Deductibility of settlement-linked employee payments turns on whether an ad hoc amount is true bonus or business expenditure.

Additional payment made under an industrial settlement was examined for deductibility where employees received bonus at the statutory rate plus an extra ad hoc amount described as welfare expenses. The majority view treated the extra sum as part of the bonus arrangement and considered that, after the first proviso to section 36(1)(ii) of the Income-tax Act, bonus in establishments governed by the Payment of Bonus Act, 1965 could not exceed the statutory entitlement; amounts barred under that provision could not be claimed under section 37(1). The Third Member, however, treated the payment as a separate settlement cost incurred to secure industrial peace, outside the restricted bonus regime, and regarded it as deductible business expenditure.

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Issues: Whether the additional payment of Rs. 4,07,776 made to employees over and above the bonus allowable under the Payment of Bonus Act, 1965 was deductible under the Income-tax Act, 1961.

Analysis: The dispute arose from a settlement with workmen in which the management agreed to pay bonus at 8.33 per cent and an additional amount of 4.42 per cent described as welfare expenses/ad hoc payment. The majority view treated the additional payment as part of the bonus dispute itself and held that the nomenclature adopted in the settlement could not alter the true character of the payment. It was held that, after the first proviso to section 36(1)(ii) of the Income-tax Act, 1961, bonus paid to employees in establishments governed by the Payment of Bonus Act, 1965 could not exceed what was payable under that Act, and what was prohibited by section 36(1)(ii) could not be claimed under section 37(1). The Third Member, however, held that the additional sum was not profit-sharing bonus but a separate payment made in the course of a conciliation settlement to secure industrial peace, that it did not fall within the bonus categories regulated by the Payment of Bonus Act, 1965 in the relevant sense, and that it was allowable either under the second proviso to section 36(1)(ii) or, alternatively, under section 37(1) as expenditure incurred wholly and exclusively for business purposes.

Conclusion: The additional payment of Rs. 4,07,776 was allowable as a deduction and the assessee succeeded on the substantive question.

Ratio Decidendi: A payment made under a genuine industrial settlement, though described as welfare or ad hoc payment, is deductible if it is not bonus within the restricted statutory sense and is otherwise incurred wholly and exclusively for business purposes; the first proviso to section 36(1)(ii) does not bar deduction of payments outside the bonus regime contemplated by the Payment of Bonus Act, 1965.

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