1971 (7) TMI 29 - HC - Income Tax

Whether where the assessee had kept its books on mercantile system of accountancy and had made a provision for payment of bonus just before the close of the accounting year in pursuance of a resolution of the board of directors, it could rightly be held that the claim for the deduction on the amount for the provision of bonus cannot be allowed as a deduction on the ground that the assessee s profits were not ascertained or known till the final adjustment of the accounts Held, no

Summary

Issues:
1. Deductibility of bonus provision in income tax assessment.
2. Interpretation of Section 36 of the Income-tax Act, 1961.
3. Accounting method impact on bonus deduction eligibility.

Detailed Analysis:
1. The primary issue in this case was whether the provision made for the payment of bonus by an assessee, who kept its books on a mercantile system of accountancy, could be allowed as a deduction even if the profits were not ascertained at the time of making the provision. The assessee, a private limited company engaged in the sports goods business, passed a resolution for bonus payment at the end of the accounting year. The Income-tax Officer disallowed the deduction, but the Appellate Assistant Commissioner and the Tribunal disagreed, with the Tribunal disallowing the claim based on the timing of profit ascertainment.

2. The judgment delves into the interpretation of Section 36 of the Income-tax Act, 1961, which allows deductions for bonus payments. The Tribunal contended that since the profit for the year had not been ascertained when the provision for bonus was made, the deduction could not be allowed. However, the High Court disagreed, emphasizing that the directors had an idea of the profits before making the provision, and the exact profit figure need not be known at that time. The Court highlighted that bonus is fixed with reference to profits, but it is not necessary for the exact profit amount to be determined before making the provision.

3. The impact of the accounting method on the deduction eligibility was crucial in this case. The Court noted that under the mercantile system, a deduction can be claimed when the liability is incurred and appropriate entries are made, regardless of the actual payment date. In contrast, under the cash system, a deduction is allowed only upon payment. As the assessee maintained accounts on the mercantile system and had incurred the liability when passing the resolution, the Court held that the company was entitled to the deduction claimed, irrespective of the final profit calculation at the time of the bonus declaration.

In conclusion, the High Court ruled in favor of the assessee, allowing the deduction for the bonus provision, emphasizing that under the mercantile system, the timing of profit ascertainment is not a bar to claiming deductions for liabilities incurred.