1973 (7) TMI 10 - HC - Income Tax

Court allows deduction of bonus claimed under Payment of Bonus Act, 1965, emphasizing mercantile accounting system.

The High Court upheld the Tribunal's decision, allowing the deduction of bonus claimed by the assessee under the Payment of Bonus Act, 1965, for the ... Claim for larger bonus due to the enactment of Bonus Act - 'Whether, on the facts and in the circumstances of the case and keeping in view the provisions of the Payment of Bonus Act, 1965, the assessee is entitled to claim deduction of bonus of Rs. 6,200 relating to the financial year 1964-65 for the assessment year 1965-66 ?' Issues:1. Interpretation of provisions of the Payment of Bonus Act, 1965 for claiming deduction of bonus.2. Applicability of the mercantile system of accounting in relation to bonus payments.3. Adjustment of accounts and retrospective effect of bonus payments.Analysis:Issue 1: Interpretation of provisions of the Payment of Bonus Act, 1965 for claiming deduction of bonusThe High Court was tasked with determining whether the assessee was entitled to claim a deduction of bonus for a specific financial year under the Payment of Bonus Act, 1965. The Tribunal allowed the deduction based on the provisions of the Act, emphasizing that the bonus was payable for the relevant accounting period and computed in accordance with the Act. The Court upheld the Tribunal's decision, stating that the bonus claimed by the assessee was payable as per the provisions of the Act, even though the Act came into force after the end of the accounting period. The Court relied on the mercantile system of accounting and the decision in Commissioner of Income-tax v. Mysore Electrical Industries Ltd. to support the allowance of the bonus deduction.Issue 2: Applicability of the mercantile system of accounting in relation to bonus paymentsThe Revenue contended that the mercantile system of accounting does not allow for re-opening of accounts and that liabilities must be reflected in the books to be accounted for in the same year. However, the Court rejected this argument, stating that under the Bonus Act, the assessee was entitled to make adjustments in the accounts even after the accounting period had ended. The Court emphasized that the bonus payable related to the accounting period under consideration and, therefore, the deduction claimed by the assessee was valid under the mercantile system of accounting.Issue 3: Adjustment of accounts and retrospective effect of bonus paymentsThe Court highlighted that the effect of the enforcement of the Bonus Act was that the bonus amount sought to be accounted for subsequently would be deemed to have been included in the accounting year for which it was required to be paid. The Court emphasized that the bonus payable in the case related to the accounting period in question, and the assessee was justified in seeking the deduction in accordance with the provisions of the Payment of Bonus Act. Consequently, the Court upheld the Tribunal's decision to allow the amount of bonus as a deductible expense for the assessment year in question, answering the referred question in the affirmative.In conclusion, the High Court affirmed the Tribunal's decision, allowing the deduction of bonus claimed by the assessee under the Payment of Bonus Act, 1965, for the relevant accounting period, based on the mercantile system of accounting and the retrospective effect of bonus payments as per the Act.