Amounts credited to the bonus reserve account have been allowed by way of deductions under section 36(1)(ii) of the Income-tax Act, 1961 - Income Tax - 590/CBDT

INSTRUCTION NO. 590/CBDT Dated : August 18, 1973 Section(s) Referred: 36(1)(ii) Statute: Income - Tax Act, 1961 A case has come to the notice of the Board in which the amounts credited to the bonus reserve account have been allowed by way of deductions under section 36(1)(ii) of the Income-tax Act, 1961 in the assessment year while computing the total income. 2. If an employer maintains his books on the mercantile system of accounting, he is entitled to a deduction in respect of the bonus in the year in which he admits the employees' claim or the claim is adjudicated upon if during a year the claim for bonus is admitted but the quantum of the bonus is in dispute, a fair estimate of the liability may be allowed as a deduction if provided in the books of accounts vide Textile Machinery Corporation Ltd. Vs. C.W.T. (67 ITR, p. 122) (accepted by the Board). There is, however, no justification for allowing as a deduction the bonus provided in the accounts as reserve. Under the Bonus Act, 1965 the amount of allowable surplus is determined with reference to the profits. Where surplus exceeds the maximum bonus which is payable the employer is required to credit the excess to a bonus reserve account under section 15 of the Bonus Act, 1965 after paying during the year bonus due to the employees. The excess, subject to the prescribed limit is carried forward to four accounting years for being utilised for the payment of bonus in those years. Reserves for bonus made in the aforesaid circumstances or otherwise are not to be allowed as a deduction till the claim materializes in the manner mentioned in the opening sentence of this para. The claims for bonus expenditure should be carefully scrutinised in this context and necessary disallowances made. 3. Necessary instructions may please be issued to the officers working in each charge on the lines indicated above.