LexTHE COMMISSIONER OF INCOME-TAX, MADHYA PRADESH, NAGPUR versus SWADESHI COTTON AND FLOUR MILLS
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1964 .April 17 SUPREME COURT REPORTS (1964) THE COMMISSIONER OF INCOME-TAX, MADHYA PRADESH, NAGPUR v. SWADESHI COTTON AND FLOUR MILLS [K. SUBBA RAO, J.C. SHAH AND S. M. SIKR!, JJ.] lncome Tax-Deduciion of bonus-Bonus relating to 1947 paid in 1949-Claim for deduction for account year 1949-Sys- tem of accounting by assessee-Principle of reopening of ac- c-ounts-lf applicable-Indian Income-tax Act, 1922 (11 of 1922), ss. 10(2)(x), 10(5). The respondent company paid to its employees Rs. 1,08,325/- as bonus for tbe year 1947 in the calendar year 1949, as a result of tbe award of the Industrial Tribunal dated January 13, 1949. This amount was debited by the company in its profit and loss account for the year 1948 and the corresponding credit was given to the bonus p'l)'able account. The books for 1948 were not closed till the date of the award of the Industrial Tribunal. For the relevant assessment year, 1950-51, the com- pany claimed that under s. 10(2)(x) of the Indian Income-tax Act, 1922, it was entitled to an allowance in respect of the amount paid as bonus, but the claim was reiecte9 by the In- come-tax authorities on the ground that according to the mer- cantile system of accounting which was followed by the assessee the year to which the liability was properly attributa- ble was the calendar year 1947 and not 1949. It was the case of the Income-tax authorities that it was a legal liability of the assessee which arose in 1947 and should have been estimated and put into the accounts for 1947, and that, if necessary, the amounts for the year 1947 should be reopened. It was admitted that the bonus in the instant case was a: profit bonus. Held: (i) It was only when the claim to profit bonus, if made, was settled amicably or by industrial adjudication that a liability was incurred by the employer, who followed the mer- cantile system, within s. 10(2)(x), read with s. 10(5), of the Indian Income-tax Act, 1922; and as it was only in 1949 that the claim to profit bonus was settled by an award of the Industrial 'Tribunal, the only year the liability could be pro- perly attributed to was 1949. (ii) The system of reopening accvunts was not applicable under the scheme of the Indian Tncome-tax Act. (iii) The words "year in question·' in proviso (b) to s. 10 :2)(x) of the Act incant "year in respect of which bonus was paid''. - C!V!L APPELLATE JURISDICTION: Civil Appeal No. 587 of 1963. Appeal by special leave from the judgment and nrder dated November 30, 1960 of the Madhya Pradesh High Court, in Miscellaneous Civil Case No. 73 of 1960. K. N. Rajagopal Sastri and R. N. Sachthev, for the appellant. S. K. Kapoor, S. Murty and K. K. Jain, for the respon- dent 7S.C.R. SUPREME COURT REPORTS 811 April 17, 1964. The judgment of the Court was ~elivered by Tl1e Commis3ioner l11come-tax, SJKRI, J.-The respondent, Swadeshi Cotton & Flour Madl•11~• Pradeah, Mills, hereinafter referred to as the assessce, is a limited 1\a~pur company which owns and runs a textile mill at Indore. For Swadrsl1iv(·o11on a11d the assessment year 1950-51 (accounting year calendar year Flour Jlill• 1949), which was its first year of assessment under the Indian Sikri, J. Income-tax Act, 1922 (hereinafter referred to as the Act) it claimed that under s. I0(2)(x) of the Act it was entitled to an allowance in respect of the sum of Rs. 1,08,325 /- which it had paid as bonus for the year 1947 in the calendar year 1949, as a result of the award of the Industrial Tribunal, dated January 13, 1949. The claim of the assessee was not accepted by the Income Tax authorities. The Appellate Tri· bunal held that it was a liability relating ttJ an earlier year and not the year 1949. However, on an application by the assessee it stated a case and referred two questions. We are concerned only with one which reads thus: "Whether on the facts and in the circumstances of the case the assessee is entitled to claim a deduction of bonus of Rs. 1,08,325 /- relating to the calen- dar year 1947 in the assessment year 1950-51? The High Court of Madhya Pradesh answered the ques- tion in the affirmative. The appellant, having failed to get a certificate under ~. 66A(2) of the Act, obtained special leave from this Court, and that is how the appeal is before us. The facts and circumstances referred to in the question have been set out in the statement of the case. Unfortunate- ly, the facts are meagre, but since th
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