1980 (3) TMI 164 - AT - Income Tax

Summary

Issues:
1. Disallowance of bonus and provision for bonus under section 36(1)(ii) of the IT Act.
2. Application of cash basis vs. mercantile system of accounting for bonus payments.
3. Interpretation of the Payment of Bonus Act in relation to bonus payments.
4. Assessment of liability for bonus payments based on agreements with workers.
5. Disallowance of excess payment of bonus and provision for bonus.

Analysis:
The appeal involved the disallowance of bonus and provision for bonus by M/s Rajan Leather Manufacturers (P) Ltd., Dindigul under section 36(1)(ii) of the IT Act for the assessment year 1976-77. The appellant, a private limited company engaged in the hides and skins business, contested the disallowance of Rs. 23,333 related to bonus payments and Rs. 20,000 as provision for bonus. The assessing officer disallowed the balance amount, citing that the appellant cannot claim both on the basis of payment and accrual. The AAC confirmed the disallowance, leading to the second appeal.

The appellant argued that they followed a mercantile system of accounting and had a binding agreement with workers for bonus payments. They contended that the bonus payments were regular and based on existing agreements, not on a cash basis. The appellant highlighted the distinction between bonus payments to workers and staff, emphasizing the accrual of liabilities based on agreements. The Departmental Representative relied on previous orders and the Payment of Bonus Act, claiming that all bonus payments would be affected by the Act.

Upon review, the tribunal found that the appellant consistently paid bonuses to staff and workers, with payments and provisions made in the same year. The tribunal acknowledged the unique circumstances where the liability for bonus payments became certain and ascertainable only upon agreement between the parties. The tribunal held that the disallowance of Rs. 3,333 as excess payment of bonus was unwarranted, as it did not fall under the purview of the Payment of Bonus Act. Additionally, the provision of Rs. 20,000 for 1975 was deemed valid under the mercantile system of accounting, as it was based on existing agreements and allocable surplus.

In conclusion, the tribunal allowed the appeal, granting relief of Rs. 23,333 to the appellant. The judgment emphasized the importance of interpreting bonus payments in line with accounting principles and existing agreements, ultimately supporting the appellant's position regarding the validity of bonus provisions and payments under the mercantile system of accounting.