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TMI Blog1980 (6) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... y provisions for bonus transferred to the bonus set-on reserve account as per Bonus Act. The perusal of this in greater depth shows that the bonus which is only payable can be charged to the account of the assessee. the bonus which is not payable cannot be charged and claimed as expenses in the relevant assessment year. This amount which was also charged to the profit and loss account has been allowed as claimed by the assessee during the course of assessment. The perusal of the IT Act in greater depth shows that the deduction under the Act is to be allowed only to the extent of bonus payable under Bonus Act. Therefore, the amount payable or paid during the year as bonus to the employees can be allowed to the extent to which the same is paid or payable but not the provision or the set-on amount. Therefore, it is quite clear that the amount which has been transferred to the bonus set-on account for the year amounting to.... which is only a reserve, cannot be charged to the profit and loss account of the company and as such not an allowable expenditure. This matter has come to my notice from an investigation of the various materials on record and after research into the facts and var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue with the ITO for all the assessment years under appeal by way of written submissions made of 6th March, 1978. In the said written submissions the assessee, inter alia, contended that, "any reason which led you to believe that our income chargeable to tax for the above assessment year has escaped assessment within the meaning of s. 147 of the IT Act, 1961, was, however, neither disclosed in your above notice nor during discussions in the matter." It was also contended before the ITO at the re-assessment stage that, (i) the notice issued under s. 148 was bad in law, since there was no income which has escaped assessment: (ii) proceedings initiated under s. 147(b) are not based on any information which came into possession of the Department subsequent to the making of the original assessment, since all the material facts and informations required for the assessment were there on the record at the time of passing original assessment order; (iii) that the income which is said to have escaped assessment and for which re-assessment proceedings have been started has already been considered in subsequent assessment year; (iv) that the liability which has been provided has arisen out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom record and the method has since been accepted by the Department after having been given due thought and consideration. 8. The re-assessments in the case of the assessee were finalised vide orders of assessments made for all the assessment years under appeal on 20th July, 1978 and the ITO revised the originally assessed income of the assessee company for all the three assessment years. An amount of Rs. 2,26,059 for the asst. yr. 1972-73, Rs. 3,92,355 for the asst. yr. 1973-74 and Rs. 6,97,002 for the asst. yr. 1975-76 were added in the originally assessed income, in lieu of, "amount credited to 'bonus set-on' reserve account". The ITO in framing the reassessment reasoned that, the assessee company is in the habit of creating a reserve, namely, 'bonus set-on reserve' charging the profit and loss account, over and above the bonus payable for the previous year. The 'bonus set-on reserve' is created according to the provisions of s. 15 of the Payment of Bonus Act, 1965. The permissible reserve is created for the purpose of falling upon the same if necessary, when there is small profit or no profit to pay bonus to the employees under the Bonus Act. If the reserve is not utilised wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of the ITO under the above provisions of law were totally different, hence the facts of the case and the ratio of the decision of the Andhra Pradesh High Court has had no bearing on the facts of the assessee's case. He further observed that in the case of Kalyanji Mavji & Co., the Supreme Court have observed that the word information as found out in s. 34(1)(b) of 1922 Act, was of the widest amplitude and comprehends a variety of factors, nevertheless, the power under s. 34(1)(b) of the 1922 Act, however wide it may be, is not plenary because discretion of the ITO is controlled by the words "reason to believe". Where, however, the ITO gets no subsequent information, but merely proceeds to re-open the original assessment without any fresh fact or material or without any enquiry into the materials which form part of the original assessment, s. 34(1)(b) would have no application. As regards the decision of the Calcutta High Court, the CIT (A) observed, that Their Lordships have observed that, "in a case where the ITO on his own initiative and on materials which were before him at the time of the original assessment changed his opinion and came to a different conclusion, he would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come up in second appeals before us, as such we are seized of the matter. 14. The assessee has taken the following five substantive grounds which are common to all the assessment years. "1. That the order was bad in law in as much as the reopening proceedings under s. 147(b) were misconceived, irregular and invalid. 2. That the ld. officer erred in facts and in law in issuing a notice under s. 148 and reopening the assessment merely on the basis of fresh application of his mind to an old and regularly discussed issue and the order under s. 143(3)/147 read with s. 144B was illegal and without jurisdiction. 3. That the reasons for reopening were not valid and the records of different assessment years would show positive evidence and materials that the question was gone into before original assessments and the reopening did not satisfy the requirements of law. 4. That the ld. officer erred in facts and in law in disregarding the regular method of accounting regularly employed by the appellant company and the ld. officer could not overrule the mandatory provisions of s. 145(1) and could not reject the method on the basis of an unreasonable interpretation. 5. That the bonus set-on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... WTO, 'H' Ward, and Others, 1978 CTR (Cal) 210 : (1979) 119 ITR 629, apart from relying upon the ratio of the decision of the Supreme Court in the case of Kalyanji Mavji & Co. vs. CIT, West Bengal II (1976) 102 ITR 287 (SC). Shri Chattopadhyay further contended that the decision of the Gauhati Bench since relied upon by the learned CIT (A) while deciding the cases of the assessee on merits, was made while relying upon the order dated 11th May., 1978 made by the Tribunal 'B' Bench, Calcutta, in the case of Express Cables Ltd., whereby reference application under s. 256(1) of the Act was rejected by the Tribunal, but subsequently Their Lordships of the Calcutta High Court on an application made by the assessee Express Cables Ltd. under s. 256(2) of the Act have required the ITAT to state the case and to refer it to the Hon'ble Calcutta High Court for its opinion, and, accordingly, the reference application made by the assessee was allowed to the extent as above. Shri Chattopadhyay in the light of this fact has tried to make out a case that under s. 256(2) of the Act, the High Court requires the Tribunal to state that a case and refer it in the High Court only when the High Court is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeals of the assessee be accepted on the preliminary objection as to the applicability of the provisions of law under s. 147(b) of the Act, as also on merits since regular method of accounting within the meaning of s. 145 of the Act could not be disturbed by the ITO as there was no basis that the real commercial profits for the accounting period relevant to the assessment years under appeal could not have been computed from the method regularly employed by the assessee 16. On his part, Shri B.N. Sarma Barthakur, the ld. Departmental Representative placed strong reliance on the observations and findings of the lower authorities and contended that real enquiries having not made at the time of the original assessments, the facts of the cases in appeal before us warrant application of s. 147(b) of the Act, and for the purpose he relied upon the ratio of the decision in the case of Kalyanji Mavji & Co. vs. CIT, West Bengal-II 1976 CTR (SC) 85 : 102 ITR 287 (SC), in the case of Indian and Eastern Newspaper Society 119 ITR short note 21 (SC) and in the case of Indian and Eastern Newspaper Society vs. CIT (1979) 12 CTR (SC) 190. 17. We have given our due and thoughtful consideration to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . . 10,89,357 Add: For the year . 7,36,915 . . 18,26,272 1975-76 (1977-78) . Less: Written back of 1971-72 to P &L a/c . 3,92,355 . . 14,33,917 Add: For the year . 62,479 . . 14,96,346 1976-77 (1978-79) . Less: From set-on of 1973-74 Rs. 5,88,346 has been utilised for payment of Bonus due to insufficient allocable surplus . . .. . 5,88,346 . . 9,08,050 1977-78 (1979-80) Less: Balance set-on of 1973-74 Rs. 1,08,656 and part of 1974-75 has been utilised for Payment of Bonus due to insufficient allocable surplus . 7,33,872 . . 1,74,178 1978-79 (1980-81) . Less: Balance set-on of 1974-75 Rs. 1,11,699 and full set-on of 1975-76, Rs. 62,479 has been utilised for payment of Bonus due to insufficient profit. . 1,74,178 . . Nil" 20. This 'bonus set-on reserve' has been shown under the statutory 'Fourth Schedule' under s. 15 of the Payment of Bonus Act and Rules, 1965, as under: "Payment of Bonus Act and Rules, 1965. FOURTH SCHEDULE (See Section 15) In this Schedule, the total amount of bonus equal to four per cent of the annual salary or wage payable to all the employees is assumed to be Rs. 50,000. Accordingly, the maximum bonus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso the basis of creating such reserve. Presumably this reserve was kept for lean years and if so please state why the same should be allowed in computation of income for the year in which the reserve was credited." To the above query, the assessee has rejoined the issue with the ITO as to the subject-matter of 'bonus set-on reserve' vide assessee's letter dt. 11th Jan., 1971, in the following terms: "That the meaning of "set-on Reserve" is that where for any accounting year the allocable surplus exceeds the amount of bonus payable to the employees in the establishment under s. 11, of the Payment of Bonus Act, 1965, then the excess shall, subject to a limit of 20 per cent of the total salary or wage of the employees employed in the establishment in that accounting year, be carried forward for being set-on in the succeeding accounting year and so on upto the and inclusive of the Fourth accounting year to be utilised for the purpose of payment of bonus in the manner illustrated in Fourth Schedule of the Payment of Bonus Act, 1965. Year-wise break-up is given below: Accounting year Bonus set-on carried over under sec. 15 1964-65 Rs. 1,07,200.00 1965-66 Rs. 1,35,300.00 1966-6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Rs. 10,89,357 Add: Set-on for the year Rs. 7,36,915 . Rs. 18,26,272 It is in respect of this set-on for the year under reference amounting to Rs. 7,36,915 that the ITO made this addition on the ground stated by him in the assessment order, as it has been held by him that the said amount of bonus does not constitute to be 'bonus payable in the year' within the meaning of s. 36(1)(ii) of the IT Act, 1961. On a careful perusal of the assessment order of the ITO presently under appeal, it is seen that the computation of allocable surplus, the allocation of statutory and ascertained liability of the bonus payable for the year, as well as the computation of the bonus set-on reserve, not exceeding the actual amount of bonus payable, have been made by the appellant company as per the statutory provisions of the Payment of Bonus Act, 1965, read with the Third and Fourth Schedule of the said Act which fact has not been disputed by the ITO in the assessment order. It is only in the matter of the carrying forward of the set-on reserve that the ITO has contended that the said sum cannot be treated as an actual and ascertained liability pertaining to bonus payable by the appellant compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sments, and the ITO, in the instant assessment, has deviated from the principles followed in the earlier assessments. It has been contended that under the mercantile system, if a business liability has definitely arisen in the accounting year, a deduction should be allowed although the liability may pertain to earlier year, or may have to be discharged at a future date and the cost of discharging it may be indefinite and may have to be ascertained. I have given careful consideration to the arguments preferred on behalf of the appellant company at the time of hearing of the appeal, as well as to what has been stated by the ITO in the assessment order. As discussed above, the ITO has disallowed this amount of Rs. 7,36,915 being set-on reserve, as not being bonus payable for the year. Having regard to the specific provisions in the 1st proviso to s. 36(1)(ii) of the IT Act, 1961, which has been elaborately discussed in paras (iii) above, and the fact that the provision made by the appellant company is a "statutory liability under s. 15 of the Payment of Bonus Act, 1965, which Act alone governs the principles of Payment of Bonus, I hold that the action of the ITO, in this regard, is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nct and separate head, 'bonus set-on reserve' and this head has been shown in the printed books of balance-sheet and profit and loss account of the assessee regularly from year to year. The said subject-matter 'bonus set-on reserve' has since been a subject of detailed enquiries during the assessment proceedings for the asst. yr. 1970-71 and the claim was allowed at the assessment stage, and there has been no action by the Revenue under any sections of the Act against that assessment. The said subject-matter, 'bonus set-on reserve' has again been a subject matter of investigation and enquiries at the assessment stage for the asst. yr. 1976-77, and the claim was negatived, but allowed by the AAC in appeal by the assessee, though the action of the ITO was upheld by the ITAT in further appeal by the Revenue. 28. All the above facts go a long way to disprove the reasons recorded by the ITO for re-opening of the assessments for the assessment years under appeal since, all the lower authorities have perused the subject-matter in great details and depth and certainly the claim having been negatived, discussed and enquired into shows, that the IT Act, has also been perused by the lower ..... X X X X Extracts X X X X X X X X Extracts X X X X
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