ANNAMALAIAR MILL (P) LTD. v. INCOME TAX OFFICER
[Citation -1984-LL-0831-7]

Citation 1984-LL-0831-7
Appellant Name ANNAMALAIAR MILL (P) LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 31/08/1984
Assessment Year 1980-81
Judgment View Judgment
Keyword Tags mercantile system of accounting • payment actually made • partial disallowance • method of accounting • additional payment • actual payment • accrual basis • cash basis • bonus act
Bot Summary: Taking up the assessee s appeal relating to the income tax assessment, the only objection raised in the grounds is on the question of deductibility of an amount of Rs. 8,02,048 being provision for bonus as computed under the Payment of Bonus Act and the additional payment due to the assessee s employees under an agreement. The claim relating to this amount was disallowed by the ITO on the ground that the assessee was claiming deduction of the liability for bonus on the basis of actual payment during the year, i.e. on cash basis and the assessee was accordingly allowed the payment relating to the calendar year 1978 as stated above and the assessee cannot claim over again the liability on accrual basis on the mercantile system of accounting. The action of the ITO was confirmed by the first appellate authority, according to whom, under s. 145(1) of the IT Act the income of the assessee is to be computed as per the method of accounting regularly followed by an assessee which in this case was cash basis and the assessee had not indicated any compelling reason for changing his method of accounting. Secondly, under s. 145 of the IT Act the method of accounting is material for determination of the income and the method adopted by the assessee would govern the determination of the assessee s income and allowance of any expenditure. In the present case, it is clear that the assessee has been following the mercantile system of accounting for determining its profits except in regard to the bonus payment and if it considers that the method adopted hitherto concerning the bonus is not in keeping with the that the method adopted hitherto concerning the bonus is not in keeping with the mercantile system followed in respect of all other transactions and it should be brought in line with the system, the assessee in our view is certainly entitled to do so and its conduct cannot be faulted unless the change is found to be not bona fide or to take any tax advantage which is not its due. In respect of the liability relating to the past year, which could not be allowed in those years on account of the system hitherto adopted, the assessee is entitled to deduction on the basis of payment because otherwise the assessee will get no opportunity to avail of the deduction which it is justly entitled to. In the circumstances, we agree with the assessee that the assessee is entitled to claim the deduction of amount of liability that arises for the year under consideration also.


There are two assessee s appeals, one relating to income tax assessment and other relating to assessment and other relating to assessment to Companies (Profits) Surtax Act for asst. yr. 1980-81, while Department s appeal relates to income tax assessment of assessee for same year. These connected appeals are conveniently disposed of by this common order. Taking up assessee s appeal relating to income tax assessment, only objection raised in grounds is on question of deductibility of amount of Rs. 8,02,048 being provision for bonus as computed under Payment of Bonus Act and additional payment due to assessee s employees under agreement. peculiar facts relating to assessee s claim and its rejection by Departmental authorities may be stated. assessee, it appears, upto year under appeal, namely calendar year 1979 as previous year for asst. yr. 1980-81, has been claiming both in accounts and in income tax assessment as deduction of bonus payment actually made during concerned previous year and such claim was allowed in income tax assessment. On that basis assessee had claimed deduction of Payment in accordance with provision of payment of Bonus Act relating to calendar year 1979 of Rs. 5,28,048 which was allowed by ITO in assessment itself. assessee also claimed another sum of Rs. 2,91,887 representing payment made to employee relating to calendar year 1978 due to them under agreement with employees. This amount was disallowed by ITO but allowed by CIT(A) in appeal preferred by assessee. It is against this allowance by CIT(A) of sum of Rs. 2,91,887 that Department has come up in appeal. assessee also provided in accounts sum of Rs. 8,02,048 made up of two figures, namely Rs. 5,01,280 being amount of bonus payable in accordance with Payment of Bonus Act and Rs. 3,00,768 being additional payment under agreement. claim relating to this amount was disallowed by ITO on ground that assessee was claiming deduction of liability for bonus on basis of actual payment during year, i.e. on cash basis and assessee was accordingly allowed payment relating to calendar year 1978 as stated above and assessee cannot claim over again liability on accrual basis on mercantile system of accounting. action of ITO was confirmed by first appellate authority, according to whom, under s. 145(1) of IT Act income of assessee is to be computed as per method of accounting regularly followed by assessee which in this case was cash basis and assessee had not indicated any compelling reason for changing his method of accounting. In appeal before us, assessee s ld. Representative made two submissions against disallowance. In first place it was claimed that there has been no change in method of accounting adopted by assessee. In was contended that method of accounting adopted by assessee for determining its income is mercantile system and irrespective of whether assessee had made provision in account for liability which had accrued under law according to mercantile system or not, assessee is entitled to claim. second submission was that even assuming that there was change, there is no lega bar for making change if it is bona fide. With regard to claim of amount in excess of bonus calculated under Payment of Bonus Act, it was pointed out that such additional payment is under agreement with employees or workers for period of three years and pursuant to agreement memorandum of settlement under s. 12(3) of Industrial Disputes Act was also arrived at before Labour Officer. copy o f agreement and memorandum of settlement was also filed before us. In support of assessee s claim for deduction of payment of bonus and additional payment on mercantile system and change of method of accounting, reliance was placed on following decisions: (1) Addl. CIT vs. Anamallais Bus Transports (P) Ltd. (1979) 9 CTR (Mad) 219: (1979) 118 ITR 739 (Mad) (2) Seth Chemical Works vs. CIT (1981) 21 CTR (Cal) 274: (1983) 140 ITR 507 (Cal) (3) Ishwari Prasad vs. CIT (1983) 33 CTR 48 (All): (1983) 143 ITR 789 (All) ld. Departmental Representative relied on order of CIT(A), particularly his finding in paragraph 5 of his order. He also relied on decision of Madras High Court in CIT vs. Somasundaram Mills (P) Ltd. (1974) 95 ITR 365 (Mad). We have carefully considered rival contentions of parties regarding facts stated above. We find that cases relied on by either party are not quite relevant and do not exactly touch issues raised in these appeals. So far as Department s appeal against deduction allowed of additional amount relating to calendar year 1978 is concerned, objection is that since it is in nature of bonus nothing can be allowed beyond maximum permissible under payment of Bonus Act which is already allowed in sum of Rs. 5,28,048. We do not see any force or merits in this contention. Undisputedly payment has been required to be made under agreement n d settlement under Industrial Disputes Act which is binding on assessee under statutory obligation. payment cannot be, therefore, regarded as payment under Payment of Bonus Act, but one governed by settlement under Industrial Disputes Act. It is, therefore, not in nature of bonus, but payment necessitated by compulsion under statute and incurred on business necessity. deduction is, therefore, allowable under s. 37 of IT Act. This disposes of Department s objection in its appeal, which is rejected. Coming to amount claimed relating to calendar year 1979, in first place we can not accept assessee s contention that there is no change in method of accounting. It is not disputed that in past assessee has been debiting in accounts and claiming in assessment expenditure in respect of bonus only represented by actual payments during year and no provision whatsoever was made. It is only for first time in this year that provision is also made in accounts for liability of yearn concerned and claimed in assessment. Secondly, under s. 145 of IT Act method of accounting is material for determination of income and, therefore, method adopted by assessee would govern determination of assessee s income and allowance of any expenditure. only question therefore is whether assessee can change method. In present case, it is clear that assessee has been following mercantile system of accounting for determining its profits except in regard to bonus payment and if it considers that method adopted hitherto concerning bonus is not in keeping with that method adopted hitherto concerning bonus is not in keeping with mercantile system followed in respect of all other transactions and it should be brought in line with system, assessee in our view is certainly entitled to do so and its conduct cannot be faulted unless change is found to be not bona fide or to take any tax advantage which is not its due. When assessee changes basis of claiming bonus hitherto adopted to more reasonable one in keeping with system adopted, there is bound to be in year of change claim for deduction of more than one amount in respect of liability, which is justifiable. In respect of liability relating to past year, which could not be allowed in those years on account of system hitherto adopted, assessee is entitled to deduction on basis of payment because otherwise assessee will get no opportunity to avail of deduction which it is justly entitled to. assessee is also entitled to deduction of amount provided on mercantile system because it is in keeping with method which is correct and reasonable and is followed by it, provided, as we have already noted, changes is bona fide. In circumstances, we agree with assessee that assessee is entitled to claim deduction of amount of liability that arises for year under consideration also. With regard to sum of Rs. 3,00,763 additional payment, same consideration relating to claim of Rs. 2,91,887 would apply as assessee had to pay amount under agreement and settlement is valid for years. We, therefore, uphold claim of assessee and direct deduction of sum of Rs. 8.02,043 claimed by it. surtax appeal is consequential and amount determined as chargeable profits will stand modified in light of revision of income as per order in income tax appeal. It may also be mentioned that in surtax appeal claim for deduction of Rs. 1152 as partial disallowance in respect o f salary etc. to Secretary and Joint Secretary is not pressed and claim is accordingly rejected. This disposes of Department s objection in its appeal, which is rejected. In result, assessee s appeal ITA No. 2550/Mad 83 is allowed. surtax appeal STA No. 1/Mds/14 is partly allowed and Department s appeal ITA No. 2408 (Mds)/83 is dismissed. *** ANNAMALAIAR MILL (P) LTD. v. INCOME TAX OFFICER
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