TMI Blog1965 (7) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... cant. R.L. Gulati for the Respondent. JUDGMENT Manchanda, J. This is a case stated under section 66(1) of the Income-tax Act of 1922. The question referred is : "Whether, on the facts and in the circumstances of the case stated above, the amount of Rs. 4,50,000 provided for in the balance-sheet and debited to the profit and loss account as bonus, could be allowed as a deduction in the assessment year under consideration ?" The material facts are that for the assessment year 1949-50, the previous year being 31st December, 1948, the assessee-company claimed as a deduction a provision made for bonus amounting to Rs. 4,50,000 provided for in the profit and loss account in the relevant previous year, but actually paid in the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance of bonus on the ground that the assessee could not change over from the cash system of accounting in respect of bonus which it had hitherto followed to the mercantile basis. Still being aggrieved, the matter was taken to the Income-tax Appellate Tribunal. The Tribunal was of the view that though the assessee was following the mercantile system of accounting nevertheless there was nothing to prevent it from following the cash system in respect of bonus payment. It found that the allowance for bonus in the past had never been on the basis of what had been provided by the company in its books of account "during each of the years but it was based entirely on the actual payments made during each such year". Such disallowance was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted the cash basis, in respect of bonus, imposed by the department upon it, it is too late in the day now for it to turn round and contend that it was not following a hybrid or mixed method of accounting. It is not incumbent upon an assessee to follow a purely cash method of accounting or a purely mercantile method of accounting. It can be a mixture of both (see Dhakeshwar Prasad Narain Singh v. Commissioner of Income-tax [1936] 4 ITR 71 (FB). It is no doubt open to the assessee to change his method of accounting but the change should be bona fide and not a casual departure from the regular method which has hitherto been accepted by him for a number of years. Merely because in the subsequent assessment year there was a loss and the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stem can never be "stretched to embrace all sorts of provisional, notional or contingent payments which the assessee considers that he might ultimately be called upon to pay. It is well settled that anticipated losses and contingent liabilities can-claimed under the mercantile system of accounting. The liability definite and real. The Supreme Court in Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Private Ltd. [1964] 53 ITR 134 (SC) at page 138, has laid down the conditions which must be satisfied before bonus can be allowed even on the mercantile system of accounting. They are : "(a) That the workmen are entitled to make a claim to profit bonus because certain conditions stood satisfied ; (b) The workmen have to make a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Nagri Mills Co. Ltd. [1958] 33 ITR 681 , where it was held by the Bombay High Court that even where an assessee maintains its accounts on the mercantile basis but it had not made any entry towards bonus for the calendar year 1951, and upon a dispute regarding bonus payable to the workers having been referred to the conciliation board who by its award in June, 1952, directed the company to pay bonus out of the profits for that year, the company was entitled in making its return to deduct for the year 1951, the bonus which was distributed in December, 1952. This view of the Bombay High Court would necessarily have involved the reopening of the accounts for 1951, if bonus was to be debited against the income for that year. Though this part ..... X X X X Extracts X X X X X X X X Extracts X X X X
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