1964 (4) TMI 8 - SC - Income Tax

Whether on the facts and in the circumstances of the case the assessee is entitled to claim a deduction of bonus of ₹ 1,08,325 relating to the calendar year 1947 in the assessment year 1950-51 ? Held that - The words for the year in question mean the year in respect of which bonus is paid. Appeal dismissed.

Summary

Issues:
Interpretation of Section 10(2)(x) and Section 10(5) of the Indian Income-tax Act, 1922 regarding the deduction of bonus paid by a company to its employees.

Analysis:
The case involved a limited company that claimed a deduction for the bonus paid to its employees in 1947, but the income-tax authorities rejected the claim. The main issue was whether the liability for the bonus should be attributed to the year 1947 or 1949 based on the mercantile system of accounting followed by the company. The court had to interpret Section 10(2)(x) and Section 10(5) of the Indian Income-tax Act, which define the conditions for claiming deductions related to bonus payments.

The company argued that the liability for the bonus arose in 1947, as per the mercantile system of accounting, and should be accounted for in that year. However, the court analyzed previous judgments and established that the liability for profit bonus arises only when the claim is settled either amicably or through industrial adjudication. In this case, the claim for the bonus was settled in 1949 by an award of the industrial tribunal, making 1949 the relevant year for attributing the liability.

The court also rejected the argument to reopen the accounts for 1947, stating that such a practice does not align with the Indian Income-tax Act. The court emphasized that the mercantile system of accounting requires the recognition of liabilities when they are settled, not when they are incurred. Additionally, the court clarified that profit bonus is not akin to wages or ordinary expenses, as it is a sharing of profits based on a specific formula, and the principle of attributing payments to earlier years does not apply in the case of profit bonuses.

Furthermore, the court addressed the interpretation of the phrase "for the year in question" in the Act, clarifying that it refers to the year in which the bonus is paid, not the year in which the allowance is claimed. Ultimately, the court upheld the High Court's decision in favor of the company, dismissing the appeal and affirming that the liability for the bonus should be attributed to the year 1949.