R.L. Gulati, J. - (1.) THIS is a reference under Section 256(1) of the Income-tax Act, 1961. The following question of law has been referred for the opinion of this court. "Whether, on the facts and circumstances of the case and where the assessee had kept its books on mercantile system of accountancy and had made a provision for payment of bonus just before the close of the accounting year in pursuance of a resolution of the board of directors, it could rightly be held that the claim for the deduction on the amount for the provision of bonus cannot be allowed as a deduction on the ground that the assessee's profits were not ascertained or known till the final adjustment of the accounts ?"
(2.) THE assessee is a private limited company engaged in the business of sports goods. THE assessment year involved is 1962-63, the accounting year being the calendar year 1961. There is a group of three companies including the assessee-company which is managed by the same management. M/s. A. H. Wheeler and Co. (P.) Ltd. is the parent company, while the other two companies are the subsidiaries of M/s. Wheeler Distributors (P.) Ltd. The connected reference relates to M/s. Wheeler Distributors Company and an identical question arises in that case also. It appears that the parent company has employed the entire staff. The assessee company has no staff of its own. The staff from the parent company is lent to it, but the salaries of the staff are paid by the assessee-company in respect of the time and work done by the staff. In respect of the assessment year 1962-63 the board of directors of the parent company passed a resolution to the effect that the bonus at the rate of two months' salary be allowed to the staff. It was also resolved that a proportionate amount for the payment of the bonus should be recovered from the assessee-company. The assessee-company in its turn passed a similar resolution. The resolution was passed on December 4, 1961, and reads as under : "Bonus to staff It was resolved that having regard to the prospects of the company for the year 1961 the company do declare bonus for the year 1961 at the rate of one-sixth of the total basic pay drawn by the staff during the year, the payment to be made after the final accounts for the year have been drawn up." In pursuance of the aforesaid resolution a sum of Rs. 6,500 was earmarked for the payment of the bonus and appropriate adjustment entry was made in the accounts for the calender year 1961. The assessee claimed this sum of Rs. 6,500 as a deduction in the computation of its net income assessable for the year 1962-63. The Income-tax Officer disallowed the claim principally on the ground that the staff to whom the bonus was payable did not belong to the assessee-company. The Appellate Assistant Commissioner of Income-tax on appeal reversed the finding of the Income-tax Officer. He was of the opinion that the fact that the staff did not belong to the assessee-company was of no consequence. There was an Appeal by the department to the Income-tax Appellate Tribunal. The Tribunal agreed with the view of the Appellate Assistant Commissioner of Income-tax, but disallowed the assessee's claim on another ground, the ground being that as the provision for the bonus had been made before the close of the accounting year, the profits for that year had not been ascertained at the time when the entry was made in the assessee's account books.
(3.) NOW a payment of bonus is allowed as a deduction under Section 36 of the Income-tax Act, 1961, which corresponds to Section 10(2)(x) of the Income-tax Act, 1922. The relevant provision of Section 36 reads as under: "36. The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28--...... (ii) 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 bonus or commission is reasonable with reference to-- (a) the pay of the employee and the conditions of his service; (b) the profits of the business or profession for the previous year in question ; and (c) the general practice in similar business or profession;....." The Tribunal has not disputed the existence of conditions (a) and (c) referred to above, but has held that condition (b) did not exist. Condition (b) merely stipulates that the admissibility of any sum paid as bonus shall be judged with reference to the profits of the previous year in question. The profit for the relevant previous year in the instant case was a sum of Rs. 61,794. The Tribunal has not taken the view that the amount of profit was inadequate so as to warrant the payment of the bonus. Its view seems to be that since the profit had not been worked out when the provision for the payment of bonus was made, the claim could not be allowed. We are of opinion that the Tribunal was in error in taking that view. The resolution for making the provision for payment of bonus was passed on December 4, 1961, and the accounts of the previous year were to be closed on December 31, 1965, so that the resolution was passed almost at the end of the year. It cannot be said that the board of directors of the assessee-company were not in a position at that time to have an idea of the profits of the company.;