Section 36(1)(ii) — Deductions for Bonus or Commission

Section 36(1)(ii) of the Income-tax Act, 1961, allows for the deduction of any sum paid to an employee as bonus or commission for services rendered, provided it is not in lieu of dividends or profits. This section is significant as it helps businesses reduce their taxable income by deducting legitimate employee-related expenses. The statutory test requires that the payment must be made to an employee and must not be a distribution of profits. The burden of proof lies with the taxpayer to demonstrate that the payment qualifies as a deductible expense under this section. In practice, this section is crucial for businesses to ensure that their compensation structures are tax-efficient while complying with the law.

Common Litigation Flashpoints

1. Whether the payment is genuinely a bonus or commission
2. Distinguishing between bonus/commission and profit distribution
3. Timing of the payment and its deductibility
4. Employee vs. non-employee status for the recipient

Judgments on Section 36(1)(ii) — Deductions for Bonus or Commission

• M/S. W. T. Suren & Co. Ltd. Vs. The Commissioner of Income Tax. Bombay — SC, 1998
  Payment of gratuity made by the assessee to Rallis India Ltd. was an allowable deduction as it was incurred wholly and exclusively for the purpose of business.
• Union of India & Anr. vs M/s. Ganpati Dealcom Pvt. Ltd. — SC,
  The 2016 Amendment Act cannot be applied retrospectively as it creates new offences and substantive changes, which cannot be applied to past transactions.