Accrued liability rule: only legally ascertained liabilities are deductible; bonus allowed and Removal of Difficulties paragraph applied.

Issue whether a bonus payable for calendar year 1947 was deductible in assessment year 1950-51 was resolved by applying the accrued-liability principle under a mercantile accounting system: only liabilities legally ascertained in the accounting year are deductible, and the bonus became an ascertained obligation on 13 January 1949 when the Industrial Tribunal awarded it, so the deduction is allowable. Issue whether paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 applies for computing written-down value was answered affirmatively: the executive power to remove difficulties and the Explanation to paragraph 2 are valid and operate to adjust written-down value computation.

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Issues: (i) Whether the assessee is entitled to deduct Rs. 1,08,325-9-3 as bonus relating to calendar year 1947 in assessment year 1950-51; (ii) Whether paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 is applicable to the assessee for computing the written-down value of its assets.

Issue (i): Whether the bonus amount of Rs. 1,08,325-9-3 relating to calendar year 1947 is deductible in assessment year 1950-51.

Analysis: The deduction under clause (x) of section 10(2) depends on the meaning of "paid" as defined in subsection (5) - i.e., actually paid or incurred according to the method of accounting on which profits are computed. Where the taxpayer's accepted method of accounting is a mercantile or adjustment system, deduction is allowable for liabilities which have definitely arisen in the accounting year. A liability that is provisional or contingent until determined by admission or adjudication is not deductible. The bonus in question became a definite legal obligation only when the Industrial Tribunal made its award on 13 January 1949; prior entries or provisions in earlier accounts did not convert a contingent liability into an ascertained liability for income-tax deduction purposes.

Conclusion: The bonus of Rs. 1,08,325-9-3 became an ascertained liability on 13 January 1949 and is deductible in computing the assessee's profits for the assessment year 1950-51. This conclusion is in favour of the assessee.

Issue (ii): Whether paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 applies to the assessee for computing written-down value of assets.

Analysis: The power under section 12 of the Finance Act, 1950 to make provisions or directions for removal of difficulties is a matter for the executive to determine and may be broad enough to modify provisions to remove identified difficulties. The Supreme Court has upheld the validity of the Explanation to paragraph 2 and the scope of the executive power to address difficulties in applying sections 10(2)(vi) and 10(5)(b) to Part B States; accordingly paragraph 2 is applicable and valid for the purpose of computing written-down value where the stated difficulty arises.

Conclusion: Paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 is applicable to the assessee for computing the written-down value of its assets. This conclusion is in favour of the assessee.

Final Conclusion: The reference questions are answered affirmatively in favour of the assessee, entitling the assessee to the bonus deduction and validating application of paragraph 2 of the Removal of Difficulties Order for written-down value computation.

Ratio Decidendi: For income-tax deduction purposes under a mercantile or accepted accounting system, only liabilities that have become legally ascertained (accrued liabilities) in the accounting year are deductible; contingent or provisional liabilities determined subsequently by adjudication are not deductible in earlier accounting years.

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