Deductibility of minimum bonus and managerial remuneration ceiling clarified under the Income-tax Act and Bonus Act.

The proviso inserted in section 36(1)(ii) applied to the assessment year 1976-77, so the minimum bonus payable under section 10 of the Payment of Bonus Act was deductible. For the assessment year 1977-78, the bonus disallowance could not be finally settled because the allocable surplus required fresh verification of the assessee's computation. In computing disallowance under section 40(c) read with section 40A(5), commission on profits formed part of remuneration, but sitting fees were not a perquisite; the disallowance was therefore confined to the statutory ceiling and reduced to the excess amount.

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Issues: (i) Whether the assessee was entitled to deduction of the minimum bonus payable to employees for the assessment year 1976-77 under section 36(1)(ii) of the Income-tax Act, 1961 read with the Payment of Bonus Act, 1965; (ii) Whether the disallowance of bonus for the assessment year 1977-78 required fresh verification of the allocable surplus; (iii) Whether the disallowance under section 40(c) read with section 40A(5) of the Income-tax Act, 1961 in respect of the managing director's remuneration and perquisites was correctly computed.

Issue (i): Whether the assessee was entitled to deduction of the minimum bonus payable to employees for the assessment year 1976-77 under section 36(1)(ii) of the Income-tax Act, 1961 read with the Payment of Bonus Act, 1965.

Analysis: The accounting year relevant to the assessment year 1976-77 ended on 31 December 1975, and the proviso inserted in section 36(1)(ii) with effect from 25 September 1975 applied. The minimum bonus payable under section 10 of the Payment of Bonus Act, 1965 was therefore admissible as a deduction.

Conclusion: The issue is decided in favour of the assessee. The minimum bonus payable was allowable as a deduction.

Issue (ii): Whether the disallowance of bonus for the assessment year 1977-78 required fresh verification of the allocable surplus.

Analysis: The computation of allocable surplus was not properly examined, and the factual basis for restricting the deduction was not satisfactorily explained. The matter required verification of the assessee's computation before a final allowance could be made.

Conclusion: The issue is sent back for verification. The deduction claim was not finally decided on merits at this stage.

Issue (iii): Whether the disallowance under section 40(c) read with section 40A(5) of the Income-tax Act, 1961 in respect of the managing director's remuneration and perquisites was correctly computed.

Analysis: Commission on profits formed part of remuneration, but sitting fees could not be treated as a perquisite. On the material available, the amounts representing salary and commission were relevant for the ceiling under the provision, while the disallowance could not be sustained in the higher figure adopted by the Assessing Officer. The disallowable amount was confined to the excess over the statutory ceiling on the remuneration component.

Conclusion: The issue is decided partly in favour of the assessee. The disallowance was restricted to Rs. 1,839.

Final Conclusion: The appeals succeeded only in part, with one bonus issue allowed, one bonus issue remitted for factual verification, and the disallowance relating to managerial remuneration substantially reduced.

Ratio Decidendi: Where the proviso to section 36(1)(ii) applies, the minimum bonus payable under the Payment of Bonus Act is deductible; while computing disallowance under section 40(c) and section 40A(5), only amounts properly falling within remuneration or perquisites can be brought to account.

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