Deductibility of settlement bonus depends on valid bonus-law approval and compliance with the statutory ceiling.

Bonus paid under a settlement may qualify as a deductible business expense only if the settlement is valid under the amended section 34 of the Payment of Bonus Act, 1965, including prior approval of the appropriate Government and compliance with the statutory ceiling in the third proviso. The earlier view that such settlement-based payment fell outside the Act was rejected. Where approval exists and the ceiling is not breached, the payment falls within the statutory framework and may be deductible; where compliance is absent, only the excess over the permissible limit is liable to disallowance. The matter therefore turns on factual verification of government approval and ceiling compliance.

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Issues: Whether bonus paid under a settlement could be allowed as deduction under section 36(1)(ii) of the Income-tax Act, 1961, having regard to section 34 and the bonus limits under the Payment of Bonus Act, 1965.

Analysis: The payment was made pursuant to a settlement expressly linked to the Payment of Bonus Act, 1965. The earlier view that such payment was outside the Act was rejected as incorrect. The applicable law was the amended section 34, which permitted an agreement for bonus under a different formula, subject to previous approval of the appropriate Government and subject further to the ceiling in the third proviso. The record did not show whether Government approval had in fact been granted, and the factual position as to compliance with the statutory ceiling was also not clear. If approval existed and the ceiling was not breached, the entire payment would fall within the statutory framework and be deductible; otherwise, only the excess over the permissible limit would be disallowable.

Conclusion: The matter required factual verification on Government approval and compliance with the statutory ceiling, and the disallowance issue was restored to the Assessing Officer for fresh determination.

Ratio Decidendi: A bonus payment made under a settlement can be deductible only if the settlement is valid under section 34 of the Payment of Bonus Act, 1965, including previous Government approval and compliance with the statutory ceiling on bonus.

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