Employee remuneration accrual and ex gratia bonus deduction upheld as allowable business expenditure under mercantile principles.

Employee remuneration that accrued during the relevant year was deductible in that year on mercantile principles, even though later settlement quantified the liability, because the obligation related to services rendered in the year under consideration. Ex gratia bonus paid over and above the statutory bonus entitlement was also allowable as business expenditure where it was incurred in the course of business for employees and was not disallowed merely because it exceeded the amount payable under bonus legislation. The assessee's deduction claim was therefore accepted.

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Issues: (i) whether provision for additional salary and wages arising from the Justice Palekar Award was allowable as expenditure in the relevant previous year; (ii) whether ex gratia bonus paid over and above the eligible bonus under the Payment of Bonus Act was allowable as business expenditure.

Issue (i): whether provision for additional salary and wages arising from the Justice Palekar Award was allowable as expenditure in the relevant previous year.

Analysis: The liability related to services rendered during the relevant year and had been provided for as a business liability on mercantile principles. A subsequent settlement or quantification did not change the character of the expenditure, which had accrued in relation to the year under consideration. The reasoning accepted that such expenditure was incurred for earning the income of that year.

Conclusion: In favour of the assessee. The liability for salary and wages was allowable in the relevant previous year and not deferred to the year of the settlement agreement.

Issue (ii): whether ex gratia bonus paid over and above the eligible bonus under the Payment of Bonus Act was allowable as business expenditure.

Analysis: Ex gratia payment beyond the statutory bonus ceiling was treated as deductible business expenditure where it was made to employees in the course of business and was not barred merely because it exceeded the amount payable under the bonus legislation. The deduction was held to be permissible under the income-tax provisions governing business expenditure.

Conclusion: In favour of the assessee. The ex gratia bonus was allowable as expenditure.

Final Conclusion: Both substantial questions of law were answered against the Revenue and the assessee's claim to deduction was accepted, resulting in disposal of the appeal in its favour.

Ratio Decidendi: Expenditure relating to employee remuneration that accrues during the relevant year is deductible in that year under mercantile accounting, and ex gratia bonus paid to employees, even beyond the statutory bonus limit, can qualify as allowable business expenditure when it is incurred for business purposes.

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