Law:

Section:

Section 37(1), read with section 36(1)(ii), of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1976-77 - Whether ex gratia payment made to workers in terms of a settlement to keep good relations with workers, in excess of limitation provided under Payment of Bonus Act, 1965, is an allowable expenditure under section 37(1) - Held, yes Section 36(1)(ii) of the Income-tax Act, 1961 - Bonus - Allowability of - Assessment year 1976-77 - Whether in a case where Tribunal finds that all three conditions laid down in second proviso to section 36(1)(ii) are satisfied, bonus paid to employees in excess of limits under Bonus Act is allowable as deduction under section 36(1)(ii) - Held, yes FACTS The assessee-company was engaged in the business of manufacturing pharmaceutical and industrial gelatin. For the year relevant to the assessment year 1976-77, in addition to bonus at 8.33 per cent it paid additional sum of Rs. 74,206 to its employees by way of ex gratia payment calculated at 8.17 per cent. The ITO refused to allow deduction in respect of the said sum of Rs. 74,206 claimed as business expenditure. On appeal, the Commissioner (Appeals) held that the additional payment of Rs. 74,206 being in excess of the amount of bonus payable under the Payment of Bonus Act, 1965, the same was not allowable as a business expenditure. On further appeal before the Tribunal, reference was made to a memorandum of settlement executed between the assessee-company and its employees under which the said sum was agreed to be paid by way of ex gratia in addition to the minimum bonus payable at 8.33 per cent under the provisions of the Payment of Bonus Act. The Tribunal observed that the additional payment calculated at 8.17 per cent was made by the assessee-company to its employees only to keep good relations with its workers, to buy industrial peace and save the industry from strikes and lock-outs. This was customary and in consonance with the commercial practice adopted by others and, therefore, the payment of such bonus was clearly saved by the second proviso to section 36(1)(ii). Referring to an alternative submission of the assessee-company, the…

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