Statutory bonus liability deductible in the relevant year despite later settlement fixing the exact amount.

Bonus paid after the close of the accounting year remained deductible in the relevant assessment year where the employer followed the mercantile system and the liability arose under the Payment of Bonus Act. Section 19 recognises the statutory character of the obligation, so the liability is allowable in the year to which it relates even if the exact amount is settled later. A subsequent settlement fixing the bonus rate only quantified the pre-existing statutory liability and did not convert it into a purely contractual obligation. The excess over the provision in the accounts was therefore referable to the relevant accounting year and deductible in that year.

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Issues: Whether bonus paid after the close of the accounting year, in excess of the provision made in the accounts and pursuant to a settlement between management and employees, was deductible in the relevant year as a statutory liability or was deductible only on payment as a contractual liability.

Analysis: Section 19 of the Payment of Bonus Act, 1965 mandates payment of bonus within the prescribed time and recognises the statutory character of the employer's liability. Where the assessee follows the mercantile system of accounting, the liability is allowable in the year to which it relates, even if the exact quantum is settled later. A settlement fixing the rate of bonus does not convert a statutory obligation into a non-statutory or contractual one; it merely quantifies the liability with the consent of the parties. The amount paid in excess of the provision was therefore referable to the relevant accounting year.

Conclusion: The bonus was deductible in the relevant assessment year as a statutory liability, and the Revenue's challenge failed.

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