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of <h1>Deductibility of Bonuses: Legal Liability vs. Voluntary Payments</h1> <h3>Pankaja Mills Ltd. Versus Commissioner of Income-Tax, Kerala</h3> Pankaja Mills Ltd. Versus Commissioner of Income-Tax, Kerala - [1963] 50 ITR 665 Issues Involved:1. Whether the allowance of bonus was to be made in the relevant year of account or when it was ascertained and paid.2. The distinction between legal liability and voluntary payment in the context of mercantile accounting.Issue-wise Detailed Analysis:1. Allowance of Bonus in the Relevant Year of Account:The primary issue was whether the bonus amount debited by Pankaja Mills Limited for the assessment year 1952-53, which included Rs. 70,000, should be allowed as a deduction in the year it was accrued or only when it was actually paid. The Income-tax Officer, Appellate Assistant Commissioner, and the Appellate Tribunal had disallowed the deduction, stating that it could only be allowed when actually paid. The High Court examined whether the assessee, maintaining accounts on a mercantile basis, could claim this deduction in the year of accrual.The Court noted that the assessee maintained accounts on a mercantile basis, which allows for the deduction of liabilities as they accrue, not necessarily when they are paid. The Court referred to the Industrial Tribunal award dated October 24, 1951, and its publication on December 4, 1951, which created a legal liability for the assessee to pay the bonus. Under Section 17 of the Industrial Disputes Act, an award becomes final and enforceable after 30 days of its publication, thereby establishing a legal liability for the assessee.The Court cited the case of Associated Printers (Madras) Private Ltd. v. Commissioner of Income-tax [1961] 43 I.T.R. 281, where it was held that liabilities under an award or agreement, even if related to an earlier period, could be debited in the year of account if they became legally enforceable in that year.2. Distinction Between Legal Liability and Voluntary Payment:The Court distinguished between the legal liability arising from the Industrial Tribunal award and the voluntary payment advised by the Southern India Mill Owners' Association. The bonus for the year 1948, amounting to Rs. 32,220-8-9, was a legal liability established by the award and was therefore deductible in the year of account.However, the bonus for the year 1950, amounting to Rs. 33,671-11-9, was a voluntary payment based on the Association's advice and not a legal liability enforceable against the assessee. The Court emphasized that under the mercantile system of accounting, only accrued liabilities could be debited, not contingent liabilities. Since the voluntary payment was not based on any agreement with the workers and was not enforceable, it could not be deducted in advance of actual payment.The Court referred to the case of Calcutta Company Limited v. Commissioner of Income-tax [1959] 37 I.T.R. 1, where it was held that an accrued liability could be deducted even before actual disbursement, provided it was a legal liability.Conclusion:The Court concluded that the bonus payment arising from the Industrial Tribunal award was an allowable deduction for the assessment year in question as it constituted a legal liability. Conversely, the voluntary payment towards the bonus for the year 1950 did not become an accrued liability in the year of account and was not deductible. The question was answered accordingly, with no order as to costs.
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