Statutory ceiling on bonus deduction under income tax law applies unless higher payment is strictly justified by evidence.

Bonus paid to employees is deductible under section 36(1)(ii) only within the statutory ceiling linked to the Payment of Bonus Act, 1965. Where no allocable surplus is shown, the allowable bonus is limited to the minimum statutory rate, and a private agreement cannot expand that limit. The second proviso can justify a higher deduction only if the assessee proves, with cogent evidence, that the payment was reasonable having regard to employee remuneration, service conditions, or general practice in similar businesses. In the absence of such proof, deduction above the minimum statutory bonus is not allowable.

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Issues: Whether bonus paid in excess of the minimum statutory rate was deductible under section 36(1)(ii) of the Income-tax Act, 1961, in the absence of allocable surplus and whether the assessee could rely on the second proviso to justify deduction at the maximum rate.

Analysis: The deduction for bonus is controlled by the first proviso to section 36(1)(ii), which limits the allowable amount to the bonus payable under the Payment of Bonus Act, 1965. On the facts found, no allocable surplus was shown, so the permissible bonus under that Act was only the minimum rate. The existence of a private agreement was held to be irrelevant to enlarge the statutory ceiling. The second proviso could assist only if the assessee established, by cogent evidence, that the higher payment was reasonable with reference to the employee's pay and service conditions or to the general practice in similar business or profession. No such foundation was laid, and the agreement by itself did not prove general practice.

Conclusion: The deduction beyond the minimum statutory bonus was not allowable, and the Tribunal was right in disallowing the claim. The question referred was answered in the affirmative, against the assessee and in favour of the Revenue.

Ratio Decidendi: Bonus paid to employees is deductible only within the statutory limit prescribed by the Payment of Bonus Act, 1965, unless the assessee strictly proves that a higher payment is justified under the exceptional grounds in the second proviso to section 36(1)(ii) of the Income-tax Act, 1961.

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