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Issues involved:
The judgment involves a reference at the instance of the Revenue u/s 256(1) of the Income-tax Act, 1961 for the assessment year 1978-79 regarding the change in the method of accounting for payment of bonus from cash system to mercantile system. Summary: Issue 1: Change in Accounting Method The assessee historically followed the cash system of accounting for bonus payments, debiting the profit and loss account for bonuses actually paid during the year. However, in the year under consideration, the assessee also debited a provision for bonus that accrued during the year, transitioning to the mercantile system. The Income-tax Officer disallowed this provision, stating it allowed deduction for bonus under both systems. The Commissioner of Income-tax (Appeals) supported the assessee's method, and the Tribunal upheld this decision, noting the change was bona fide and consistent in subsequent years. Issue 2: Tribunal's Decision The Tribunal found that the assessee's change to the mercantile system for bonus payments was in line with recognized accounting methods and reflected true profits. The change was made after the Payment of Bonus Act, 1965, became statutory, ensuring bonus payments were unavoidable. The Tribunal held that the change was bona fide, consistently followed, and not prejudicial to the Revenue. The Tribunal emphasized that an assessee can change accounting methods if done in good faith and consistently, supporting the Commissioner of Income-tax (Appeals)'s decision. Conclusion: The High Court upheld the Tribunal's decision, affirming that the assessee's change in the method of accounting for bonus payments from cash to mercantile was valid and consistent with accounting principles. The Court found no grounds for interference, ruling in favor of the assessee and answering the reference question affirmatively.
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