1. ' K. A. THANIKKACHALAM, J.---In accordance with the direction given by this Court, dated March 23, 1983, the Tribunal referred the following two questions for the opinion of this Court under section 256(2) of the Income Tax Act, 1961, hereinafter referred to as the "Act": "(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the bonus paid was treated as part of the remuneration and not as a bonus out of profits and, therefore, the Payment of Bonus Act has no application to the assessee's case?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the ceiling prescribed under section 36(1)(ii) was not attracted and, therefore, there was no case for disallowance of a part of the bonus payment?"
2. ' The assessee is an individual carrying on business in tanning hides and skins. In the accounts of the previous year ended March 31, 1978, corresponding to the assessment year 1978-79, the assessee had paid a sum of Rs,20,900, to the workmen with the narration that it was bonus paid to them and debited to the wages account. The Income-tax Officer noted that .This bonus was in excess of 20 per cent. Of the salary and assuming that the Payment of Bonus Act did not authorise payment of bonus in excess of 20 per cent. Of the salary, he disallowed a sum of Rs, 16,450, under section 36(1)(ii) of the Act. On appeal, the Commissioner of Income-tax (Appeals) found that the assessee was a Muslim and there was ample evidence of a custom common to Muslim owned businesses to pay small salaries and relatively large amounts as bonus. He was of the view that such customary bonus did not fall within the provisions of the Payment of Bonus Act, as held by the Supreme Court in Hukumachand Jute Mills' case, AIR 1979 SC 876, and he accordingly deleted the disallowance. Aggrieved, the Revenue filed an appeal before the Appellate Tribunal. The assessee filed a statement before the Tribunal showing that the total salary paid for the assessment year was Rs,22,250 and the bonus Rs,20,950, which was similar to the payment of salary of Rs,24,760, and bonus of Rs,24,800 for the assessme nt year 1977-78 and salary of Rs,18,249 and bonus of Rs,15,600 for the assessm ent year 1976-77. The Tribunal, therefore, found that the bonus paid was equivalent to the salary paid. According to the Tribunal, the assessee treated the bonus paid as part of the remuneration and not as bonus out of the profits and that was the practice even in the past. The Tribunal also found that such a mode of payment of remuneration in the form of bonus was customary in the trade and, therefore, the ceiling prescribed under section 36(1)(ii) of the Act was not attracted, since the payment itself was only a remuneration and not bonus at all. Therefore, the Tribunal came to the conclusion that the disallowance as deleted by the Commissioner of Income- tax is in order.
3. ' In the assessm ent year 1978-79, the assessee had paid a sum of Rs,20,900 to the workmen as bonus and debited it to the wages account. According to the Department, since it is bonus payment, it should be allowed as per the provisions contained in section 36(1)(ii) of the Act. Even if this provision is applied, the excess amount of Rs,16,450 over and above 20 per cent. Of the salary has got to be disallowed. The assessee pleaded it is a customary bonus. The assessee filed a statement before the Tribunal showing that the total salary paid for this assessment year was Rs,22,250 and the bonus was Rs,20,950. So also in the assessment year 1977-78 salary was paid to the extent of Rs,24,760 and the bonus was paid to the extent of Rs,24,800.
4. ' In the assessm ent year 1976-77, the salary payment was Rs,18,249 and the bonus was Rs,15,600.
5. According to the Tribunal, the bonus was equivalent to the salary payment. If the bonus is not paid under the Payment of Bonus Act, then the provisions of section 36(1)(ii) of the Act would not apply.
6. If the payment of bonus is customary bonus, then it will go out of the purview of section 36(1)(ii) of the Act.
7. ' According to the Appellate Assistant Commissioner, the assessee is a Muslim and there is a custom among Muslim businessm en to pay less salary and higher bonus.
8. ' The Kerala High Court in CIT v. P. Balakrishna Pillai International Cashew Traders (1990) 182 ITR 449, held that all the three conditions prescribed by clauses (a) to (c) of the second proviso to section 36(1)(ii) of the Income Tax Act, 1961, must be satisfied, if the payment made, in excess of amount allowed by the Payment of Bonus Act, is to be regarded as reasonable within the meaning of section 36(1)(ii) of the Income Tax Act, 1961.
9. ' Again, the Kerala High Court in CIT v. P. Alikunju (M.A.) Nazir, Cashew Industries (1987) 166 ITR 611, held that to say that the second proviso to clause (ii) of section 36(1) of the Act has no application in respect of employees covered under the Bonus Act, and that bonus or commission paid to them in excess of, or otherwise than, what is statutorily required (although reasonable when considered with reference to clauses (a) to (c) of the second proviso) is not deductible under section 36, is to put an artificial construction upon a beneficial provision.
10. ' In Workmen of Kettlewell Bullen & Co. Ltd. v. Kettlewell Bullen & Co. Ltd. (1994) 84 FJR 265; 1994 2 SCC 357, the Supreme Court, while considering payment of customary bonus, held that since there was payment of a uniform rate of 10.5 per cent. Of salary or wages for an unbroken period of nine years from 1965 to 1973, which was a sufficiently long period, the Tribunal could have reasonably drawn an inference that the said payment was customary or traditional bonus on the occasion of pooja festivals.
11. ' In the case of Mumbai Kamgar Sabha v. Abdulbhai Faizulla Bhai (1976) 49 FJR 15; (1976) 3 SCC 832, the Supreme Court held that (at page 32) "the conclusion seems to be fairly clear, unless we strain judicial sympathy contrary wise, that the Bonus Act dealt with only profit bonus and matters connected therewith and did not govern customary, traditional or contractual bonus".
12. ' In Hukumchand Jute Mills Ltd. v. Second Industrial Tribunal (1979) 54 FJR 391, 394; 3 SCC 261, the Supreme Court held that the customary or contractual bonus was excluded for the provisions of the Act and it was laid down "the Bonus Act, 1965, was a complete code, but was confined to profit oriented bonus only. Other kinds of bonus have flourished in Indian industrial law and have been left uncovered by the Bonus Act. The legislative universe spanned by the said statute cannot, therefore, affect the rights and obligations belonging to a different world or claims and conditions".
13. In the abovesaid decision, it was further held that (at page 395): "Section 17 of the Bonus Act in express terms refers to Pooja bonus and other customary bonus as available for deduction from the bonus payable under the Act, thus making a clear distinction between the bonus payable under the Act and Pooja bonus or other customary bonus. So long as this section remains without amendment, the inference is clear that the categories covered by the Act, as amended, did not deal with customary bonus".
14. ' According to learned standing counsel appearing for the Department, the Tribunal has not considered the second proviso to section 36(1)(ii) of the Income Tax Act, 1961. The second proviso prescribes three conditions in order to allow the bonus payment as customary bonus. In order to allow the bonus as customary bonus, we have to look into the pay of the employee and the conditions of his service, the profits of the business or profession for the previous year in question and the general practice in similar business or profession. In the present case, the Tribunal recorded a finding that the assessee is a Muslim and Muslim traders used to pay more bonus than salary. It was also found that in the previous years the assessee was paying bonus almost equal to the salary. Therefore, there is a practice in payment of customary bonus in the earlier years. The total bonus paid in this assessm ent year was Rs,20,950 and the salary paid was Rs,22,250. Even if the provision of section 36(1)(ii) of the Act is applied the excess comes to Rs,16,450. Considering the nature of the business, the amount of bonus paid in the previous year and the amount of bonus paid in the assessm ent year under consideration in relation to the salary paid, we are of the opinion that the assessee satisfied the conditions prescribed under the second proviso to section 36(1)(ii) of the Act. Under such circumstances, we consider that there is no infirmity in the order passed by the Tribunal in allowing the excess amount of Rs,16,450, treating the same as part of customary bonus.
15. ' In that view of the matter, we answer the questions referred to us in the affirmative and against the Department. No costs.