The assessee is the Pankaja Mills Limited. In relation to the assessment year 1952-53, the account year of which ended with the 31st December, 1951, the assessee company debited a sum of Rs. 70,000 by way of bonus. The Income-tax Officer disallowed this deduction from the income returned, stating that it could be allowed only as and when actually paid. The Appellate Assistant Commissioner agreed with this contention and the further appeal to the Appellate Tribunal also failed. In these circumstances, on the application of the assessee, the question :
'Whether, on the facts and circumstances of the case, the allowance of bonus was to be made in the relevant year of account or when it was ascertained and paid ?' stands referred to us.
The facts relevant to the question are these : There was an industrial dispute between the assessee and its workers relating to the payment of bonus for the calendar year 1948. An award was made by the Industrial Tribunal on October 24, 1951. It was published in the Fort St. George Gazette on December 4, 1951. Part of the amount debited by the assessee company relates to the amount of bonus directed to be paid under this award. It appears that the Southern India Mill Owners Association of which the assessee is a member passed a resolution advising its members to pay bonuses for the years 1949 and 1950 of an amount equivalent to two months basic wages. The quantum computed or estimated by the assessee towards such bonus payment for the year 1950 came to Rs. 33,671-11-9. This amount of bonus was actually paid by the company only after the 1st of January, 1952. The amount of bonus which became payable as a result of the award for the year 1948 was Rs. 32,220-8-9. This amount also was paid by the assessee company only after the close of the account year.
It is in respect of these liabilities that the company purported to make a provision in the accounts relevant to the assessment year and sought to deduct a sum of Rs. 70,000 from its returned income. The question accordingly is whether the assessee company is entitled to deduct these amounts even in advance of actual payment. We have already stated that the department and the Tribunal have taken the view that the amounts are not deductible until they were actually paid. If that conclusion is correct, the deduction would be allowable only in respect of the assessment year 1953-54.
It is conceded that the assessee company maintains its accounts on the mercantile basis. It is not disputed by the department that if a legal liability had been incurred by the company, it was entitled to make a debit in respect of the quantum of that liability even though the liability had not been actually met by payment. This right is conferred upon an assessee who maintains his accounts on the mercantile system, even as such an assessee is made liable to income-tax in respect of a mere accrual of income though such income has not been actually received.
On the making of the award under the Industrial Disputes Act, which was on October 24, 1951, and on the publication of the award on December 4, 1951, there is no doubt whatsoever that a legal liability to pay that amount covered by the award had come into existence. Under section 17 of the Industrial Disputes Act, every award shall be published within thirty days of its receipt by the appropriate Government. Section 17(2) lays down that an award so published shall, subject to the provisions of section 17A, be final and shall not be called in question by any court in any manner whatsoever. Under section 17A also, the award becomes enforceable on the expiry of thirty days from the date of its publication under section 17. Failure to comply with the terms of the award is punishable under other provisions of the Industrial Disputes Act.
It is true that an appeal was preferred against the award, but it has not been stated before us that the appellate court had made any directions in regard to the compliance with the terms of the award during the accounting year. It is therefore clear that the award brought into existence a legal liability which was enforceable against the assessee company and which the company was bound to comply with on pain of the imposition of penalties against it if it failed to comply with the terms of the award. The debit of the amount directed to be paid under the award has therefore to be considered in the light of the above.
In Associated Printers (Madras) Private Ltd. v. Commissioner of Income-tax a similar question arose. The assessee in that case took over a running business at a time when a dispute between the workmen and the predecessor-in-interest of the assessee was pending adjudication by the Industrial Tribunal. The Tribunal directed payment of 1 1/2 months basic wages as bonus. In respect of the Deepavali bonus also, an agreement had been entered into between the assessee and its workers. The total of these amounts, part of which was covered by the award and part by the agreement, was debited in the assessees accounts which were maintained on the mercantile system. In the accounting year January 31, 1952, the question arose as to whether this amount was deductible in the assessment for the relevant assessment year 1952-53. It was held that the liability to pay bonus both under the award and on foot of the agreement was a liability which became legally enforceable against the assessee and that though the liability related to a period anterior to the point of time when the assessee took over the business, when the assessee provided for the bonus payment in the year ended January 31, 1952, it discharged its own liability accruing in that year of account. The departments contention that the payment of bonus constituted an allowable item of the trading expenses of the earlier years of account was repelled. It was observed :
'That the profits earned in the year of account ended on January 31, 1950, would, in the normal circumstances, have furnished the basis for determining the quantum of bonus payable on the occasion of Deepavali in 1950 did not alter the position that the bonus was claimable and, if there had been no dispute, would have been payable only in the year of account that ended on January 31, 1951. Apart from this aspect of the case, it was a statutory liability that the assessee company discharged when it paid the bonus for 1949. Section 18 of the Industrial Disputes Act made the award enforceable against the successor in business. The assessee company was itself made a party to the industrial dispute, and even as a party it was bound by that award under section 18 of the Industrial Disputes Act. It is true that there was no statutory liability as such when the assessee company undertook to pay bonus for 1950. Had there been no direct settlement with the workmen, there would have certainly been an industrial dispute and section 18 of the Industrial Disputes Act would then have imposed a statutory liability on the assessee company. It was in form a contractual liability under a contract with the workmen, but it was obviously undertaken to avoid an industrial dispute. Thus it was a liability legally enforceable against it that the assessee company discharged by providing for the payment of bonus for the two years 1949 and 1950.'
It would be noticed that in the above case, both kinds of liability were legally enforceable liabilities, one being on foot of an award and the other arising out of an agreement entered into between the assessee and its workmen.
In James Spencer & Co. v. Commissioner of Inland Revenue, the company charged against the profits of the chargeable accounting period a sum representing the capitalised value of certain claims against it even where the capitalised value had not been paid within the accounting period. This claim was disallowed by the Commissioners and on appeal the Special Commissioners found that no liability in respect of an accident arose until it was either admitted, or, if disputed, until determined by the decision of a competent court. On reference, the Lord President Cooper said :
'.... the broad working rule which emerges as a guide to the crediting or debiting in a tax computation of subsequently maturing credits or debits is to enquire in which accounting period the right or liability was established and to carry the item into the account in that year. I use the vague word established advisedly, for we are now in the region of proper commercial and accountancy practice rather than of systematic jurisprudence. In the case of credit items, such cases as Newcastle Breweries and Issac Holden and Sons indicate that, if the title to the sum arose in one accounting period, the fact that the precise amount of the credit was not fixed until later will not prevent the eventual receipt being credited in the earlier year. So too in the case of expenses, as is illustrated by Ford and Bernhard....'
The Supreme Court had to deal with the proper debit of an item of expenditure under the mercantile system of accounting in Calcutta Company Limited v. Commissioner of Income-tax. In that case, the appellant bought lands and sold them in plots fit for building purposes. He undertook to develop them by laying out roads, providing the drainage system, etc. At the time of the sale, the appellant gave this undertaking to the purchaser. Though the purchase price was not paid in full and the purchaser undertook to pay the price in instalments, the appellant in accordance with the mercantile system of accounts credited in its accounts the full sale price of the lands. At the same time, the appellant also debited an estimated sum as the expenditure for the development to be carried out. The department disallowed the expenditure. Their Lordships held that the undertaking to carry out the developments was unconditional, the appellant binding itself absolutely to carry out the same, and that that undertaking imposed a liability on the appellant which accrued on the dates of the sale, though that liability was discharged at a future date. It was thus an accrued liability and the estimated expenditure which should be incurred in discharging the same could be deducted from the profits and gains of the business and the amount to be expended could be debited in the accounts maintained on the mercantile system of accounting even before it was actually disbursed. The difficulty in the estimation thereof did not convert the accrued liability into a conditional one.
It is clear from the above decision that if a legal liability had been incurred, it is open to the assessee adopting the mercantile system of accounts to debit the estimated expenditure even before the amount was actually expended.
These decisions clearly established that in so far as the amount which became payable under the award is concerned, the assessee was entitled to debit the amount in the year of account notwithstanding that the amount was actually paid subsequently. It was undoubtedly a legal liability which could have been enforced against it.
Mr. Ranganathan, for the department, purported to claim that the award became enforceable only after the period of 30 days from the date of its publication. Since the award in this case was published on December 4, 1951, he claimed that the award became enforceable only in the subsequent year of account, and on this ground sought to suggest that the sum could be deducted only from the profits of the succeeding account year. We are unable to accept this argument. That the award fastened a legal liability upon the assessee even on the date of its publication is beyond question. In terms the award directed the payment of certain sum by way of bonus. What section 17A contemplates is only that in the case of an award, the employer is given a time of one month to comply with the terms of that award, failing which it becomes enforceable by proper proceedings against him. But that does not detract from the fact that the award created a legal liability on the assessee even by the date of its publication. It follows therefore that in so far as the amount which became payable under the award is concerned, it was properly debitable in the year of account.
The other part of the amount which was in effect a voluntary payment on the part of the assessee stands on a different footing. That payment related to the bonus which might have been claimed in respect of the calendar year 1950. No claim had actually been made by the workers. But, on the advice of the Southern India Mill Owners Association, the assessee made certain payments in the subsequent accounting year. It purported to estimate the amount and to deduct it from the income of the assessment year. The question is where the accounts are maintained according to the mercantile system, the assessee is entitled to do so. The broad principle that in the mercantile system of accounting it is only the accrued liability that can be so debited even in advance of the actual expenditure being incurred has been far too well established to be questioned. It was not, Mr. Swaminathan for the assessee is compelled to concede, a legal liability which would have been enforceable against the assessee at the time when he made the entry in question. It was not on the basis of any agreement between the assessee and its workmen that it accepted any liability for payment. What happened was that the Association of Mill Owners thought it fit to arrive at an understanding as among themselves with regard to the bonus payable for the calendar year 1950. Had it been on foot of an agreement between the assessee and its workers, it would, as explained in Associated Printers (Madras) Private Limited v. Commissioner of Income-tax, have amounted to a legal liability. But when it was a case of voluntary payment, it seems to us that notwithstanding that the accounts are maintained on the mercantile basis, it was no more than a contingent liability which the assessee was not entitled to estimate and debit in advance of the date when it became converted into an accrued liability, or when it was actually paid.
We answer the question accordingly, that is to say, the payment of the bonus made on the foot of the award is an allowable item for the assessment year in question. The payment voluntarily made towards the bonus for the year 1950 did not become an accrued liability in the year of account and was not deductible from the profits of that year. In the circumstances, there will be no order as to costs.