Profit bonus deduction under mercantile accounting arises only when liability is finally settled by award or agreement.

A profit bonus is deductible under section 10(2)(x) read with section 10(5) of the Indian Income-tax Act, 1922 only when the liability is actually incurred or paid according to the accounting method adopted. Under mercantile accounting, the obligation arises when the claim is finally settled by agreement or industrial adjudication, not merely when employees may have a claim during the relevant year. The phrase "for the year in question" in the proviso refers to the year to which the bonus relates, not the year in which deduction is claimed. Reopening earlier accounts was treated as inconsistent with the statutory scheme.

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Issues: Whether a profit bonus paid in 1949 pursuant to an industrial tribunal award could be deducted in the assessment year 1950-51 under section 10(2)(x) of the Indian Income-tax Act, 1922, read with section 10(5), on the basis of mercantile accounting, and whether the phrase "for the year in question" in the proviso referred to the year of payment or the year for which the bonus was paid.

Analysis: Under section 10(2)(x), as controlled by the definition of "paid" in section 10(5), deduction is available when the bonus is actually paid or incurred according to the method of accounting on which profits are computed. In mercantile accounting, expenditure is debited when a legal liability is incurred. For profit bonus, the liability does not arise merely because the workmen may have a claim in a given year; it arises when the claim is settled amicably or by industrial adjudication. The award in the present case was made in 1949, and only then did the legal liability become definite. The phrase "for the year in question" refers to the year in respect of which the bonus is paid, not the year in which the deduction is claimed. Reopening of earlier accounts was also held to be inconsistent with the scheme of the Act.

Conclusion: The liability for the bonus was incurred in 1949, the deduction was allowable for that year, and the question was rightly answered in favour of the assessee on that point; however, the appeal as a whole failed and was dismissed.

Ratio Decidendi: For a profit bonus governed by mercantile accounting, the deductible liability arises only when the claim is finally settled by agreement or industrial adjudication, and the relevant year under the proviso is the year to which the bonus relates.

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