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)
Circular No. 287 was issued by the Central Board of Direct Taxes on 4 December 1980. Its subject is 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).
Shuts the door on deducting bonus above the Payment of Bonus Act figure. Section 36(1)(ii) allows a deduction for bonus or commission paid to an employee for services rendered, but its proviso caps the deduction, for an employee in a factory or establishment to which the Payment of Bonus Act, 1965 applies, at the bonus payable under that Act. The question was whether the excess could still be claimed under section 36(1)(ii) or as ex gratia under the residuary section 37(1) on grounds of commercial expediency. The Board is advised that in view of the specific limitation, section 37(1) cannot be resorted to for any larger amount, whether called bonus or ex gratia, and whether paid in cash or in kind. Its own illustration: where bonus payable under the Act is 10 per cent of salary, payment of 18 per cent — even though under the 20 per cent ceiling — is not allowable as to the extra 8 per cent under either section. Officers are told to obtain the bonus payable under the Act and the bonus actually paid, and to allow only the correct amount.
A question was raised, following Circular No. 206 dated 9 August 1976 on the proviso inserted in section 36(1)(ii) by section 29 of the Payment of Bonus (Amendment) Act, 1976, whether the excess could be claimed as an ex gratia payment made on grounds of commercial expediency.
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.
In a scrutiny assessment where bonus in excess of the statutory formula is disallowed, or in the appeal against it.
On a salary base of Rs. 10 lakh a company pays bonus of 18 per cent, Rs. 1.8 lakh, while the amount payable on the Payment of Bonus Act formula is 10 per cent, Rs. 1 lakh. Following this circular, Rs. 1 lakh is allowed under section 36(1)(ii) and the balance Rs. 80,000 is disallowed, and cannot be picked up under section 37(1) by calling it ex gratia.
Source: the Income Tax Department’s own published text — its page for this instrument.
