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Issues involved: Interpretation of section 36(1)(ii) of the Income-tax Act regarding the deductibility of bonus paid to employees.
Summary: The High Court of Kerala was presented with a question regarding the deductibility of bonus paid by an assessee to its employees for the assessment year 1976-77. The Income-tax Officer initially disallowed the bonus payment under section 36(1)(ii) as the assessee had no allocable surplus for the period, and thus, was not obligated to pay any bonus. The Commissioner of Income-tax (Appeals) later accepted the contention that the bonus was customary. However, the Tribunal, considering previous court decisions, held that the bonus should be treated as contractual rather than customary, and thus, the first proviso to section 36(1)(ii) would not apply. The court emphasized the importance of the second proviso to section 36(1)(ii), which requires the bonus amount to be reasonable based on various factors such as employee pay, business profits, and industry practices. Referring to previous judgments, the court highlighted that the Payment of Bonus Act pertains to profit-sharing bonuses and does not cover customary or contractual bonuses. The Tribunal's decision was criticized for not fully considering the guidelines provided by the law in determining the nature of the bonus payment. Consequently, the court declined to answer the question directly and directed the Tribunal to reevaluate the matter in line with the court's interpretation of the law and previous decisions. The judgment was to be forwarded to the Income-tax Appellate Tribunal for further action.
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