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Issues involved: Interpretation of the term "salary" for the purpose of calculating perquisites u/s 40(c)(iii) of the Income-tax Act, 1961.
Summary: The High Court of Madras considered a case where the assessee, a controlled company, provided perquisites including rent-free quarters, free conveyance, insurance premium, and bonus to certain employees. The Income-tax Officer excluded the bonus while calculating perquisites u/s 40(c) of the Income-tax Act. The Appellate Assistant Commissioner directed the inclusion of bonus in the salary for calculating perquisites. The Tribunal held that bonus is akin to salary and should be included. The main question was whether "salary" under section 40(c)(iii) includes "bonus." The relevant provision, section 40(c)(iii), states that any expenditure resulting in benefits to an employee should not exceed one-fifth of the salary payable. The term "salary" is defined in rule 2(h) of Part A to the Fourth Schedule, including dearness allowance but excluding other allowances and perquisites. The court analyzed the nature of bonus payments post the Payment of Bonus Act, 1965, which changed the character of bonus from a share of profits to additional wages. Previous court decisions and labor law developments indicated that bonus is now considered part of salary or wages. The court rejected the argument that bonus should be treated as an allowance and not included in salary for section 40(c)(iii) purposes. Referring to the Payment of Bonus Act and the historical context of the Income-tax Act provisions, the court concluded that bonus should be considered part of salary. Therefore, the question was answered in favor of the assessee, allowing them costs.
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