1990 (2) TMI 39 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of bonus paid during the accounting year but relating to the previous year.
2. Deduction of provision for accrued liability for bonus payable to employees.
3. Entitlement to deduction of bonus on both actual payment and accrued liability basis.
4. Disallowance of expenditure for maintenance of buildings provided for employees' residence under Section 40A(5) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deduction of Bonus Paid During the Accounting Year but Relating to the Previous Year:
The assessee, a non-resident sterling company, claimed deductions for bonuses paid during the accounting year but relating to the preceding year. The Income-tax Officer (ITO) disallowed these claims, which were upheld by the Commissioner of Income-tax (Appeals). The Appellate Tribunal, however, allowed the claims on an accrual basis rather than actual payment basis, despite the absence of an appeal by the Revenue. The court held that the Appellate Tribunal was justified in its decision, as the assessee follows the mercantile system of accounting, which permits deductions based on accrued liabilities. The Tribunal's decision was supported by the precedent set in Seth Chemical Works v. CIT [1983] 140 ITR 507, where the court allowed deductions on an accrual basis for an assessee following the mercantile system.

2. Deduction of Provision for Accrued Liability for Bonus Payable to Employees:
The assessee sought to deduct provisions made for accrued liability for bonuses payable to employees. The ITO and the Commissioner of Income-tax (Appeals) disallowed these claims, allowing only actual payments made during the previous year. The Tribunal, however, allowed the deductions based on accrued liabilities, consistent with the mercantile system of accounting. The court upheld the Tribunal's decision, citing that the Tribunal has the authority to grant relief based on the system of accounting followed by the assessee, as established in CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 and other similar cases.

3. Entitlement to Deduction of Bonus on Both Actual Payment and Accrued Liability Basis:
The assessee argued that it should be entitled to deductions for bonuses on both actual payment and accrued liability bases. The court, however, held that under the mercantile system of accounting, the assessee is entitled to deductions only on an accrual basis. The Tribunal's decision to allow deductions solely on an accrual basis was deemed appropriate and consistent with legal precedents, including CIT v. Sundaram and Co. P. Ltd. [1964] 52 ITR 763 and CIT v. Edward Keventer (Successors) P. Ltd. [1980] 123 ITR 200.

4. Disallowance of Expenditure for Maintenance of Buildings Provided for Employees' Residence Under Section 40A(5):
For the assessment year 1978-79, the Tribunal disallowed the entire expenditure incurred by the assessee for the maintenance of buildings provided for employees' residence under Section 40A(5) of the Income-tax Act, 1961. The court upheld this disallowance, referencing the Full Bench decision in CIT v. Forbes, Ewart and Figgis (P.) Ltd. [1982] 138 ITR 1, which supported the disallowance under the specified section of the Act.

Conclusion:
The court affirmed the Tribunal's decisions across all issues, emphasizing the adherence to the mercantile system of accounting and the Tribunal's authority to grant relief based on accrued liabilities. The references were answered in favor of the Revenue and against the assessee for all questions raised. The judgment directs a copy of the decision to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.