- (1.) We have heard Sri R.K. Upadhyay for the department. Sri Shakeel Ahmad appears for the respondent-assessee.
(2.) The Income Tax Appellate Tribunal, Allahabad has referred the following, two questions of law under section 256 (1) of the Income Tax Act, 1961 (the Act), for opinion to this Court. "1. Whether on the facts and in the circumstances of the case, the learned Tribunal was legally correct in holding that the incentive of Rs.2,10,67,677/- received by the assessee by way of additional quota for free sale sugar which is directly connected with the business activities of the assessee, was on capital account and hence not taxable as a revenue receipt 2. Whether on the facts and in the circumstances of the case, the learned ITAT was legally correct in deleting the dis-allowance of Rs. 13,98,899/- made u/s 43B in respect of unpaid production incentive bonus covered under section 36 (i) (ii) of the I.T. Act
(3.) Brief facts, as stated in the reference are as follows:- "The assessee is a cooperative society engaged in the business of manufacture and sale of sugar. For the year ending 31st March, 1990, relevant to the assessment year 1990-91, it filed its return on 16.10.1990, declaring a loss of Rs.4,00,64,360/-. In the profit & loss account total sales were shown at Rs.15,20,83,667/- which included an amount of Rs.2,10,67,677/- received as 'incentive earned from sale of sugar'. The assessee gets this incentive by way of additional free sugar quota wherein excise duty is leviable at a reduced rate but the sugar is available for being sold at the market price. The resultant benefit is required to be used for repayment of term loans obtained from financial institutions for setting up the plant and other capital expenses in due time. This incentive scheme is based on the recommendation of the Sampat Committee report. While in the accounts, the above receipt on account of incentive was treated as revenue receipt and formed part of the sales, in appeal, filed before the C.I.T.(A) on other grounds, an additional ground was raised that the Assessing Officer had erred in facts and in law in not treating the sum of Rs.2,10,67,677/- being the incentive received under the 'Sampat Incentive Scheme' by way of additional from sale sugar quota as a capital receipt in the hands of the assessee. The C.I.T.(A) obtained a report from the Assessing Officer on the above issue who objected to the admission of the fresh grounds. However, C.I.T.(A) admitted the fresh ground. After adjudicating the issue on merits, vide paras 4 and 5 of his order dated 9.2.94, the C.I.T.(A) rejected the objection of the assessee by observing that the benefit received by the assessee under the Sampat Scheme was in the nature of revenue receipt as it had not been received to meet out the capital cost. Aggrieved by the order of C.I.T.(A) the assessee filed an appeal before the Income Tax Appellate Tribunal. The Income Tax Appellate Tribunal has held that the said incentive received by the assessee was on capital account and that it was not taxable as a revenue receipt. In the assessment proceedings, while examining the accounts, the Assessing Officer noticed that the assessee had debited to the Profit and Loss account a sum of Rs.17,80,342/- on account of production incentive bonus. Out of this amount a sum of Rs.13,98,899/- remained upheld at the end of the year. The assessee contended that production incentive bonus has been paid by the Mill Society in accordance with the special scheme promulgated by the U.P. Cooperative Sugar Factory Federation Ltd. Lucknow under the power conferred to it under section 123 of the U.P. Cooperative Society Act and is paid for improved productivity and achievement of various production efficiency targets irrespective of profit of the industrial undertaking. It was also argued that the expenditure should be allowed under section 37(1) as having been incurred wholly and exclusively for the purpose of business. The Assessing Officer did not accept the assessee's arguments and was of the opinion that the payments covered under section 36(i) (ii) of the Income Tax Act and the unpaid excess provision amounting to Rs.13,98,899/- was added to the income of the assessee. In appeal, the C.I.T.(A) observed that the incentive bonus was to be paid in the case only after the verification and approval from the U.P. Cooperative Sugar Factories Federation which had not been obtained and, therefore, the liability for payment of bonus had not crystallized during the relevant previous year. The C.I.T.(A) held that the deduction could not be allowed to the assessee to the extent of unpaid incentive bonus and accordingly, confirmed the said disallowance. Feeling aggrieved by the order of the C.I.T.(A), the assessee preferred appeal before the Tribunal. The Tribunal held that the amount in question was productivity linked bonus, was relating to the business and has been allowed earlier in the case of assessee itself. The issue was, therefore, decided in favour of the assessee. On the question of bonus, the department's view is that payment being specifically covered under section 36 (i) (ii), provisions of Section 37 were not applicable and the unpaid bonus was obviously disallowed in view of clause (c) of Section 43-B read with section 36(i)(ii) of the Income Tax Act, which permits deduction of bonus only on actual payment basis.";