Matter of Bonus Payments

SOME PROCEDURAL DIFFICULTIES IN THE MATTER OF PAYMENT OF BONUS FOR THE YEAR 2007-08 (FINANCIAL YEAR) AND PRACTICAL SOLUTIONS ARE DISCUSSED IN THIS ARTICLE.

An issue was brought to light in the discussion table of Tax Forum that with the advent of the advanced due date viz. 30th of September for filing of returns by all entities who are subjected to Tax Audit as laid down under section 44AB, there are certain practical difficulties in the matter of charging the Payment of Bonus to employees covered under the Payment of Bonus Act. The difficulties visualized are that under normal circumstances, it has been the convention of Corporate entities to pay Bonus at or upon the exact festivity which mostly happens to be Deepavali in our country. This year, actually Deepavali festival falls on 29.10.2008. Up to last year, the due date for filing of Tax Audit Reports and returns was up to 31st October. Under normal circumstances any expenditure is charged to revenue during the financial year itself. However since Bonus payment is an issue to be decided only on arriving at the actual profits available for such consideration; besides, a decision has to be taken on the extent of Bonus payable according to situation occurring in each year, the same cannot be charged as a normal expenditure. By virtue of the provisions of section 43B of the Income-tax Act, if the payment is made before the due date for filing of the return, the expenditure in question would be admissible as a deduction, being a charge on the profits of the year.

Since during the year in currency, the festivity Deepavali falls a month beyond the due date for filing of the return, in order to claim the deduction, there is a suggestion that a provision could be made in the accounts. Or conversely, instead of making payment under the nomenclature of Bonus, certain adhoc payments in the form of ex-gratia award could be considered. In this back ground, what is the impact on the entrepreneur, is being analyzed in this article.

It has also been expressed by many entities that normally, Bonus is being paid for a specific, festival and in this case for Deepavali. The concern of the institutions is that the provisions of section 43B is so scathing that unless the payment is made within the time allowed under section 139(1), of the Income-tax Act, it shall not be allowed as a deduction. The lurking anguish is that in the current year, Deepavali falling beyond the due date, laid down for filing the return viz. during October,08, it could be that the claim for Bonus, in the form of provision would perforce be disallowed,( as the payment cannot be made before 30th September,08) entailing in huge liability, by way of tax and attendant interest levies. The suggestion of the Managers is that we can style the payment as “adhoc” or “ex-gratia”and charge to the running account, in which case the difficulty could be overcome.

Section43B, which is a "non-obstente" provision, says, interalia, that “Any sum referred to in clause (ii) of sub section (1) of section 36..” shall be allowed (irrespective of the previous year in which the liability pay such sum was incurred by the assessee according to the method of accounting regularly employed by6 him) only in computing the income referred to in section 28 of that previous year in which such payment was actually paid.”

The above position makes it clear that unless the Bonus which is the issue in question is paid within the previous year or extended time of the due date for filing of the return of income, the same shall not be allowed. But would be allowed irrespective of the previous year to which it relates, in the year in which it is actually paid, no matter whether it relates to a different year or is not a charge on the profits of the year, in which the payment was actually made..

Now coming to the Payment of Bonus Act, it only envisages payment of Bonus to employees, upon their eligibility from out of the income earned during the previous year. This provision does not postulate any condition that it ought to be paid only during any specific festivity or time. It merely provides for payment according to the capacity and eligibility from out of the profits earned during the previous year. Over a period of time, we have adopted a convention by which we have been adopting a standard method of paying Bonus during Deepavali, which is predominantly the festival largely celebrated by the citizens of our country. The Managers have voiced their concern that since the Deepavali festivity actually falls beyond the due date for filing the return, payment made subsequently would entail in sizable liability. Such anguish is true and well reasoned. However, in order to over come the dis allowance, it is suggested that the Bonus can be paid well before the festivity to time before the due date for filing the return. There is absolutely no rigid rule or principle that a change in the procedure ought not to be effected.

To illustrate a few examples, it may be recalled that the Banks were adopting earlier the calendar year as the previous year. Similarly Income-tax payers were adopting different periods as their previous year such as “Samvath Year”. Deepavali year, "Vijayadasami year" “Tamil New Year”, “Yugadhi year”.. etc., But the legislature, however, by a stroke of pen ruled that hence forth the previous year for the purpose of finalizing accounts shall only be the financial year commencing from 1st of April and ending on the 31st day of March. The principle is that Bonus has to be paid for loyalty in service which has generated to the growth of the institution and earning of income. Such recognition can be made any time after the accounts are finalized and the real profits ascertained. It does not mean that the bonus should be so timed to suit any specific festivity. In view of the anomalous situation, there is nothing improper in adopting in this method. Besides, this is the only institution where regular method of payment of Bonus is being followed as per note of the Mangers who run the institution, while other governmental agencies are merely following the adhoc method.

The suggestion to switch over to adhoc method would not be recognized, as such a proposition is not being followed, as the system of maintenance of accounts and the method of accounting f, there is a possibility of the same being disallowed, as it is not a change on the income of the year. The only exceptional provision is section 43B which provides for deduction irrespective of the year of accrual, but the material yardstick is the date of payment. We cannot all of a sudden switch on to the new procedure, (to circumvent dis allowance) as it is likely to entail in procedural wrangles, besides involving the institution in litigation, which may take years to settle.

In this view of the matter, considering the back ground as projected in the detailed note, it is opined, that there is nothing improper in paying the Bonus before the due date for filing of the return. If it is not done dis allowance under section 43B is certain with additional tax liability, which cannot be mitigated later, especially the interest component. Added to that, the change in the procedure would not upset the apple cart of the institution, as it is not a shift in the policy of the affecting or impacting all institutions since payment of bonus is being systematically followed as per working conditions of employees. If, however we attempt to change the system by adopting adhoc or ex-gratia payment, it would be in conflict with the accounting method followed. This apart, there is every possibility that the payment shall be disallowed, as any deduction be it under section 36 or 37 are aimed at the current profits only. Hence if we charge the bonus of the earlier year, under the garb of ex-gratia payment, the stigma of “not laid out for the purpose of earning the current income” shall be applied. Further, being corporate entities we cannot shift our stand in the matter of accounting principles for the sake of a simple issue. Hence the alternate route of adopting ex-gratia payment and charging to the current profits is not desirable.

In this situation, the entities may appraise their respective Board of the urgent need to pay Bonus before the 30th September and obtain sanction, which would be perfectly within the 4 corners of law in all respects, both from the point of Payment of Bonus Act, Conditions of employment governing the employees as also the provisions of the Income-tax Act. No provision can be made in the accounts towards payment of Bonus, as any provision is perforce inadmissible, other than in cases of specific financial institutions and that too in the form of reserves.

Finally, as an alternative, it can also be considered that the entire Bonus be credited to each individual employee’s account with the condition that it shall be drawn only on or after the cut off date for the festivity. By this method, the money also goes out of the pockets of the entrepreneur and at the same time, in keeping with the convention being followed over a period of time, that it would be available for a specific festivity. This could also over come any future situation in which for each year, the date of festivity may vary and every year a new method cannot be adopted. If this is once credited, I could well suit for any future contingency.