AJIT K.SENGUPTA, J. - (1.) THIS reference at the instance of the Revenue under S. 256(1) of the IT Act, 1961, relates to the asst. yr. 1978-79. The question which has been raised in this reference is as follows : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was at liberty to change its method of accounting in respect of payment of bonus from cash system to mercantile system?"
(2.) SHORTLY stated, the facts are that, in the past, the assessee was debiting to the P&L account of the year the bonus relating to the immediately preceding year that was actually paid during the year. In other words, the assessee was not making any provision for payment of bonus in the accounts of the year to which the bonus related. Instead it used to debit the bonus actually paid during the year to the P&L account of the year even though the bonus related to the working of an earlier year. In short, the assessee was following the cash system of accounting so far as this item of expense was concerned. During the year under consideration, the assessee debited the amount actually paid during this year in accordance with its past practice. This had been allowed by the ITO and there was no dispute about the same. In addition to the above, the assessee also debited to the P&L account of this year the provision for bonus that accrued as payable for working of this year. The idea was that in the subsequent year the bonus relating to this year would be payable out of the provision made during this year, and not out of the profits of the subsequent year. In other words, the assessee changed its system of accounting in respect of this item of expenses from "cash" to mercantile. Hence, it debited the aforesaid provision for bonus relating to this year in the P&L account of this year. The ITO disallowed this provision made by the assessee on the ground that the change in the method of accounting introduced was not acceptable. The reason given by the ITO was that the change permits the assessee to deduct the bonus for two years in this year, one under the previous cash system and the other under the new mercantile system. According to the ITO, such a change adopted by the assessee was not acceptable and so he disallowed the aforesaid provision for bonus. The assessee appealed to the CIT(A) and contended that the action of the ITO was not justified. The CIT(A) agreed with the contention of the assessee and directed the ITO to accept the method of accounting adopted by the assessee and allow the deduction claimed by the assessee in respect of the aforesaid provision for bonus relating to the year under consideration which has been made in the P&L account.
(3.) THE Department appealed to the Tribunal and contended that the CIT(A) erred in his decision. On the other hand, the assessee supported the order of the CIT(A). The Tribunal considered the contentions of both the parties as well as the facts on record and held as follows : "We find force in the contentions raised for the assessee. We find that, in the printed accounts for the year under consideration, in item No. 8 of Schedule 16 at page 29, a reference has been made to the changed system of accounting for this item of expense. In addition, we find from the copies of the assessment orders for the asst. yrs. 1979-80 and 1980-81 that the assessee has been following the changed mercantile system of accounting for bonus in those two subsequent assessment years also. This has clearly been stated in paragraph 17 of the assessment order for the asst. yr. 1979-80 and paragraph 6 of the assessment order for the asst. yr. 1980-81. Hence, there is no doubt that the assessee has followed the changed method regularly after the change. The changed method is also one of the recognised methods of accounting and so it will also reflect the true profits of the business. It was explained before us that the assessee intended to change over to the mercantile system after the coming into force of the Payment of Bonus Act, 1965, under which the liability to pay bonus became statutory and certain. In other words, there was no escape from the payment of bonus in any year after the coming into force of the said Act. Hence, it cannot be said that the change has been made with any mala fide intention. It is but natural that, in the first year of change, two items had to be debited to the P&L account, one on the old basis and the other on the new basis. This would make no difference in the long run as in the subsequent years only the excess over the provision made, if any, would be claimed as deduction on payment basis. Besides, possible detriment to the Revenue is no ground for rejecting a bona fide change in the method of accounting followed consistently after the change. Hence, we uphold the decision of the CIT(A) on this point and reject this ground.'' ;