Deductibility of bonus to senior staff depends on reasonableness, settled practice and commercial expediency, not mere lack of profit.

Bonus paid to senior staff not entitled to bonus under the Payment of Bonus Act was examined for deduction under section 36(1)(ii) of the Income-tax Act. The payment is allowable only if its reasonableness is established on relevant factual factors, including employee service conditions, settled practice, and commercial expediency. A mere absence of business profit does not by itself make the payment reasonable or deductible. On the stated facts, the bonus payment was treated as not admissible as expenditure, because there was no finding supporting commercial expediency or a consistent practice of such payment.

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Issues: Whether bonus paid to senior staff who were not entitled to bonus under the Payment of Bonus Act was an admissible expenditure under section 36(1)(ii) of the Income-tax Act, 1961.

Analysis: The question of reasonableness under section 36(1)(ii) had to be assessed with reference to the factors indicated by the Supreme Court, including the relevant circumstances of the payment and the service conditions of the employees. The Tribunal did not record findings on those factors and proceeded mainly on the basis that absence of business profit by itself would not make the payment unreasonable. There was no material showing any settled practice of paying such bonus to senior staff, nor any finding that the payment was dictated by commercial expediency. On the facts, the payment could not be treated as justified merely because it was described as bonus.

Conclusion: The payment of Rs. 24,674 was not an admissible expenditure under the Act and the answer to the referred question was in the negative, in favour of the Revenue and against the assessee.

Ratio Decidendi: Deduction for bonus or similar employee payment under section 36(1)(ii) is allowable only when its reasonableness is established on relevant factual factors and commercial expediency; the mere absence of business profit does not by itself justify the claim.

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