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SUPREME COURT OF INDIA
17th April 1964
K. SUBBA RAO, J.C. SHAH AND S.M. SIKRI, JJ.
Commissioner of Income-tax, Madhya Pradesh, Nagpur and Bhandara-Nagpur, Appellant
Versus
M/s. Swadeshi Cotton and Flour Mills (Private) Limited, Indore, Respondent.
Civil Appeal No. 587 of 1963.
Advocates Appeared
Mr. K. N. Rajagopal Sastri, Senior Advocate, (Mr. R. N. Sachthey, Advocate, with him), for Appellant; Mr. S .K. Kapoor, Sr. Advocate, (M/s. S. Murty and K. K .Jain Advocates, with him), for Respondent.
As a result of the award of Industrial Tribunal made on 13-1-1949, the assessee paid bonus for the year 1947 in the calendar year 1949 and claimed deduction in that year. The Income-tax authorities contended that it was a liability relating to an earlier year and not the year 1949 and deduction could not be claimed in relation to 1947 in the assessment year 1950-51, and in any case the accounts for 1947 should not be re-opened following the practice in England.
Held: It is only when the claim to profit bonus is settled amicably or by Industrial adjudication that a liability is incurred by the employer who follows the mercantile scheme of accounting within section 10 (2) (x) read with section 10 (5) of the Income-tax Act. Since it was only in 1949 that the claim to profit bonus was settled by an award of the Industrial Tribunal, the only year the liability can be properly attributed to is 1949.
A profit bonus is strictly not wages, at least not for the purpose of computing liability to income-tax; it is not an expense, in the ordinary sense of the term, incurred for the purpose of earning profits. It is more like sharing of profits on the basis of a certain formula. The words "for the years in question" in the proviso to sub-section (2) (x) of section 10 mean the year in respect of which the bonus is claimed.
The accounts could not be re-opened. The system of reopening account does not fit in with the scheme of the Indian Income-tax Act. AIR 1953 SC 187 = (1953) 23 ITR 230; AIR 1959 SC 1165 = (1959) 37 ITR 1; AIR 1955 SC 170 = (1955) 1 SCR 991; AIR 1959 SC 967 = (1959) SCR 925; (1961) 2 SCR 995, (1962) Supp. 1 SCR 557; 1957 AC 334, referred to. 1961 JLJ 498 confirmed.
(1) Income-tax Act, 1922 - Ss. 10 (2) (x), 10 (5) - profit bonus - nature of payment - liability to pay when arises - claim for profit bonus for year 1947 awarded in 1949 - assessee is entitled to deduct amount paid in assessment year 1950-51.
A profit bonus is strictly not wage, at least not for the purpose of computing liability to income-tax; it is not an expense, in the ordinary sense of the term incurred for the purpose of earning profits. A fortiori profits have already been made. It is more like sharing of profits on the basis of a certain formula. [Para 19
It is only when the claim to profit bonus, if made, is settled amicably or by industrial adjudication that a liability is incurred by the employer, who follows the mercantile system of accounting, within S. 10 (2) (x), read with S. 10 (5) of the Act. [Para 17
The assessee, a limited company running a textile mill, claimed, for the assessment year 1950-51, which was its first year of assessment under the Act of 1922, an allowance in respect of the sum of Rs. 1,08,325 which it had paid as bonus for the year 1947 in the calendar year 1949, as a result of the award of the Industrial Tribunal, dated January 13, 1949. The claim of the assessee was not accepted by the Income-tax authorities on the ground that it was a liability relating to an earlier year and not the year 1949. The accounts of the assessee company were kept in mercantile system.
Held on the facts of the case : It was only in 1949 that the claim to profit bonus was settled by an award of the Industrial Tribunal. Therefore, the only year the liability could be properly attributed to was 1949, and could be deducted in the assessment year 1950-51. [Para 18
Held further : As there could be no reopening of accounts so far as receipts were concerned, the same would be the position in respect of expenses. AIR 1964 SC 1653, relied on. 1964 JLJ 493 confirmed. [Para 19
(2) Income-tax Act, 1922 - S. 10 (2) (x) Proviso - for the year in question - meaning of.
The words "for the year in question" in the proviso to sub - S. 10 (2) (x) do not mean "for the year in which allowance is claimed." The words 'for the year in question' mean the year in respect of which bonus is paid. [Para 20
Judgment
SIKRI, J. : The respondent, Swadeshi Cotton and Flour Mills, hereinafter referred to as the assessee, is a limited company which owns and runs a textile mill at Indore. For the assessment year 1950-51 (accounting year, calendar year 1949), which was its first year of assessment under the Indian Income-tax Act, 1922 (hereinafter referred to as the Act) it claimed that under S. 10(2) (x) of the Act it was entitled to an allowance in respect of the sum of Rs. 1,08,325/- which it had paid as bonus for the year 1947 in the calendar year 1949, as a result of the award of the Industrial Tribunal dated January 13, 1949. The claim of the assessee was not accepted by the Income-tax authorities. The Appellate Tribunal held that it was a liability relating to an earlier year and not the year 1949. However, on an application by the assessee it stated a case and referred two questions. We are concerned only with one which reads thus :
"Whether on the facts and in the circumstances of the case the assessee is entitled to claim a deduction of bonus of Rs. 1,08,325/- relating to the calendar year 1947 in the assessment year 1950-51?"
2. The High Court of Madhya Pradesh answered the question in the affirmative. The appellant, having failed to get a certificate under S. 66A(2) of the Act, obtained special leave from this Court, and that is how the appeal is before us.
3. The facts and circumstances referred to in the question have been set out in the statement of the case. Unfortunately, the facts are meagre, but since the appellant is content to base his case on a few facts, which will be referred to shortly, it is not necessary to call for a further statement of the case.
4. The facts in brief, are as follows. The assessee paid as bonus to its employees the sum of Rs. 1,08,325/9/3 for the calendar year 1947 in terms of an award made on January 13, 1949 under the Industrial Disputes Act. This amount was debited by the assessee in its profit and loss account for the year 1948 and the corresponding credit was given to the bonus payable account. The books for 1948 had not been closed till the date of order of the Industrial Tribunal, January 13, 1949. This bonus was in fact paid to the employees in the calendar year 1949, the relevant assessment year being 1950-51.
5. The Appellate Assistant Commissioner had further found that "upto 1946 when the order for payment of bonus used to be received before the company s accounts for the year were finalised, the amount of bonus used to be in fact debited to the profit and loss account of the respective year. This finding is repeated by the Appellate Tribunal in its appellate order.
6. On these facts the learned counsel for the appellant Mr. Sastri, contends that according to the mercantile system of accounting, which is followed by the assessee, and on which its profits have been computed for the accounting calendar year 1949, the year to which the liability is properly attributable is the calendar year 1947 and not 1949. He says that it was a legal liability of the assessee which arose in 1947 and should have been estimated and put into the accounts for 1947. In the alternative he has invited us to reopen the accounts for the year 1947, following the practice which, according to him, obtains in England.
7. In our opinion the answer to the question must depend on the proper interpretation of S. 10(2) (x), read with S. 10(5), of the Act. These provisions read as follows :-
" S. 10(2) (x) - Any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission;
Provided that the amount of the bonus or commission is of a reasonable amount with reference to-
(a) the pay of the employee and the conditions of his service ;
(b) the profit of the business, profession or vocation for the year in question ; and
(c) the general practice in similar businesses, professions or vocations."
"S. 10(5)- I
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