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Issues:
1. Whether the assessee is entitled to deduction claimed for provisions for bonus under section 36(1)(ii) of the Income-tax Act, 1961? 2. Whether the provision for bonus can be allowed as a deduction even if the sum was not actually paid to the employees? Analysis: The judgment pertains to a consolidated reference for two assessment years by the Income-tax Appellate Tribunal on the claim made by a registered firm, engaged in the manufacture and sale of bidis, for deduction of provisions for bonus. The dispute arose as the Income-tax Officer disallowed the claimed amounts as no bonus payments were made by the assessee. The Appellate Assistant Commissioner and the Tribunal allowed the deduction, citing the maintenance of accounts on the mercantile system. The key legal provision in question was section 36(1)(ii) of the Income-tax Act, 1961, which allows deductions for sums paid as bonus. The judgment emphasized that under the mercantile system, a liability need not be actually paid but should be incurred according to the accounting method. The definition of "paid" in section 43(2) was crucial in determining the eligibility for deduction. It was highlighted that a mere provision for bonus does not qualify as "paid" unless a legal liability is established, such as under a statute, award, agreement, or settlement. The court pointed out that the critical aspect of whether the provision for bonus was covered by a legal liability was not examined by the income-tax authorities. The judgment highlighted the necessity to establish a real liability for bonus payment before allowing the deduction under section 36(1)(ii). The court referred to precedents emphasizing the need for a clear legal liability for bonus payments to qualify for deduction. It was noted that the mere maintenance of accounts on the mercantile system was insufficient to claim the deduction without proving the existence of a legal liability. As the question of legal liability was not adequately addressed, the court decided to remand the case to the Tribunal for further inquiry and examination of the liability aspect. The judgment cited a previous case where a similar issue was addressed by taking assurance from the assessee, but the court opted for a remand in this instance for a fresh enquiry into the legal liability for bonus payments. In conclusion, the court declined to answer the questions raised and remanded the case to the Tribunal for a detailed examination of the legal liability aspect concerning the provision for bonus. The judgment highlighted the importance of establishing a genuine legal liability for bonus payments to qualify for deductions under the Income-tax Act, 1961.
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