G.P. Singh, J.
1. This is a consolidated reference for two assessment years made by the Income-tax Appellate Tribunal at the instance of the Additional Commissioner of Income-tax. The assessee, Messrs. Kale Khan Mohammad Hanif, is a registered firm deriving income from manufacture and sale of bidis on a very large scale. The relevant assessment years are 1967-68 and 1968-69, for which the previous years ended on Diwali of 1966 and Diwali of 1967, respectively. The dispute relates to the claim made on behalf of the assessee by way of deduction of certain amount as provisions for payment of bonus. For the assessment year 1967-68, the amount claimed as deduction on this account is Rs. 2,52,720 and for the assessment year 1968-69, Rs. 80,820. These claims were disallowed by the Income-tax Officer on the ground that no payment whatsoever was made by the assessee by way of bonus to its employees and the amount was swelling year after year and that not even a pie had been paid in four years. In appeals, the Appellate Assistant Commissioner held that the claim for provision by way of bonus was an allowable deduction as the assessee had been maintaining its books of account on mercantile system of accounting. The Tribunal also took the. same view in the appeals filed by the department. The Tribunal referred to the decision of the Calcutta High Court in Textile Machinery Corporation v. Commissioner of Wealth-tax : 67ITR122(Cal) and observed that the Calcutta High Court had held that the liability to pay bonus was a debt and not a contingent liability. The Tribunal further observed that as the assessee had made provision for payment of bonus for the current year's liability and had been maintaining its accounts according to the mercantile system, it was entitled to deduction of the amounts shown as provisions for payment of bonus.
2. On these facts, the question of law referred to us are as follows:
'(i) Whether the Appellate Tribunal was right in holding that since the assessee had made provision for bonus and maintains accounts on mercantile system, it was entitled to the deduction claimed in that behalf ?
(ii) Whether, under the provisions of Section 36(l)(ii) of the Income-tax Act, 1961, the claim for bonus could be allowed even though such sum was actually not paid to the employees or without considering the general practice in similar business ?'
3. The assessee's claim for deduction of the provisions for bonus in the two years was based on Section 36(l)(ii) of the Income-tax Act, 1961, which reads as follows :
'36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28--.........
(ii) 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 deduction in respect of bonus paid to an employee employed in a factory or other establishment to which the provisions of the Payment of Bonus Act, 1965 (XXI of 1965), apply shall not exceed the amount of bonus payable under that Act:......'
4. Another relevant statutory provision is Section 43(2) of the Act, which defines the word 'paid' as follows :
'(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 the head ' Profits and gains of business or profession'.'
5. Reading Section 36(1)(ii) in the light of the definition of the word 'paid' in Section 43(2) of the Act, it is clear that the assessee need not have actually paid the bonus for claiming deduction and it is sufficient if the liability for payment of bonus was incurred according to the method of accounting on the basis of which profits and gains were computed by the assessee. The assessee follows the mercantile system of accounting. The mercantile system of accounting on the one hand brings into credit what is due, immediately it becomes legally due and before it is actually received, and on the other it brings into debit as expenditure the amount for which a legal liability has been incurred before it is actually disbursed [see Keshav Mills Ltd. v. Commissioner of Income-tax : 23ITR230(SC) , Calcutta Co. Ltd. v. Commissioner of Income-tax : 37ITR1(SC) and Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Private Ltd. : 53ITR134(SC) ]. The point to be noted here is that simply because an amount is shown as provision for payment of bonus, it cannot come within the definition of 'paid' in Section 43(2) and it cannot be taken to be a sum paid to employees as bonus within the meaning of Section 36(1)(ii) of the Act until it is shown that the amount was actually paid or that a legal liability for payment had been incurred during the accounting year. It necessarily follows that a provision for bonus would not qualify for deduction under Section 36(1)(ii) even when accounts are maintained according to the mercantile system until it is shown that the assessee had really incurred the liability for payment of bonus. A liability for bonus can be incurred under a statute, an award, an agreement or a settlement. The assessee must satisfy the income-tax authorities that the provision for bonus made by him was covered by any such liability before he is held entitled to its deduction under Section 36(i)(ii) [see Commissioner of Income-tax v. Somasundaram Mills (P.) Ltd. : 95ITR365(Mad) and Commissioner of Income-tax v. Anamallais Bus Transports (P.) Ltd. : 99ITR445(Mad) ].
6. The learned counsel for the assessee has placed reliance on Additional Commissioner of Income-tax v. Jai Bajrang Nail Industries . This case only lays down that the provision regarding bonus payable under the Payment of Bonus Act, 1965, is an allowable deduction. If any employer incurred liability under the Payment of Bonus Act, and made provision for payment of bonus to the extent of that liability, there can be no difficulty that the provision for bonus would be an allowable deduction. The difficulty in the case before us, however, is that neither the Appellate Assistant Commissioner nor the Tribunal examined the question whether the provision for bonus made in the two assessment years by the assessee was covered by any legal liability of the assessee. The learned counsel for the assessee submitted that the amounts shown in the two years for bonus are covered by the liability under the Payment of Bonus Act. The matter was, however, not examined by the income-tax authorities from that angle. The Appellate Assistant Commissioner and the Tribunal both came to the conclusion that the provision for bonus was an allowable deduction simply because the assessee maintained its accounts according to the mercantile system. The Appellate Assistant Commissioner and the Tribunal both failed to decide the crucial question whether the provision made for bonus in the two years was really covered by any liability incurred by the assessee under the Payment of Bonus Act or an award or settlement. The view taken by the Appellate Assistant Commissioner and the Tribunal that simply because the assessee maintained its accounts according to the mercantile system, it was entitled to claim deduction of the amounts shown as provision for bonus in the account years is not sustainable. Without examining the question that the provision was in respect of a legal liability incurred for bonus, the assessee's claim for deduction could not have been allowed. As this important aspect of the case has not been examined by the income-tax authorities, we are not in a position to answer the questions referred to us. All that we can do is either to call for a supplementary statement from the Tribunal or to remand the case to the Tribunal for further enquiry. As the question of legal liability of the assessee for bonus has not been examined at any stage, the case will need a fresh enquiry. It is, therefore, in the interests of the parties to remand the case to the Tribunal for a fresh enquiry on the question of liability indicated above. It will be open to the Tribunal to take additional evidence for deciding this question after giving the parties reasonable opportunity to adduce evidence. The course that we are adopting in this case is sanctioned by the ruling of the Supreme Court in Raghunath Prasad Poddar v. Commissioner of Income-tax : 90ITR140(SC) . AH that we may state here is that if the Tribunal comes to the conclusion that the assessee had incurred legal liability for payment of bonus during the relevant accounting years, the provisions made for bonus will qualify for deduction under Section 36(1)(ii) to that extent.
7. The learned counsel for the assessee brought to our notice the decision of a Division Bench of this court in Commissioner of Income-tax v. Kalekhan Mohammad Hanif, (Misc. Civil Case No. 54 of 1971, decided on 23rd June, 1973). That was a reference on identical questions in respect of the assessment year 1966-67. The difficulty felt by us on the, point whether any legal liability was incurred by the assessee for payment of bonus was also felt by the learned judges who decided the reference. However, they overcame the difficulty by taking an assurance from the assessee that the amount of bonus as shown in the account books shall be paid to the workers. We do not think that it is possible for us to adopt that course.
8. The better course, in our opinion, would be remand the case to theTribunal.
9. For the reasons given above, we decline to answer the questions and remand the case to the Tribunal, There shall be no order as to costs.