2005 (12) TMI 70 - HC - Income Tax

Payment of bonus - year of allowability - Whether on the facts and circumstances of the case the Tribunal was right in law in reversing the order of the Assessing Officer confirming the disallowance of Rs. 66, 577 being payment of bonus of earlier years? - because the assessee switched over from cash system of accounting to mercantile system of accounting it appeared that the assessee had claimed double deduction one on the basis of cash payment and another on the basis of mercantile system of accounting namely the provision made. However apart from the fact that this might be a necessary concomitant in the year of change of system of accounting what is more material is that the assessee had been consistently paying bonus on cash basis in the past after the end of the accounting period and the same modality was adopted in the year under consideration. Therefore to state that this was payment relatable to earlier years is not absolutely correct. order of tribunal is confirmed

Summary

Issues: Reframing of question for reference under section 256(1) of the Income-tax Act, 1961 regarding the disallowance of bonus payment for earlier years.

Analysis:
The High Court of Gujarat addressed the issue of the disallowance of a bonus payment of Rs. 66,577 for earlier years in the context of a switch from cash to mercantile accounting by the assessee. The Assessing Officer initially disallowed the amount actually paid as bonus during the accounting period while allowing the deduction of the provision made. The Inspecting Assistant Commissioner directed to allow the provision and disallow the amount paid, citing that it was relatable to an earlier year due to the change in the accounting system. The Tribunal, however, ruled in favor of the assessee, relying on a Bombay High Court decision and distinguishing a Calcutta High Court decision. The Tribunal noted the consistent practice of the assessee paying bonuses on a cash basis in the year following the accounting period. The High Court found that the bonus payment was an allowable deduction, considering the historical payment practices and the change in the accounting system. The Court concluded that the Tribunal was justified in holding the bonus payment as deductible for the accounting year in question, answering the reframed question in favor of the assessee.

The Court highlighted the assessee's historical accounting practices, emphasizing the consistent payment of bonuses on a cash basis after the end of each accounting period. The Court noted that the switch from cash to mercantile accounting led to a double deduction claim, but the essential point was the regularity of bonus payments following the end of accounting periods. The Court rejected the Revenue's argument that the bonus was relatable to earlier years, stating that the payment was allowable as a deduction, with the only dispute being the year of allowability. The Court upheld the Tribunal's decision, emphasizing the factual background and the regular payment pattern of bonuses by the assessee. The Court disposed of the reference in favor of the assessee, with no order as to costs.