TMI Blog1960 (11) TMI 135X X X X Extracts X X X X X X X X Extracts X X X X ..... r in question, the assessee claimed a deduction under section 10(2)(x) of the Act on account of the bonus amount paid to its employees for the year 1947. The Income-Tax Officer disallowed the claim holding that in regard to bonus the assessee maintained its accounts on the mercantile basis and not on the cash basis and that, therefore, the bonus that the assessee could be allowed to deduct would be only the bonus payable for the year 1949. The Appellate Assistant Commissioner took the view that the bonus amount became a definite ascertained liability only when the Industrial Court's award was made and till then it was only a contingent liability; and that the assessee's method of accounting for bonus was not strictly the mercantile basis but it was not one which could be rejected as a method from which the true profits could not be ascertained. On an examination of the method and system of accounts of the assessee, the Appellate Assistant Commissioner expressed the opinion that till 1946 the order for payment of bonus used to be received before the company's accounts for the year were finalised and the amount used to be in fact debited to the profit and loss account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Income-tax Officer, the Appellate Assistant Commissioner, and by the Appellate Tribunal also. According to the Tribunal, paragraph 2 of the Order of 1950 was intended to apply to the assessee in Part B States who were previously not liable to assessment under the Income-Tax Act; that if section 10(2)(vi) and section 10(5)(b) of the Act had been uniformly applied to the asseesees in Part A States and Part B States there would have been discrimination in that, while the written-down value of the assets of an assessee in a Part A State would be the value of the assets acquired before the 'Previous year' under section 10(5)(b), in the case of the assets of a Part B State assessee depreciation would have been allowed on the original cost of the assets as the depreciation already allowed to such an assessee under the relevant State law could not have been deducted under the provisions of section 10(5)(b); that paragraph 2 of the Order of 1950 was complimentary to section 10(5)(b) of the Act; and that having been made under section 12 of the Finance Act, 1950, it had the force of a statute and did not in any way conflict with the provisions of the Income-Tax Act. On t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by the taxing authorities. The question, therefore, that requires consideration is whether the bonus amount of ₹ 1,08,325-9-3 was a liability incurred in the year of account. The Department disallowed the deduction in the computation of the profits and gains of the calendar year 1949 on the basis that the bonus related to the year 1947; that according to the system of accounting adopted by the assessee the bonus amount was debited in the accounts of the year to which it related; and that according to that method the assessee never claimed bonus on the basis of the date of the award of the Industrial Tribunal or on the basis of the date of the Actual payment. This is a mistaken view. If the system of accounting adopted by the assessee was not the cash basis, but one of adjustment irrespective of whether the profits and gains have been actually received or not and whether the expenditure has been actually paid or not, then, in view of the definition of the word 'paid' in section 10(5) the taxing authorities had no other alterative but to allow the deduction in that accounting year in which the liability to pay bonus arose. Under section 13 the assessee's method o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ult of the contribution made by the workmen in increasing production. In fixing the amount of bonus payable to workmen, the amount of the available surplus in the hands of the employer has to be determined. From this it follows that the liability to pay bonus is not incurred from the time the employer knows the extent of his profits. At that time the liability in the matter of bonus can at the most be a provisional or contingent liability. It does not become certain unless and until the actual liability is determined by admission or by adjudication of the Court after taking all the relevant factors into consideration. A great point was made by the Appellate Tribunal and the taxing authorities that the assessee's method of accounting was to debit the amount of bonus in the accounts for the particular year to which it related and that the books of 1948 were not closed till the date of the making of the order by the Industrial Tribunal on 13th January 1949. We do not think this makes any difference in the question as to when the obligation to pay bonus became a certain obligation. Even if the assessee had foreseen in 1947 or 1948 the possibility of its being required to pay add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the deeds of sale. The Supreme Court referred to Peter Merchant Ltd. v. Stedeford (1948) 30 TC 496 to emphasize the distinction between a legal liability which is deductible and a liability which is future or contingent and for which no deduction can be made, and quoted with approval the statement contained in paragraph 280 at page 203 of Simon's Income-Tax which is as follows- In computing the profits of a trade it is the normal accountancy practice to allow as an expense any sum in respect of liabilities which have accrued over the accounting period, and to make a deduction of such sums from the profits. Following the decision in Peter Merchant, Ltd. v. Stedeford (Inspector of Taxes) (1948) 30 TC 496, however, it appears that the nature of liabilities which may be deducted on business and accountancy principles does not accord with the nature of liabilities deductible for income-tax purposes. For income-tax purposes it was held that a distinction must be drawn between an actual, i.e., legal, liability, which is deductible, and a liability which is future or contingent and for which no deduction can be made. The same principle has been laid down in Senthikumara Nad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be ascertained. This decision makes it very clear that even if the assessee here knew in 1947 that it would have to pay an additional amount of bonus and had made a provision in its accounts during the year 1947-48 for the payment of the amount that would not have converted the uncertain liability into an ascertained liability. The decisions in Commr. of Inc.-Tax v. Burmah Oil Co. 34 ITR 750 and Kanpur Tannery Ltd. v. Commr. of Inc.-Tax 34 ITR 863 are also in a similar vein. The Lord President put the matter thus in J. Spencer and Co. v. Inland Revenue (1950) ITR 149:- It seems to follow that, if in the earlier period there is only a provisional or contingent liability, it is not until it has been subsequently determined to be an actual liability by admission or decision that it can properly be brought into computation. The matter was put as clearly as it can be in Edward Collins and Sons Ltd. v. Commissioner of Inland Revenue (1924) 12 TC 773 where the Lord President said- It is a general principle, in the computation of the annual profits of a trade or business under the Income tax Acts, that those elements of profit or gain, and those only, enter into the computat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounting year to which the bonus related, with all due deference to the learned Judges of the Bombay High Court, this decision does not seem to be in accord with the well settled principle that deductions are not permissible for anticipatory losses or for contingent liabilities even if they are inevitable. On a perusal of the judgment, it seems to us that in coming to the conclusion that they did in the case before them, the learned Judges of the Bombay High Court were considerably influenced by the fact that the question as to the year in which the bonus deduction was allowable was not material in that particular case. As the learned authors have pointed out in Kanga and Palkhivala's Supplement to the Law and Practice of Income-Tax (1959 Edn., at p. 192), that decision should have been different if the real point in favour of the Department - viz. that the liability to pay bonus not having arisen in the accounting year, no deduction could be claimed for that year even under the mercantile system of accounting-had been urged before the Court. For all these reasons, we are of the opinion that the liability for the payment of ₹ 1,08,325-9-3 as bonus for the cale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 10(5)(b) to an assessee in a Part B State. It was also observed that it was for the Central Government to determine if any difficulty of the nature indicated in section 12 of the Finance Act, 1950, had arisen and that Parliament had left the matter to the executive. A reference was made to the observations in Banarsi Das v. State of M.P. AIR 1958 SC 909 that it was not unconstitutional for the Legislature to leave it to the executive to determine details relating to the working of taxation laws, such as the selection of persons on whom the tax is to be laid, the rates at which it is to be charged in respect of different classes of goods and the like. The validity of the Explanation to paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, was upheld by the Supreme Court. If the Explanation is valid, it follows that the substantive provision must also be held to be valid. In view of the decision of the Supreme Court the power given to the Central Government under section 12 of the Finance Act, 1950, must be held to be a wide one permitting the Government to modify a provision substantially if it becomes necessary for the removal of a difficu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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