Prior deduction requirement controls taxability of unpaid bonus credited to profit and loss account

An amount credited to the profit and loss account as unpaid bonus was not taxable under section 10(2A) of the Indian Income-tax Act, 1922 because the foundational condition of a prior allowance or deduction in respect of that trading liability was not proved. The provision applies only where an earlier assessment has allowed a deduction for a loss, expenditure, or trading liability, and the assessee later receives a remission or cessation benefit. On the record, there was no showing that the bonus liability had been specifically allowed as a deduction in the earlier year, so the statutory test failed. The referred question was answered in the negative, in favour of the assessee.

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Issues: Whether the amount credited to the profit and loss account as unpaid bonus was assessable under section 10(2A) of the Indian Income-tax Act, 1922 when it had not been established that any allowance or deduction had earlier been granted in respect of that trading liability.

Analysis: Section 10(2A) applies only where an allowance or deduction has been made in an earlier assessment in respect of a loss, expenditure, or trading liability and, thereafter, the assessee receives an amount or obtains a benefit by remission or cessation of that liability. The material on record did not show that the bonus item had been specifically allowed as a deduction in the earlier assessment year. In the absence of that foundational fact, the statutory condition for treating the subsequent credit as income was not satisfied. The question had to be answered by reference to the assessment order of the earlier year and not by inference from surrounding circumstances.

Conclusion: The amount was not assessable under section 10(2A), and the answer to the referred question was in the negative, in favour of the assessee.

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