Case Note & Summary
The appellant, Indian Express Newspapers (Bombay) Ltd., engaged in printing and publishing, filed an appeal against the order of the Income Tax Appellate Tribunal (ITAT) dated 8th April 2002 for Assessment Year 1987-88. The Assessing Officer had made three disallowances: (a) provision for additional salary and wages of Rs.17 lakhs arising from the Justice Palekar Award for the period 1st January 1986 to 30th June 1986, based on a Memorandum of Settlement signed on 8th May 1987; (b) exgratia bonus of Rs.16,28,258 paid over and above the eligible bonus under the Payment of Bonus Act; and (c) bad debts written off of Rs.13,65,300. The Commissioner of Income Tax (Appeals) deleted all disallowances, but the Revenue appealed to the ITAT, which restored the Assessing Officer's order. The present appeal challenged only the first two disallowances. The High Court framed two substantial questions of law: (1) whether the liability for salary and wages under the Palekar Award is allowable in the present year or only in the year of settlement; and (2) whether exgratia bonus is allowable under Section 37(1) of the Income Tax Act. The Court noted that the ITAT had given a cryptic order without proper reasoning. On the first issue, the Court held that the liability accrued in the assessment year 1987-88 because the award was made and the amount was quantified, and the subsequent settlement merely implemented the award. On the second issue, the Court held that exgratia bonus paid for commercial expediency is allowable as business expenditure under Section 37(1). The Court allowed the appeal, set aside the ITAT order, and restored the CIT(A)'s order allowing the deductions.
Headnote
A) Income Tax - Allowability of Expenditure - Accrual of Liability - Section 37(1) of Income Tax Act, 1961 - The assessee claimed deduction for provision of additional salary and wages arising from Justice Palekar Award for period 1st January 1986 to 30th June 1986. The Assessing Officer disallowed it, but CIT(A) allowed it. ITAT restored AO's order. The High Court held that the liability accrued in the relevant assessment year as the award was made and the amount was quantified, and the subsequent settlement only implemented the award. Therefore, the deduction is allowable in the assessment year 1987-88. (Paras 1-5) B) Income Tax - Allowability of Expenditure - Exgratia Bonus - Section 37(1) of Income Tax Act, 1961 - The assessee paid exgratia bonus of Rs.16,28,258 over and above the eligible bonus under the Payment of Bonus Act, 1965. The Assessing Officer disallowed it, CIT(A) allowed, ITAT restored AO's order. The High Court held that exgratia bonus paid to employees for commercial expediency is allowable as business expenditure under Section 37(1) as it was incurred wholly and exclusively for the purpose of business. (Paras 1-5)
Issue of Consideration
Whether the liability for salary and wages arising out of the Justice Palekar Award is allowable as expenditure in the present year or only in the year of settlement; and whether exgratia bonus paid over and above the eligible bonus under the Payment of Bonus Act is allowable under Section 37(1) of the Income Tax Act, 1961.
Final Decision
Appeal allowed. ITAT order set aside. CIT(A) order restored. The provision for additional salary and wages of Rs.17 lakhs and exgratia bonus of Rs.16,28,258 are allowable as deductions.
Law Points
- Accrual of liability
- Allowability of expenditure under Section 37(1) of Income Tax Act
- 1961
- Provision for salary and wages
- Exgratia bonus
- Payment of Bonus Act
- 1965
