduction under Section 36(1)(ii), read with first proviso, should be restricted to the amount payable under the Bonus Act. This is the plain and harmonious meaning of Section 36(1)(ii), read with first proviso. However, if the employer paid any other bonus to its employee, the restriction imposed by first proviso is not applicable and the amount is deductible under Section 36(1)(ii).
9. The terms of settlement made by the assessee-employer with its employees had been quoted earlier. The assessee agreed for the payment of additional amount at 8.17 per cent only to keep good relation with the workers and to buy industrial peace and save the industry from strike or lock-out. Moreover, this was customary and in consonance with the commercial practice adopted by others. The second proviso related to bonus payable by the employer where the Bonus Act is not applicable.
It clearly indicates the guidelines on the basis of which the bonus payable shall be determined and allows deduction. One of the guidelines provided in the second proviso is the general practice in similar business or profession. This is simply given by way of illustration to show that the general practice followed in the industries would also be a guideline for allowing deduction under Section 36(1)(ii). Under the above circumstances, the first argument of the assessee is correct that the additional payment made by the assessee at 8.17 per cent is available for deduction under Section 36(1)(ii).
10. The alternative argument of the assessee's counsel is that otherwise the payment should be allowed under Section 37. Section 37 is a residual clause and if an expenditure is not allowable in Sections 30 to 36 and the expenditure is expended wholly and exclusively for the purposes of the business, the same can be allowed under Section 37.
Objection has been taken by the departmental representative that the specific clause excludes general. In other words, his objection was that for the deduction of bonus, there is specific Section 36 and once the deduction is not available under Section 36(1)(ii), the assessee cannot pounce upon Section 37 and claim under the latter Section. So far as the legal maxim referred to by the departmental representative is concerned, there cannot be any quarrel and the same is acceptable but, however, it is to be seen whether the specific clause excludes the general and thereby the assessee is out of the field to claim the additional amount at 8.17 per cent which had been paid to its workers for keeping industrial peace Section 36(1)(ii), read with first proviso, as it has been read by the Commissioner (Appeals), restricts the payment. Therefore, it is clear that the amount payable under the Bonus Act, can be allowed as deduction under Section 36, but Section 36 does not say that if the assessee pays any other bonus, the same cannot be allowed even though the same had been expended for the purposes of the business of the assessee. Therefore, the specific clause is in relation to the bonus payable under the Bonus Act. But if the bonus had been paid, which does not come under the purview of the Bonus Act, such bonus would only be governed by Section 37 of the Act. Hence, the legal maxim referred to by the departmental representative is not coming as a rock to deter the assessee from claiming deduction under Section 37.
The assessee has filed the terms of settlement. The assessee is running an industry and the industry cannot run unless the relation between the employer and the employee is good. The assessee paid the amount for labour peace. The additional amount has been spent by the assessee exclusively for the purpose of the business of the assessee and, hence, even the additional amount is available under Section 37. Dr. Pal has referred to some of the decisions, the principles of which are not discussed in detail because there cannot be any dispute over the principles. This is a fact that the additional amount has been paid by the assessee for its business. Therefore, the amount is also available for deduction under Section 37.
11. The matter can be independently considered from a different angle.
The assessee is carrying on a business. The bonus, according to the Bonus Act, had been paid at 8.33 per cent. The labour was not satisfied with the above payment. Similar was the position in the earlier year.
The assessee paid the additional amount which was considered to be the business expenditure of the assessee though the amended provision of Section 36(1)(ii) was not there. The tactics and the role adopted in India for payment of bonus are somewhat different. The labour resorts to strike, or management resorts to lock-out. However, ultimately these tactics and roles lead to only one conclusion that the dispute is settled between the labour and management either through interference of the State Government or otherwise. The labour is thus paid additional amount. In the present case, according to the Bonus Act, the assessee was to pay 8.33 per cent and there is no dispute over this amount. The labour demanded further 20 per cent to which the management did not agree and the ultimate amount was settled at 8.17 per cent. Two courses were open before the management, either not to yield to the demand of the labour and allow the income-earning asset to die temporarily and thereby reduce not only the income but the revenue to the Government. The other course was to the pay something more, get the labour satisfied and have peaceful work and thereby maintain the income-earning apparatus so that not only the income of the assessee goes up but the Government also gets its due share. Between the two options definitely the second option is in the interest of the assessee. The second step would not only be logical, but commercial expediency would justify it. Therefore, the additional payment made by the assessee which has been paid not only during the year of appeal but in preceding and still preceding years and which had taken the character of a customary payment necessarily will have to be allowed as business expenditure, if not under Section 36(1)(ii) but under Section