Accrued liability and removal-of-difficulties order governed bonus deduction and written-down value computation under income tax law.
Bonus under the Income-tax Act was deductible only when the liability had accrued and crystallised, not when it remained contingent or merely provided for in the books. On the facts, the liability arose when the Industrial Tribunal made its award in January 1949, so the deduction was allowable in the assessment year 1950-51. The Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 was also held to validly apply to the computation of written-down value, as the statutory power to remove difficulties extended to the income-tax machinery for Part B States. The reference was therefore answered partly in favour of the assessee and partly on the validity of the Order.
Issues: (i) Whether the bonus paid for the calendar year 1947 was deductible in the assessment year 1950-51; (ii) Whether paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, applied in computing the written-down value of the assets.
Issue (i): Whether the bonus paid for the calendar year 1947 was deductible in the assessment year 1950-51.
Analysis: Under section 10(2)(x) read with section 10(5) of the Income-tax Act, deduction is allowed when the bonus is actually paid or when the liability is incurred according to the method of accounting employed. The assessee's method of accounting had been accepted as a basis for computing true profits, but the decisive question was when the liability to pay the bonus became an ascertained liability. The liability did not arise merely because profits for 1947 existed or because a provision was made in the books. It crystallised only when the Industrial Tribunal made its award on 13 January 1949, and until then it remained contingent.
Conclusion: The bonus was deductible in the assessment year 1950-51, and the answer was in favour of the assessee.
Issue (ii): Whether paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, applied in computing the written-down value of the assets.
Analysis: The validity of the Order was concluded by the Supreme Court decision relied upon by the Court. The power under section 12 of the Finance Act, 1950 was treated as wide enough to remove difficulties in applying the relevant income-tax provisions to Part B States, including the manner of computing written-down value. Paragraph 2 was therefore not repugnant to the Act and operated validly for the assessee.
Conclusion: The Order applied validly, and the answer was in favour of the revenue on this issue.
Final Conclusion: Both reference questions were answered in favour of the assessee on the bonus issue and in favour of the validity of the removal-of-difficulties order on the written-down-value issue, resulting in a partly mixed but ultimately assessee-favouring reference.
Ratio Decidendi: A deduction for bonus is allowable only when the liability has accrued and crystallised, not when it is merely contingent, and a removal-of-difficulties order made under a taxing statute may validly modify the computation machinery where required to remove implementation difficulties.