1. These are two appeals by the assessee relating to the assessment years 1978-79 and 1979-80. The assessee is a co-operative society which carries on the business of running' a spinning mill. The Income-tax Officer stated for the assessment year 1978-79 that bonus had been paid at 11.33 per cent. This came to Rs. 3,90,819. He allowed as a deduction bonus at 8.33 per cent at Rs. 2,87,366 and disallowed the balance of Rs. 1,03,453. This disallowance was made taking the view that this amount of 3 per cent was in excess of the statutory requirement permissible under the provisions of the Bonus Act. The Income-tax Officer stated that the necessity for making the additional payment in terms of a settlement was not acceptable. For the subsequent assessment year, i.e., 1979-80, similarly it was mentioned that bonus was payable at 12 per cent and the amount was Rs, 4,65,680. Allowing as deduction 8.33 per cent, the balance of 3.67 per cent, i.e., Rs. 1,38,684 was brought to tax for the same reason.
2. The assessee appealed and it was contended that the entire payment of bonus was in terms of a settlement and hence should have been allowed as a deduction. The CIT (Appeals) stated that the additional payment was not an incentive bonus and since the mills of the assessee-company had worked at a loss, only the minimum bonus of 8.33 per cent was an admissible deduction. He, therefore, upheld the disallowance.
3. The assessee is in appeal before us and it was contended that the bonus payment in each of the years was only 8.33 per cent in terms of settlement under Section 18(1) of the Industrial Disputes Act dated 15-10-1978 for the first year and 30-10-1979 for the second year. The further payment of 3 per cent in the first year and 3.67 per cent in the second year, it was urged, was not bonus but an ex gratia payment.
In support of its contention, the express terms of the settlement was relied upon. Opposing the plea, the learned Departmental Representative submitted that the payment over and above 8.33 per cent was nothing but additional payment of bonus.
4. We have considered the rival submissions. The terms of the settlement for the first year are in English and the same read as under: 1. It is agreed that the workmen will be paid 8.33 per cent as bonus for the accounting year 1977.
2. It is also agreed that 3 per cent additional amount shall be paid in consideration of the cordial and smooth working of the mills in the relevant year.
In the second year, the terms are in Tamil and are to similar effect.
The additional payment was made for cordial and smooth working of the Mills due to the co-operation of labour. It was, therefore, not a payment linked with the profit but a payment out of commercial expediency which would have the effect of securing co-operation in the succeeding year also in the hope of getting such a payment. The extra amount paid really partakes of a nature of ex gratia payment and does not partake of a nature of bonus. The Supreme Court in the case of Sassoon J. David & Co. (P.) Ltd. v. CIT [1979J 118 ITR 261 had occasion to consider the ambit of the provisions of Section 10(2) (xv) of the Income-tax Act, 1922, and the corresponding provisions of Section 37(1) of the Act of 1961, and observed as under : It has to be observed here that the expression "wholly and exclusively" used in s. 10(2)(xv) of the Act does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under s. 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of s. 37 of the I.T. Act, 1961, which corresponds to s. 10(2)(xv) of the Act. An attempt was made in the I.T. Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under s. 37. Section 37(1) in the Bill read "any expenditure. . . laid out or expended wholly, necessarily and exclusively for the purpose of the business or profession shall be allowed. . ." The introduction of the word "necessarily" in the above section resulted in public protest.
Consequently, when s. 37 was finally enacted into law, the word "necessarily" came to be dropped.
The payment in the present case, viewed in the light of the aforesaid observations, was clearly made for promoting the business and earning profits. It was in terms of an express agreement entered into under the Industrial Disputes Act between the management and the workers. Whether there was any compelling necessity to incur such expenditure or not, in terms of the observations of the Supreme Court, as long as the payment was for commercial expediency, the same would be an allowable deduction. In the light of our conclusion that the payment does not partake of the nature of bonus, much less as bonus under the Payment of Bonus Act, but is of the nature of ex gratia payment, the ceiling under the first proviso to Section 36(1)(ii) is not attracted and the payment would be an admissible deduction under the provisions of Section 37(1).
The result is the appeals are allowed.