1984 (8) TMI 153 - AT - Income Tax

Summary

Issues:
- Deductibility of provision for bonus under the Payment of Bonus Act and additional payment to employees under an agreement in income tax assessment.
- Change in method of accounting and its impact on deduction claims.
- Allowability of additional payment beyond the maximum permissible under the Payment of Bonus Act.
- Deduction claims under the mercantile system of accounting.

Analysis:

1. The judgment dealt with two assessee's appeals related to income tax assessment and assessment under the Companies (Profits) Surtax Act for the assessment year 1980-81, along with the Department's appeal concerning the income tax assessment for the same year. The appeals were disposed of together in a common order.

2. The primary issue in the assessee's income tax assessment appeal was the deductibility of a provision for bonus and an additional payment to employees under an agreement. The dispute arose from the Department disallowing the deduction claimed by the assessee based on the method of accounting followed. The assessee contended that the mercantile system was consistently used for determining income and claimed entitlement to the deduction.

3. The assessee argued that there was no change in the method of accounting and even if there was, it was bona fide. The additional payment claimed was supported by an agreement with employees and a settlement under the Industrial Disputes Act, making it a statutory obligation and not a bonus under the Payment of Bonus Act. The Tribunal rejected the Department's objection and allowed the deduction under section 37 of the IT Act.

4. Regarding the claim for the provision made for the year 1979, the Tribunal noted a change in the method of accounting by the assessee. However, it acknowledged that the change was justifiable as the assessee had been following the mercantile system except for bonus payments. The Tribunal held that the assessee was entitled to claim deductions based on the mercantile system, provided the change was bona fide and not for undue tax advantage.

5. The Tribunal upheld the assessee's claim for deduction of the provision made for bonus and additional payment under the agreement, totaling Rs. 8,02,048. The surtax appeal was deemed consequential and modified based on the revised income from the income tax appeal. Additionally, a claim for partial disallowance in the surtax appeal was rejected. Consequently, the assessee's income tax appeal was allowed, the surtax appeal was partly allowed, and the Department's appeal was dismissed.