1970 (3) TMI 27 - HC - Income Tax

Assessee following mercantile system of accounting - what would be the date of accrual of liability for bonus and for leave and holiday wages payable to the employees - sum set apart by an employer in any year for meeting the contingency of some of his workers going on leave the next year cannot be regarded as a permissible expenditure under section 10(2)(xv)

Summary

Issues:
1. Deduction of bonus amount under section 10(2)(xv) of the Income Tax Act for the accounting year 1949.
2. Deduction of leave wages under sections 79 and 80 of the Factories Act, 1948 for the accounting year 1949.

Analysis:
1. The first issue pertains to the deduction of a bonus amount claimed by the assessee mills company for the accounting year 1949. The company claimed a deduction of Rs. 4,16,604 as bonus related to the accounting year 1948. The Income-tax Appellate Tribunal accepted this claim, which was contested by the Commissioner of Income-tax. The Tribunal allowed the deduction based on a decision of the High Court of Madhya Pradesh, disregarding a decision of the High Court of Bombay. The Supreme Court's decision in a similar case supported the allowance of the deduction, emphasizing that a liability is incurred when a claim to profit bonus is settled. As the liability for the bonus amount was settled in 1949, the deduction was deemed valid for the accounting year 1949. The Tribunal's decision to allow the deduction of Rs. 4,16,604 was upheld, answering question No. 1 in the affirmative.

2. The second issue concerns the deduction of leave wages amounting to Rs. 1,75,246 under sections 79 and 80 of the Factories Act, 1948 for the accounting year 1949. The assessee-company made a debit entry for this amount in its books of accounts. However, the Appellate Tribunal rejected this claim, stating that the liability to pay leave wages had not been incurred in the accounting year. Referring to a decision of the Madhya Pradesh High Court, it was highlighted that the liability to pay wages for leave arises only under specific circumstances, such as when a worker goes on leave or is discharged. Since the liability for leave wages was contingent and may or may not be realized, setting aside an amount for potential future payments does not qualify as a permissible deduction under the Income Tax Act. Following the reasoning of the Madhya Pradesh High Court, the claim for deduction of Rs. 1,75,246 was deemed unsustainable, and the Tribunal's decision was upheld, answering question No. 3 in the negative.

In conclusion, the High Court of Bombay upheld the Tribunal's decision to allow the deduction of the bonus amount but rejected the claim for deduction of leave wages, based on the principles established by the Supreme Court and the Madhya Pradesh High Court. The judgment clarified the criteria for allowable deductions under the Income Tax Act, emphasizing the importance of when liabilities are incurred for determining deductibility.