Bonus treated as part of salary for income-tax disallowance under section 40(c)(iii), favouring the assessee.

Bonus was treated as part of "salary" for disallowance under section 40(c)(iii) of the Income-tax Act, because Explanation 2 adopted the rule 2(h) definition from the Fourth Schedule and that definition did not expressly exclude bonus. The analysis also noted that labour law and the Payment of Bonus Act, 1965 recognise bonus as wages or additional wages rather than a purely voluntary payment. On that basis, the provision was read to include bonus within salary, and the issue was answered against the Revenue and in favour of the assessee.

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Issues: Whether, for the purpose of disallowance under section 40(c)(iii) of the Income-tax Act, 1961, the term "salary" includes bonus paid to employees.

Analysis: Section 40(c)(iii) limits disallowance of expenditure on benefits, amenities or perquisites to one-fifth of the salary payable, and Explanation 2 refers to the meaning of "salary" in rule 2(h) of Part A of the Fourth Schedule. That definition includes dearness allowance, if the terms of employment so provide, and excludes other allowances and perquisites, but it does not expressly exclude bonus. The development of labour law and the enactment of the Payment of Bonus Act, 1965 indicate that bonus is treated as a part of wages or additional wages rather than as a mere voluntary payment. In the absence of an express exclusion in the Income-tax Act, and having regard to the change in the legal character of bonus, the term "salary" was held to be capable of including bonus.

Conclusion: Bonus is included in "salary" for the purposes of section 40(c)(iii) of the Income-tax Act, 1961, and the question was answered against the Revenue and in favour of the assessee.

Ratio Decidendi: Where a taxing provision adopts the meaning of salary from a definition that does not expressly exclude bonus, and the legal character of bonus has evolved to form part of wages, bonus must be treated as part of salary for that provision.

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