COMMISSIONER OF INCOME-TAX CENTRAL ZONE `A' vs Messrs CHEMDYES

1. SALEEM AKHTAR, J.--For the assessm ent year 1974-75 the respondent claimed a sum of Rs. 5,01,671 as Bonus to Staff and Executives. Out of this amount Rs. 1,11,706 represented the amount equal to two months salary which was actually paid during the relevant year and Rs. 3,89,965 which was equal to five months salary of the staff and executives had not been paid but was to be paid to them. The Income-tax Officer allowed the claim to the extent of two months salary which was paid as bonus but disallowed the claim of Rs. 3,89,965 for which provision was made in the books of accounts. The main ground for rejecting the claim was that this amount had not actually been paid by the respondent. The respondent filed appeal before Appellate Assistant Commissioner who upheld the order of the Income-tax Officer also holding that seven months salary as bonus is highly excessive as compared to past or to the subsequent years. The respondents filed appeal before the Income-tax Appellate Tribunal which allowed the claim of the assessee. The applicant then filed an application for referring the question to High Court but it was rejected. The applicant has filed this application under section 136(1) of the Income-tax Ordinance, seeking permission to allow to raise following question of law for our consideration:-- "Whether the Income-tax Appellate Tribunal was justified in law in deleting the addition of Rs.

2. 3,89,965 made by the Income-tax Officer on account of provision for additional bonus (which was equal to 5 months' salary of the staff and executives) though it was a mere provision and did not qualify for exemption as it did not fulfil the conditions laid down in section 10(2)(x) of the Repealed Income-tax Act of 1922."

3. The question has not been properly framed. After hearing the learned counsel for the parties we are of the opinion that from the facts and circumstances of the case question of law does arise. We have, therefore, reconstituted the question as follows:--

(1) Whether the Income-tax Appellate Tribunal was justified in terms of section 10(2)(x) to give allowance of Rs. 3,89,965 being the provision made by the assessee for payment of bonus in its books of account without having paid it.

4. The question calls for interpretation of section 10(2)(x) of the Income --tax Act 1922 which provides for method of computing profits and gains after making the allowance including the sum paid by the employers as bonus. It reads as follows:-- "S.10(1). ...............

(2) Such profits or gains shall be computed after making the following allowances, namely:--- (i)

(ii) ................

(iii) ................

(iv) ................

(v) .............---.

(vi) .................

(vii) ................

(viii) ................

(ix) ................

(x) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profit 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--

(a) the pay of the employee and the conditions of his service;

(b) the profits of the business, profession or vocation for the year inquestion; and

(c) the general practice in similar businesses, professions or vocations.

5. The word `paid' used in section 10(2) has been given a definite meaning by section 10(5) relevant part of which is re-produced as follows: "10(5). In subsection "(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".

6. The main contention of Mr. Shaikh Haider, learned counsel appearing for the Defendant is that the respondent had made a provision for payment of the bonus amount equivalent to five months' salary of the staff and executive without actually making the payment and, therefore, in terms of section 10(2)(x) it is not entitled to get the allowance to that extent as it has not been paid but was actually paid in the succeeding assessment year. The learned counsel has laid much emphasis on the word "paid" as used in section 10(2)(x); In this regard the learned counsel has referred to A.M.

7. Arumugham v. Commissioner of Income-- tax Madras; (1973) 87 I.T.R. 568. In this case the employer had paid bonus equal to 13 months' salary but the Tribunal held that bonus equal to 10 months' salary was payable. On reference the High Court held that the disallowance of the bonus paid to the employees to the extent of 3 months salary was not lawful. In our view this judgment does not throw much light on the controversy involved in this reference. It can only be referred to show that the amount paid was allowed and not for the proposition that provision made in the books of account for payment of bonus will amount to payment.

8. The learned counsel then referred to 1972 SCMR 116 Commissioner of Income-tax v. Mst.

9. Wazirunnisa Begum; in which the Supreme Court held that: "A Division Bench of the High Court held that the word "pay" in Section 16(2) means to satisfy, to set at rest, to discharge, to require with what is due or deserved etc., and that it is obvious that the word as used in the aforesaid provision means when the money is actually delivered and not when a decision is made to make the payment. We have no hesitation in affirming this view of the High Court. A mere declaration of the dividend at the annual general meeting of the Company amounts only to a decision by the Company to pay to the shareholders dividend at a certain rate. It creates a right in favour of the shareholders and a corresponding liability on the Company to pay the amount but it does not at all mean actual payment. It is only when the warrant for payment is made out that the shareholders get into the position to receive the actual payment."

10. "The assessee, a professional money-lender, regularly kept her accounts according to what is known as the mercantile accountancy system or the book profits system of accountancy or the complete double entry book--keeping. Under this system the not profit or loss is calculated after taking into account all the income and all the expenditure relating to the period, whether such income has been actually received or not and whether such expenditure has been actually paid or not. That is to say, the profit computed under this system is the profit actually earned, though not necessarily realised in cash, or the loss computed under this system is the loss actually sustained, though not necessarily paid in cash. The distinguishing feature of this method of accountancy is that it brings into credit what is due 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".

11. The respondent is employing mercantile system therefore the liability will be incurred the moment, any expense or payment is entered in the books of account. The respondent has made provision for payment of bonus and thus incurred the payment in terms of section 10(5). The judgment of the Supreme Court is completely distinguishable and cannot be applied to the facts of the present case as in section 16(2) the word `paid' has not been used in the wide senses as used in section 10(2) & 10(5).

12. The learned counsel has also referred to Commissioner of Income-tax Rawalpindi Zone, v. K.K. & Company Ltd., Peshawar 1980 PTD 210 where referring to Wazirunnissa Begum's case and other judgments relating to payment of dividend it was observed as follows:-- "`In view of the decision quoted above, the word `paid' used in the context of the bonus under section 10(2)(x) could not be so extended as to cover any provision of payment at the end of the year unless the obligation is discharged by actual payment of the sum involved during the accounting year. In this view of the matter we are humbly of the opinion that the interpretation given to the word "paid" by their Lordships of the Supreme Court of Pakistan in the context of the dividend as provided under subsection (2) of section 16 of-the Income --tax Act 1922 would be on all fours on the provision of bonus in the annual statement under the provision of section 10(2)(x)of the said Act."

13. From this judgment it is not clear whether the system of accounting employed by the assessee was cash or mercantile and, therefore, for the afore stated reason with respect, we may observe that this dictum can only apply where the assessee is employing cash system. But where the assessee is employing mercantile system of accounting the afore stated observation will not apply. We are fortified in our view by the observations made in Satyanarayan Tea Co., (Pvt.) Ltd. v.

14. Commissioner of Income-tax Assam (1963) 47 I.T.R. 932. We may further observe that actual payment made afterwards in the next assessment year will not deprive the assessee of the benefits of section 10(2)(x) provided he has adopted mercantile method of accounting and entry has been made during the relevant assessment year. In this context reference can be made to Commissioner of Income-tax v. Nagri Mills Co. Ltd., (1958) 33 I.T.R. 681. We therefore answer in the Affirmative.