Statutory bonus accrual and section 80-I computation after carried forward development rebate set-off

Statutory bonus liability accrued in the accounting year to which it related and remained deductible in computing business income even though the amount was settled after the year-end; later quantification and the absence of a book entry did not postpone deduction. For deduction under section 80-I, the special deduction had to be computed only after first setting off carried forward unabsorbed development rebate, following the later Supreme Court approach approving the Cambay Electric line and rejecting the contrary Cloth Traders view. The reference was answered partly for the assessee and partly for the Revenue.

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Issues: (i) Whether the additional bonus liability settled after the close of the previous year was deductible in computing business income for the relevant assessment year. (ii) Whether deduction under section 80-I of the Income-tax Act, 1961 was to be computed before setting off the unabsorbed development rebate carried forward from the earlier assessment year.

Issue (i): Whether the additional bonus liability settled after the close of the previous year was deductible in computing business income for the relevant assessment year.

Analysis: The liability arose under the Payment of Bonus Act, 1965 and related to the accounting year in question. A statutory obligation to pay bonus accrued during that year, and later quantification did not postpone the liability to the year of settlement. The existence or absence of an entry in the books was not decisive where the liability had already accrued under law.

Conclusion: The additional bonus amount was deductible and the answer was in favour of the assessee.

Issue (ii): Whether deduction under section 80-I of the Income-tax Act, 1961 was to be computed before setting off the unabsorbed development rebate carried forward from the earlier assessment year.

Analysis: The computation of the special deduction had to follow the principle that carried forward unabsorbed development rebate was to be deducted first. The controlling rule was the one recognised in the later Supreme Court authority approving the Cambay Electric Supply line of reasoning and disapproving the contrary view based on Cloth Traders. The earlier contrary High Court view could not be followed.

Conclusion: The deduction under section 80-I had to be calculated after setting off the unabsorbed development rebate, and the answer was in favour of the Revenue.

Final Conclusion: The reference was answered partly for the assessee and partly for the Revenue, with no order as to costs.

Ratio Decidendi: A statutory bonus liability accrues in the accounting year to which it relates and remains deductible even if quantified later, while special deduction under section 80-I must be computed only after first giving effect to carried forward unabsorbed development rebate.

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