Tax Deductions Reaffirmed: Court Rules in Favor of Salary Liabilities and Exgratia Bonus.


08 March 2024 Income Tax >> Tax Laws   |   Unpaid salary/bonus/gratuity >> Workplace/ Professional Related  

This case of Indian Express Newspapers (Bombay) Ltd. v/s The Commissioner of Income Tax, Mumbai City I, Mumbai., concerns the disallowance of certain expenditures by the Assessing Officer during the assessment of the appellant, a business engaged in printing and publishing newspapers and periodicals, for the Assessment Year 1987-88. The issues revolve around two main points of dispute:
Liability for Salary and Wages: The Assessing Officer disallowed a provision for salary and wages amounting to Rs. 17 lakhs, arising from the Justice Palekar Award, on the grounds that the memorandum of settlement between the management and employees was signed after the close of the accounting year. The Assessing Officer argued that the liability could not be recognized in the current year and should be claimed in the year when the settlement was signed. The Commissioner of Income Tax (Appeals) (CIT(A)) allowed the deduction, but the Income Tax Appellate Tribunal (ITAT) reversed this decision, citing the need for the liability to be "ascertained" before being recognized as an expense.

 

 

Exgratia Bonus: The Assessing Officer also disallowed an exgratia bonus of Rs. 16,28,258 paid to employees in excess of the statutory bonus under the Payment of Bonus Act, arguing that it was not an allowable deduction. CIT(A) allowed the deduction under Section 37(1), but ITAT restored the Assessing Officer’s disallowance, citing the jurisdictional High Court’s ruling in a prior case that payments over and above the prescribed bonus were not deductible.

Upon appeal, the High Court examined both issues. For the first issue, it relied on prior rulings that held the liability for salary and wages, though arising from a post-year agreement, should be allowed as a deduction in the year when services were rendered. The Court rejected ITAT's reasoning, affirming the CIT(A)'s decision to allow the deduction. Similarly, on the second issue, the Court agreed with the CIT(A)'s ruling that exgratia bonus payments beyond the statutory limit were allowable as business expenses under Section 37(1), contrary to the ITAT's decision.

In conclusion, the High Court ruled in favor of the assessee, holding that both the liability for salary and wages arising from the Justice Palekar Award and the exgratia bonus were allowable as deductions for the Assessment Year 1987-88. The appeal was disposed of accordingly.

  

Payment of Bonus Act, 1965    

Income Tax Act, 1961