Customary bonus paid under settlement allowed as business expenditure where it secured industrial peace and served commercial expediency.

Ex gratia or customary bonus paid to employees under a settlement, over and above the statutory bonus under the Payment of Bonus Act, 1965, was held allowable as a deduction where the payment was made consistently in earlier years and was commercially expedient. The court accepted that the statutory bonus regime does not exhaust all bonus payments, and that deductibility depends on the surrounding business circumstances and reasonableness of the outlay. Because the payment was made wholly and exclusively for business purposes to maintain employer-employee relations, secure industrial peace, and avoid strikes or lock-outs, it satisfied the test for business expenditure under the Income-tax Act, 1961.

---

---

Issues: Whether additional ex gratia or customary bonus paid to employees over and above the statutory bonus under the Payment of Bonus Act, 1965 was deductible under section 36(1)(ii) of the Income-tax Act, 1961, or otherwise allowable as business expenditure under section 37 of the Income-tax Act, 1961.

Analysis: The payment in question was made in terms of a settlement with workmen, over and above the statutory bonus, and was found as a fact to have been made consistently in earlier years. The Court accepted that the Payment of Bonus Act governs only statutory bonus and does not exhaust all kinds of bonus payments. It agreed that where an amount is not covered by the statutory bonus ceiling, the allowability of the payment under section 36(1)(ii) depends upon the requirements of reasonableness and the surrounding business circumstances. The Court further held that the ex gratia payment was made wholly and exclusively for business purposes to maintain employer-employee relations, secure industrial peace, and avoid strikes and lock-outs, thereby satisfying the test of commercial expediency.

Conclusion: The additional payment was allowable as a deduction and the reference was answered in favour of the assessee.

Ratio Decidendi: An ex gratia or customary payment to employees, made pursuant to a settlement and incurred wholly and exclusively for business purposes to maintain industrial peace, is deductible as business expenditure even if it exceeds the statutory bonus payable under the Payment of Bonus Act, 1965.

---