1965 (7) TMI 39 - HC - Income Tax

Court rejects switch to mercantile basis for bonus deductions, cites historical practice. Cash basis upheld.

The court upheld the disallowance of a bonus provision claimed by the assessee-company, emphasizing the historical acceptance of deductions based on ... Bonus or Commission - Assessment year 1949-50 - Assessee company which was following mercantile system of account was claiming deduction of bonus on actual payment basis - Whether liability for payment of bonus is incurred only when conditions for making such claim are satisfied or claim is settled amicable or by industrial adjudication and therefore when liability was unascertained even on mercantile system of accounting it could not be allowed as deduction under section 10(2)(x) of 1922 Act Issues:1. Deductibility of bonus provision in the assessment year under consideration.Analysis:The judgment revolves around the deductibility of a bonus provision in the assessment year. The assessee-company claimed a deduction for a bonus provision of Rs. 4,50,000 in the profit and loss account for the relevant previous year, which was actually paid in the following year. The Income-tax Officer disallowed a major portion of the provision, allowing only the actual payment made during the relevant year. The Appellate Assistant Commissioner upheld the disallowance, stating that the assessee could not switch from the cash system of accounting to the mercantile basis for bonus. On further appeal, the Income-tax Appellate Tribunal noted the historical practice of allowing bonus deductions based on actual payments rather than provisions in the accounts. The Tribunal upheld the disallowance, considering the assessee's acceptance of the cash basis for bonus claims over the years. The court was tasked with determining the acceptability of the assessee's accounting method and the deduction of the bonus provision.The court analyzed the arguments presented by the assessee's counsel, emphasizing the distinction between the mercantile and cash systems of accounting. It was highlighted that the assessee had consistently made provisions for bonus in its accounts, but the department had historically accepted deductions based on actual payments rather than provisions. The court emphasized that a change in accounting method should be bona fide and not a casual departure from the regular practice. It was noted that the assessee's attempt to switch to the mercantile basis for bonus deductions was not justified, given its historical acceptance of the cash basis imposed by the department.Moreover, the court delved into the principles of the mercantile system of accounting, emphasizing that debits in the accounts must represent enforceable liabilities that have accrued and can be enforced. The court cited the conditions laid down by the Supreme Court for allowing bonus under the mercantile system, emphasizing the need for a legitimate claim by workers and the existence of enforceable liabilities. In the absence of evidence showing compliance with these conditions, the court concluded that even under the mercantile system, the bonus provision could not be allowed as a deduction.Additionally, a precedent from the Bombay High Court was discussed, highlighting the importance of amicable settlements or industrial adjudications in determining liabilities under the mercantile system. The court rejected the notion of reopening accounts to accommodate bonus payments and reiterated the necessity of ascertained liabilities for legitimate deductions. Ultimately, the court ruled against the assessee, emphasizing the lack of compliance with the conditions for bonus deductions and upholding the disallowance of the bonus provision. The court directed the assessee to bear the costs of the reference.