Employee settlement payment distinct from bonus was deductible as business expenditure on commercial expediency grounds.

An additional payment made to employees under a settlement was treated as distinct from statutory bonus because it was linked to better performance and smooth working of the mills, not as bonus in substance. On that basis, section 36 of the Income-tax Act, 1961 did not apply, and the expenditure was allowable under section 37 when incurred wholly and exclusively for business purposes. The Tribunal's finding of commercial expediency was accepted, and the payment was held deductible as a business expense.

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Issues: Whether the additional amount paid to employees under a settlement, over and above statutory bonus, was deductible as business expenditure under section 37 of the Income-tax Act, 1961, or was to be treated as bonus governed by section 36 of that Act.

Analysis: The settlement under section 12(3) of the Industrial Disputes Act, 1947, showed a clear distinction between statutory bonus and an additional payment made in consideration of better performance and smooth working of the mills. The excess amount paid over the statutory bonus was not bonus in substance merely because it arose from the same settlement or collective bargaining. Once the payment was held not to be bonus, section 36 did not apply, and the expenditure was allowable if it was incurred wholly and exclusively for the assessee's business. The Tribunal's finding that the payment was made out of commercial expediency was accepted.

Conclusion: The additional amount was not bonus and was deductible as business expenditure under section 37 of the Income-tax Act, 1961.

Ratio Decidendi: A payment made under a settlement, though connected with employee remuneration, is deductible under section 37 if it is distinct from statutory bonus and is incurred wholly and exclusively for business purposes on commercial considerations.

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