Reasonableness of employee bonus must follow statutory factors, not profit fluctuations alone; disallowance was unsustainable.

Disallowance of part of the bonus paid to employees under section 10(2)(x) of the Income-tax Act, 1922 was held unjustified where the payment was genuine and the statutory test of reasonableness had to be assessed by reference to employee pay and service conditions, the year's profits, and the general practice in similar businesses. The taxing authorities could not reduce the allowable bonus merely because profits were lower than in earlier years or because the bonus did not move proportionately with profits. In the absence of any evidentiary basis or relevant standards supporting a lower allowance, the reduction was not sustainable and the issue was answered in favour of the assessee.

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Issues: Whether the disallowance of part of the bonus paid to employees was lawful under section 10(2)(x) of the Income-tax Act, 1922, on the ground that the payment was excessive having regard to the relevant statutory factors.

Analysis: The statutory test required the reasonableness of bonus to be judged with reference to the employee's pay and service conditions, the profits of the business for the year in question, and the general practice in similar businesses. Once the genuineness of the payment was not in dispute, the taxing authorities could not substitute their own view of the proper quantum of bonus merely because profits in the relevant year were lower than in earlier years. The Tribunal had not identified any evidentiary basis or relevant standards to justify reducing the allowed bonus, and it was not open to treat increased bonus as unreasonable simply because it did not move in proportion to profits.

Conclusion: The disallowance was not justified and the question was answered against the revenue and in favour of the assessee.

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