Deduction for bonus: liability incurred under mercantile accounting is treated as paid or incurred, enabling deduction in assessment.

Under the Income-tax Act provision defining "paid" to include amounts actually paid or incurred according to the method of accounting, a bonus liability fixed in a later year but incurred under the mercantile system is treated as an expense of the accounting year in which the liability arose; accordingly such bonus may be claimed as a deduction in the assessment year following the award when it is paid or incurred in accordance with the mercantile accounting method. The conclusion supports deductibility of the bonus claimed.

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Issues: Whether, having regard to the provisions of section 10(2) read with section 10(5) of the Income-tax Act, the assessee company is entitled to a deduction of Rs. 1,80,000 on account of bonus for the year 1951 in computing the business profits for the assessment year 1952-53.

Analysis: Section 10(2)(x) allows deduction for "any sum paid to an employee as bonus" while section 10(5) defines "paid" to include amounts "actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed". The assessee computed profits on the mercantile basis. Under the mercantile system a liability for bonus for the year 1951, fixed by the conciliation board in June 1952 and paid in December 1952, is regarded as an expense of the accounting year 1951 when the liability was incurred. The amount was not charged in the profit and loss account for 1951 but the statutory return form permits deduction of "any other allowable expense which has not been charged in arriving at the above figure of profits", and the assessee claimed the bonus under that head after the award. The Tribunal's conclusion that the amount was properly deductible in assessment year 1952-53 follows from the statutory definition of "paid" and the application of the mercantile method of accounting.

Conclusion: The amount of Rs. 1,80,000 paid as bonus is deductible for the assessment year 1952-53; issue answered in the affirmative in favour of the assessee.

Ratio Decidendi: For deductions under section 10(2)(x) of the Income-tax Act a sum is "paid" if it is actually paid or incurred in accordance with the method of accounting used to compute profits; under the mercantile system a liability for bonus incurred in the accounting year is deductible for that year even if paid subsequently.

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