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AI Drafter - (New and Powerful) ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
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Issues: Whether the provision made for bonus relating to the profits of the assessment year 1961-62 was an allowable deduction in computing income, where the Government notification creating the liability was issued after the close of the previous year.
Analysis: Under the mercantile system, a liability is deductible only if it has accrued or has become an enforceable liability during the relevant previous year. The bonus in question did not arise under the Bonus Act, but only upon the Government notification issued under the Industrial Disputes Act after the accounts had been closed. Until that notification, there was no ascertained or enforceable obligation to pay bonus. The statutory language permitting deduction of bonus or commission requires the sum to be paid or incurred, and the liability cannot be treated as having arisen merely because the bonus related to the profits of the year. The principle accorded with the earlier decision holding that bonus becomes deductible only in the year in which the liability is actually determined or adjudicated.
Conclusion: The provision for bonus was not deductible for the assessment year 1961-62. The question was answered in the negative, against the assessee and in favour of the Revenue.
Ratio Decidendi: A bonus provision is deductible only in the accounting year in which the liability becomes an ascertained and enforceable obligation and not in the year to whose profits the bonus relates.
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