Statutory bonus liability can be deducted in the relevant year when it relates back to the completed accounting period.

Statutory bonus liability under the Payment of Bonus Act, 1965 was treated as attributable to the relevant accounting year, because the Act applied to accounting years commencing in 1964 and the bonus had to be computed under the allocable surplus scheme for that period. Where accounts are kept on the mercantile system, a later quantified adjustment that validly relates back to the last day of the accounting year can be given effect in that year. The bonus was therefore deductible in the assessment year corresponding to the completed accounting period, even though its precise quantification and entry were made later.

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Issues: Whether bonus computed under the Payment of Bonus Act, 1965 for the accounting year ending 31 March 1965 was deductible in the relevant assessment year even though the additional liability was quantified and provided for only after the Act came into force.

Analysis: The reference turned on the effect of section 1(4) of the Payment of Bonus Act, 1965, under which the Act applied to accounting years commencing in 1964, and the statutory definition of accounting year in section 2(1). On that basis, the bonus payable for the year under consideration was a statutory liability attributable to the relevant accounting period. The Court accepted that the bonus had to be computed under the scheme of allocable surplus and the Second Schedule, and held that where accounts are maintained on the mercantile system, a later adjustment that validly relates to the accounting period can be made effective from the last day of that period. The statutory liability therefore attached to the year in question and was not confined to the later year in which payment or revised entry was made.

Conclusion: The question was answered in the affirmative, and the bonus of Rs. 6,200 was held to be an admissible deduction for the assessment year in question, in favour of the assessee.

Ratio Decidendi: A statutory bonus liability relating to a completed accounting year may be deducted in that year under the mercantile system when the liability is attributable to that period and valid adjustment relates back to the last day of the accounting year.

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