Bonus provision deduction requires an ascertained liability; contingent or unadjudicated claims are not deductible under mercantile accounting.

Under the mercantile system, a bonus provision is deductible only if it reflects a real, enforceable and ascertained liability. A unilateral shift from actual payment to accrual basis is ineffective unless it is a bona fide and consistently applied change in the regular method of accounting. Where there is no proof of a workers' claim, settlement, or industrial adjudication fixing the obligation, the provision remains contingent and unascertained and is not allowable as expenditure for income-tax purposes.

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Issues: Whether the assessee could claim deduction for the provision made towards bonus on accrual basis, and whether such provision was allowable as a liability under the accounting method accepted for income-tax purposes.

Analysis: The assessee had for several years been allowed bonus only on the basis of actual payment, and the attempted shift to accrual basis was not supported by bona fide change in the regular method of accounting. A taxpayer may adopt a mixed or hybrid method, but a change in method must be genuine and consistently employed. Even on the assumption that bonus was claimed under the mercantile system, the amount could be deducted only if an enforceable and ascertained liability had arisen. The conditions for allowing profit bonus under the mercantile system, as indicated by the Supreme Court, were not shown to exist: there was no proof of a claim by the workmen, settlement, or industrial adjudication fixing the liability. The provision therefore represented an unascertained and contingent liability and could not be treated as a deductible expenditure.

Conclusion: The claim for deduction of the bonus provision was not allowable. The answer to the reference was against the assessee and in favour of the Revenue.

Final Conclusion: A provision for bonus is deductible only when a real and ascertained liability has accrued under the relevant accounting method, and a unilateral book entry for a contingent or unadjudicated obligation does not suffice.

Ratio Decidendi: Under the mercantile system, only a definite and enforceable liability can be deducted, and a mere provision for bonus is not allowable unless the workers' claim has been established, settled, or adjudicated.

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