1973 (11) TMI 6 - HC - Income Tax

Assessee is a private limited company. For the assessment year 1957-58, the account year being the calendar year ending December 31, 1956, the assessee submitted a return and claimed a deduction of a sum of Rs. 1,98,993. The assessee was keeping its accounts on mercantile system. In the accounts for the calendar year 1956, the assessee made a provision for bonus payment of Rs. 1,50,000 for the year 1956 on the basis of 3 3/4 months wages. The bonus was actually paid after the close of the accounting year 1956, the actual payment being of the order of Rs. 1,98,993 equivalent to five months wages. The assessee claimed deduction also in regard to the difference of Rs. 48,993 not provided in the accounts of 1956 but paid for 1956 in later periods representing additional bonus liability equivalent to 11 months wages - Whether the amount paid is deductible in the year in which provision was made

Issues Involved:
1. Admissibility of the deduction of Rs. 1,50,000 as a provision for bonus in the assessment year 1957-58.
2. Whether the provision for bonus constituted an ascertained or accrued liability.
3. The relevance of past practices and implied agreements in determining the nature of the liability.
4. The legal precedents and their applicability to the case at hand.

Detailed Analysis:

1. Admissibility of the Deduction of Rs. 1,50,000 as a Provision for Bonus in the Assessment Year 1957-58:

The primary issue was whether the provision of Rs. 1,50,000 made by the assessee for bonus payment in the calendar year 1956 was an admissible deduction for the assessment year 1957-58. The Income-tax Officer disallowed the entire claim for deduction, arguing that no part of it was an ascertained liability at the close of the accounting year 1956. The Tribunal, however, allowed the deduction to the extent of Rs. 1,50,000, considering it an admitted liability.

2. Whether the Provision for Bonus Constituted an Ascertained or Accrued Liability:

The court emphasized that in the mercantile system of accounting, a claim for bonus can be allowed only when it is an ascertained or accrued liability and not a contingent liability. The court found no evidence that the provision of Rs. 1,50,000 was made based on any agreement or systematic basis followed in earlier years. The provision was deemed a prudent provision for a possible contingent liability rather than an accrued liability.

3. The Relevance of Past Practices and Implied Agreements in Determining the Nature of the Liability:

The assessee argued that the practice of making provisions for bonus in the accounts had been followed since the assessment year 1943-44, implying an agreement between the assessee and its employees. The court, however, found no evidence of such an agreement or any definite basis for the provisions made in earlier years. The Tribunal did not accept that any particular system of accounting was systematically followed.

4. The Legal Precedents and Their Applicability to the Case at Hand:

The court referred to several legal precedents to determine the nature of the liability:

- Associated Printers (Madras) Private Ltd. v. Commissioner of Income-tax: The court held that a liability to pay bonus arises only when an award is made or an agreement is reached between the employer and the employee. The court observed that a provision for meeting a contingent liability is not an allowable item of deduction.

- Pankaja Mills Ltd. v. Commissioner of Income-tax: The court held that a voluntary payment based on advice, without any claim made by the workers or agreement, is a contingent liability and not an accrued liability.

- Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Private Ltd.: The court held that the liability to pay bonus arises when an award is passed by the industrial tribunal, and the assessee is entitled to claim the deduction in the assessment year corresponding to the year in which the liability was incurred.

The court concluded that the provision of Rs. 1,50,000 was not made based on any agreement or award and thus was not an accrued liability. The sum of Rs. 1,50,000 was deemed not an admissible deduction for the assessment year 1957-58.

Conclusion:

The court answered the reference in the negative and in favor of the revenue, holding that the sum of Rs. 1,50,000 was not an admissible deduction. The court also noted that while the assessee would be entitled to a deduction in the assessment year 1958-59 when the amount was actually paid, this issue was not covered by the question referred to the court. The revenue was entitled to its costs, with counsel's fee set at Rs. 250.

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