Full Judgment Text
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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,
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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
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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?"
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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.
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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.
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