JUDGMENT Rajes Kumar, J.
1. The Income Tax Appellate Tribunal, New Delhi has referred to following four questions of law under Section 256(1) of the Income Tax Act, 1961, (hereinafter referred to as "the Act") for opinion of this Court.
"1. Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in ignoring the fact that the assessee had not established the genuineness and nature of the payment and as such, had failed to discharge the onus for deduction of the payment in computing the business income.
2. Whether on the facts (sic.) and in the circumstances of the case, the tribunal was correct in law in admitting the claim for payment of incentive bonus over and above the admissible bonus under the Payment of Bonus Act.
3. Whether, on the facts and in the circumstances of the case, the I.T.A.T. was correct in stating that if a particular payment does not fall within the first provision it can still be considered under the second proviso to Section 36(1)(ii) of the Act, or even under Section 37(1) of the Act.
4. Whether on the facts and in the circumstances of the case, the I.T.A.T. Was correct in law in holding that the assessee is entitled to the deduction of the entire incentive bonus of Rs. 22,23,518."
2. The present reference relates to the assessment year 1981-82.
3. Brief facts of the case are as follows:
The assessee-respondent (hereinafter referred to as "Assessee") claimed before the Inspecting Assistant Commissioner that it had paid incentive bonus of Rs. 22,23,518/- to its workers and members of the staff. This was in addition to another payment of Rs. 11,31,000/- paid under the Payment of Bonus Act. When enquired about the nature of the payment, it was stated before the Assistant Commissioner that it was incentive bonus representing overtime payment for extra work done by the employees in double shifts. It was also stated that the workers had gone on strike in the assesses mill on 22.01.1980, which was called off only in May, 1981. During the month of December, 1980, some of the loyal workers/employees had agreed to stay in the factory premises. They were provided food as also extra payment as "reward for loyality" compensation for good work and risk involved in their stay in the factory premises." It was because of these extra payment the amount of incentive bonus had gone upto Rs. 6,69,440/- in the month of December, 1980. The I.A.C. Disallowed the claimed with the following observations:-
"20. I have gone through his arguments and also the decision cited by him. Firstly, the payments made to the employees as loan can not be allowed as deduction. Secondly, if the Incentive Bonus is taken to be Bonus, it is not allowable in view of first proviso to Section 36(1)(ii). Lastly, presuming (without accepting) that the payment is covered by second proviso to Section 36(1)(ii) I hold that with reference to the circumstances mentioned therein the payment does not qualify for deduction."
On appeal, it was contended before the Commissioner of Income-tax (Appeals) that the workers were paid since the very inception of the mills a customary amount as production-cum-attendance and efficiency bonus. It was shown to the Commissioner of Income-tax (Appeals) that the following payments had been made in different years:-
4. It was next submitted before him that it was the policy of the management to pay the workmen the advances against the incentive bonus and when pay sheets were finally prepared, the advances under head "Workers Loan Account" were recovered and credited to the Incentive Bonus Account. It was further clarified that the above payments were exempt from Provident Fund and E.S.I., as the payment related only for attendance, efficiency and production. It was also explained that the payment was equal to single wages for extra time put in by the workers. It was further clarified that there was considerable increase in the payment in the month of December, 1980, because of the extra payments made to loyal workers, who had stayed within the mill premises during the period of strike. It was also stated that as a consequence the wages had gone down in the above month. Certain vouchers for payments were also produced before the Commissioner of Income-tax (Appeals). It was found that the thumb impressions of the recipients were similar against several payments. This matter was, therefore, enquired into through the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner reported that the Finger-print expert had confirmed that thumb impressions on the documents had been forged. As a clarification, it was point out to him that sometimes the workers used to authorise their colleagues to receive the payments and that explained the similarity in the thumb impressions. In this connection, the Commissioner of Income-tax (Appeals) also required the Inspecting Assistant Commissioner to examine some of the workers. According to him, a perusal of their statements went to show that they had only selective memory or, in other words, they had come forward only to support the assessee's version. At the instance of the Commissioner of Income-tax (Appeals) it was finally certified by the Joint Managing Director of the assessee that "incentive bonus" was an additional payment made to regular workers for additional work done by such workers mainly during time other than their normal duty hours i.e. in additional time. It was again stated that non-payment/payment of Provident Fund and E.S.I., in no way, rendered the amount as disallowable.
5. The Commissioner of Income-tax (Appeals) observed that the nature of the payment was not clear as the assessee had taken different stands at different stages. At one stage, according to the Commissioner of Income-tax (Appeals), the payment was claimed to be overtime, while at other time, it was stated to be an incentive bonus for efficiency production and attendance. He further held that even the genuineness of the payment was not beyond doubt. In view of these facts, he held that the provisions of Section 145(2) of the Act were applicable to the case. He then examined the actual payment as claimed in the assessment year 1980-81 and in the assessment year 1980-81 and in the assessment year under reference and finally held that on estimate a sum of Rs. 10 lacs required to be disallowed. Thus, he allowed the claim to the extent of Rs. 12,23,518/- only.
6. The above finding of the Commissioner of Income-tax (Appeals) was challenged before the Tribunal both by the assessee and by the department. The assessee challenged the disallowance of Rs. 10 lacs by rejecting its books of account, while the department was aggrieved with the relief of Rs. 12,23,518/- allowed by the Commissioner of Income-tax (Appeals). The Appellate Tribunal dealt with the matter in paragraphs 9 to 17 of its order in the following words and allowed the claim of the assessee in regard to the incentive bonus of Rs. 22,23,518/- in full:-
"9. We have heard the parties at somewhat length, who have supported their counter claims by referring to various decided authorities also. We have already stated above that the first reason for disallowing the assessee's claim by the Inspecting Assistant Commissioner was that the amount had been debited to "Workers Loan Account" and, therefore, it could not be treated as an expenditure deductible under the provisions of the Act. We do not find any substance in this ground. It is not disputed that the amount had finally been debited under the head "Incentive Bonus Account" in the Wages and Salaries. Merely because, at first, an advance was to the workers and subsequently it was transferred to 'Incentive Bonus Account' is no ground to hold that either the payment had not been made or the expenditure had not been incurred. In this connection, reliance was placed by the counsel for the assessee on the decision of Orissa High Court in Kalinga Tubes Ltd. v. C.I.T., 96 I.T.R. 20. It was held in this case that the bonus may be paid in cash or it may be adjusted against the pre-existing loan. The nature and character of bonus was not, in any way, affected merely because the same was not paid in cash but was given by way of adjustment. It was for the management to decide for maintaining peace in an industrial concern whether to pay bonus to the workmen to keep them contended for better production, even though bonus had not been statutorily prescribed. It was not for the Income-tax department to control the management's conduct in paying bonus.
10. The second connection of the Inspecting Assistant Commissioner was that even if it was in the nature of Incentive bonus, it was not allowable in view of the first proviso to Section 36(1)(ii) of the Act. Section 36(1)(ii) of the Act allows deduction for any sum, among others, paid to an employee as bonus in computing an assessee's income from business. The first proviso to this section, however, states 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 apply, shall not exceed the amount of bonus payable under that Act. We have already stated above that the assessee made a separate payment under the Payment of Bonus Act, 1965. In view of this fact, the finding of the Inspecting Assistant Commissioner was that no further payment was permissible under the above proviso.
11. However, we do not find any merit in the stand taken by the Inspecting Assistant Commissioner in view of assessee's alternate contention. We have already stated above that he refused to consider the assessee's claim under the second proviso to Section 36(1)(ii) of the Act merely stating that with reference to the circumstances mentioned therein, the payment did not qualify for deduction. The authorities on the point are unanimous that if a particular payment does not fall within the first proviso, it can still be considered under the second proviso to Section 36(1)(ii) of the Act or even under Section 37(1) of the Act. The first authority on the point is of Supreme Court in Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai and Ors. (1976) 3 S.C.R. 591. It was held in this case that the Bonus Act deals wholly and solely with profit bonus and that it does not cover other types of bonus including customary bonus, nor does not bar their payment. The court held that the fact that certain types of bonus which are attended with peculiarities deserving all special treatment have been expressly saved from the Bonus Act, did not mean that whatever had not been expressly saved, was by necessary implication, included in the Bonus Act. A similar view was taken by the Hon'ble Court in the case of Hukum Chand Jute Mills Ltd. v. Second Industrial Tribunal West Bengal and Ors. (1979) 3 S.C.R. 644. It was held in this case that the Bonus Act, 1965 does not deal with customary bonus and is confined to profit based on productivity based bonus. The provisions of that Act have no say on customary bonus and cannot, therefore, be inconsistent therewith. Consequently statutory bonus and customary bonus operate in two fields and do not clash with each other. In the case of Baidyanath Ayurveda Bhawan Mazdoor Union v. Management of Shri Baidyanath Ayurvedi Bhawan (P) Ltd. (1984) 17 Taxman 19 (S.C.) the Hon'ble Supreme Court held that it was settled that the Payment of Bonus Act deals only with profit bonus and matters connected therewith and does not govern customary, traditional or contractual bonus. There is no categorical provision in the Payment of Bonus Act nullifying all other kinds of bonus, nor does such a conclusion arise by necessary implication. It was held in this case that on the finding of the Tribunal as also the High Court that attendance bonus was being paid from before and it being outside the purview of the Payment of Bonus Act, the High Court was right in vacating the award. In view of the above decisions, it has to hold that if a particular type of bonus does not fall within the first proviso to Section 36(1)(ii) of the Act, it can be considered for allowance under the other provisions of the Act including the second proviso to the above section. Regarding the second proviso to Section 36(1)(ii) of the Act, it was submitted that either of the three conditions required to be satisfied if the deduction was considered thereunder. These conditions are that the amount of the bonus is reasonable with reference to-
(a) the pay of the employee and the conditions of his service;
(b) the profits of the business or profession for the previous year in question: and
(c) the general practice in similar business or profession.
It was contended that the payment was reasonable with reference to the pay of the employees and the conditions of their service, that it was also reasonable with reference to the profit of Rs. 40,31,000/- earned by the assessee after deduction of the incentive bonus in the year under appeal. It was further submitted that the general practice was established from the fact that similar bonus had been allowed by the department in earlier years. In our opinion, in view of these facts, the assessee fully satisfies the conditions laid down in the second provision to Section 36(1)(ii) of the Act and the payment can be considered under this proviso. Even if any of these conditions might not strictly be satisfied, still there will be no justification for disallowing the claim in view of the principle laid down by the Supreme Court in Shahzada Nand and Sons v. C.I.T., 108 ITR 358. It was held in this case that the three factors laid down by the proviso to Section 36(1)(ii) are nor really conditions on the fulfillment of which alone the amount commission (in our case bonus) 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. It may be that one of these factors yields a negative response. The court held that what the proviso requires is merely that the reasonableness of the amount of commission shall be determined with reference to the three factors, but it is well settled that these factors are to be considered from the point of view of normal, prudent businessman. The reasonableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expedience. What is the requirement of commercial expediency must be judged, not in the light of the 19th century laissez, faire doctrine which regarded man as an economic being only to protect and advance his self-interest, but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges, part of it should in all fairness go to the employees. This principle, in our opinion, squarely applies to the present case. The above principle is also supported by another decision of the Supreme Court in Sassoon J. David and Co. P. Ltd. v. C.I.T., 118 ITR 261.
12. Even if the case can be treated as not covered by the second proviso to Section 36(1)(ii) of the Act, the allowance can still be considered under Section 37 of the Act. This was the principle laid down by the Tribunal in the case of I.T.O. v. Arya Vaidya Pharmacy (CBE) Ltd. (1982) 1 I.T.D. 748. It was held in this case that ex gratia payments like incentive wages are by now well recognized in trade circle and because of various trade union activities have become a trade practice. They can not, in all cases, be treated as a camouflage for bonus, so as to circumvent the provisions of the Payment of Bonus Act. These are payments deductible not under Section 36(1)(ii) but under Section 37(1) of the Act. A similar view was taken by the Third Member of the Tribunal in the case of I.T.O. v. Gopalpur Tea Co. Ltd. (1985) 12 I.T.D. 259. It was held that the additional payment made by the assessee was also allowable under Section 37 of the Act. The bar for the consideration of the payment of bonus under Section 37 is to be extent it is allowable under the Payment of Bonus Act. If the payments are other than the three types of payments payable under the above Act, the assessee has got a right to claim deduction under Section 37 if such claim has not been allowed under the second proviso to Section 36(1)(ii).
13. Having dealt with the principles and after holding that the assessee's claim is allowable either under the second proviso to Section 36(1)(ii) or under Section 37(1) of the Act, we have to consider the other objections raised by the Commissioner of Income-tax (Appeals) against the allowability of the claim. He was doubtful about the nature of the claim and its actual disbursement to the workers. We think that the Commissioner of Income-tax (Appeals) actually failed to appreciate the stand of the assessee about the nature of the claim. No doubt at one stage, it was claimed as overtime allowance to the workers, while other times it was claimed as incentive bonus for efficiency, production and attendance. In our opinion, the position is like this. The workers allowed to put in extra time and increase the production by their labour, good attendance and efficiency. For this extra time or overtime, they were paid extra single wages. It was this payment, which was treated as incentive bonus by the assessee. In this connection, we will refer to the certificate issued by U.P. Chamber of Commerce on 24.07.1985 as under:-
"This is to confirm that industries, businesses pay their employees for additional work achieve/done during additional or standard time. This is a normal procedure. The nomenclature of such payment may differ and is known to be termed as Over Time, Extra Time, Productivity Payment, Incentive Bonus, Production Incentive, Ex gratia payment etc. However, the nature of the payment is the same and it forms a part of the cost of production/operation."
It we look at the matter from this angle, the doubt expressed by the Commissioner of Income-tax (Appeals) will disappear. It was also in the nature of customary bonus a similar payments have been made by the assessee to its workers in the earlier years.
14. A word about the analysis of the actual payment will also be necessary. The details of the payments are given in a hart, which we are told, was submitted to the lower authorities also. This chart gives month-wise details of the payments. In the assessment year 1980-81, the total payment amounted to Rs. 12,68,682/-. In the year under appeal, on the other hand, it amounted to Rs. 22,23,518/-. This included Rs. 8,69,440/- in the month of December, 1980 alone. In the earlier year, the payment for December was Rs. 1,57,650/-. Details for the payment of December, 1980 have also been given by the assessee. Besides, the normal payments, they include an additional payment of Rs. 6,00,006/-. It is this amount which needs a little explanation. We have already stated above that it was the case of the assessee that during strike period 775 workers had stayed within the mill premises. Besides the normal wages, they were paid an additional amount equal to twice the normal wages. This was also admitted by the Commissioner of Income-tax (Appeals) in para 32 of his order while making an estimate for the deduction. The details of the above amount are as under:-
Rs.
15. We will now deal with the second doubt of the Commissioner of Income-tax (Appeals) regarding the actual disbursement of the amount. There is overwhelming evidence on record to justify the stand of the assessee that the entire payment had, in fact, been made to the workers. The first is the report of the Chartered Accountant, Price Water house & Co. We quote below from this report:-
"We carried out tests to assess the system of Internal Control in respect of salaries and wages (inclusive of Incentive Bonus) to determine whether they are reliable and according to such tests and the information and explanations given to us, we are of opinion that the Company only pays for employees' services which it requires and has received and no fictious employees are introduced on the payroll and the amounts disbursed to the employees properly relates to the business of the Company.
X X X X X We have attended a Wages & Incentive Bonus pay out of the period 30th July, 1985 to 5th August, 1985 and confirm that during out presence, the recipients or their nominees have proved their identity while receiving payments."
There are also letters from Raza Textiles Labour Union, Rampur and Raza Textiles Mazdoor Sangh stating that there was never any complaint for the non-payment of any amount including bonus by any worker from the management and that some of the workers loyal to the management remained within the premises of the mills during the strike period of 24.11.1980 to 20.1981, who were paid extra wages. The Finger print experts have also not given any categorical statement that there was any forgery in the thumb impressions. This is what Rajendra Prasad, an expert has said:-
"Inspite of the above so many thumb impressions seem to be similar from one another but without photo enlargements scientific and satisfactory opinion can not be given."
Some of the workers also filed affidavits accepting that there was a practice of authorising other co-workers to receive the payments and that the management co-operated in this practice. Some workers were also explained by the Inspecting Assistant Commissioner. No doubt, they were unable to recount the exact instance or the amount received on behalf of the others, but they did certify the prevalence of the practice in the assessee's case. Shri Prem Kumar stated that sometimes he did take his wages personally, while at other times he authorised other worker to take his wages and salary. The other workers also authorised him to take their wages. Similar statements were given by the other workers also.
16. The main stand of the learned Departmental Representative Shri G.N. Srivastava before it was that the assessee had failed to produce either a resolution of the Board of Directors or any office order in support of the above payment of incentive bonus to the workers. In our opinion, there is no merit in this claim. In the first place, none of the authorities below had required the assessee to submit any such document. In the second place, the past practice of the assessee is a pointer to the fact that such payment was made by the assessee and that there was such a practice in the industry as certified by the U.P. Chamber of Commerce.
17. On the basis of the above facts and the legal principles, it is difficult to hold that assessee is not entitled to the deduction of the entire incentive bonus of Rs. 22,23,518. We direct the Inspecting Assistant Commissioner to allow it in full.
7. Heard learned Standing Counsel appearing on behalf of the Revenue.
8. Learned Standing Counsel submitted that in view of the provisions to Section 36(1)(ii) incentive bonus was admissible only to the limit of the bonus payable under the Payment of Bonus Act and the incentive bonus at Rs. 22,23,518/-, which was paid over and above the bonus payable under the Payment of Bonus Act is not allowable and the Tribunal has erred in allowing the deduction of such incentive bonus. In our opinion, submission is devoid of any merit.
9. We have perused the order of Tribunal. Tribunal on the consideration of entire facts and circumstances of the case, held that workers were allowed to put in extra time and increase the production by their labour and efficiency and for this extra time or over time, they were paid extra single wages. It was this payment, which was treated as incentive bonus by the assessee. Question for consideration is that whether the bonus of above nature, which is called as incentive bonus is liable for deduction under the provisions of Section 37(1) of the Act. It is useful to refer Section 36 and 37(1) as they stood at the relevant time:
"Section 36(1) The deduction 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:] Provided further that the amount of the bonus (not being bonus referred to in the first proviso) or commission is reasonable with reference to--
(a) the pay of the employee and the conditions of his service;
(b) the profits of the business or profession of for the previous year in question; and
(c) the general practice in similar business or profession;
Note: (The two proviso of Clause (ii) have been omitted by the Direct Tax Laws (Amendment) Act, 1987 w.e.f. 01.04.1989).
Section 37(1): (1) Any expenditure (not being expenditure of the nature described in Section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".
Explanation: For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure."
10. 36.(1)(ii) covers only bonus paid under the Payment of Bonus Act. Under the Payment of Bonus Act only approved bonus is payable and customary festival attendance or incentive bonus are not covered. (Vide Mumbai Kamagar Sabha v. Abdulbhai Faizullabhai, AIR 1976 SC 1455; Hukumchand Jute Mills Ltd. v. Second Industrial Tribunal, AIR 1979 SC 876; Baidyanath Ayurveda Bhawan Mazdoor Unions v. Management, AIR 1984 SC 457, CIT v. Sivanandha Mills Ltd., 156 ITR 629 (Madras), CIT v. Arya Vaidya Pharmach (CBE) Ltd., 156 ITR 630 (Madras), CIT v. Babcock & Willcox of India ltd., 165 ITR 105 (Cal.). In the case of CIT v. Bhavani Mills Ltd., 1998 (Tax LR 230).
11. Tests for determination of customary or festival bonus have been laid down by the Apex Court in Vegetable Products Ltd. v. Their Workmen, reported in AIR 1965 SC 1499 and Upendra Chandra Chakraborty v. Union Bank of India, reported in AIR 1985 SC 1010 as follows:
"1) that the payment has been made over an unbroken series of years;
2) that it has been paid for a sufficiently long period--the period has to be longer than in the case of an implied term of employment;
3) that it has been paid even in years of loss and did not depend on the earning of profit; and
4) that the payment has been made at a uniform rate throughout"
12. In the case of CIT v. Mettur Chemicals & Industrial Corporation Ltd., reported in Madras High Court held that the customary bonus as well as the amount paid under the agreement entered into with the employees for smooth running of the business without getting embroiled in labour unrest and to avoid friction with the labourers for the efficient running of the business has to be considered under the provisions of Section 37(1) because such payments cannot be regarded as part of the bonus under the Payment of Bonus Act, 1965, and thus falling within the purview of Section 36(1)(ii).
13. In the case of CIT v. Kasturi Mills Ltd., 1998 (Tax LR) 239 Madras High Court held that incentive bonus paid to the employees is liable for deduction under Section 37(1) of the Act.
14. In the case of CIT v. Holman Climax Manufacturing Ltd., reported in 196 ITR 698, Calcutta High Court held that the monthly incentive bonus and the special incentive bonus have been held not to be covered under the Payment of Bonus Act, 1965, as the same were incentive wages and not to be governed by the provisions of Section 36(1)(ii). Therefore, these were held to be permissible as deduction under Section 37.
15. Similar view has been taken by the Calcutta High Court in the case of CIT v. Ujain Pipe & Foundry Co. Ltd., reported in 196 ITR 707 and in the case of CIT v. Sree Kamalkay Tea Co. (P) Ltd., reported in 199 ITR 714. In the case of CIT v. Rahimia Lands & Tea Co. P. Ltd., reported in 197 ITR 310. Calcutta High Court held that Payment of Bonus Act, 1965 does not prevent the payment of additional wages to the employees by the assessee to its workmen as per memorandum of settlement was ex gratia payment does not fall under the purview of the Payment of Bonus Act and would be allowable as a deduction under Section 37 of the Act.
16. In the case of CIT v. Orissa Industries Ltd., reported in 203 ITR 449. Orissa High Court held that production bonus and maintenance bonus are in the nature of incentive wages and allowable as deduction under Section 37(1) of the Act.
17. In the present case, Tribunal has come to the conclusion that workers were allowed to put in extra time and increase the production by their labour, good attendance and efficiency. For this extra time or overtime extra single wages was paid. It was this payment, which was treated as incentive bonus by the assessee. We are of the opinion, that such incentive bonus does not fall within the purview of Payment of Bonus Act and thus it is not covered under Section 36(1)(ii) of the Act. Since the payment was wholly and exclusively for the purpose of business it was liable for deduction under Section 37(1) of the Act. In the circumstances, We do not find any error in the order of the Tribunal and we accordingly, upheld the same.
18. For foregoing reasons the questions referred to us are answered in affirmative, i.e. in favour of assessee and against the Revenue.