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C.I.T. versus M/S C.S.CO. LTD.

High Court of Judicature at Allahabad

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C.I.T. v. M/S C.S.Co. Ltd. - INCOME TAX REFERENCE No. 20 of 1990 [2005] RD-AH 404 (14 February 2005)


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I.T.R.20 of 1990


Commissioner of Income Tax, Kanpur Vs. M/s.

Champaran Sugar Co. Ltd. Kanpur.


Hon'ble R.K.Agarwal, J.

Hon'ble Prakash Krishna, J.

(Delivered by Hon.P.Krishna, J)

The Income Tax Appellate Tribunal, Allahabad has referred the following question of law under section 256 (1) of the Income Tax Act, 1961 ( here in after referred to as the Act) for 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 Payment of Bonus Act, 1965 is an admissible expenditure" under the Income-tax Act.?"

Briefly stated the facts giving rise to the present case are as follows:-

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 30th September,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.

Heard Shri Shambhu Chopra, the learned standing counsel for the department and Shri R.S. Agrawal for the assessee.  The 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 was no profits of the business. The Tribunal without looking to the para meters 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 the learned counsel on a judgment of the Supreme Court in the case of Shahjada Nand and Sons  vs. C.I.T.  (1977) 108 ITR 358. In contra, the learned counsel for the respondent assessee submitted that reasonableness of the payment of  bonus is to be determined with reference to the principle of commercial expendiency 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 vs. Lakshmi Mills Co. Limited  (1977) 204 ITR 81.

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  &  Sons  Vs. CIT (1977) 108 ITR 358. The relevant paragraph is quoted below:-

"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.

The Tribunal after noticing the aforesaid three factors, straightway 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 there is  any thing 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 expendiency. In the case of CIT vs. Lakshmi  Mills Co. Limited (supra) the Tribunal had recorded a finding that there was a memorandum of the settlement arrived under section 12 (3) of the Industrial Disputes Act between the assessee and the trade union of the assessee. In the memorandum of the 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 expendiency. 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 any way, due to the commercial expendiency. Thus the payment of Rs.24,674/- cannot be regarded as admissible expenditure under the Act.  

In view of the above discussion we answer the question referred to us  in negative i.e. in favour of the Department and against the assessee. However, no order as to costs.

Dt.February 14,2005



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