The Commissioner of Income-Tax, Madhya
Pradesh, Nagpur Vs. Swadeshi Cotton And Flour Mills [1964] INSC 127 (17 April
1964)
17/04/1964 SIKRI, S.M.
SIKRI, S.M.
SUBBARAO, K.
SHAH, J.C.
CITATION: 1964 AIR 1766 1964 SCR (7) 810
CITATOR INFO:
F 1992 SC 718 (7)
ACT:
income Tax-Deduction of bonus-Bonus relating
to 1947 Paid in 1949-Claim for deduction for account year 1949-System of
accounting by assessee-Principle of reopening of accounts-If applicable-Indian
Income-tax Act, 1922 (11 of 1922), ss.
10(2)(x), 10(5).
HEADNOTE:
The respondent company paid to its employees
Rs. 1,08,325/-- as bonus for the year 1947 in the calendar year 1949, as a
result of the award of the Industrial Tribunal dated January 13, 1949. This
amount was debited by the company in its profit and loss account for the year
1948 and the corresponding credit was given to the bonus payable account.
The books for 1948 were not closed till the
date of the award of the Industrial Tribunal. For the relevant assessment year,
1950-51, the company claimed that under s. 10(2)(x) of the Indian Income-tax
Act, 1922, it was entitled to an allowance in respect of the amount paid as
bonus, but the claim was rejected by the Income-tax authorities on the ground
that according to the mercantile system of accounting which was followed by the
assessee the year to which the liability was properly attributable was the
calendar year 1947 and not 1949. It was the case of the Income-tax authorities
that it was a legal liability of the assessee which arose in 1947 and should
have been estimated and Put into the accounts for 1947, and that, if necessary,
the amounts for the year 1947 should be reopened. It was admitted that the
bonus in the instant case was a profit bonus.
Held:(i) It was only when the claim to profit
bonus, if made, was settled amicably or by industrial adjudication that a
liability was incurred by the employer, who followed the mercantile system,
within s. 10(2)(x), read with s. 10(5), of the Indian Income-tax Act, 1922; and
as it was only in 1949 that the claim to profit bonus was settled by an award
of the Industrial Tribunal, the only year the liability could be properly
attributed to was 1949.
(ii) The system of reopening accounts was not
applicable under the scheme of the Indian Income-tax Act.
(iii) The words "Year in question."
in proviso (b) to s.10 (2)(x) of the Act meant "year in respect of which
bonus was paid".
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 587 ,of 1963.
Appeal by special leave from the judgment and
order dated November 30, 1960 of the Madhya Pradesh High Court, in
Miscellaneous Civil Case No. 73 of 1960.
K.N. Rajagopal Sastri and R. N. sachthev, for
the appellant.
S.K. Kapoor, S. Murty and K. K. fain, for the
respondent, 811 April 17, 1964. The judgment of the Court was delivered by
SIKRI, J.-The respondent, Swadeshi Cotton & Flour Mills, hereinafter
referred to as the assessee, is a limited company which owns and runs a textile
mill at Indore. For, the assessment year 1950-51 (accounting year calendar year
1949), which was its first year of assessment under the Indian Income-tax Act,
1922 (hereinafter referred to as the Act) it claimed that under s. 10(2)(x) of
the Act it was entitled to an allowance in respect of the sum of Rs.
1,08,325/- which it had paid as bonus for the
year 1947 in the calendar year 1949, as a result of the award of the Industrial
Tribunal, dated January 13, 1949. The claim of the assessee was not accepted by
the Income Tax authorities.
The Appellate Tribunal held that it was a
liability relating to an earlier year and not the year 1949. However, on an
application by the assessee it stated a case and referred two questions. We are
concerned only with one which reads thus:
"Whether on the facts and in the
circumstances of the case the assessee is entitled to claim a deduction of
bonus of Rs. 1,08,325/- relating to the calendar year 1947 in the assessment
year 1950-51? The High Court of Madhya Pradesh answered the question in the
affirmative. The appellant, having failed to get a certificate under s. 66A(2)
of the Act, obtained special leave from this Court, and that is how the appeal
is before us.
The facts and circumstances referred to in
the question have been set out in the statement of the case. Unfortunately, the
facts are meagre, but since the appellant is content to base his case on a few
facts, which will be referred to shortly, it is not necessary to call for a
further statement of the case.
The facts, in brief, are as follows. The
assessee paid as bonus to its employees the sum of Rs. 1,08,325/9/3 for the
calendar year 1947 in terms of an award made on January 13, 1949 under the
Industrial Disputes Act. This amount was debited by the assessee in its profit
and loss account for the year 1948 and the corresponding credit was given to the
bonus payable account. The books for 1948 had not been closed till the date of
order of the Industrial Tribunal, January 13, 1949. This bonus was in fact paid
to the employees in the calendar year 1949, the relevant assessment year being
1950-51.
The Appellate Assistant Commissioner had
further found that upto 1946 when the order for payment of bonus used to be
received before the company's accounts for the year were finalised, the amount
of bonus used to be in fact 812 debited to the profit and loss account of the
respective year. this finding is repeated by the Appellate Tribunal in its
appellate order.
On these facts the learned counsel for the
appellant, ,Mr. Sastri, contends that according to the mercantile system of
accounting, which is followed by the assessee, and on which its profits have
been computed for the accounting calendar year 1949, the year to which the
liability is properly attributable is the calendar year 1947 and not 1949. He
says that it was a legal liability of the assessee which arose in 1947 and
should have been estimated and put into the accounts for 1947. In the
alternative he has invited us to reopen the accounts for the year 1947,
following the practice which,according to him, obtains in England.
Inour opinion, the answer to the question
must depend on theproper interpretation of s. 10(2)(x), read with s. 10(5), of
theAct. These provisions read as follows:- "s. 10(2)(x)-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 the bonus or
commission is of a reasonable amount with reference to- (a)the pay of the
employee and the conditions of his service-, (b)the profits of the business,
profession or vocation for the year in question; and (c)the general practice in
similar businesses, professions or vocations." s. 10(5)-In sub-section
(2), "paid" means actually paid or incurred according to the method
of accounting upon the basis of which the profits or gains are computed under
this section;..." If we insert the definition of the word 'paid' in
sub-cl.
(x), it would read as follows:
any sum actually paid or incurred according
to the method 'of accounting upon the basis of which the profits or gains are
computed under this section, to an employee as bonus..." As the assessee's
profits and gains have been computed according to the mercantile system, the
question, using for .he time being the terms of the clauses, comes to this:
"Has this sum of Rs. 1,08,325/- been
incurred by the assessee according to the mercantile system in the calendar
year 1947 or 1949?" 813 At first sight the sentence does not read well,
but the meaning of the word 'incur' includes 'to become liable to' Therefore,
the question boils down to:
"In what year did the liability of this
sum of Rs. 1,08,325/- arise, according to the mercantile system ? " The
mercantile system of accounting was explained in a judgment of this Court in
Keshav Mills Ltd. vs. Commis- sioner of Income Tax, Bombay(1) thus:- "That
system brings into credit what is duc, immediately it becomes legally due and
before it is actually received, and it brings into debit expenditure the amount
for which a legal liability has been incurred before it is actually
disbursed." These observations were quoted with approval in Calcutta ,Co.
Ltd. vs. Commissioner of Income Tax, West Bengal(2).
On the facts of this case, when did the legal
liability arise in respect of the bonus? This depends on the facts of the case
and the nature of the bonus awarded in this case.
This Court has examined the nature of profit
bonus-it is common -round, that the bonus with which we are concerned with was
a profit bonus-in various cases. It is explained in Muir Mills v. Suti Mills
Mazdoor Union(3) that "there .are two conditions which have to be
satisfied before a demand for bonus can be justified and they are (1) when
'wages fall short of the living standard, and (2) the industry makes huge
profits part of which are due to the contribution 'Which the workmen make in
increasing production. The demand for bonus becomes an industrial claim when
either or both these conditions are satisfied." This matter was again
considered in the case of Associated Cement Co. v. Their Workmen(4). This Court
observed: - "It is relevant to add that in dealing with the concept of
bonus this Court ruled that bonus is neither a gratuitous payment made by the
employer to his workmen nor can it be regarded as a deferred wage. According to
this decision, where wages fall short of the living standard and the industry
makes profit part of which is due to the contribution of labour, a claim for
bonus can be legitimately made." [1953] S.C.R. 950. (2) [1960] 1 S.C.R.
185.
[1955] 1 S.C.R. 991. (4) [1959] S.C.R. 925.
814 In 1961, this Court was able to say that
"the right to claim bonus which has been universally recognised by indus-
trial adjudication in cases of employment falling under the- said Act has now
attained the status of a legal right.
Bonus can be claimed as a matter of right
provided of course by 'the application of the Full Bench formula it is shown
that for the relevant year the employer has sufficient available surplus in
hand." (Vide Gajendragadkar, J., as lie then was, in Workmen v. Hercules
Insurance Co.(1).
The Indian Tea Association v. Workmen (2)
this Court held that "the profit bonus can be awarded only by reference to
a relevant year and a claim for such bonus has therefore to be made from year
to year and has to be settled either amicably between the parties or if a
reference is made, it has to be determined by Industrial adjudication. A
general claim for the introduction of profit bonus cannot be made or
entertained in the form in which it has been done in the present proceedings."
It follows from the above decisions of this Court that:- (a) workmen are
entitled to make a claim to profit bonus if certain conditions are satisfied;
(b) the workmen have to make a claim from
year to year;
(c) this claim has either to be settled
amicably or by industrial adjudication; and (d) if there is a loss or if no
claim is made, no bonus will be permissible.
In our opinion it is only when the claim to
profit bonus, if made, is settled amicably or by industrial adjudication that a
liability is incurred by the employer, who follows the mercantile system of
accounting, within s. 10(2)(x), read with s. 10(5) of the Act.
On the facts of this case, it is clear that
it was only in 1940 that the claim to profit bonus was settled by an award of
the Industrial Tribunal. Therefore, the only year the liabiiity can be properly
attributed to is 1949, and hence we are of the opinion that the High Court was
right in answering the question in favour of the assessee.
The second contention of the learned counsel
does not appeal to us. We are of the opinion that this system of reopening
accounts does not fit in with the scheme of the Indian Income Tax Act. We have
already held in Commissioner of Income Tax, Madras v. A. Gajapathy Naidu,
Madras(,) that as far as receipts are concerned, there -,an be no reopening
[1961] 2 S.C.R. 995. (2) [1962] Supp. (1) S.C.R. 557.
(3)A.I.R. 1964 S.C. 1653.
815 of accounts. The same would be the
position in respect of expenses. But even in En-land accounts are not opened in
every case. Halsbury gives various instances in footnote (m) at p. 148. Vol.20.
Mr. Sastri has relied on various English cases but it is unnecessary to refer
to them as Lord Radcliffe explains the position in England, in Southern Railway
of Peru Ltd. v. Owen(1) thus:
"The courts have not found it impossible
hitherto to make considerable adjustments in the actual fall of receipts or
payments in order to arrive at a truer statement of the profits of successive
years. After all, that is why income and expenditure accounting is preferred to
cash accounting for this purpose.
As I understand the matter, the principle
that justified the attribution of something that was in fact, received in one
year to the profits of an earlier year, as in such cases as Isaac Holden and
Sons v. Inland Revenue Comrs. (1924) 12 Tax Cas. 758 and Newcastle Breweries
Ltd. v. Inland Revenue Comrs. (1927) 12 Tax Cas. 927 was just this, that the
payment had been earned by services given in earlier year and, therefore, a
true statement of profit required that the year which had borne the burden of
the cost should have appropriated to it the benefit of the receipt." The
principle mentioned by Lord Radcliffe would not apply to a profit bonus. As
stated above, a profit bonus is strictly not wages, at least not for the
purpose of computing liability to income tax; it is not an expense, in the
ordinary sense of the term, incurred for the purpose of earning profits. A
fortiori profits have already been made.
It is more like sharing of profits on the
basis of a certain formula.
One other point raised by Mr. Sastri remains.
He urged that the word "for the year in question" in the proviso to
sub-s.
10(2)(x) mean "for the year in which
allowance is claimed." We are unable to agree with him. The words 'for the
year in question' mean the year in respect which bonus is paid.
In the result, the appeal fails and is
dismissed with costs.
Appeal dismissed.
(1), [1957] A.C. 334.
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