COMMISSIONER OF INCOME TAX vs. NAVJIVAN MILLS LTD.

ITR/21/1984HC GujaratGJHC24011696198427 February 1997Author: HONOURABLE MR. JUSTICE R.K.ABICHANDANI,HONOURABLE MR. JUSTICE R.BALIA3 pages
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What were the facts?

The Commissioner of Income Tax referred two questions of law to the High Court of Gujarat concerning the assessment year 1974-75, arising from an order of the Income Tax Appellate Tribunal (ITAT). The first question pertained to the allowance of Rs. 4,46,457/- as bonus liability for Assessment Year 1970-71. The assessee, Navjivan Mills Ltd., had paid this bonus for calendar years 1970, 1971, and 1972. The Income Tax Officer disallowed the claim, stating that as the assessee followed the mercantile system of accounting, a provision should have been made in the relevant year. The Appellate Assistant Commissioner allowed the deduction, finding that the bonus liability account was maintained on a cash or actual payment basis. The ITAT affirmed this finding. The second question concerned the allowance of Rs. 10,000/- as staff welfare expenses for maintaining a temple on the assessee's premises.

What did the High Court hold?

The High Court answered both questions in the affirmative, in favour of the assessee. Regarding the first question, the Court held that the Tribunal was justified in allowing the bonus liability of Rs. 4,46,457/-. The reasoning was that the assessee maintained its bonus liability account on an actual payment basis, which is permissible even if the general accounting system is mercantile. The Court acknowledged that an assessee can follow a hybrid accounting system. The Court found this reasoning sufficient and refrained from delving into further complexities of bonus liability determination under a mercantile system. For the second question, the Court held that whether an expenditure is for the welfare of employees and qualifies as a business expense is a finding of fact. The Tribunal's finding that the expenses for maintaining a temple and organizing festivals were for the welfare of workmen and incurred at the instance of employees was a factual determination that did not warrant interference. Therefore, both questions were answered in favour of the assessee and against the revenue.

What were the issues?

The High Court was asked to decide two questions of law: 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing an admissible sum of Rs. 4,46,457/- being the bonus liability for the A.Y 1970-71? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing a sum of Rs. 10,000/- in maintaining of a temple in the premises of the assessee as staff welfare expenses? Arguments presented: For Question 1: Assessee (implicitly supported by lower authorities and Tribunal): The bonus liability account was maintained on a cash or actual payment basis, making the deduction admissible upon payment, even if the mercantile system was generally followed. It is permissible to have a hybrid accounting system. Revenue (implicitly argued by the Income Tax Officer): The assessee followed the mercantile system of accounting, and since no provision for bonus was made in the relevant year, the expenditure could not be allowed on the basis of payment. For Question 2: Assessee (implicitly supported by lower authorities and Tribunal): The expenditure on maintaining a temple and organizing festivals was for the welfare of workmen and was incurred at the instance of employees, thus qualifying as an employee welfare expense and a business expenditure. Revenue: No specific arguments for the revenue are recorded in the judgment regarding this issue, other than the implicit challenge to the allowance of the expenditure.

Which sections of the Income-tax Act were involved?

Section 37

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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 21 of 1984

For Approval and Signature:

Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE R.BALIA. ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements?

2.

To be referred to the Reporter or not?

3.

Whether Their Lordships wish to see the fair copy of the judgement?

4.

Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge?

The order continues below.

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