Customary bonus deduction for ex-gratia worker payments treated as business expenditure under labour settlements and board resolutions.

Ex-gratia payments to workers of a sugar mill were treated as customary bonus or business expenditure when made under board resolutions and labour settlements, rather than as statutory profit bonus confined by the Payment of Bonus Act, 1965 or section 36(1)(ii) of the Income-tax Act, 1961. The analysis distinguishes customary or traditional bonus from profit-linked bonus and states that the statutory scheme does not extinguish other forms of bonus. It also notes that the liability arose when the resolution or agreement fixing payment was made, and that the expenditure was incurred to preserve industrial peace and labour co-operation, making the deduction allowable.

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Issues: Whether ex-gratia payments made to workers of the assessee sugar mill for the relevant years were deductible as customary bonus or business expenditure, and not confined by the limits of the Payment of Bonus Act, 1965 and section 36(1)(ii) of the Income-tax Act, 1961.

Analysis: The payments were made pursuant to Board resolutions and labour settlements in the relevant accounting years and were found to be in the nature of customary bonus or ex-gratia incentive, not statutory profit bonus governed by the Payment of Bonus Act, 1965. The legal framework distinguished profit bonus from customary or traditional bonus, and the statutory scheme was held not to annihilate such other forms of bonus. The decision further treated the timing of the liability as arising when the resolution or agreement fixing the payment was made, and not in the earlier year to which the wages were related for quantification. The payment was held to be a business outlay incurred to maintain industrial peace and labour co-operation.

Conclusion: The ex-gratia payments were allowable as deduction, and the departmental disallowance was not justified.

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