The liability to pay extra salary and wages materialises only when the liability crystallises or becomes ascertained, and in the mercantile system of accounting, a deduction can be made only in the year in which the liability to pay accrues.

( 1 ) AT the instance of the Revenue, the following question has been referred by the Income-tax appellate Tribunal for our opinion :

" Whether on the facts and in the circumstances of the case, the Tribunal was, in law, justified in holding that the salary and wages amounting to Rs. 18,813 relating to earlier years were allowable as deduction in the assessment year in question ?"

( 2 ) THE relevant assessment year is 1974-75. The dispute related to the assessees claim for deduction of Rs. 18,813 on account of extra salary and wages paid to its employees in the year in question. The claim was disallowed by the Income-tax Officer holding that it related to earlier years. According to the Income-tax Officer, the assessee who was maintaining accounts on mercantile basis should have made provision for this payment in the years to which this amount related and, in the absence of such a provision, it could not legitimately claim deduction of this amount during the year under consideration. In appeal before the Appellate Assistant commissioner, it was contended that the assessee was required to pay salary and wages at the highest rates fixed under the Wage Board Notification dated July 13, 1970, with effect from january 1, 1970. There were, however, some disputes regarding the precise amount to be paid to the employees. The disputes were finally settled only during the year under consideration. The amount was then worked out and was also paid to the employees in the year in question.

( 3 ) THIS contention was accepted by the Appellate Assistant Commissioner. On a further appeal by the Department, the Tribunal, relying on the two decisions of the Supreme Court in cases of cit v. A. Gajapathy Naidu [1964] 53 ITR 114 and CIT v. Swadeshi Cotton and Flour Mills Pvt. Ltd, [1964] 53 ITR 134, concluded that inasmuch as there was a dispute regarding the classification of various categories of workers which dispute was eventually settled by the assistant Labour Commissioner, Gorakhpur, only on December 51, 1973, whereupon the assessee worked out the extra amounts payable to various employees in accordance with the rates laid down by the notifications, the amount claimed by the assessee could be allowed as a permissible deduction only in the year in question and not in earlier years as it was quantified and ascertained only in that year. The Tribunal observed that the liability to pay this amount materialised only in the previous relevant year to the assessment year 1974-75 and not earlier. The assessee was, therefore, rightly entitled to claim deduction of the same. This decision was founded on several decisions noted in its order by the Tribunal. Following these decisions, the tribunal dismissed the appeal of the Department.

( 4 ) WE are clearly of the opinion that the view expressed by the Tribunal is correct. In the case of cit v. Swadeshi Cotton and Flour Mills Pvt. Ltd, [1964] 53 ITR 134, their Lordships of the supreme Court were concerned with an identical question. There the assessee had paid a sum of rs. 1,08,325. 93 by way of profit bonus to its employees for the calendar year 1947 in terms of an award made on January 13, 1949, under the Industrial Disputes Act. It debited the amount in its profit and loss account for the year 1948 but in fact paid it to the employees in the calendar year 1949. The Supreme Court ruled on these facts that the liability to pay the bonus accrued only in 1949 when the claim of profit bonus was settled under an award by the Industrial Tribunal. Consequently, the amount of bonus was rightly debited in that year, that is, 1949. The Supreme court further stressed that the employer who follows the mercantile system of accounting incurs a liability towards profit bonus only when the claim is settled amicably or by industrial adjudication. This view was followed by our court in J. K. Woollen Manufacturers (P.) Ltd. v. CIT[1967] 65 ITR 237.

( 5 ) THE above decisions, in our opinion, are directly in