1986 (1) TMI 44 - HC - Income Tax

Summary

Issues Involved:
1. Reopening of assessment u/s 147(b) of the Income-tax Act.
2. Inclusion of bonus reserve in assessable income.
3. Allowable deduction of bonus reserve under the Income-tax Act.

Summary:

Issue 1: Reopening of Assessment u/s 147(b)
The Tribunal held that the Income-tax Officer (ITO) was entitled to reopen the assessment u/s 147(b) based on an internal audit note pointing out that the provision for bonus under section 15 of the Payment of Bonus Act, 1965, related to an unascertained liability. However, the court concluded that the audit note does not constitute "information" within the meaning of section 147(b). The Supreme Court's decision in Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 clarified that an audit note cannot be the basis for reopening an assessment as it merely represents a change of opinion on material already considered. Therefore, the ITO was not justified in reopening the assessment for the year 1973-74.

Issue 2: Inclusion of Bonus Reserve in Assessable Income
The court examined whether the amounts set apart in the profit and loss account pursuant to the provisions of the Bonus Act formed part of the assessable income. It was determined that the reserve created under section 15(1) of the Bonus Act is a provision for future liability and not an amount expended during the accounting year. The reserve fund remains with the assessee and is intended to meet contingent liabilities that may arise in the future. Therefore, it forms part of the assessee's income and is not deductible under section 37 of the Income-tax Act.

Issue 3: Allowable Deduction of Bonus Reserve
The court held that a provision to meet an unascertained future contingent liability is not a permissible deduction under the Income-tax Act. The profits earned in a particular year should be assessed as assessable income during that year. The court referenced various judgments, including CIT v. Travancore Sugars and Chemicals Ltd. [1973] 88 ITR 1, to support the principle that income diverted at source is deductible, but a reserve fund retained by the assessee is not. The sums set apart under section 15(1) of the Bonus Act are not expended and are intended to meet future contingencies, thus forming part of the assessable income.

Conclusion:
The court answered question No. (i) in O.P. No. 1833 of 1977-B against the Revenue, stating that the ITO was not justified in reopening the assessment. Consequently, questions Nos. (ii) and (iii) were not addressed. In O.P. No. 1834 of 1977-B, both questions were answered against the assessee, affirming that the bonus reserve forms part of the assessable income and is not a permissible deduction. The parties were directed to bear their respective costs.