JUDGMENT Prakash Krishna, J.
1. The Income-tax Appellate Tribunal, Allahabad, has referred the following question of law under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), for the opinion to this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the payment of Rs. 24,674 under the head 'Bonus to senior members of employees who are not entitled to receive the bonus under the provisions of the Payment of Bonus Act, 1965, is an admissible expenditure' under the Income-tax Act ?"
2. Briefly stated the facts giving rise to the present case are as follows :
3. The reference relates to the assessment year 1976-77. The assessee-respondent is a limited company and derives income from the manufacture and sale of sugar. The accounting period relevant to the assessment year 1976-77 ended on September 30, 1975. The Assessing Officer disallowed a sum of Rs. 24,674 as bonus paid to the senior members of the staff in view of the provisions of Section 36(1)(ii) of the Act. The disallowance was confirmed by the Commissioner of Income-tax (Appeals), Kanpur. The Tribunal has set aside the disallowance of the above sum on the finding that the payment of bonus of Rs. 24,674 cannot be regarded as being more than what was reasonably required to be paid.
4. Heard Shri Shambhu Chopra, learned standing counsel for the Department, and Shri R. S. Agrawal for the assessee. Learned standing counsel submitted that a sum of Rs. 24,674 being the amount of bonus was paid to the senior members of the staff although for the year under consideration there were no profits of the business. The Tribunal without looking to the parameters for grant of deduction as admissible under Section 36(1)(ii) of the Act granted the deduction of the above amount. Strong reliance was placed by learned counsel on a judgment of the Supreme Court in the case of Shahzada Nand and Sons v. CIT [1977] 108 ITR 358. Per contra, learned counsel for the respondent-assessee submitted that the reasonableness of the payment of bonus is to be determined with reference to the principle of commercial expediency which is to be viewed in the light of the requirements of the business, services rendered by the persons concerned. He placed reliance upon a judgment of the Madras High Court in the case of CIT v. Lakshmi Mills Co. Ltd. [1999] 240 ITR 81.
5. The question whether the amount paid as bonus was a reasonable amount or not had to be determined with reference to the three factors, as pointed by the Supreme Court in the case of Shahzada Nand and Sons v. CIT [1977] 108 ITR 358. The relevant paragraph is quoted below (page 365) :
"Turning to the provisions of Section 36, Sub-section (1), Clause (ii), we find that the proviso to that clause lays down three factors for the purpose of determining the reasonableness of the commission paid to an employee. The question whether the amount of the commission is a reasonable amount or not has to be determined with reference to these three factors. Sometimes these three factors are loosely described as conditions but they are not really conditions on the fulfilment of which alone the amount of commission paid to an employee can be regarded as reasonable. They are merely factors to be taken into account by the revenue authorities in determining the reasonableness of the amount of commission."
6. The Tribunal after noticing the aforesaid three factors, straightaway came to the conclusion that the payment of bonus cannot be termed as being unreasonable merely because there was no profit of the business in the relevant assessment year. It was of the view that the payment of bonus cannot be said to be unreasonable even if there is no profit from the business. The Tribunal has not recorded any finding on the above three factors as laid down by the Supreme Court. There is absolutely no discussion in the order of the Tribunal regarding the pay and service conditions of the senior employees. Nor is there anything on record to show that it was the general practice to pay bonus to senior staff of the company even if there is no profit. In the present case the assessee has failed to prove that the payment of the aforesaid amount was on account of commercial expediency. In the case of CIT v. Lakshmi Mills Co. Ltd. [1999] 240 ITR 81 (Mad), the Tribunal had recorded a finding that there was a memorandum of settlement arrived at under Section 12(3) of the Industrial Disputes Act between the assessee and the trade union of the assessee. In the memorandum of settlement, it was mentioned that in addition to the bonus that is payable under the Bonus Act the assessee also agreed to pay certain additional amount shown in the annexure to the agreement. The Appellate Tribunal found that if the amount was not paid, the workers would have gone on strike and in such circumstances the payment of additional amount was regarded by the Tribunal as commercial expediency. In the case in hand there is no such finding nor material on record to show that the payment of Rs. 24,674 to the senior members of the staff was made, in anyway, due to commercial expediency. Thus the payment of Rs. 24,674 cannot be regarded as admissible expenditure under the Act.
7. In view of the above discussion, we answer the question referred to us in the negative, i.e., in favour of the Department and against the assessee. However, no order as to costs.