Law:

Section:

Section 36(1)(ii) of the Income-tax Act, 1961 (Corresponding to section 10(2)(x) of the Indian Income-tax Act, 1922) - Bonus or commission - Assessment year 1961-62 - Whether even in a case where mercantile system of accounting is followed, in order to claim deduction, liability incurred by assessee must be an enforceable liability ascertained or capable of being ascertained during relevant accounting year - Held, yes - Whether, therefore, where liability for payment of bonus arose as a consequence of Government's notification after expiry of relevant previous year and was actually paid thereafter, provision made for payment of bonus in accounts of relevant previous year was not allowable deduction under section 10(2)(x) of 1922 Act even though assessee was following mercantile system of accounting - Held, yes FACTS The assessee-company made a provision of certain amount for payment of bonus to its workers in respect of the profits of the relevant previous year and claimed the sum as deduction in the computation of its net profits liable to tax. The Income-tax Officer disallowed the claim on the ground that the liability for bonus was determined under the orders of the Government dated 29-12-1960, and so on 29-12-1960, when the accounts were closed there was no ascertained liability against the assessee for payment of bonus. On appeal, the AAC accepted the assessee's claim. On revenue's further appeal, the Tribunal set aside the order of the Appellate Assistant Commissioner holding that at the end of the previous year there did not exist any legal liability against the assessee for the payment of bonus. On reference: HELD The assessee, no doubt, followed the mercantile system of accounting so that every liability incurred by it during the relevant previous year could be claimed as a deduction. But even in a case where mercantile system is followed the liability must be an enforceable liability ascertained or capable of being ascertained. The Bonus Act was not in force at the relevant time. Thus, the liability of the assessee to pay bonus, arose when the State Government issued the notification. Under section 10(2)(x ) of the Act, 1922, any sum paid to an…

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