Accrued bonus liability under mercantile accounting remains deductible when a binding resolution creates an enforceable obligation.

Under the mercantile system of accounting, a liability is deductible when it accrues through a binding business decision or enforceable obligation, even if payment is made later. The assessee's resolution to pay maize growers a specified share of profits as bonus created an accrued liability in the form of additional purchase money, not a dividend or rebate under the co-operative bye-laws or the Andhra Pradesh Co-operative Societies Act, 1964. Later receipt of the Registrar's approval and the absence of actual payment in the same year did not defeat accrual. The bonus expenditure was therefore allowable as a business deduction in the relevant previous year.

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Issues: Whether the assessee was entitled, under the mercantile system of accounting, to deduct the amount debited as bonus payable to maize growers as business expenditure for the relevant assessment year.

Analysis: The liability to pay bonus arose when the managing committee and the general body resolved, in implementation of the Registrar's policy directions, to pay a specified portion of the profits to the growers. The payment was not a dividend or rebate within the co-operative bye-laws or section 45 of the Andhra Pradesh Co-operative Societies Act, 1964, but additional purchase money described as bonus. The absence of actual payment in the year of accrual, or the fact that the Registrar's approval was received later, did not negative the liability where the assessee followed the mercantile system. The resolution created an enforceable right in favour of the growers, and the expenditure was deductible when the liability accrued.

Conclusion: The deduction was allowable and the question was answered in favour of the assessee.

Final Conclusion: The taxable income had to be computed after allowing the bonus liability as an accrued business expenditure in the relevant previous year.

Ratio Decidendi: Under the mercantile system of accounting, an expenditure becomes deductible when the liability to pay it accrues by a binding business decision or other enforceable obligation, even if actual payment is made later.

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