Bonus payable out of profits cannot be added to closing stock cost for valuation purposes.

Bonus paid to employees, where the payment is linked to profits, does not form part of the wages or salary element of production cost for valuing closing stock. The Bombay HC held that the proportionate bonus could not be added to the cost price of closing stock because the agreements showed it was payable out of profits after the year-end and not as an ordinary manufacturing cost. The reference was answered against inclusion of bonus in stock valuation, in favour of the assessee, and the remaining questions were left unanswered because they did not survive.

---

---

Issues: Whether the proportionate amount of bonus paid by the assessee to its employees could be taken into account in determining the cost price of the closing stock.

Analysis: Bonus, in the context of industrial employment, was treated as a payment out of profits under settled principles governing bonus claims. It was not accepted as part of the wages or salary element of the cost of production for stock valuation. On the facts, the agreements regarding bonus also indicated that the payment was linked to the availability of profits after the year had ended.

Conclusion: The addition of the proportionate bonus to the cost of the closing stock was not justified and the question was answered in the negative, in favour of the assessee.

Final Conclusion: The reference was answered by rejecting the Revenue's basis for including bonus in stock valuation, and the remaining questions were left unanswered as they did not survive.

Ratio Decidendi: Bonus paid to employees, where payable out of profits, does not form part of the cost price of closing stock for purposes of valuation.

---