Commissioner of Income Tax vs Anamallais Bus Transports (P.) Ltd.

Ramaswami, J.—The following question has been referred in this tax case :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sums of Rs. 1,63,503 and Rs. 1,79,000

being the amounts provided for payment of bonus for the assessment years 1962-63 and 1963-64 represented liability of the assessee-company

for the relevant years and were allowable as deductions in the computation of the profits and gains of the assessee''s business for purposes of

assessment for the assessment years 1962-63 and 1963-64 ?

The assessee is a private limited company operating a bus transport. It follows the mercantile system. For the assessment years 1962-63 and

1963-64, the assessee made provision for payment of bonus to its employees to the extent of Rs. 1,63,503 and Rs. 1,79,000, respectively. The

amounts were shown under "" liabilities for expenses "" under the head, ""contingency account "" and the assessee deducted these amounts from the

income returned for the respective years. The Income Tax Officer held that these amounts were only provisions and not an ascertained liability and

that, therefore, it was not an allowable claim. The assessee preferred an appeal. The Appellate Assistant Commissioner agreed with the views of

the Income Tax Officer. But, on a further appeal, the Tribunal took the view that the bonus was regularly calculated on the basis of the period of

service of the employees, that it was an ascertained and definite sum of money and that the bonus to workmen is a contingent liability of the

employer and that this contingent liability becomes an accrued liability when the claim is admitted by the employer. In that view, the Tribunal held

that it is an allowable claim of deduction.

On somewhat similar facts in Commissioner of Income Tax Vs. Somasundaram Mills (P.) Ltd., . (Tax Case No. 99 of 1968 of this court), we

have held that the provision is a prudent action of the management for a possible contingent liability, but it is not an accrued and definite liability

and, therefore, not an allowable deduction. In that case also, the assessee had made a provision to the extent of Rs. 1,50,000, It was contended

that the assessee was paying bonus to the workers for a long number of years prior to the assessment year in question and that the provision made

was thus an admitted liability and, therefore, allowable as a dedction. We have not accepted that contention and have held that it is a prudent

provision for a possible, contingent liability and not a definite, accrued liability and that, therefore, it is not allowable as a deduction. The learned

counsel for the assessee tried to distinguish this case on the ground that, in that case, the emphasis was on the absence of any basis for making that

provision of Rs. 1,50,000, but, on the other hand, in the case on hand, the Tribunal has definitely found on the basis of the evidence shown, that

the amount was arrived at on a particular basis. It is true that we have referred to the absence of definite basis in our earlier judgment in

Commissioner of Income Tax v. Somasundaram Mills (P.) Ltd. But that was for the purpose of repelling the contention that for a long number of

years the assessee therein had been adopting a particular basis on which bonus was paid and that amounted to an implied agreement between the

assessee and its employers. We have noticed that the basis was not uniform in the previous years and, therefore, it could not amount to an implied

agreement. But neither before the authorities below nor before us, was it contended by the learned counsel for the assessee that, by virtue of

adopting a uniform basis, there was an implied agreement between the assessee and its employees and that, therefore, the provision should be on

the basis of a subsisting understanding, amounting to a definite liability. The distinction, therefore, is of no material importance.

It is next stated by the learned counsel that the Tribunal has found that the assessee had admitted the liability during the accounting period itself

and that finding, having not been specifically challenged by a separate reference, could not be questioned. We are unable to agree with the learned

counsel. What the Tribunal has found is that since the assessee had shown the particular amounts referred to above in the accounts as for payment

of the bonus, it is an admission of liability. It is not as if there was a claim by the workers and to the extent of the provision made, the assessee had

admitted the liability. Certainly, the workers would not be entitled to make a claim on the basis of the entries made in the account books of the

assessee. Nor could the assessee be barred from contending that the workers are entitled either to a lesser amount than that provided or not at all

entitled to the bonus. In these circumstances, we are unable to agree that the provision made is with reference to a definite and ascertained liability

and not a mere provision for a possible contingent liability. The learned counsel also stated that the point referred to us did not involve the question

as to whether there is an accrued liability or not and the finding of the Tribunal that it was with reference to an accrued liability is a finding of fact

and that not having been specifically challenged by a separate reference, it is not open to us to go into the same. We are unable to accept this

contention. The first part of the question referred specifically requires us to answer as to whether the Tribunal was right in holding that the sums in

question represented liability of the assessee-company. That is directly a question as to whether it is an accrued liability or a mere provision. It is

only if we answer the question whether it is an accrued liability or not, there will be a proper answer to the question referred to us. We,

accordingly, hold that the question referred to us also includes a consideration of the question whether there was an accrued liability to the extent of

the amounts provided for the assessment years 1962-63 and 1963-64. For the foregoing reasons, we answer the reference holding that the

Tribunal was not right in holding that the amounts in question represented liability of the assessee and, therefore, are an allowable deduction. The

revenue will be entitled to its costs. Counsel''s fee Rs. 250.

The learned counsel for the assessee submitted that if the amounts were not an admissible deduction in the assessment years 1962-63 and

1963-64, it should be permitted to be deducted in the subsequent assessment years at least. Certainly, the assessee would be entitled to a

deduction of this amount in the subsequent years in which the liability has accrued or the year in which the amount is actually paid. But this is a

matter to be taken into account by the assessing authorities in the appropriate assessment proceeding.