Ex-gratia employee payments above statutory bonus limits may still be deductible as business expenditure for industrial harmony.

Ex-gratia payment to employees above the statutory bonus ceiling under the Payment of Bonus Act can qualify as deductible business expenditure under the Income-tax Act where it is a reasonable outlay incurred wholly and exclusively for business, including to maintain industrial peace. The proviso to section 36(1)(ii) was read as not limiting deduction only to statutory bonus, and section 37(1) was also recognised as supporting deductibility of non-statutory employee payments made for business purposes. The ex-gratia payment was therefore treated as allowable, and the assessee's claim was upheld.

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Issues: Whether ex-gratia payment made to employees in excess of the limit under the Payment of Bonus Act, 1965 is allowable as a deduction under section 36(1)(ii) or section 37(1) of the Income-tax Act, 1961.

Analysis: The payment was treated as ex-gratia made over and above the statutory bonus limit. The reasoning accepted that the proviso to section 36(1)(ii) does not confine deduction only to statutory bonus and that a payment made as a reasonable business outlay to maintain industrial peace can qualify. The conclusion was also supported by the view that such expenditure, if incurred wholly and exclusively for business, may fall within section 37(1). Earlier decisions of the same court and other High Courts were followed, and the interaction between statutory bonus and other forms of bonus or ex-gratia payment was read in a manner consistent with the survival of such non-statutory payments.

Conclusion: The ex-gratia payment was held allowable as a deduction, and the questions were answered in favour of the assessee.

Final Conclusion: The reference was answered by upholding deduction of the ex-gratia payment as business expenditure and by affirming the assessee's entitlement to the claim.

Ratio Decidendi: Ex-gratia payment made to employees over and above the statutory bonus ceiling is deductible where it constitutes a reasonable business expenditure incurred for the purpose of business, including maintenance of industrial harmony, and is not confined only to statutory bonus payments.

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