COMMISSIONER OF INCOME TAX Vs. KESORAM INDUSTRIES AND COTTON MILLS LTD

JUDGEMENT

(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 :

(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.

(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 :