SECTION 36 – OTHER DEDUCTIONS

306. Bonus – Employees not covered by Payment of Bonus Act – Whether restriction laid down in the first proviso1 to clause (ii) of sub-section (1) applies to such persons – Bonus paid to such persons whether falls under the second proviso to the said clause

1. Section 29 of the Payment of Bonus (Amendment) Act, 1976 has inserted a new proviso to clause (ii) of sub-section (1) of section 36 and has made an amendment to the existing proviso to the said clause with effect from September 25, 1975.  The newly inserted first proviso to clause (ii) of section 36(1) will apply in relation to bonus paid to an employee employed in a factory or other establishment to which the provisions of the Payment of Bonus Act, 1965 apply.  The term “employee” has been defined in section 2(13) of the Payment of Bonus Act to mean “any person (other than an apprentice) employed on a salary or wage not exceeding Rs. 1,600 per month in any industry to do any skilled or unskilled, manual, supervisory, managerial, administrative, technical or clerical work for hire or reward, whether the terms of employment be express or implied”.  Under this definition, persons drawing a salary or wage exceeding Rs. 1,600 per month and employed in a factory or establishment to which the provisions of the Payment of Bonus Act apply, are not covered by the provisions of that Act relating to compulsory payment of bonus.  In view thereof the restriction laid down in the aforesaid first proviso regarding deduction in respect of  bonus paid to employees covered by the Payment of Bonus Act will not apply in relation to such persons.  Bonus paid to such persons will, therefore, fall under the second proviso to section 36(1)(ii) and its admissibility will be governed by the conditions spelt out in the said proviso.

2. Since the amendment made in section 36(1)(ii) by the Payment of Bonus (Amendment) Act has come into force with effect from September 25,1975, the amended provisions will apply in relation to the assessment year 1976-77 and subsequent years.

Circular : No. 206 [F.  No. 204/64/75-IT(A-II)], dated 9-8-1976.

JUDICIAL ANALYSIS

APPLIED IN – The above circular was referred to and applied in Eisen Pharmaceutical Co. (P.) Ltd. v. ITO [1992] 40 ITD 467 (Pune), with the following observations :

“5. After due consideration of the rival submissions, we are of the opinion that the CIT was not justified in invoking the juris­diction under section 263 and consequently directing the ITO to disallow the excess payment of bonus. Admittedly the six employ­ees to whom bonus of Rs. 12,462 has been paid, are not the em­ployees as per the definition under section 2(13) of the Payment of Bonus Act, 1965. Therefore, the claim of deduction of bonus paid to them requires to be considered only under the second proviso to section 36(1)(ii) of the Income-tax Act, 1961 as clarified by the CBDT in Circular No. 206 dated 9-8-1976. The Board clarified that the persons drawing salary or wage exceeding Rs. 1,600 p.m. and who are employed in a factory or establish­ment to which the provisions of Payment of Bonus Act apply, are not covered by the provisions of that Act relating to compulsory payment of bonus. In view thereof, the restrictions laid down in the aforesaid first proviso regarding the deduction in respect of bonus paid to employees covered by the Payment of Bonus Act will not apply in relation to such persons. The bonus paid to such persons will therefore, fall under the second proviso to section 36(1)(ii ) and its admissibility will be governed by the condi­tions spelt out in the said proviso.

6. In view of this clarification given by the CBDT the CIT is not correct in coming to the conclusion that for the excess pay­ment of bonus only the first proviso is applicable and the second proviso is not applicable. It is to be observed that the Board Circular No. 206 dated 9-8-1976 has contemplated a situation which is applicable to the assessee also, viz., the bonus is paid to employees who are governed by the Payment of Bonus Act as well as those who are not covered by the Payment of Bonus Act but the establishment is one which is governed by the Payment of Bonus Act. Consequently, the CIT was clearly in error in coming to the conclusion that the second proviso to section 36(1)(ii) is not applicable to the assessee’s case and therefore, the entire payment is excess payment of bonus to be disallowed under the first proviso to section 36(1)( ii) of the Act. Even the Circular No. 287 dated 4-12-1980 relied upon by the CIT clarifies that in case of employees covered by the Payment of Bonus Act, 1965, excess payment over the limit prescribed is not permissible under section 37(1) as ex gratia paid in cash or in kind. Even here the CIT is not correct in relying on this circular.” (pp. 469, 470)

REFERRED TO IN –  The above circular was referred to in ITO v. Coimbatore Kamala Mills Ltd. [1984] 20 TTJ (Mad.) 319, with the following observa­tions :

“. . . The CBDT itself has issued a Circular No. 206, dated 9-8-1976 instructing the ITO(s) to allow bonus under the first proviso of section 36(1)(ii) wherever the bonus does not fall within the scope of the Payment of Bonus Act. Since the additional amount was paid under a settlement with the workmen under the auspices of the Government it is not the case of the revenue that any of the conditions prescribed under the first proviso are not met or that the additional bonus was not allowable under that provi­so. Even if the additional payment is not to be considered as a bonus clearly, it is undisputedly paid for the purpose of the business and, therefore, allowable as a business expenditure. Since in any view of the matter, the additional payment was an allowable deduction, we see no reason to interfere with the order of the CIT (Appeals) on this point.” (p. 319).

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