Sabyaschi Mukharji, J. - (1.) In this reference under Section 256(2) of the I.T. Act, 1961, the following question, as directed by this court, has been referred to this court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the liability to pay additional bonus in the sum of Rs. 1,32,795 did not arise in 1969 and the said sum was not, therefore, allowable as a deduction in the assessment year 1970-71 ?"
(2.) In order to appreciate the question, it would be necessary to refer to certain facts. The assessment year involved is 1970-71, which covers the calendar year 1969. The ITO disallowed the assessee's claim for Rs. 1,32,795 on the ground that it was a provision for an ex gratia compensation and that the liability was neither ascertained nor quantified. There was an appeal from the said order of the ITO before the AAC. Before we mention anything about that, it may be mentioned that, as for income-tax assessment purpose, the business loss was computed at Rs. 1,97,350. It was further contended on behalf of the assessee, before us, that the business loss was computed after disallowance of certain amount and after allowing depreciation of Rs. 1,87,897, which was necessary for income-tax purpose, but actually there was a business profit. In any event, we are not concerned, in the present reference, with that aspect but we are merely noting it because one argument was advanced before us which we shall presently indicate. In the appeal before the AAC, he held as follows : "5. The next ground of appeal is regarding the disallowance of provision for ex gratia amount (compensation) totalling Rs. 1,32,795 which the ITO disallowed on the ground that this provision for ex gratia compensation is a liability not ascertained and quantified and hence he disallowed it. The A/R of the company submits before me that the ITO was not justified in disallowing this provision for expenditure amounting to Rs. 1,32,795 on the ground that the liability was not. ascertained and quantified without going into the details of this item. He further submits that this amount though called ex gratia is in fact a provision for bonus for the year 1969, for the Western Region of Kilburn Division, by the appellant-company. He further submits that the total provision for bonus for this region for the year 1969, amounted to Rs. 1,25,292 including Rs. 59,434, which has been provided in the accounts in accordance with the Bonus Act and the balance sum of Rs. 1,32,795 represents bonus payable on account of settlement grant as agreed with the employees' union. He further submits that in the statement of salaries this amount has been wrongly described as ex gratia. He finally submits that as the liability was determined and quantified it should be allowed. I have given a careful consideration to the submissions made by the learned counsel but find that there is not enough force in the arguments advanced by him. The memorandum of settlement regarding bonus payable for the accounting years 1968 to 1971 has been signed by the respective parties on 15th of January, 1970, which goes to prove that the matter regarding the payment of bonus was under dispute till the end of this assessment year under appeal. It was also outlined in the said settlement that the current result of the appellant-company did not justify payment of bonus beyond the level obtaining under the agreement which expired in 1967. However, the company was prepared to consider a higher quantum only on the basis that this be separated into two parts, the first part being paid as bonus according to the Act formulated and the second part being paid as fixed allowance to the existing staff on the basis of difference between bonus payable under the Act formulated and the higher quantum of bonus they have been accustomed to receive in the past and such payment was termed as a settlement grant. From this agreement it is clear that the appellant-company had not admitted its liability to pay the settlement grant till the end of the year under appeal and also till the agreement was drawn up in January, 1970. The Bonus Act, 1965, gave statutory basis to payment of bonus under a formula set out in the Act itself. It is also provided therein under Section 34(3) of the Act that bonus could be paid in accordance with formula different from the formula given under the Bonus Act should there be agreement between the employers and employees to this effect provided that no such agreement deprived the employees from receiving the minimum bonus as provided under Section 10 of the Act. The appellant-company has not given any satisfactory reasons for bifurcating the payment of bonus into two parts and claiming the ex gratia payment also as bonus which in fact it is not because nothing prevented the company from turning it into bonus as demanded by the employees' union unless it was a sort of payment which was left to the discretion of the management instead of turning it into an enforceable legal claim. In my opinion, therefore, the ITO was justified in disallowing this provision which did not become a legally enforceable liability till the end of this accounting year under appeal; this liability should, therefore, be allowed in the year of actual payment."
(3.) Being aggrieved by the order of the AAC, the assessee went up in appeal before the Tribunal. The Tribunal noted the rival contentions as also the contentions of the ITO and the AAC. The Tribunal held as follows ; "5. We have considered the rival submissions of the learned representative of the parties. The Bonus Act provided for the payment of minimum bonus but it left to the parties to settle at a higher rate. The assessee had been paying bonus in the past and the earlier settlement came to an end in 1967. By the new settlement the parties were required to settle the formula, i. e., the basis of liability and it was not mere quantification of the liability which was to be done. The decision of the Tribunal in I.T.A. No. 3725 (Cal) of 1974-75 is, therefore, not applicable to the facts of the present case as in that case the liability involved was only under the Bonus Act. We may point out that the mere levelling of a part of the liability as a settlement grant would not change the nature of the liability which became legally enforceable on the execution of the settlement on 10th January, 1970. It appears that the assessee paid the earlier liability of bonus as finally settled between the parties for 1968, by the end of 1969. This supports that a tentative decision had been taken but no finality can be attached to it as a formal document was to be executed and until that was done, the settlement did not become final and legally enforceable. We thus hold that the liability to pay Rs. 1,32,795 did not arise during the year under consideration and the Appellate Assistant Commissioner was right in affirming the disallowance.";