These are two appeals by assessee relating to assessment years 1978-79 and 1979-80. assessee is co-operative society which carries on business of running spinning mill. Income-tax Officer stated for assessment year 1978-79 that bonus had been paid at 11.33 per cent. This came to Rs. 3,90,819. He allowed as deduction bonus at 8.33 per cent at Rs. 2,87,366 and disallowed balance of Rs. 1,03,453. This disallowance was made taking view that this amount of 3 per cent was in excess of statutory requirement permissible under provisions of Bonus Act. Income-tax Officer stated that necessity for making additional payment in terms of settlement was not acceptable. For subsequent assessment year, i.e., 1979-80, similarly it was mentioned that bonus was payable at 12 per cent and amount was Rs. 4,65,680. Allowing as deduction 8.33 per cent, balance of 3.67 per cent, i.e., Rs. 1,38,684 was brought to tax for same reason. 2. assessee appealed and it was contended that entire payment of bonus was in terms of settlement and hence should have been allowed as deduction. CIT (Appeals) stated that additional payment was not incentive bonus and since mills of assessee-company had worked at loss, only minimum bonus of 8.33 per cent was admissible deduction. He, therefore, upheld disallowance. 3. assessee is in appeal before us and it was contended that bonus payment in each of years was only 8.33 per cent in terms of settlement under sec. 18(1) of Industrial Disputes Act dated 15-10-1978 for first year and 30-10-1979 for second year. further payment of 3 per cent in first year and 3.67 per cent in second year, it was urged, was not bonus but ex gratia payment. In support of its contention, express terms of settlement was relied upon. Opposing plea, learned Departmental Representative submitted that payment over and above 8.33 per cent was nothing but additional payment of bonus. 4. We have considered rival submissions. terms of settlement for first year are in English and same read as under: "1. It is agreed that workmen will be paid 8.33 per cent as bonus for accounting year 1977. 2. It is also agreed that 3 per cent additional amount shall be paid in consideration of cordial and smooth working of mills in relevant year ". In second year, terms are in Tamil and are to similar effect. additional payment was made for cordial and smooth working of Mills due to co-operation of labour. It was, therefore, not payment linked with profit but payment out of commercial expediency which would have effect of securing co-operation in succeeding year also in hope of getting such payment. extra amount paid really partakes of nature of ex gratia payment and does not partake of nature of bonus. Supreme Court in case of Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 had occasion to consider ambit of provisions of section 10(2) (xv) of Income-tax Act, 1922, and corresponding provisions of sec. 37(1) of Act of 1961, and observed as under: "It has to be observed here that expression "wholly and exclusively" used in s. 10(2) (xv) of Act does not mean "necessarily". Ordinarily, it is for assessee to decide whether any expenditure should be incurred in course of this or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting business and to earn profits, assessee can claim deduction under s. 10(2) (xv) of Act even though there was no compelling necessity to incur such expenditure. IT is relevant to refer at this stage to legislative history of s. 37 of I. T. Act, 1961, which corresponds to s. 10(2) (xv) of Act. attempt was made in I. T. Bill of 1961 to lay down "necessity" of expenditure as condition for claiming deduction under s. 37. Section 37(1) in Bill read "any expenditure .... laid out or expended wholly, necessarily and exclusively for purpose of business or profession shall be allowed ....." introduction of word "necessarily" in above section resulted in public protest. Consequently, when s. 37 was finally enacted into law, word "necessarily" came to be dropped". payment in present case, viewed in light of aforesaid observations, was clearly made for promoting business and earning profits. It was in terms of express agreement entered into under Industrial Dispute Act between management and workers. Whether there was any compelling necessity to incur such expenditure or not, in terms of observations of Supreme Court, as long as payment was for commercial expediency, same would be allowable deduction. In light of our conclusion that payment does not partake of nature of bonus, much less as bonus under Payment of Bonus Act, but is of nature of ex gratia payment, ceiling under first proviso to sec. 36(1) (ii) is not attracted and payment would be admissible deduction under provisions of section 37(1). result is appeals are allowed. APPENDIX HIGH COURT OF MADRAS COMMISSIONER OF INCOME-TAX v. SREVILLIPUTHUR CO- OPERATIVE MILLS LTD M. N. Chandukar CJ. and Srinivasan, J. Tax Case Petition Nos. 453 and 454 of 1986 JANUARY 29, 1987 ORDER Chandukar, CJ. - These petitions under section 256(2) of Income-tax Act, 1961 are filed for direction to Tribunal to forward statement of case referring following question for reference: "Whether, on facts and in circumstances of case, Appellate Tribunal was justified in holding that Additional payment made is not bonus and hence cannot be disallowed under provisions to section 36(1) (ii)?" In order of Tribunal, view taken was that having regard to decision of Supreme Court in Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 payment of amount in addition to bonus prescribed under Payment of Bonus Act was in nature of ex gratia payment and did not partake of nature of bonus and was, therefore, not hit by ceiling prescribed under first Proviso to section 36(1) (ii) of Income-tax Act, 1961. settlement between employer and Union specifically provided i n respect of 3 per cent additional amount which has been paid to be in consideration of cordial and smooth working of Mills in relevant year. It was, therefore, not payment linked with profit and was out of commercial expediency. Expenditure in form of such payment was clearly incurred wholly and exclusively for purpose of business of assessee. In view of above decision of Supreme Court question of law which is requested to be referred does not really arise. Accordingly, petitions are rejected. No orders as to costs. *** SRIVILLIPUTHUR CO-OP. SPG. MILLS LTD. v. SECOND INCOME TAX OFFICER