R.R. Rastogi, J.
1. The assessee is a limited company engaged in the business of manufacturing glasses. It follows the calendar year as its year of account. For the year 1963, the Assistant Labour Commissioner by an order dated November 18, 1965, directed the assessee to pay bonus to its workers. It appears that subsequently at the instance of the assessee by an order dated December 24, 1965, the assessee was given time to make the payment by 31st of January, 1966. In its assessment for the assessment year 1967-68, the assessee claimed deduction of Rs. 15,273 being bonus paid for the year 1963 under the aforesaid order of the Labour Commissioner. The ITO held that this liability related to the year 1966-67 and, hence, disallowed the claim. On appeal, the AAC took a contrary view and treated the aforesaid payment as liability of the year under consideration. There was an appeal preferred by the department against that order before the Income-tax Appellate Tribunal. The Appellate Tribunal, disagreeing with the AAC, has taken the view that since the assessee was following the mercantile system of accounting the liability to pay the aforesaid amount arose in the previous year relevant to the assessment year 1966-67, and not in the year under consideration and as such for this year it was not an allowable deduction. In this view of the matter, the order of the AAC in this behalf was reversed and that of the ITO was restored.
2. At the instance of the assessee, the following question of law has been referred for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in concluding that the liability to pay the bonus of Rs. 15,273 arose in the assessment year 1966-67 but not in the assessment year 1967-68 ?'
3. After hearing counsel for the parties we are of the opinion that the view taken by the Appellate Tribunal is absolutely correct. It is not disputed that the assessee follows mercantile system of accounting and the liability for payment of the disputed amount arose in the calendar year 1965, relevant to the assessment year 1966-67. We need hardly emphasise that there are two methods of accounting, one cash system and the other mercantile system. According to the cash basis accounts are kept on actual receipts and actual payments and entries are made only when the moneys are actually collected or disbursed while in the mercantile accounting system net profits or losses are calculated after taking into account all the income and all the expenditure relating to the period, whether such income has actually been received or not and whether such expenditure has been actually paid or not. There being no dispute in the instant case that the assessee follows mercantile accounting system and that the liability to pay the disputed amount of bonus arose as a result of the order of the Assistant Labour Commissioner, Bareilly, dated November 18, 1965, the liability was relatable to the previous year relevant to the assessment year 1966-67 and certainly not to the following year simply because the payment was made in that year. Oar attention was invited by the learned counsel for the assessee to the definition of the expression 'paid' as contained in Section 43(2) of the I.T. Act, 1961. That definition reads :
' 'paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains ate computed under the head '(Profits or gains of business or profession'.'
4. We do not think that this definition advances the case of the assessee in any maner. Reference was also made to the proviso to Section 145(1) of the Act but that also does not help the assessee. This sub-section provides for the method of accounting and it says that income chargeable under the head 'Profits or gains of business or profession 'or' Income from other sources' shall be computed in accordance with the method of accounting regularly employed by the assessee. The proviso reads I
'Provided that in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that, in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, then the computation shall be made upon such basis and in such manner as the Income-tax Officer may determine.'
5. This proviso is not attracted to the present case because the system followed by the assessee is mercantile system of accounting. The ITO did not find the method employed by the assessee to be such from which income could not properly be deduced.
6. Another submission made on behalf of the assessee was that the real purpose is to find out the income of the assessee and it is in the discretion of the taxing authorities to apply whichever method they think proper. We are not very much impressed by this argument because of the clear provisions contained in the Act as noted above and also because of the admitted facts of the case.
7. In our opinion, therefore, the Appellate Tribunal was right in holding that the liability in regard to payment of bonus amounting to Rs. 15,273 arose in the previous year relevant to the assessment year 1966-67 and did not relate to the assessment year 1967-68.
8. We answer the question referred to us in the affirmative, in favour of the department and against the assessee. The department is entitled to Rs. 250 as costs.