Ex gratia settlement payments treated as additional wages, not bonus, and allowed as deductible business expenditure.

Ex gratia payments made under a settlement, paid separately from statutory bonus to maintain industrial peace in tea estates, were held not to be profit-sharing bonus in substance. The court construed the memoranda as showing that the amounts were incentive-linked additional wages or emoluments, so section 34 of the Payment of Bonus Act, 1965 was not attracted. On that basis, the payments were allowable business expenditure and deductible under section 37 of the Income-tax Act, 1961.

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Issues: Whether ex gratia payments made under the settlement were bonus within the Payment of Bonus Act, 1965, and therefore not deductible, or whether they were additional wages/ex gratia payments allowable as a deduction under section 37 of the Income-tax Act, 1961.

Analysis: The settlements showed that statutory bonus at 8.33 per cent was provided separately, and the impugned amounts were agreed to be paid in addition to such statutory bonus for maintaining industrial peace and smooth working of the tea estates. Mere description of the payment as bonus did not make it bonus in substance. On a proper construction of the memoranda, the payments were not profit-sharing bonus but incentive-linked ex gratia payments, partaking of the character of additional wages or emoluments. Section 34 of the Payment of Bonus Act, 1965, was therefore not attracted, and the amounts were allowable business expenditure.

Conclusion: The questions were answered in the affirmative, in favour of the assessee; the ex gratia payments were not bonus under the Payment of Bonus Act, 1965, and were deductible under section 37 of the Income-tax Act, 1961.

Ratio Decidendi: Where a payment is separately made under a settlement in addition to statutory bonus for industrial peace and is not profit-sharing bonus in substance, it is to be treated as ex gratia/additional wages and not barred from deduction under the income-tax law.

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