THE COMMISSIONER OF INCOME-TAX, MADHYA PRADESH, NAGPUR vs. SWADESHI COTTON AND FLOUR MILLS

CIVIL APPEAL No. 587/1963Supreme Court[1964] 7 S.C.R. 81017 April 1964Bench: 3 JudgesAuthor: K. SUBBA RAO, J.C. SHAH, S.M. SIKRI6 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court held that a liability for profit bonus is incurred by an employer following the mercantile system of accounting only when the claim for bonus is settled, either amicably or by industrial adjudication. Since the claim for profit bonus in this case was settled by an award of the Industrial Tribunal in 1949, the liability was properly attributable to 1949. Therefore, the assessee was entitled to claim the deduction for the assessment year 1950-51. The Court also held that the system of reopening accounts is not applicable under the scheme of the Indian Income-tax Act. The Court further clarified that the words 'year in question' in proviso (b) to Section 10(2)(x) mean 'year in respect of which bonus was paid'. The appeal was dismissed.

What were the facts?

The respondent company, Swadeshi Cotton and Flour Mills, paid Rs. 1,08,325/- as bonus for the year 1947 in calendar year 1949, following an Industrial Tribunal award dated January 13, 1949. The company debited this amount in its profit and loss account for 1948, crediting the bonus payable account. The books for 1948 were not closed until the award date. For assessment year 1950-51, the company claimed a deduction under Section 10(2)(x) of the Indian Income-tax Act, 1922. The Income-tax authorities rejected this, arguing that under the mercantile system, the liability was attributable to 1947 and the accounts for that year should be reopened. The bonus was admitted to be a profit bonus.

What were the issues?

1. Whether, on the facts and circumstances, the assessee is entitled to claim a deduction of Rs. 1,08,325/- bonus relating to calendar year 1947 in assessment year 1950-51, under Section 10(2)(x) read with Section 10(5) of the Indian Income-tax Act, 1922? Assessee's Contention: The assessee argued that the liability for the bonus was incurred in 1949 when the Industrial Tribunal's award settled the claim, and therefore, it should be deductible in the assessment year 1950-51. Revenue's Contention: The revenue contended that according to the mercantile system of accounting followed by the assessee, the liability was attributable to calendar year 1947, and the accounts for 1947 should have been estimated and accounted for, or alternatively, reopened. The revenue also argued that the words 'year in question' in the proviso to Section 10(2)(x) meant the year in which the allowance is claimed.

Which sections of the Income-tax Act were involved?

Section 10(2)(x),Section 10(5)

AI-generated summary — verify with the full judgment below

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- canti

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