Bonus paid to shareholder-employees remained deductible where it was linked to salary and not treated as disguised dividend.

Bonus paid to shareholder-employees was treated as deductible under section 10(2)(x) of the Indian Income-tax Act, 1922 because the provision applies to bonus or commission paid for services rendered, and its exception depends on whether the sum would otherwise have been payable as profits or dividend. The court construed the allowance strictly in favour of the taxpayer and focused on whether the actual bonus represented an amount that would have reached the employees as profit or dividend absent the bonus payment. As the bonus was linked to salary and not shareholding, the deduction was allowed.

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Issues: Whether the bonus paid to shareholder employees was allowable as a deduction under section 10(2)(x) of the Indian Income-tax Act, 1922.

Analysis: The allowance in section 10(2)(x) covers sums paid to an employee as bonus or commission for services rendered, and the exception turns on whether the sum would otherwise have been payable as profits or dividend. The provision was construed strictly in favour of the taxpayer, and the relevant inquiry was whether the very sum paid as bonus represented an amount that would have reached the employee as profit or dividend in the absence of its payment as bonus. On the facts, the bonus was paid by reference to salary and not to shareholding, and the mere fact that some shareholder employees might, by coincidence, have received an amount comparable to dividends did not bring the payment outside the statutory allowance.

Conclusion: The bonus paid to the shareholder employees was deductible under section 10(2)(x), and the question was answered in the affirmative in favour of the assessee.

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