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IN THE HIGH COURT OF MADHYA PRADESH
P.V. DIXIT AND K.L. PANDEY, JJ.
Swadeshi Cotton and Flour Mills (Private) Ltd., Indore
Vs.
Commissioner of Income Tax, Nagpur
M.C.C. No. 73 of 1960
Decided On: 30.11.1960
INCOME TAX - Deduction - Bonus - Liability incurred in the year of account - Mercantile system of accounting - Contingent liability - Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 - Validity.
Fact of the Case:
The assessee, a limited company owning and running a textile mill, paid Rs. 1,08,325-9-3 as bonus to its workers for the calendar year 1947. The award under which the bonus became payable was made on 13th January 1949 under the Industrial Disputes Act. The assessee claimed a deduction under section 10(2)(x) of the Income-tax Act for the bonus amount paid to its employees for the year 1947. The Income-Tax Officer disallowed the claim holding that the assessee maintained its accounts on the mercantile basis and not on the cash basis and that, therefore, the bonus that the assessee could be allowed to deduct would be only the bonus payable for the year 1949. The Appellate Assistant Commissioner and the Tribunal also rejected the assessee's claim.
Finding of the Court:
The Court held that the liability for the payment of Rs. 1,08,325-9-3 as bonus for the calendar year 1947 became a legal liability on 13th January 1949 and the assessee is, therefore, entitled to claim a deduction in respect of that amount in computing the profits for the assessment year 1950-61. The Court also held that the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, is valid and the assessee is entitled to compute the written-down value of its assets in accordance with paragraph 2 of the Order.
Issues: 1. 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. Whether on the facts and in the circumstances of the case the provisions of Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, are applicable to the assessee in computing the written-down value of its assets?
Ratio Decidendi: 1. The Court held that the liability for the payment of bonus became a legal liability when the award was made on 13th January 1949 and the assessee is entitled to claim a deduction in respect of that amount in computing the profits for the assessment year 1950-61. The Court relied on the definition of 'paid' in section 10(5) of the Income-tax Act, which states that 'paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section. The Court also relied on the decision in Calcutta Co. Ltd. v. I.T. Commr. (1959) 37 ITR 1, where the Supreme Court held that under the mercantile system deduction could be claimed in respect of a liability which had definitely arisen in the accounting year although the liability might be one to be discharged at a future date and the amount to he expended for the discharge of the liability would have to be estimated. 2. The Court held that the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, is valid and the assessee is entitled to compute the written-down value of its assets in accordance with paragraph 2 of the Order. The Court relied on the decision in The Commissioner of Income-tax, Hyderabad v. Dewan Bahadur Ramgopal Mills Ltd. C.A. No. 5 of 1959, D/- 8-11-1960, where the Supreme Court held that the power given to the Central Government under section 12 of the Finance Act, 1950, is a wide one permitting the Government to modify a provision substantially if it becomes necessary for the removal of a difficulty.
Final Decision: Both the questions referred to us for decision are, therefore, answered in the affirmative. The assessee shall have costs of this reference. Counsel's fee is fixed at Rs. 250.
P.V. Dixit, C.J.
"In this reference under section 66(1) of the Income-tax Act at the instance of the assessee, the questions referred to this Court arise out of the assessment for the year 1950-51, the previous year in relation to which is the calendar year 1949. The assessee is a limited company owning and running a textile mill at Indore. During the year of account, the company paid Rs. 1,08,325-9-3 as bonus to its workers for the calendar year 1947. The award under which the bonus became payable to the employees was made on 13th January 1949 under the Industrial Disputes Act. This amount was debited by the company in its profits and losses account for the year 1948. The assesses did not close its books of account for 1948 till the date of the making of the order by the Industrial Tribunal on 13th January 1949. In the assessment year in question, the assessee claimed a deduction under section 10(2)(x) of the Act on account of the bonus amount paid to its employees for the year 1947. The Income-Tax Officer disallowed the claim holding that in regard to bonus the assessee maintained its accounts on the mercantile basis and not on the cash basis and that, therefore, the bonus that the assessee could be allowed to deduct would be only the bonus payable for the year 1949.
The Appellate Assistant Commissioner took the view that the bonus amount became a definite ascertained liability only when the Industrial Court's award was made and till then it was only a contingent liability; and that the assessee's method of accounting for bonus was not strictly the mercantile basis but it was not one which could be rejected as a method from which the true profits could not be ascertained. On an examination of the method and system of accounts of the assessee, the Appellate Assistant Commissioner expressed the opinion that till 1946 the order for payment of bonus used to be received before the company's accounts for the year were finalised and the amount used to be in fact debited to the profit and loss account of the respective year; that in 1947 an "Independence bonus was awarded and actually paid in the year of account and the account was debited in the accounts of 1947 itself"; and that the amount of Rs. 1,08,325-9-3 was the amount of additional bonds for 1947 which became payable by the award dated the 13th January 1949 and was debited in the books of 1948 which were open at the date of the award. He, therefore, came to the conclusion that on the method of accounting adopted by the assessee the additional bonus amount for the year 1947 could not be allowed as a deduction in the computation of the profits and gains of the asseseee's business of the account year 1949.
Before the Tribunal, the assessee again pressed the claim for deduction contending that the liability for the bonus amount of Rs. 1,08,325-9-3 became a legal liability when the award was made on 13th January 1949; that for the purposes of deduction it made no difference whether the bonus related to an earlier year, namely, 1947; and that the assessee had the right to claim the deduction in the year in which the award was made. The Tribunal rejected this contention observing that in the past the assessee had never claimed bonus on the basis of the date of the award of the Industrial Tribunal or on the basis of the date of actual payment; that till 1946 the assessee debited bonus in the accounts for the particular year to which it related; that it never claimed bonus for more than one year in any particular accounting year; and that the true profits of the assessee must be computed in accordance with the method of accounting regularly employed by it.
The second contention of the assessee, which was rejected by the taxing authorities, related to the computation of the written-down value of its assets. The Income-tax Officer computed the written-down value of the assets by deducting the depreciation already allowed to the assessee under the Industrial Tax Rules of the former Hol
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