Court rules on bonus payment liability under mercantile accounting system for assessment year 1966-67

The court affirmed the Income Tax Tribunal's decision that the liability to pay a bonus arose in the assessment year 1966-67, not in 1967-68, based on the mercantile accounting system. The court emphasized the distinction between cash basis and mercantile accounting and ruled that the bonus payment liability was attributable to the previous year relevant to the assessment year 1966-67. The court upheld the Tribunal's decision, dismissing the assessee's arguments and ruling in favor of the department, with costs awarded to the department.

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Issues:
Interpretation of liability for bonus payment under mercantile accounting system.

Analysis:
The case involves a limited company engaged in manufacturing glasses, following the calendar year as its year of account. The Assistant Labour Commissioner directed the company to pay bonus to its workers in 1963, with a subsequent extension for payment until January 31, 1966. In the assessment for the year 1967-68, the company claimed a deduction for the bonus paid in 1963. The Income Tax Officer (ITO) disallowed the claim, stating that the liability related to the year 1966-67. However, the Appellate Assistant Commissioner (AAC) disagreed and considered the payment a liability for the year under assessment. The Income-tax Appellate Tribunal overturned the AAC's decision, stating that under the mercantile accounting system, the liability arose in the previous year relevant to the assessment year 1966-67, not in the current year. Thus, the ITO's decision was upheld.

The key question referred to the court was whether the Tribunal was correct in determining that the liability to pay the bonus arose in the assessment year 1966-67, not in 1967-68. The court affirmed the Tribunal's decision, emphasizing the distinction between cash basis and mercantile accounting systems. The court highlighted that under the mercantile system, profits or losses are calculated considering all income and expenditure for the period, irrespective of actual receipt or payment. The liability for the bonus payment in question was deemed to have arisen in 1965, relevant to the assessment year 1966-67, based on the order of the Assistant Labour Commissioner. The court also addressed the definitions of "paid" and the method of accounting under the Income Tax Act of 1961, concluding that the mercantile system applied in this case.

The court dismissed the assessee's arguments regarding the discretion of taxing authorities in applying accounting methods, emphasizing the clear provisions of the Act and the facts of the case. Ultimately, the court upheld the Tribunal's decision, ruling that the liability for the bonus payment of Rs. 15,273 was attributable to the previous year relevant to the assessment year 1966-67, not to the subsequent year. The question was answered in favor of the department, with costs awarded to the department.

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