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PETITIONER: THE COMMISSIONER OF INCOME-TAX, MADHYAPRADESH, NAGPUR

       Vs.

RESPONDENT: SWADESHI COTTON AND FLOUR MILLS

DATE OF JUDGMENT: 17/04/1964

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C.

CITATION:  1964 AIR 1766            1964 SCR  (7) 810  CITATOR INFO :  F          1992 SC 718  (7)

ACT: income Tax-Deduction of bonus-Bonus relating to 1947 Paid in 1949-Claim  for  deduction for account year  1949-System  of accounting by assessee-Principle of reopening of accounts-If applicable-Indian  Income-tax  Act, 1922 (11 of  1922),  ss. 10(2)(x), 10(5).

HEADNOTE: The respondent company paid to its employees Rs. 1,08,325/-- 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.   This amount was debited by the company  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 were not closed till the  date  of  the award   of  the  Industrial  Tribunal.   For  the   relevant assessment year, 1950-51, the company claimed that under  s. 10(2)(x) of the Indian Income-tax Act, 1922, it was entitled to an allowance in respect of the amount paid as bonus,  but the claim was rejected by the Income-tax authorities on  the ground that according to the mercantile system of accounting which  was  followed by the assessee the year to  which  the liability  was properly attributable was the  calendar  year 1947  and  not  1949.  It was the  case  of  the  Income-tax authorities  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, and that,  if  necessary,  the amounts  for  the  year 1947 should  be  reopened.   It  was admitted  that  the bonus in the instant case was  a  profit bonus. Held:(i) It was only when the claim to profit bonus, if made,  was  settled amicably or by  industrial  adjudication that a liability was incurred by the employer, who  followed the  mercantile  system, within s. 10(2)(x),  read  with  s. 10(5),  of  the Indian Income-tax Act, 1922; and as  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 could be properly attributed to was 1949. (ii) The system of reopening accounts was not applicable

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under thescheme of the Indian Income-tax Act. (iii)     The  words "Year in question." in proviso  (b)  to s.10 (2)(x) of the Act meant "year in respect of which bonus was paid".

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 587 ,of 1963. Appeal  by special leave from the judgment and  order  dated November  30,  1960  of the Madhya Pradesh  High  Court,  in Miscellaneous Civil Case No. 73 of 1960. K.N.  Rajagopal  Sastri  and  R.  N.  sachthev,  for  the appellant. S.K. Kapoor, S. Murty and K. K. fain, for the respondent, 811 April 17, 1964.  The judgment of the Court was delivered by SIKRI,  J.-The  respondent, Swadeshi Cotton &  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? 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. 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. 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. 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 812

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debited  to  the profit and loss account of  the  respective year.  this finding is repeated by the Appellate Tribunal in its appellate order. 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. Inour opinion, the answer to the question must depend  on theproper  interpretation  of s. 10(2)(x),  read  with  s. 10(5), of theAct.  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 profits 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)-In  sub-section (2), "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;..." If  we insert the definition of the word ’paid’  in  sub-cl. (x), it would read as follows:               any sum actually paid or incurred according to               the  method ’of accounting upon the  basis  of               which the profits or gains are computed  under               this section, to an employee as bonus..." As  the  assessee’s  profits and gains  have  been  computed according  to  the mercantile system,  the  question,  using for .he time being the terms of the clauses, comes to this: "Has  this  sum  of  Rs. 1,08,325/-  been  incurred  by  the assessee according to the mercantile system in the  calendar year 1947 or 1949?" 813 At  first  sight the sentence does not read  well,  but  the meaning  of the word ’incur’ includes ’to become liable  to’ Therefore, the question boils down to: "In  what  year  did  the  liability  of  this  sum  of  Rs. 1,08,325/- arise, according to the mercantile system ? " The  mercantile  system  of accounting was  explained  in  a judgment  of  this Court in Keshav Mills Ltd.  vs.   Commis- sioner of Income Tax, Bombay(1) thus:- "That system brings into credit what is duc, immediately  it becomes legally due and before it is actually received,  and it  brings  into debit expenditure the amount  for  which  a legal  liability  has been incurred before  it  is  actually disbursed." These  observations  were quoted with approval  in  Calcutta ,Co.  Ltd. vs.  Commissioner of Income Tax, West Bengal(2). On  the  facts of this case, when did  the  legal  liability

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arise in respect of the bonus?  This depends on the facts of the  case and the nature of the bonus awarded in this  case. This  Court  has examined the nature of profit  bonus-it  is common  -round, that the bonus with which we  are  concerned with  was a profit bonus-in various cases.  It is  explained in   Muir  Mills  v.  Suti  Mills  Mazdoor   Union(3)   that "there .are two conditions which have to be satisfied before a  demand for bonus can be justified and they are  (1)  when ’wages  fall  short  of the living  standard,  and  (2)  the industry  makes  huge profits part of which are due  to  the contribution   ’Which   the  workmen  make   in   increasing production.   The  demand for bonus  becomes  an  industrial claim when either or both these conditions are satisfied." This  matter was again considered in the case of  Associated Cement Co. v. Their Workmen(4).  This Court observed: -               "It  is relevant to add that in  dealing  with               the  concept  of bonus this Court  ruled  that               bonus is neither a gratuitous payment made  by               the  employer  to his workmen nor  can  it  be               regarded  as  a deferred wage.   According  to               this  decision, where wages fall short of  the               living standard and the industry makes  profit               part  of which is due to the  contribution  of               labour, a claim for bonus can be  legitimately               made." [1953] S.C.R. 950.            (2)  [1960] 1 S.C.R. 185. [1955] 1 S.C.R. 991.         (4)  [1959] S.C.R. 925. 814 In  1961,  this  Court was able to say that  "the  right  to claim bonus which has been universally recognised by  indus- trial adjudication in cases of employment falling under the- said  Act  has  now attained the status of  a  legal  right. Bonus can be claimed as a matter of right provided of course by  ’the application of the Full Bench formula it  is  shown that  for  the  relevant year the  employer  has  sufficient available surplus in hand." (Vide Gajendragadkar, J., as lie then was, in Workmen v. Hercules Insurance Co.(1). The  Indian  Tea Association v. Workmen(2) this  Court  held that "the profit bonus can be awarded only by reference to a relevant year and a claim for such bonus has therefore to be made from year to year and has to be settled either amicably between the parties or if a reference is made, it has to  be determined by Industrial adjudication.  A general claim  for the   introduction  of  profit  bonus  cannot  be  made   or entertained  in  the form in which it has been done  in  the present proceedings."               It  follows from the above decisions  of  this               Court that:-               (a)   workmen are entitled to make a claim  to               profit   bonus  if  certain   conditions   are               satisfied;               (b)   the  workmen have to make a  claim  from               year to year;               (c)   this  claim  has either  to  be  settled               amicably or by industrial adjudication; and               (d)   if  there  is a loss or if no  claim  is               made, no bonus will be permissible. In our opinion 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. On  the facts of this case, it is clear that it was only  in 1940 that the claim to profit bonus was settled by an  award of  the Industrial Tribunal.  Therefore, the only  year  the

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liabiiity  can be properly attributed to is 1949, and  hence we  are  of  the opinion that the High Court  was  right  in answering the question in favour of the assessee. The second contention of the learned counsel does not appeal to us.  We are of the opinion that this system of  reopening accounts  does  not  fit in with the scheme  of  the  Indian Income  Tax  Act.  We have already held in  Commissioner  of Income Tax, Madras v. A. Gajapathy Naidu, Madras(,) that  as far as receipts are concerned, there -,an be no reopening [1961] 2 S.C.R. 995.  (2) [1962] Supp. (1) S.C.R. 557. (3)A.I.R. 1964 S.C. 1653. 815 of  accounts.  The same would be the position in respect  of expenses.   But even in En-land accounts are not  opened  in every  case.  Halsbury gives various instances  in  footnote (m)  at  p. 148.  Vol.20. Mr. Sastri has relied  on  various English cases but it is unnecessary to refer to them as Lord Radcliffe  explains  the position in  England,  in  Southern Railway of Peru Ltd. v. Owen(1) thus:               "The  courts  have  not  found  it  impossible               hitherto  to make considerable adjustments  in               the  actual  fall of receipts or  payments  in               order  to arrive at a truer statement  of  the               profits of successive years.  After all,  that               is  why income and expenditure  accounting  is               preferred to cash accounting for this purpose.               As I understand the matter, the principle that               justified  the attribution of  something  that               was  in  fact,  received in one  year  to  the               profits  of an earlier year, as in such  cases               as  Isaac  Holden and Sons v.  Inland  Revenue               Comrs.  (1924) 12 Tax Cas. 758  and  Newcastle               Breweries Ltd. v. Inland Revenue Comrs. (1927)               12  Tax  Cas.  927 was  just  this,  that  the               payment  had been earned by services given  in               earlier year and, therefore, a true  statement               of  profit  required that the year  which  had               borne  the  burden  of the  cost  should  have               appropriated   to  it  the  benefit   of   the               receipt." The principle mentioned by Lord Radcliffe would not apply to a profit bonus.  As stated above, 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. A fortiori profits have already been  made. It is more like sharing of profits on the basis of a certain formula. One other point raised by Mr. Sastri remains.  He urged that the word "for the year in question" in the proviso to sub-s. 10(2)(x) mean "for the year in which allowance is  claimed." We are unable to agree with him.  The words ’for the year in question’ mean the year in respect which bonus is paid. In the result, the appeal fails and is dismissed with costs.                                Appeal dismissed. (1), [1957] A.C. 334. 816