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Issues:
Claim for bonus disallowed by ITO under IT Act - CIT (A) deleted disallowance - Department appealed - Interpretation of s. 36(1)(ii) and s. 37(1) of the IT Act - Whether bonus provision was reasonable and allowable - Application of Payment of Bonus Act, 1965 - Ex-gratia payment vs. bonus - Reasonableness of bonus payment for Fifth Anniversary celebration - Customary bonus vs. festival bonus - Commercial expediency in bonus determination. Analysis: The appeal pertains to the disallowance of a bonus provision made by the assessee for the asst. yr. 1977-78. The ITO disallowed the claim on the basis that the amount exceeded the maximum payable under the Payment of Bonus Act, 1965. However, the CIT (A) deleted the disallowance, stating that the bonus was not linked to profits or productivity but was a recognition of employees' services on a significant occasion. The Department contended that conditions under s. 36(1)(ii) should be satisfied for bonus allowance, while the assessee argued that the bonus was ex-gratia and not subject to s. 36(1)(ii) provisions. The Tribunal examined the provisions of s. 36(1)(ii) and the nature of bonus payments in detail. The main provision of s. 36(1)(ii) allows deduction for bonus paid to an employee, provided it would not have been payable as profits or dividends. The term "bonus" encompasses amounts paid in addition to contractual salary for services rendered, including ex-gratia payments. The Tribunal emphasized that even if the main provision is met, the amount may be subject to the ceiling under the first and second provisos, necessitating an inquiry to determine applicability. The first proviso deals with bonus under the Payment of Bonus Act, 1965, where deduction is allowed without further inquiry. If the bonus falls outside this category, the second proviso applies, requiring assessment based on employee pay, business profits, and industry practice. The Tribunal clarified that festival bonuses are distinct from those under the Payment of Bonus Act, and if reasonable, are deductible under the second proviso. The Tribunal rejected the argument that the bonus should be treated as festival bonus, noting it was customary to pay bonuses on business anniversaries as a form of recognition for employee contributions. Such customary bonuses, falling outside the Payment of Bonus Act, are subject to the second proviso's reasonableness criteria. Commercial expediency and actual services rendered should guide the assessment of bonus payments. As the ITO and CIT (A) failed to assess the reasonableness of the bonus as a customary bonus, the Tribunal remanded the matter to the CIT (A) for a fresh determination in light of relevant legal provisions. The appeal was allowed, emphasizing the need for a thorough evaluation of the bonus provision's reasonableness under the applicable statutory framework.
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