Exgratia Bonus Paid By Indian Express To Employees Over And Above Eligible Bonus Is Allowable As Business Expenditure: Bombay High Court

The Bombay High Court has held that exgratia bonuses paid to employees over and above the eligible bonus under the Payment of Bonus Act are allowable as business expenditures.

The bench of Justice K. R. Shriram and Justice Dr. Neela Gokhale has observed that the ITAT was not right in law in holding that the liability for salary and wages arising out of the Justice Palekar Award is not allowable as expenditure in the present year but only in the year in which the agreement between the management and the employees is entered into.

The appellant/assessee, Indian Express, is in the business of printing and publishing newspapers and periodicals. The AO Assessing Officer disallowances in respect of the provision for additional salary and wages amounting to Rs. 17 lakhs arising out of the Justice Palekar Award for the period 1st January 1986 to 30th June 1986 on the basis of the Memorandum of Settlement between the management and the employees signed on 8th May 1987. The AO has disallowed the exgratia bonus paid amounting to Rs. 16,28,258 over and above the eligible bonus under the Payment of Bonus Act.

The assessee challenged the order before the Commissioner of Income Tax (Appeals), who deleted the disallowances and allowed the amount as a deduction in computing the assessee's income. The department impugned the order of the CIT (A) before the Income Tax Appellate Tribunal (ITAT), which set aside the findings of the CIT (A) and restored those of the Assessing Officer.

The assessee challenged the order passed by the ITAT. The ITAT held that the exgratia payment in excess of the limit prescribed under the Payment of Bonus Act, 1965, either under Section 36(1)(ii) or Section 37(1) of the Act, was not allowable as a business expenditure.

The assessee contended that the ITAT, in four lines, set aside the order of the CIT(A) and restored that of the Assessing Officer by simply saying, “On consideration of the arguments advanced by the representatives of the parties, we hold that the findings of the CIT(A) are contrary to the decision of the jurisdictional High Court in CIT vs. Rajaram Bandekar & Sons (Shipping) Pvt. Ltd. 237 ITR 628 (Bom.)”.

In the case of CIT vs. Rajaram Bandekar & Sons (Shipping) Pvt. Ltd., it was held that it is not open to the assessee to contend that the deduction in respect of the bonus paid to the employees for the services rendered can be claimed under Section 37(1) of the Act.

The court relied on the decision in Commissioner of Income Tax v. Maina Ore Transport P. Ltd., a Division Bench of this Court; after that, the Tribunal was justified in holding that the exgratia payment in excess of the limit prescribed under the Payment of Bonus Act, 1965, either under Section 36(1)(ii) or Section 37(1) of the Act, was allowable as a business expenditure. The Court also held that the Tribunal was justified in holding that the exgratia amount paid over and above the amount paid in accordance with the Bonus Act was an allowable expenditure, although the payment did not cover contractual or customary payment, considering Rajaram Bandekar & Sons (Shipping) Pvt. Ltd.

The court held that the ITAT was not right in law in holding that exgratia bonuses paid to employees over and above the eligible bonus under the Payment of Bonus Act are not allowable as expenditures under Section 37(1) of the Act.

Counsel For Appellant: Sukhsagar Sayal

Counsel For Respondent: P.C. Chhotaray

Case Title: Indian Express Newspapers (Bombay) Ltd. Versus CIT

Case No.: Income Tax Appeal No.1 Of 2003

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