307. Bonus – Whether it would be permissible for employers to claim deduction of bonus paid in excess of amount worked out as per formula laid down under Payment of Bonus Act in terms of first proviso to clause (ii) of sub-section (1) or under residuary section 37(1)
1. Reference is invited to Board’s Circular No. 206 [F. No. 204/64/75-IT(A-II)], dated 9-8-1976 [printed at Sl. No. 306 above] which had clarified the newly inserted proviso to section 36(1)(ii) of the Income-tax Act by section 29 of the Payment of Bonus (Amendment) Act, 1976.
2. A question has been raised as to whether it would be permissible for the employers to claim deduction of bonus paid in excess of the amount worked out as per the formula laid down under the Payment of Bonus Act, 1965 under section 36(1)(ii) or under residuary section 37(1) of the Income-tax Act as ex gratia payment being made on grounds of commercial expediency.
3. Under section 36(1)(ii ), an assessee carrying on business or profession is entitled to a deduction in respect of any amount paid to an employee as bonus or commission for services rendered by him. A proviso was, however, added to section 36(1)(ii) to the effect that the deduction in respect of bonus paid to an employee employed in a factory or other establishment to which the provisions of the Payment of Bonus Act apply, shall not exceed the amount of bonus payable under that Act.
4. Section 37(1) provides deduction for any expenditure other than expenditure of the nature described in sections 30 to 36 and section 80VV and not being capital expenditure or personal expenses of the assessee, laid out or expended wholly or exclusively for the purposes of business or profession. The Board have been advised that in view of the specific limitation, resort cannot be had to the provisions of section 37(1) to claim deduction in respect of any larger amount paid by way of bonus whether this be termed as bonus or ex gratia payment made in cash or in species. For example, if the amount of bonus payable as per the Payment of Bonus Act is only 10 per cent of salary, then payment of 18 per cent even when it is below the ceiling of 20 per cent is not allowable either under section 36(1)(ii) or under section 37(1) in respect of the difference of 8 per cent.
5. The above clarifications may please be brought to the notice of all the officers working under your charge. The officers may be advised to obtain the particulars of the amount of bonus payable under the Payment of Bonus Act and the amount actually paid so as to allow only the correct amount allowable under the Income-tax Act.
Circular : No. 287 [F. No. 204/21/80-IT(A-II)], dated 4-12-1980.
JUDICIAL ANALYSIS
APPLIED IN – This circular was cited in ITO v. Daga & Co. (P.) Ltd. [1984] 20 TTJ (Cal. – Trib.) 174, with the following observations :
“6. On a perusal of sections 30 to 37 of the Act, we find that section 37 is a residuary section and in case any expenditure falls within the ambit of sections 30 to 36, it cannot be allowed under section 37 of the Act. If such interpretation is not put, the various restrictions imposed by sections 30 to 36 of the Act would become ineffective and not workable. To this extent, we have no difficulty in following the Circular No. 287, dated 4-12-1980 of the CBDT. . . .”
(p. 176)
RELIED ON IN – The above circular was relied on in ITO v. English Indian Clays Ltd. 1993 Tax LR 85 (Coch. – Trib.).
