Customary bonus paid on Diwali was allowed as business expenditure; section 36(1)(ii) ceiling did not apply.

Customary bonus paid to employees on Diwali every year was treated as a customary, not statutory, bonus, so the ceiling in the proviso to section 36(1)(ii) did not apply. The distinction drawn between bonus under the bonus legislation and puja or other customary bonus meant the payment was allowable as business expenditure. The disallowance was therefore unsustainable.

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Issues: Whether customary bonus paid to employees in excess of 20 per cent of salary was allowable as a deduction, or whether it was hit by the proviso to section 36(1)(ii) of the Income-tax Act, 1961.

Analysis: The payment was found to have been made on Diwali day and every year in the same manner, showing that it was a customary bonus and not a statutory bonus governed by the payment ceiling. The reasoning distinguished bonus payable under the bonus legislation from puja bonus and other customary bonus. On that basis, the restriction in section 36(1)(ii) was held inapplicable to such customary payments, and the amount was treated as a permissible business expenditure.

Conclusion: The customary bonus was allowable as a deduction and the disallowance was unsustainable.

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