Decided on March 20,1965



- (1.)THIS is a case stated under section 66(1) of the Income-tax Act of 1922.
(2.)THE question referred is:
"Whether, on the facts and in the circumstances of the case stated above, the amount of Rs. 4,50,000 provided for in the balance-sheet and debited to the profit and loss account as bonus, could be allowed as a deduction in the assessment year under consideration?"

The material facts are that for the assessment year 1949-50, the previous year being 31st December, 1948, the assessee-company claimed as a deduction a provision made for bonus amounting to Rs. 4,50,000 provided for in the profit and loss in the relevant previous year, but actually paid in the following year. For the accounting year ending October 31, 1942, although a provision was made in its accounts for bonus in the sum of Rs. 1,00,000, only Rs. 63,385, the actual payment made, was allowed to be deducted in that year and the balance was disallowed. For the years ending October 31, 1943, up to the year ending December 31, 1947, the position was more or less the same. Allowance for bonus was invariably made on the basis of actual payments and in disregard of the provision that was made in the accounts for bonus. In some years the actual payment was more than the provision that had been made and in others less. Therefore, the allowance for bonus since the year ending October 31, 1942, was always made on the basis of actual payments and this was being acquiesced in by the assessee. In the relevant year of account the assessee while admitting before the Income-tax Officer that the past practice was to claim deduction for bonus on the basis of actual payment contended that it could change the system of accounting hitherto followed by it by insisting on the bonus being allowed on accrual basis and not on the actual receipt or payment basis. The Income-tax Officer did not accept this contention and allowed only the bonus of Rs. 5,252 actually paid during the relevant year of account and added back the balance of Rs. 4,44,748 out of the provision of Rs. 4,50,000 that the assessee had made in its books for bonus.

(3.)ON appeal, the Appellate Assistant Commissioner confirmed the disallowance of bonus on the ground that the assessee could not change over from the cash system of accounting in respect of bonus which it had hitherto follow to the mercantile basis. Still being aggrieved, the matter was taken to the Income- tax Appellate Tribunal. The Tribunal was of the view that though the assessee was following the mercantile system of accounting nevertheless there was nothing to prevent it from following the cash system in respect of bonus payment. It found that the allowance for bonus in the past had never been on the basis of what had been provided by the company in its books of account "during each of the years but it was based entirely on the actual payments made during each such year". Such disallowance was made year after year out of provision made by the assessee and it had consistently accepted that position. In these circumstances it was held that the assessee itself had adopted the cash basis in regard to the claim under bonus and as such this was a hybrid system of accounts which, under the proviso to section 13 of the Act, was an acceptable system of accounting provided it was regularly employed by the assessee. The disallowance was accordingly upheld. This reference under section 66(1) has been now made at the instance of the assessee and the question set out hereinabove referred for the opinion of this court.

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