Top Stories Ex-gratia Bonus Paid Over And Above Eligible Bonus To Employees allowable As Business Expenditure of Indian Express: Bombay HC [Read Order] Indian Express, engaged in newspaper and periodical printing and publishing, faced disallowances by the Assessing Officer (AO) By Manu Sharma – On March 13, 2024 5:31 pm – 2 mins read The Bombay High Court recently ruled that ex gratia bonuses provided to employees, exceeding the eligible bonus under the Payment of Bonus Act, qualify as permissible business expenditures. The bench, comprising Justices K. R. Shriram and Neela Gokhale, noted that the earlier decision by the Income Tax Appellate Tribunal ( ITAT ) was legally incorrect in asserting that liabilities for salary and wages resulting from the Justice Palekar Award are not deductible in the current year but only in the year of agreement between management and employees. Indian Express, the appellant/assessee engaged in newspaper and periodical printing and publishing, faced disallowances by the Assessing Officer ( AO ) concerning provisions for additional salary and wages arising from the Justice Palekar Award.

These disallowances amounted to Rs. 17 lakhs for the period spanning January 1, 1986, to June 30, 1986, based on a Memorandum of Settlement signed between management and employees on May 8, 1987. Additionally, the AO disallowed ex gratia bonuses totaling Rs. 16,28,258, paid beyond the eligible bonus under the Payment of Bonus Act. Subsequently, the Commissioner of Income Tax (Appeals) overturned the AO’s decision, allowing the deductions in computing the assessee’s income. However, the department challenged this before the ITAT, which reinstated the AO’s findings.

The assessee then contested this decision. The ITAT had held that ex gratia payments exceeding the statutory limit prescribed by the Payment of Bonus Act, 1965, were not deductible as business expenditures under either Section 36(1)(ii) or Section 37(1) of the Act. However, the appellant argued against this, highlighting a discrepancy in the ITAT’s reasoning, which relied on a decision in CIT vs. Rajaram Bandekar & Sons (Shipping) Pvt. Ltd., wherein it was observed that, “Tribunal was justified in holding that the exgratia payment in excess of the limit prescribed under the Payment of Bonus Act, 1965, either under Section 36(1)(ii) or Section 37(1) of the Act was allowable as business expenditure.

It was also noted that, “The Court also held that the Tribunal was justified in holding that ex gratia amount paid over and above the amount paid in accordance with the Bonus Act was an allowable expenditure although the payment did not cover contractual payment or customary payment.” The Bombay High Court further clarified that bonuses paid to employees for services rendered cannot be claimed under Section 37(1) of the Income Tax Act. Nonetheless, considering previous rulings, the court determined that ex gratia payments exceeding the Bonus Act’s limit were allowable as business expenditures.