1982 (9) TMI 34 - HC - Income Tax

Summary

Issues:
1. Assessment of income based on accounting system
2. Treatment of bills receivable and payable in accounting
3. Allowability of special bonus under Income-tax Act

Analysis:

Issue 1: Assessment of income based on accounting system
The case involved determining whether the assessee-company maintained the cash system of accounting for various assessment years. The Tribunal examined the accounts and found that the salaries, wages, and expenses were not provided for in the books of account and profit and loss account at the end of each accounting year. The Tribunal concluded that the assessee followed the cash system of accounting based on this observation. The High Court upheld the Tribunal's findings, stating that the decision was justified as it was based on a thorough examination of relevant documents.

Issue 2: Treatment of bills receivable and payable in accounting
Regarding the treatment of bills receivable and payable, the Tribunal found discrepancies in the AAC's order, noting that bills receivable or sundry debtors were not shown on the assets side of the balance sheet. The Tribunal also observed that salaries and wages payable were not provided for in the books of account in the last month of each accounting year, indicating a cash system of accounting. The High Court agreed with the Tribunal's findings, emphasizing that the assessee's accounting practices supported the cash system.

Issue 3: Allowability of special bonus under Income-tax Act
The case also involved the disallowance of a special bonus paid to directors and employees on the occasion of the golden jubilee celebration. The ITO and AAC disallowed the claim, considering it an ex gratia payment. However, the Appellate Tribunal allowed the claim under section 37 of the Income-tax Act. The Tribunal reasoned that the bonus was a recognition of past services and varied based on the length of service. The High Court concurred with the Tribunal's decision, stating that the payment was for the business and satisfied the conditions of section 36(1)(ii) as well. As the claim was upheld under section 36(1)(ii), the High Court did not find it necessary to answer the question related to section 37.

In conclusion, the High Court ruled in favor of the assessee on the issues of accounting system maintenance and the allowability of the special bonus, emphasizing the adherence to the cash system of accounting and the justification for the bonus payment under the Income-tax Act.