Where incentive bonus had been paid as a reward of good attendance and efficiency to the workers, it is deductible under Section 37

ALLAHABAD HIGH COURT

No.- Income Tax Appeal No. 418 of 2006

The Commissioner of Income Tax, Bareilly And Another...........................Petitioner
Verses
M/s Kisan Sahkari Chini Mills Ltd..............................................................Respondent

Hon'ble Pankaj Mithal And Hon'ble Umesh Chandra Tripathi, JJ.

Date :July 27, 2017

Appearances

For the Appellant: Manish Goel
For the Respondent : Shakeel Ahmad

Section 37 of the Income Tax Act, 1961 — Business Expenditure — Where incentive bonus had been paid as a reward of good attendance and efficiency to the workers, it is deductible under Section 37.
Facts: Being aggrieved of the order of Tribunal, Revenue went on appeal before High Court and raised the question of law that (i) "Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in deleting the disallowance, in respect of production incentive bonus amounting to Rs. 8,13,316 ? And (ii) Whether on the facts and in the circumstances of the case, the Tribunal is justified in deleting the disallowance of guest house expenses in view of the provisions of Section 37(4) of the Income Tax Act, 1961?
Held, that (i) where incentive bonus had been paid as a reward of good attendance and efficiency to the workers, it is deductible under Section 37. Therefore, the Tribunal has not erred in allowing deduction in respect of the incentive bonus in the present case. (ii) Admittedly the expenditure incurred in respect of the guest house is after the above cut of date and as such no allowance is available under Section 37 in respect thereof. The Tribunal has not considered the effect of subsection (4) of Section 37 while confirming the allowance of the guest house expenditure. It was held that any expenditure incurred by the assessee in respect of guest house after 28.02.1970 shall not be allowable.

ORDER

The appeal is directed against the order of the Income Tax Appellate Tribunal [ITAT] dated 31.03.2006 in respect of the Assessment Year Commissioner of Income Tax Vs. Bannari Amman Sugars Ltd. [2012] 349 ITR 708 (SC) 1997-1998.

The following three substantial questions of law have been raised in this appeal.

1. "Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in deleting the disallowance, in respect of production incentive bonus amounting to Rs. 8,13,316?

2. Whether on the facts land in the circumstances of the case, the Tribunal is justified in deleting the disallowance of guest house expenses in view of the provisions of Section 37(4) of the Income Tax Act, 1961?

3. Whether on the facts and in the circumstances of the case, the Tribunal is justified in deleting the addition made by the A.O. amounting to Rs. 1,86,28,389/- on account of under valuation of closing stock?"

We have heard Shri Manish Goel and Shri Shakeel Ahmad learned counsel for the parties.
They agree that aforesaid questions no. 1 and 3 are settled by the earlier decisions of the court of law.

Question No. 1 is with regard to production incentive bonus. A Division Bench of this Court in Commissioner of Income Tax Vs. Raza Textiles Ltd. (2006) 281 ITR 229 (All) has held that where incentive bonus had been paid as a reward of good attendance and efficiency to the workers, it is deductible under Section 37 of the Act. Therefore, the Tribunal has not erred in allowing deduction in respect of the incentive bonus in the present case.

Question No. 3 has been answered by the Supreme Court in the case of Commissioner of Income Tax Vs. Bannari Amman Sugars Ltd. [2012] 349 ITR 708 (SC). It has been held that the stock of incentive sugar has to be valued on the levy price and not the cost price.

In view of the above, the deletion allowed by the Tribunal in this regard is justified.

Now the only question which is left to be answered is as to whether Tribunal is justified in deleting the disallowance of guest house expenses under Section 37 of the Act.

It appears that the respondent - assessee claimed guest house expenses to the tune of Rs. 83,161/-, Rs. 10,000/- and Rs. 51,000/- total amount of Rs. 1,44,161/- which have been disallowed by the Assessing Authority. However, CIT (Appeals) accepted the claim. The Tribunal has affirmed the order of the CIT(Appeal) in this regard.

The argument is that in view of subsection (4) of section 37 of the Act which stood at the relevant time all expenses incurred by the assessee on any accommodation of the nature of the guest house after 28.02.1970 are not allowable.
Subsection (4) of Section 37 of the Act as it existed reads as under:-
" 67 (4) Notwithstanding anything contained in sub-section (1) or sub-section (3),-

(i) no allowance shall be made in respect of any expenditure incurred by the assessee after the 28th day of February, 1970, on the maintenance of any residential accommodation in the nature of a guest-house (such residential accommodation being hereafter in this sub-section referred to as "guest-house");

(ii) in relation to the assessment year commencing on the 1st day of April, 1970, or any subsequent assessment year, no allowance shall be made in respect of depreciation of any building used as a guest-house or depreciation of any assets in a guest-house:

Provided that............
Provided further ................"
The aforesaid provision is clear enough and leaves no scope of any ambiguity. It clearly lays down that no allowance is permissible in respect of any expenditure incurred in respect of any accommodation in the nature of guest house after 28.02.1970.

In the present case, admittedly the expenditure incurred in respect of the guest house is after the above cut of date and as such no allowance is available under Section 37 in respect thereof.

The Tribunal has not considered the effect of subsection (4) of Section 37 while confirming the allowance of the guest house expenditure.

In view of the above, we answer the question no. 2 in favour of the department and against the assessee and holds that any expenditure incurred by the assessee in respect of guest house after 28.02.1970 shall not be allowable.

The reference stands answered as above and appeal stands disposed of as above.

In favour of department.

[2017] 43 ITCD 81 (ALL)