Commercial expediency allows ex gratia labour payments as deductible business expenditure, not bonus, where made to promote smooth operations.

An additional payment to workmen over and above 8.33 per cent bonus was treated as ex gratia expenditure, not statutory bonus, because it was made under a settlement to secure labour co-operation and smooth working of the mills. The payment was not linked to profits and was incurred on grounds of commercial expediency for the purpose of the business. On that basis, the expenditure was held to be deductible as business expenditure under section 37(1), and the bonus ceiling under the proviso to section 36(1)(ii) was not attracted.

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Issues: Whether the additional amount paid to workmen over and above 8.33 per cent under the settlement was bonus or an ex gratia payment, and whether it was deductible as business expenditure.

Analysis: The settlement provided for payment of 8.33 per cent as bonus and an additional amount for cordial and smooth working of the mills. The additional payment was not linked to profits but was made to secure labour co-operation and to promote the business. Such expenditure was incurred on grounds of commercial expediency and fell within the principle that business expenditure need not be compulsory if it is laid out for the purpose of the business. The amount did not partake of the nature of bonus under the bonus law and therefore the ceiling under the proviso to section 36(1)(ii) was not attracted.

Conclusion: The additional payment was an ex gratia business expenditure and was allowable as a deduction under section 37(1) of the Income-tax Act, 1961.

Ratio Decidendi: Expenditure incurred voluntarily under an agreement, if laid out for commercial expediency and for the purpose of promoting the business, is deductible even though it is not compelled by necessity, and such payment is not to be treated as bonus merely because it is made to employees.

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