1971 (2) TMI 24 - HC - Income Tax

Whether Tribunal is correct in holding that the liability for payment of bonus accrued due on the dates on which the provision was made in the balance-sheet of the assessee-company for the three years under appeal irrespective of the fact that the same was actually paid in subsequent years

Summary

Issues:
Interpretation of liability for payment of bonus based on accounting system.

Analysis:
The judgment addresses the issue of whether the liability for payment of bonus accrued due on the dates of provision in the balance sheet, even if the actual payment occurred in subsequent years. The assessee, a limited company, had made provisions for bonus payments in its account books for specific amounts during the relevant years. The Income-tax Officer rejected the deduction claim for the bonus amounts provided but not yet paid, allowing only the amounts actually disbursed during each year. The Appellate Assistant Commissioner referred to the mercantile system of accounting followed by the assessee and allowed the deductions based on past practices of allowing the entire amount of bonus due to be paid in the year it pertained to, regardless of the actual disbursement date. The Income-tax Appellate Tribunal upheld the Appellate Assistant Commissioner's decision, emphasizing that the liability accrued when the board of directors passed the resolution for bonus payment, irrespective of the payment timing.

The Tribunal highlighted that the provision for bonus in the accounts was made based on a resolution by the company's board of directors, who had the authority to declare bonus without shareholder approval. The Tribunal endorsed the approach of allowing the bonus in the years it accrued, even if paid in subsequent years, as long as the provision was made based on a regular calculation method. The Tribunal stated that any undisbursed amount from the provision should be added back as the assessee's income. The judgment emphasized that under the mercantile system of accounting, the liability for bonus accrued when the obligation to pay arose, which was when the board of directors passed the resolution and the corresponding entry was made in the account books.

The court referred to previous cases related to the determination of bonus payment liabilities arising from labor tribunal awards, emphasizing that the current case involved the liability arising from a resolution of the board of directors. Ultimately, the court answered the question in favor of the assessee, affirming that the liability to pay bonus accrued when the board passed the resolution, aligning with the mercantile accounting system. The assessee was awarded costs, and the counsel's fee was also assessed.