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Issues Involved:
1. Accrual of liability to pay bonus of Rs. 1,84,575 for the period January 1, 1976, to December 31, 1976. 2. Deductibility of bonus in excess of 20% of salary. Detailed Analysis: Issue 1: Accrual of Liability to Pay Bonus of Rs. 1,84,575 The primary issue was whether the liability to pay the bonus amount of Rs. 1,84,575 for the period January 1, 1976, to December 31, 1976, accrued in the previous year relevant to the assessment year 1978-79. The Income-tax Officer disallowed this claim, asserting that it did not relate to the year of account. The Commissioner of Income-tax (Appeals) upheld this view, reasoning that the bonus, based on custom, accrued by December 31, 1976. However, the Appellate Tribunal found that the liability to pay bonus did not accrue by virtue of a statute but by an agreement made in 1977. Therefore, it regarded the bonus as an outgoing for the previous year relevant to the assessment year 1978-79. The Tribunal also noted that the bonus paid in excess of 20% of salary or wages could be justified under section 37 of the Act due to commercial expediency. The High Court supported the Tribunal's view, stating that the liability to pay bonus accrued only during the previous year relevant to the assessment year 1978-79 due to the agreement made in October 1977 between the assessee and the employees' union. This agreement created an enforceable obligation on the part of the assessee to pay the bonus, and thus the liability accrued in the year 1978-79. The Court rejected the Revenue's contention that the liability accrued in the earlier year, noting that the assessee had only made a provision for 20% of the salary or wages in the earlier year, consistent with the Department's stance. The Court distinguished the case from CIT v. Bisra Stone Lime Co. Ltd., where the liability arose by virtue of the Payment of Bonus Act, which was not applicable here. Issue 2: Deductibility of Bonus in Excess of 20% of Salary The second issue was whether the assessee was entitled to deduct the bonus amount paid in excess of 20% of the salary. The Income-tax Officer had disallowed this excess amount, but the Tribunal allowed it, citing commercial expediency. The High Court upheld the Tribunal's decision, noting that the payment in excess of 20% was made to ward off labor unrest and ensure smooth business operations. The Court referenced the decision in CIT v. D. Mohamed Ismail, which established that the Payment of Bonus Act is not applicable to customary bonuses. The Court emphasized that the bonus paid was not a festival or pooja bonus but a customary bonus, justified by the business necessity to maintain labor peace. The Court concluded that the Tribunal was correct in allowing the deduction of the bonus amount in excess of 20% of the salary, as it was paid based on commercial expediency. The Court found no infirmity in the Tribunal's order and affirmed the decision. Conclusion: The High Court answered both questions of law in the affirmative and against the Revenue. The liability to pay the bonus of Rs. 1,84,575 accrued during the previous year relevant to the assessment year 1978-79, and the assessee was entitled to deduct the bonus amount paid in excess of 20% of the salary due to commercial expediency. There was no order as to costs.
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