1989 (4) TMI 37 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of bonus set-on amount.
2. Method of accounting employed by the assessee.
3. Liability of bonus set-on amount in the year computed.

Summary:

Issue 1: Deductibility of Bonus Set-on Amount
The primary issue was whether the bonus amounts set apart (referred to as "set-on" amount) could be deducted from the profit and loss account of the assessee. The assessee claimed a deduction of Rs. 8,56,241 as bonus paid u/s 36(1)(ii) and Rs. 7,36,915 deposited in the "set-on" account u/s 37 of the Income-tax Act, 1961. The Income-tax Officer allowed the deduction of Rs. 8,56,241 but rejected the claim for Rs. 7,36,915. The Tribunal held that the latter amount cannot be considered as paid and overturned the decision of the appellate authority. The court concluded that the set-on amount, which cannot be utilized by the assessee for business purposes and is deposited perforce under the statute, is considered an expenditure and thus deductible.

Issue 2: Method of Accounting Employed by the Assessee
The second issue was whether the Tribunal was justified in disregarding and rejecting the method of accounting regularly employed by the appellant company. The assessee argued that it adopted the mercantile method of accounts and reopening assessments without any ostensible reason would adversely affect its interests. The court did not find sufficient grounds to justify the Tribunal's rejection of the accounting method employed by the assessee.

Issue 3: Liability of Bonus Set-on Amount in the Year Computed
The third issue was whether the Tribunal was justified in holding that the bonus set-on cannot be regarded as a liability of the year in which the computed amount should be carried forward for being set-on in the manner prescribed under the Payment of Bonus Act, 1965. The court held that the set-on amounts, after being deposited, cannot be utilized by the assessee and are to be paid in future within a cycle of four years. Therefore, the set-on amount is considered an expenditure incurred by the assessee and should be deducted.

Conclusion:
The court answered all three questions in the negative, in favor of the assessee and against the Revenue, concluding that the set-on amount is deductible as an expenditure. No costs were awarded.