Customary bonus treated as remuneration, not profit-linked bonus, so deduction was allowed under the Income-tax Act.

Customary bonus paid consistently to workmen, and aligned with remuneration practice in the business, was treated as part of the salary structure rather than as profit-linked bonus. The Court held that customary bonus falls outside the profit-bonus concept under the Payment of Bonus Act and that the second proviso to section 36(1)(ii) permits deduction where the surrounding conditions, including pay, service conditions, profits and general trade practice, are satisfied. On the facts, the assessee's payment pattern and industry practice supported allowance of the deduction, so the disallowance was unwarranted.

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Issues: Whether the amount described as bonus paid by the assessee to workmen was in substance customary bonus forming part of remuneration, and whether the disallowance under section 36(1)(ii) of the Income-tax Act, 1961 was justified.

Analysis: The payment was found to have been made consistently in earlier years at a level comparable to salary, and the Tribunal treated it as part of the remuneration structure rather than as profit-linked bonus. The Court held that customary bonus falls outside the profit-bonus concept dealt with by the Payment of Bonus Act, and that the second proviso to section 36(1)(ii) permits deduction where the surrounding conditions, including pay, service conditions, profits, and general practice in the business, are satisfied. On the facts, the assessee's payment pattern and the trade practice were held sufficient to bring the payment within the permissible allowance.

Conclusion: The payment was held to be customary bonus and the disallowance was held to be unwarranted. The reference was answered in the affirmative and against the Revenue.

Ratio Decidendi: Customary or traditional bonus, when supported by consistent practice and the statutory conditions in the second proviso to section 36(1)(ii), is not to be treated as disallowable profit bonus under section 36(1)(ii) of the Income-tax Act, 1961.

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