Accrued liability for bonus must be established before deduction; provision without agreement or award disallowed.

Under the mercantile system the provision for bonus is deductible only if it represents an accrued and enforceable liability; liability accrues when there is an employer-employee agreement, an admission of liability, or an enforceable industrial tribunal award. Absent evidence of agreement, admission or award, and where the entry is a prudent or contingent provision without a demonstrable basis, it is not an accrued legal liability and cannot be claimed as a deduction. The Tribunal's allowance of the Rs. 1,50,000 provision was therefore incorrect and the deduction is disallowed in the relevant assessment year.

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Issues: Whether the Tribunal was right in holding that the assessee could claim, as a deduction in the assessment year 1957-58 (accounting year ending 31-12-1956), the provision of Rs. 1,50,000 made in the books towards bonus.

Analysis: The claim concerns treatment under the mercantile system of accounting and depends on whether the provision represented an accrued (ascertained) liability as at the accounting date or merely a contingent provision. Precedent establishes that liability to pay bonus becomes accrued only when (i) an agreement is reached between employer and employees, or (ii) an award of an industrial tribunal is made and is enforceable; mere internal provision or practice without evidence of agreement, admission or adjudication is a contingent liability. Prior decisions relied upon distinguish situations where liability was admitted, agreed or adjudicated from those where payments were voluntary or based solely on employer practice or association advice. In the present case there was no evidence of any claim admitted by the employer in 1956, no agreement with workers, no award, and no demonstrable, consistent accounting system or basis tying prior provisions to an admitted liability; the entry was a prudent provision for a possible contingent liability and not an accrued legal liability.

Conclusion: The Tribunal was not right; the provision of Rs. 1,50,000 did not constitute an admissible deduction for the assessment year 1957-58 and the question is answered in the negative (in favour of the revenue).

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