Appeal No 587 of 1963
Appeal by special leave from the judgment and order dated November 30 1960 of the Madhya Pradesh High Court in Miscellaneous Civil Case No 73 of 1960
KN Rajagopal Sastri and R N sachthev for the appellant
SK Kapoor section Murty and K K fain for the respondent 811 April 17 1964
The judgment of the Court was delivered by SIKRI J
The respondent Swadeshi Cotton  Flour Mills hereinafter referred to as the assessee is a limited company which owns and runs a textile mill at Indore
For the assessment year 1950 51 accounting year calendar year 1949 which was its first year of assessment under the Indian Income tax Act 1922 hereinafter referred to as the Act it claimed that under section 102x of the Act it was entitled to an allowance in respect of the sum of Rs 108325 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 Tribunal held that it was a liability relating to 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 108325 relating to the calendar year 1947 in the assessment year 1950 51 The High Court of Madhya Pradesh answered the question in the affirmative
The appellant having failed to get a certificate under section 66A2 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
Unfortunately the facts are meagre but since the appellant is content to base his case on a few facts which will be referred to shortly it is not necessary to call for a further statement of the case
The facts in brief are as follows
The assessee paid as bonus to its employees the sum of Rs 10832593 for the calendar year 1947 in terms of an award made on January 13 1949 under the Industrial Disputes Act
This amount was debited by the assessee in its profit and loss account for the year 1948 and the corresponding credit was given to the bonus payable account
The books for 1948 had not been closed till the date of order of the Industrial Tribunal January 13 1949
This bonus was in fact paid to the employees in the calendar year 1949 the relevant assessment year being 1950 51
The Appellate Assistant Commissioner had further found that upto 1946 when the order for payment of bonus used to be received before the company s accounts for the year were finalised the amount of bonus used to be in fact 812 debited to the profit and loss account of the respective year
this finding is repeated by the Appellate Tribunal in its appellate order
On these facts the learned counsel for the appellant Mr Sastri contends that according to the mercantile system of accounting which is followed by the assessee and on which its profits have been computed for the accounting calendar year 1949 the year to which the liability is properly attributable is the calendar year 1947 and not 1949
He says 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
In the alternative he has invited us to reopen the accounts for the year 1947 following the practice whichaccording to him obtains in England
Inour opinion the answer to the question must depend on theproper interpretation of section 102x read with section 105 of theAct
These provisions read as follows section 102x 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 amount of the bonus or commission is of a reasonable amount with reference to athe pay of the employee and the conditions of his service  bthe profits of the business profession or vocation for the year in question and cthe general practice in similar businesses professions or vocations
 section 105 In sub section 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 this section  If we insert the definition of the word paid  in sub cl
x it would read as follows any sum actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section to an employee as bonus  As the assessee s profits and gains have been computed according to the mercantile system the question using for he time being the terms of the clauses comes to this Has this sum of Rs 108325 been incurred by the assessee according to the mercantile system in the calendar year 1947 or 1949 813 At first sight the sentence does not read well but the meaning of the word incur  includes to become liable to  Therefore the question boils down to In what year did the liability of this sum of Rs 108325 arise according to the mercantile system   The mercantile system of accounting was explained in a judgment of this Court in Keshav Mills Ltd vs Commis sioner of Income Tax Bombay1 thus That system brings into credit what is duc immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed
 These observations were quoted with approval in Calcutta Co Ltd vs Commissioner of Income Tax West Bengal2
On the facts of this case when did the legal liability arise in respect of the bonus This depends on the facts of the case and the nature of the bonus awarded in this case
This Court has examined the nature of profit bonus it is common round that the bonus with which we are concerned with was a profit bonus in various cases
It is explained in Muir Mills vs Suti Mills Mazdoor Union3 that there are two conditions which have to be satisfied before a demand for bonus can be justified and they are 1 when wages fall short of the living standard and 2 the industry makes huge profits part of which are due to the contribution Which the workmen make in increasing production
The demand for bonus becomes an industrial claim when either or both these conditions are satisfied
 This matter was again considered in the case of Associated Cement Co vs Their Workmen4
This Court observed It is relevant to add that in dealing with the concept of bonus this Court ruled that bonus is neither a gratuitous payment made by the employer to his workmen nor can it be regarded as a deferred wage
According to this decision where wages fall short of the living standard and the industry makes profit part of which is due to the contribution of labour a claim for bonus can be legitimately made  2   4 814 In 1961 this Court was able to say that the right to claim bonus which has been universally recognised by indus trial adjudication in cases of employment falling under the said Act has now attained the status of a legal right
Bonus can be claimed as a matter of right provided of course by the application of the Full Bench formula it is shown that for the relevant year the employer has sufficient available surplus in hand Vide Gajendragadkar J as lie then was in Workmen vs Hercules Insurance Co1
The Indian Tea Association vs Workmen2 this Court held that the profit bonus can be awarded only by reference to a relevant year and a claim for such bonus has therefore to be made from year to year and has to be settled either amicably between the parties or if a reference is made it has to be determined by Industrial adjudication
A general claim for the introduction of profit bonus cannot be made or entertained in the form in which it has been done in the present proceedings
 It follows from the above decisions of this Court that a workmen are entitled to make a claim to profit bonus if certain conditions are satisfied b the workmen have to make a claim from year to year c this claim has either to be settled amicably or by industrial adjudication and d if there is a loss or if no claim is made no bonus will be permissible
In our opinion it is only when the claim to profit bonus if made is settled amicably or by industrial adjudication that a liability is incurred by the employer who follows the mercantile system of accounting within section 102x read with section 105 of the Act
On the facts of this case it is clear that it was only in 1940 that the claim to profit bonus was settled by an award of the Industrial Tribunal
Therefore the only year the liabiiity can be properly attributed to is 1949 and hence we are of the opinion that the High Court was right in answering the question in favour of the assessee
The second contention of the learned counsel does not appeal to us
We are of the opinion that this system of reopening accounts does not fit in with the scheme of the Indian Income Tax Act
We have already held in Commissioner of Income Tax Madras vs A Gajapathy Naidu Madras that as far as receipts are concerned there an be no reopening  2 1962 Supp
1 SCR 557
3AIR 815 of accounts
The same would be the position in respect of expenses
But even in En land accounts are not opened in every case
Halsbury gives various instances in footnote m at p 148
Vol20
Mr Sastri has relied on various English cases but it is unnecessary to refer to them as Lord Radcliffe explains the position in England in Southern Railway of Peru Ltd vs Owen1 thus The courts have not found it impossible hitherto to make considerable adjustments in the actual fall of receipts or payments in order to arrive at a truer statement of the profits of successive years
After all that is why income and expenditure accounting is preferred to cash accounting for this purpose
As I understand the matter the principle that justified the attribution of something that was in fact received in one year to the profits of an earlier year as in such cases as Isaac Holden and Sons vs Inland Revenue Comrs
and Newcastle Breweries Ltd vs Inland Revenue Comrs
was just this that the payment had been earned by services given in earlier year and therefore a true statement of profit required that the year which had borne the burden of the cost should have appropriated to it the benefit of the receipt
 The principle mentioned by Lord Radcliffe would not apply to a profit bonus
As stated above a profit bonus is strictly not wages at least not for the purpose of computing liability to income tax it is not an expense in the ordinary sense of the term incurred for the purpose of earning profits
A fortiori profits have already been made
It is more like sharing of profits on the basis of a certain formula
One other point raised by Mr Sastri remains
He urged that the word for the year in question in the proviso to sub section 102x mean for the year in which allowance is claimed
 We are unable to agree with him
The words for the year in question  mean the year in respect which bonus is paid
In the result the appeal fails and is dismissed with costs
Appeal dismissed


Summary:
The respondent company paid to its employees Rs 108325 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
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 payable 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 company claimed that under section 102x 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 rejected by the Income tax authorities on the ground that according to the mercantile system of accounting which was followed by the assessee the year to which the liability was properly attributable 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
Heldi 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 mercantile system within section 102x read with section 105 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 properly attributed to was 1949
ii The system of reopening accounts was not applicable under thescheme of the Indian Income tax Act
iii The words Year in question in proviso b to s10 2x of the Act meant year in respect of which bonus was paid