Determining the reasonableness of the amount of the bonus according to section 36(1)(ii). - Income Tax - 401/CBDT

INSTRUCTION NO. 401/CBDT Dated: April 1, 1972 Section(s) Referred: 36(1)(ii) Statute: Income - Tax Act, 1961 A question has arisen whether in determining the admissibility of the bonus u/s. 36(1)(ii) of the I.T. Act, 1961, the ceiling prescribed u/s. 11(1) of the payment of Bonus Act 1965 should be taken into consideration. 2. Section 11(1) of the Payment of Bonus Act, 1965 requires that where, in respect of any accounting year the allocable surplus exceeds the minimum bonus payable to the employees u/s. 10 ibid, the employer should, in view of such minimum bonus, pay every employee in the accounting year a bonus subject to a maximum of 20 per cent of salary/wages. This ceiling may, however, be exceeded as provided for u/s. 34(3) of the Bonus Act, which states that the employees can enter into an agreement with the employer for granting bonus under a formula which is different from that under that Act. 3. Section 36(1)(ii) of the I.T. Act, 1961 does not lay down any maximum or minimum limit of allowance of bonus but requires the deduction to be allowed only to the extent that the amount of bonus is reasonable with reference to :- (a) the pay of the employee and conditions of his service. (b) the profits of the similar business or profession. (c) general practice in similar business or profession. The Board desire that the ceiling prescribed under the Bonus Act, or any higher ceiling as may be fixed under an agreement contemplated u/s. 34(3) of the said Act should be adhered to by the I.T. Officers while determining the reasonableness of the amount of the bonus according to section 36(1)(ii) of the I.T. Act, 1961. 4. The instruction may please be brought to the notice of all the assessing officers in the charge.