High Court allows deduction of bonus payment under Income-tax Act

The High Court of Gujarat ruled in favor of the assessee, allowing the deduction of a bonus payment for earlier years under section 256(1) of the Income-tax Act, 1961. The Court found the bonus payment to be deductible for the accounting year in question, considering the historical payment practices and the change in the accounting system from cash to mercantile. Emphasizing the regularity of bonus payments following the end of accounting periods, the Court upheld the Tribunal's decision and disposed of the reference in favor of the assessee, with no order as to costs.

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Issues: Reframing of question for reference under section 256(1) of the Income-tax Act, 1961 regarding the disallowance of bonus payment for earlier years.

Analysis:
The High Court of Gujarat addressed the issue of the disallowance of a bonus payment of Rs. 66,577 for earlier years in the context of a switch from cash to mercantile accounting by the assessee. The Assessing Officer initially disallowed the amount actually paid as bonus during the accounting period while allowing the deduction of the provision made. The Inspecting Assistant Commissioner directed to allow the provision and disallow the amount paid, citing that it was relatable to an earlier year due to the change in the accounting system. The Tribunal, however, ruled in favor of the assessee, relying on a Bombay High Court decision and distinguishing a Calcutta High Court decision. The Tribunal noted the consistent practice of the assessee paying bonuses on a cash basis in the year following the accounting period. The High Court found that the bonus payment was an allowable deduction, considering the historical payment practices and the change in the accounting system. The Court concluded that the Tribunal was justified in holding the bonus payment as deductible for the accounting year in question, answering the reframed question in favor of the assessee.

The Court highlighted the assessee's historical accounting practices, emphasizing the consistent payment of bonuses on a cash basis after the end of each accounting period. The Court noted that the switch from cash to mercantile accounting led to a double deduction claim, but the essential point was the regularity of bonus payments following the end of accounting periods. The Court rejected the Revenue's argument that the bonus was relatable to earlier years, stating that the payment was allowable as a deduction, with the only dispute being the year of allowability. The Court upheld the Tribunal's decision, emphasizing the factual background and the regular payment pattern of bonuses by the assessee. The Court disposed of the reference in favor of the assessee, with no order as to costs.

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