1979 (11) TMI 35 - HC - Income Tax

Summary

Issues:
- Deduction of disputed amount in books of account
- Claim for bonus liability under Payment of Bonus Act, 1965
- Allowability of statutory liability deduction under mercantile system of accounting

Analysis:
The judgment addresses the issue of the deduction of a disputed amount in the books of account maintained by the assessee on the mercantile system of accounting. The assessee, a firm engaged in the manufacture and sale of machinery parts, claimed a deduction for a bonus liability under the Payment of Bonus Act, 1965. The dispute centered around whether the assessee was entitled to the deduction of Rs. 13,692, which was not provided for in its account books during the relevant year of account. The Tribunal disallowed the claim based on the absence of a provision in the books for the amount in question.

The court examined the provisions of the Payment of Bonus Act, 1965, specifically focusing on Sections 10 and 11, which mandate the payment of bonus by the employer to employees based on certain criteria. It was noted that the statutory liability under the Act arises in the accounting year, and the employer is obligated to pay the bonus as per the provisions. The court relied on the decision in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363, which established that under the mercantile system of accounting, an assessee is entitled to a deduction for liabilities that arise in the relevant year, regardless of entries in the account books.

The court rejected the revenue's contention that the claimed amount represented the allocable surplus rather than the liability under Section 11 of the Act. It emphasized that the amount claimed was the liability under the Payment of Bonus Act for the specific period, and there was no dispute regarding the amount of liability. The court also distinguished previous cases cited by the revenue, highlighting that the conditions for the allowance of statutory bonus liability differ from non-statutory bonus claims.

Ultimately, the court ruled in favor of the assessee, allowing the deduction of the disputed amount and awarding costs to the assessee. The judgment clarified that under the mercantile system of accounting, statutory liabilities such as bonus payments are deductible in the year they arise, irrespective of the absence of provisions in the account books.