Incentive bonus treated as business expenditure where linked to employee performance and productivity, not profit-linked bonus.

Incentive bonus paid to employees, though not allowable as bonus under section 36(1)(ii), was deductible as business expenditure under section 37(1) because it was paid at varying percentages of salary on performance appraisal and time scale, and was treated as additional salary linked to productivity and efficiency rather than profit-linked bonus. On that factual basis, the payment was expenditure laid out wholly and exclusively for business, and the claim remained allowable under section 37(1).

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Issues: Whether incentive bonus paid to employees, though not allowable as bonus under section 36(1)(ii) of the Income-tax Act, 1961, was deductible as business expenditure under section 37(1) of the Income-tax Act, 1961.

Analysis: The payment was found to be made at varying percentages of salary on the basis of performance appraisal and time scale, and was treated by the lower authorities as additional salary linked with productivity and efficiency of the workers rather than as profit-linked bonus. On that factual foundation, the amount was held to be expenditure laid out wholly and exclusively for the purposes of business. Even if the claim did not fall within section 36, it remained allowable under section 37(1).

Conclusion: The incentive bonus was an allowable business expenditure under section 37(1) and the reference was answered in the affirmative, in favour of the assessee.

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