Customary bonus remains deductible where it falls outside the Payment of Bonus Act and the section 36(1)(ii) restriction

Customary bonus paid regularly to employees was treated as outside the statutory scheme of the Payment of Bonus Act, 1965. On that basis, the amendment to section 36(1)(ii) of the Income-tax Act, 1961 was read as restricting only bonus covered by the Bonus Act, not customary bonus. The analysis relied on the view that section 17 of the Bonus Act concerns adjustment of customary bonus against statutory bonus and does not negate the existence of customary bonus. Accordingly, the disallowance of deduction for such bonus was considered unsustainable.

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Issues: Whether customary bonus paid to employees falls outside the Payment of Bonus Act, 1965 so that the amendment to section 36(1)(ii) of the Income-tax Act, 1961 with effect from 25 September 1975 does not restrict deduction of such bonus.

Analysis: The assessee had paid bonus to its employees regularly for many years at varying rates and claimed that it was customary bonus. The appellate authority accepted this position by applying the principles governing customary bonus and by relying on the view that the Payment of Bonus Act, 1965 does not govern bonus of that nature. The Tribunal agreed with the earlier Tribunal decision that section 17 of the Payment of Bonus Act, 1965 deals only with adjustment of customary bonus against statutory bonus and does not exclude the existence of customary bonus. On that reasoning, the restriction introduced in section 36(1)(ii) applies only to bonus contemplated by the Bonus Act and not to customary bonus.

Conclusion: The customary bonus paid by the assessee was not hit by the amended section 36(1)(ii), and the disallowance was unsustainable.

Ratio Decidendi: Customary bonus, being outside the statutory scheme of the Payment of Bonus Act, 1965, is not subject to the ceiling introduced by the amendment to section 36(1)(ii) of the Income-tax Act, 1961.

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