1. This reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), has been made by the Income-tax Appellate Tribunal, Chandigarh Bench, on the application filed by the Additional Commissioner of Income-tax, Punjab, J.&K.; and Chandigarh, requesting the Tribunal to refer to this court a question of law which is said to have arisen out of the Tribunal's order dated 18th January, 1972, in I.T.A. No. 405 of 1970-71. The Tribunal has referred the following question of law for our opinion :
' Whether, on the facts and in the circumstances of the case and keeping in view the provisions of the Payment of Bonus Act, 1965, the assessee is entitled to claim deduction of bonus of Rs. 6,200 relating to the financial year 1964-65 for the assessment year 1965-66 '
2. The assessee in this case is not represented.
3. M/s. Jai Bajrang Nail Indusfpies' Prop. Net Ram Tirath Ram Moga (hereinafter referred to as the assessee) is an individual and manufactures nails and certain domestic goods. The reference pertains to the assessment year 1965-66 for which the financial year is 1964-65. In the profit and loss account of this year, the assessee made a provision of only Rs. 2,000 for the payment of bonus. In the return of income that was filed on 3rd August, 1965, income of Rs. 28,997 was shown and a claim for payment of bonus was limited to Rs. 2,000 only. The Payment of Bonus Act of 1965 received the assent of the President on September 25, 1965, and under Section 1(4) of the Bonus Act, provisions regarding payment of bonus were made applicable in respect of every 'accounting year' commencing on any day in the year 1964. In view of the coming into force of the BonusAct, the assessee filed a revised return on 28th March, 1966, and claimed additional bonus of Rs. 6,200. The Income-tax Officer disallowed the assessee's claim for the allowance of extra bonus of Rs. 6,200 in the year in question on the ground that no provision for that amount was made in that year nor was the amount paid in that year. Copy of the order of the Income-tax Officer is annexure ' A '. The assessee filed an appeal but the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. Copy of the order of the Appellate Assistant Commissioner is annexure 'B'. The assessee filed a second appeal which was allowed by the Tribunal for the reasons stated in paragraph 6 of the order, which are reproduced below :
' We have carefully considered the rival submissions. Under Section 1(4) of the Payment of Bonus Act, the provisions were applicable in respect of every ' accounting year ' commencing on any day in the year 1964. Section 2(1) defines ' accounting year ' and the assessee's accounting period now under consideration is a period to which the provisions of the Bonus Act apply in view of the definition in Section 2(1)(iii)(a). Thus, it is clear that the provisions of the Bonus Act apply to this accounting period. The bonus for the accounting period, under the Bonus Act, had to be computed with reference to the ' available surplus ' as defined in Section 2(4) which was 60% of the ' available surplus ' as defined in Section 2(6) read with Section 5. The available surplus is the figure arrived at on deducting from gross profits the amount mentioned in Section 6. The Second Schedule to the Payment of Bonus Act prescribes the methods of computing the gross profit. This has to be with reference to the net profit as per profit and loss account for the accounting year. Thus in the case of the assessee it had to be with reference to the net profit as per the accounts for the period ended March 31, 1964. After arriving at the allocable surplus, the maximum bonus was determined under the provisions of Section 11(1) and this was the bonus which the assessee sought to deduct. There is no material on the record to go to show that there was any error in the computation made by the assessee. We are, therefore, proceeding on the basis that there is no dispute that the amount claimed by the assessee was payable in terms of the Payment of Bonus Act which came on the statute book only on September 25, 1965. It is clear that the provisions of the said statute governed the payment of bonus for the accounting period under consideration. Where an assessee maintains its accounts on the mercantile basis, though the accounting period had ended since the assessee came to know of the liability before the assessment was made, there was, in our view, nothing wrong in the assessee's making due provision for payment of the bonus and claiming it as deduction from the profits of the year to which such bonus, in law, related. Even though an accounting period may have ended, adjustment of accounts can be done subsequently and, if validly made, such adjustment dates back to the last day of the accounting period. Authority for this is the decision of the Supreme Court in the case of Commissioner of Income-tax v. Mysore Electrical Industries Ltd.,  80 I.T.R. 566; 41 Comp. Cas. 617 (S.C.) In the present case, the bonus payable related to the accounting period under consideration and the assessee, therefore, sought for the deduction of bonus as computed in accordance with the provisions of the Payment of Bonus Act, 1965, which covered the accounting period. As the assessee maintains its accounts on the mercantile system, we are of the view that the amount of Rs. 6,200 is, on the facts set out by us, an admissible deduction for this assessment year. We allow the same as a deduction.'
4. Thereafter, the Additional Commissioner of Income-tax filed an application and, as earlier observed, on that application the question reproduced above has been referred to this court for opinion.
5. The only contention advanced by Mr. Awasthy, learned counsel for the revenue, was that the system of re-opening of accounts does not fit in with the scheme of the Income-tax Act and an employer who follows the mercantile system of accounting cannot take advantage if an entry is not reflected in the books of accounts and, in respect of that entry, the liability would accrue only in the year in which that liability has been paid off. According to the learned counsel, the liability, in the instant case, though accrued for the year ending on 31st March, 1965, yet the same having not been reflected in the account books nor any provision having been made for the same, could not be accounted for in that year.
6. After giving our thoughtful consideration to the entire matter, we find no merit in the contention of the learned counsel for the revenue. After the enforcement of the Bonus Act, under Section 1(4) provisions regarding payment of bonus were made applicable in respect of every ' accounting year ' commencing on any day in the year 1964. Section 2(1) of the Bonus Act defines ' accounting year ' and the provisions of the Bonus Act would apply to the accounting period in question in view of the definition in Section 2(1)(iii)(a). There is no dispute that after arriving at the allocable surplus, the maximum bonus was to be determined under the provisions of Section 11(1) and this was the bonus which the assessee sought to deduct. The revenue dues not deny the right of the assessee to deduct this amount, but the stand taken is that it has to be accounted for in the assessment year of 1966-67 and not the year in question, which, to our mind, is an untenable stand. The assessee under the legislation is required to pay the bonus for the year in question and he is entitled to make adjustment in his accounts, which would relate back to the last date of the accountingperiod. The effect of the enforcement of the Bonus Act would be that the amount of bonus sought to be accounted for subsequently would be deemed to have been included for all intents arid purposes in the accounting year for which it is required to be paid by the statute, and it would be deemed to be part of the expenditure for that accounting year. The bonus payable in the instant case related to the accounting period in question and the assessee rightly sought for the deduction of bonus in accordance with the provisions of the Payment of Bonus Act.
7. The Tribunal, therefore, was justified in allowing the amount ofRs. 6,200 as an admissible deduction for the assessment year in question.In this view of the matter, the question referred to is answered in the affirmative. However, in the circumstances of the case, we make no order as to costs.