Income-tax---

. ----Business expenditure---Year in which expenditure is deductible-- Company---Bonus---Payment in excess of statutory or contractual amount-- Payment sanctioned by board of directors after end of accounting year-- Excess amount not deductible---Indian Income Tax Act, 1961, S.36(1)(ii).

The board of directors of a company had sanctioned bonus at 50 percent. of the salary for the accounting year 1973-74 at their meeting held on June 5,1974. A similar payment was also authorized for the subsequent year at the meeting, which was held on June 24, 1975. It was contended on the abovesaid basis before the Income Tax Officer at the assessment stage that there was no justification in applying the ceiling prescribed under the provisions of section 36(1)(ii) of the Income Tax Act, 1961. The Income Tax Officer, however, disallowed the bonus of Rs.15,178 paid in excess of 20 percent. which was not covered by an agreement between the employer and the employee, and which was not authorised by the conditions of service. The Tribunal upheld the order on the, ground that, if during the relevant previous year, there was no obligation either statutory or contractual or otherwise and if the liability was not ascertained at the end of previous year, the claim for deduction of the excess amount of bonus would not be permissible. On a reference:

Held, that the assessee's previous year had ended on March 31, 1974, while the amount of bonus was sanctioned at the meeting of the board of directors held on June 5,1974. The bonus declared by the board of directors by the above-said resolution, at the rate of 50 per cent of the salary, was undoubtedly for the year 1973-74. It cannot be said that there was an existing or crystallized liability to pay bonus during the relevant year at a higher rate. The Tribunal was justified in law in confirming the disallowance of the bonus amount of Rs.15,178 and holding that the liability of the bonus was not referable to the year under reference.

CIT v. A. Krishnaswami Mudaliar (1964) 53 ITR 122 (SC); CWT v Sayaji Mills Ltd. (1974) 94 ITR 54 (Guj.); Metal Box Company of India Ltd. v. Their Workmen (1969) 73 ITR 53; 39 Comp Cas 410: 35 FJR 181(SC) ref.

DA. Mehta and R.K. Patel for K.C. Patel for the Assessee.

BJ. Shelat and R.P. Bhatt for the Commissioner.

JUDGMENT

S. D. DAVE, J.---The Income-tax Appellate Tribunal, Ahmedabad, Bench `A' has referred the under-mentioned set of questions to us for our opinion and answer, in exercise of the jurisdiction under section 256 (1) of the Income-tax Act, 1961. The questions relate to two aspects of the "liability to pay bonus"-- its extent and the year in which the deductions as expenses could have been claimed:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in confirming disallowance of bonus of Rs.15,178 on an altogether new ground which was not made out by the lower authorities ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in permitting the Revenue to raise an altogether new ground regarding allowance of bonus for the first time in appeal before it and whether it was justified in holding that the liability to bonus was not referable to the year under reference ?"

The broad features in the background are that the assessee which is a private limited company in which the public are not substantially interested, carried on the business of purchase and sale of crushed bones. The question was in respect of the disallowance of the bonus in a sum of Rs.15,178. It was on the one hand claimed by the assessee-company before the Revenue that the deduction of the-bonus payment of Rs.22,656 should be allowed. The Income tax Officer had, on the other hand, found that the total salary paid to the employees to whom the bonus was to be paid worked out to Rs. 37,390, .and that the bonus was paid in excess of 20 percent. which was not covered by an agreement between the employer and the employees and which was not authorised by the conditions of service.

Examining the details, the board of directors of the company had sanctioned the bonus at 50 percent. of the salary for the accounting year 1973-74 at their meeting held on June 5,1974. A similar payment was also authorised for the subsequent year at the meeting which was held on June 24, 1975. It was contended on the above-said basis before the Income-tax Officer at the assessment stage that there was on justification in applying the ceiling prescribed under the provisions of section 36 (1) (u) of the Income Tax Act, 1961. Admittedly, according to the proviso inserted in the Act of 1961 with effect from September 25, 1975, the bonus payable to an employee should not exceed the amount of bonus payable under the relevant statute, namely, the Payment of Bonus Act, 1965. However, it is common ground that the above-said proviso inserted later on has no applicability whatsoever to the assessment year under consideration. The front line stand taken by the Revenue all along was that the excess payment was not allowable as expenditure incurred in the course of the business. The amount of the bonus, according to the taxing authorities, was sanctioned at the meeting of the board of directors held on June 5, 1974, while the assessee's previous year had ended on March 31,1974. It was the case of the Revenue that there was no subsisting liability on the part of the assessee to make the payment of bonus in excess of the limits prescribed under the provisions. It was also the view taken by the Revenue that the additional liability of bonus was undertaken by the assessee as a gesture of goodwill towards the members of the staff. According to the taxing authorities what required consideration was the question in respect of the point of time when the liability could be said to have arisen. According to the Revenue, such a liability had not arisen until June 5, 1974, when the directors of the company had held a meeting and had decided to pay bonus at 50 percent. It was the view of the taxing authorities that, if, during the previous year relevant to the assessment year under appeal, there was no obligation either statutory or contractual or otherwise and if the liability was not ascertained at the end of the previous year, the claim for deduction of the excess amount of bonus would not be permissible. This view of the Income-tax Officer is discernible from the assessment orders at Annexure "A" dated October 19, 1976. The decision of the Income-tax Officer was challenged in appeal before the Appellate Assistant Commissioner who had upheld the disallowance made by the Income-tax Officer. The Appellate Assistant Commissioner has in fact held that the amount of Rs.15,178 being the bonus amount paid in excess of 20 percent. was liable to be disallowed as the said expenditure was not incurred wholly and exclusively for the purpose of business. Being aggrieved and dissatisfied with the above-said orders of the Appellate Assistant Commissioner dated March 20, 1977, Annexure "B", the assessee had approached the Tribunal in appeal, The Tribunal, after consideration of the relevant factual and legal position, had come to the conclusion that the authorities below were justified in taking the said view. The Tribunal has observed that the amount of bonus was sanctioned at the meeting of the board of directors held on June 5, 1974, while the assessee's pervious year had ended on March 31, 1974. In the view .of the Tribunal, there was no statutory liability on the part of the assessee to make the payment of the bonus in excess of the limit prescribed under the relevant provision and if the additional liability of bonus was undertaken by the assessee as a gesture of goodwill towards the staff, the real question which required consideration was--"What was the point of time when this liability could be said to have arisen ?" In the view of the Tribunal, the said liability had not arisen until June 5, 1974, when the directors had held the meeting and had decided to pay the bonus at 50 percent. The Tribunal has, after consideration of certain case law on the point, taken the view, vide the orders dated November 30, 1978, that the authorities below were justified in their orders and/or assessments. Later on, at the instance of the. assessee, the Tribunal has referred the aforementioned two questions to us for our answer and reply.

It is not necessary, according to us, to reproduce what has befallen from the Tribunal while endorsing the view taken by the authorities below. But it appears that, according to the Tribunal, if during the previous year relevant to the assessment year under appeal, there was no obligation, either statutory or contractual otherwise, and if the liability was not ascertained at the end of the previous year, the claim for deduction of the excess amount of bonus would not be permissible. The Tribunal has taken into consideration the principle laid down by a Bench decision of this Court in CWT v. Sayaji Mills Ltd. (1974) 94 ITR 54. After considering the principle laid down by this Court in the aforementioned decision, the Tribunal has summed up the position by saying that the liability to pay the bonus did not come into existence till the board of directors decided the question about the payment of bonus to the employees and their decision was made after the close of the accounting year. Therefore, in the view of the Tribunal, the claim for deduction should not have been allowed as deduction while computing the profits for the year under meal.

The learned counsel, Mr. Mehta, who appears on behalf of the assessee before us, has urged that the Tribunal and the authorities below were in error in coming to the conclusion that the bonus paid in excess of the statutory liability because of the contractual obligation was not liable to be deducted in the relevant previous year, because it is not necessary for the assessee to show that the bonus amount was actually paid in that particular year. In the submission of learned counsel for the assessee, a crystallised liability had come into existence during the relevant previous year and it is not necessary that the bonus liability should be commensurate with the statutory liability only. According to Mr. Mehta, if the employer who is a private limited company in the instant case had agreed to pay the bonus at a rate higher than the statutory rate then also a crystallised liability had come into existence during the relevant previous year and, therefore, the amount so decided to be paid to the members of the staff was required to be deducted. Anyhow, the contention raised by learned counsel, Mr. Shelat, appearing on behalf of the Revenue, is that even if it is accepted that the assessee could have agreed to pay the bonus at a higher rate than the ordinarily prevalent statutory liability, then also, in the instant case looking to the facts and circumstances, the deduction could not have been allowed in that particular relevant year. According to Mr. Shelat, if the assessee is allowed to show to the taxing authorities that there was an additional liability of bonus on the basis of the acceptance of the obligation to pay that bonus at a higher rate, it would lead to various. unforeseeable complications. Mt. Shelat has moreover urged with vehemence that, at any rate, when the liability to pay the bonus at the additional rate was accepted at the board meeting after the end of the year, the said liability could not have been included as a deductible expenditure in that particular year.

When the orders pronounced by the Tribunal are referred to, it becomes clear that the Tribunal has also taken the view that the payment of bonus to the employee is an allowable deduction and even if the payment is made in excess of the minimum amount payable under the Bonus Act, there cannot be any quarrel with the proposition that the amount should not be disqualified for allowance merely on that ground. The main difficulty which was felt by the Tribunal was to the effect that the amount of bonus was sanctioned at the meeting of the board of directors held on June 5, 1974, while the assessee's previous year had already ended on March 31,1974. This factual position as has been reiterated by the Tribunal more than once is not in dispute before us. It is the common ground both for the assessee as well as the Revenue that the assessee's previous year had ended on March 31, 1974, while the amount of the bonus was sanctioned at the meeting of the board of directors held on June 5, 1974. Learned counsel appearing on behalf of the assessee has produced for our perusal the text of the minutes of the board meeting held on June 5, 1974, so far as it relates to the question in controversy. The minutes would go to show that the board meeting was held as accepted by the Revenue and the taxing authorities below on June 5, 1974. The bonus which came to be declared by the board of directors by the above-said resolution, at the rate of 50 percent. of the salary was undoubtedly for the year 1973-74. Therefore, this document produced by learned counsel, Mr. Mehta, for the assessee, would also go to show that the factual aspect as considered by the taxing authorities and the Tribunal are not in dispute. '

Learned counsel for the assessee-Company has placed reliance upon the Supreme Court decision in CIT v. A. Kishnaswami Mudaliar (1964) 53 ITR 122. This decision on which learned counsel for the assessee has placed reliance would, according to us, not be of much assistance to the assessee, because it details the prevalent methods or modes of maintaining the accounts. The decision deals with the two current principal systems of book keeping firstly the cash system and secondly the mercantile system. Some reference has been made to a third system prevalent in this country, which is generally known as the hybrid or heterogeneous system, in which certain elements and incidents of the cash and mercantile systems are combined. It is not in dispute that in the case before us, the assessee had preferred to adopt the mercantile system of accounting. The characteristics of the above-said system are rather known and, therefore, a detailed reference to the above-said decision on which reliance has been placed by learned counsel for the assessee should not, in our view, detain us any more. Reliance is also placed upon the Supreme Court decision in Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53. This decision, while considering the provisions of the Payment of Bonus Act, 1965, alongwith the provisions of the Companies Act, 1956, and the. Income Tax Act, 1961, says thus (head-note):

"Contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if properly ascertainable and its present value is discounted, is deductible from the gross receipts while preparing the profit and loss account. This is recognized in trade circles and there is nothing in the Bonus Act which prohibits such a practice. Such a provision provides for a known liability of which the amount can be determined with substantial accuracy. It cannot, therefore, be termed a `reserve'. Therefore, the estimated liability for the year on account of the scheme of gratuity should be allowed to be deducted from the gross profits. The allowance is not restricted to the actual payment of gratuity during the year."

Adopting the above-said reasoning, the Supreme Court has said that I the estimated liability for the year, on account of a scheme of gratuity, should be allowed to be deducted from the gross profits and this allowance is not restricted to the actual payment of the gratuity during the year. There cannot H be any quarrel with the above-said principle laid down by the Supreme Court while considering the relevant provisions of the said enactment. But the real question in controversy before us, in the present reference is ... ... As to whether, when the board of directors had adopted a resolution sanctioning bonus at a higher rate after the closure of the relevant previous year, the bonus could have been deducted qua the said year. Looking to the said question in controversy before us, in our opinion, this decision would not be of any assistance to the assessee in supporting the contention being raised before us.

The Tribunal has accepted that if, during the previous year, relevant to the assessment year under appeal, there was no obligation, either statutory or contractual or otherwise, and if the liability was not ascertained at the end of the previous year, the claim for deduction of the excess amount of bonus would not be permissible. Even after hearing learned counsel, Mr. Mehta, on this point for rather a pretty long time and even after the consideration of the authorities as referred to above, we are not inclined to take a different view. The Tribunal has not stated that the bonus amount would not or should not be deducted. The real question was as to which would be the relevant year qua which the above-said deduction should be allowed. It is not in dispute that the board meeting was held only after the end of the year, i.e. on June 5, 1974. If the contention raised by learned counsel, Mr. Mehta for the assessee before us is to be accepted, then it would follow that, even if the bonus at a higher rate is being sanctioned by the assessee, may it be a firm a proprietary concern, or a limited company, after the end of the year and if the bonus so accepted to be paid at a higher rate is allowed as a deductible expenditure in computing the business income during the relevant year, it would result in unforeseen complications for not only the taxing authorities but for the assessee also. In any case, when such eventuality occurs, the old assessment orders shall have to be reopened or shall have to be revised, leading to various other complications and situations vis-a-vis, other enactments also. Moreover, it should not be overlooked that the bonus which should be deducted must be deducted qua the relevant previous year and that, when the board meeting sanctions the payment of bonus at a higher rate, after the close of that particular year, by no stretch of imagination can it be said that there was an existing liability or a crystallised liability to pay the bonus during the relevant year. Such liability to pay bonus is at a higher rate. In view of this, it appears clear that the view which is being sought to be canvassed by learned counsel, Mr. Mehta, for the assessee, before us cannot be accepted. If once this decision is reached, it would follow that the Tribunal was justified in law in confirming the disallowance of bonus amount of Rs.15,178 and further holding that the liability of the bonus was not referable to the year under reference. The conclusion, therefore, would be that the questions referred to us require to be answered in the affirmative, against the assessee and in favour of the Revenue. We hereby accordingly answer the said questions with no order as to costs.

M.B.A./225/T.F.Order accordingly.