1. The assessee is a private limited company. For the assessment year 1957-58, the account year ' being the calendar year ending December 31, 1956, the assessee submitted a return and claimed a deduction of a sum of Rs. 1,98,993. The assessee was keeping its accounts on mercantile system. In the accounts for the calendar year 1956, the assessee made a provision for bonus payment of Rs. 1,50,000 for the year 1956 on the basis of 3 3/4 months' wages. The bonus was actually paid after the close of the accounting year 1956, the actual payment being of the order of Rs. 1,98,993 equivalent to five months' wages. The assessee claimed deduction also in regard to the difference of Rs. 48,993 not provided in the accounts of 1956 but paid for 1956 in later periods representing additional bonus liability equivalent to 11/4 months' wages, following the advice of the Southern India Mill Owners' Association of which it was a member. The Income-tax Officer disallowed the entire claim for deduction of bonus on the ground that no part of it was an ascertained liability at the close of the accounting year 1956 and normally bonus is allowed on the basis of actual payment. The Appellate Assistant Commissioner, while disallowing the assessee's claim for deduction to the extent of Rs. 48,993 not provided for in the accounts, allowed the claim to the extent of Rs. 1,50,000 on the ground that the provision made in the accounts was on the basis regularly adopted in the past. Both the assessee and the department filed appeals before the Tribunal. The Tribunal confirmed the order of the Appellate Assistant Commissioner in the view that to the extent of Rs. 1,50,000 in respect of which a provision has been made in the accounts of the assessee, it was an admitted liability and, therefore, an ascertained or accrued liability as on December 31, 1956. With regard to the assessee's claim for deduction of additional bonus of Rs. 48,993 the Tribunal held that it was neither admitted by the assessee in the accounting year 1956, nor settled by agreement with the workers in 1956, nor adjudicated by any award in 1956, and, that therefore, the claim for deduction is not permissible. At the instance of the Commissioner of Income-tax, the following question has been referred :

" Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the claim for deduction of the bonus amount to the extent of Rs. 1,50,000 was admissible in law ? "

2. It was contended on behalf of the revenue that the claim regarding the bonus provision of Rs. 1,50,000 was not a permissible deduction in the assessment year 1957-58 as it had not become an ascertained liability at the end of 1956. In the mercantile system of accounting, a claim for bonus can be allowed only when it is an ascertained or accrued liability and not a contingent liability. In this case, it is not an accrued liability. The learned counsel for the assessee submitted that right from the assessment year 1943-44, the practice in their business was to make provision in the accounts on the 31st December in each year towards liability to pay bonus and set off the actual amount disbursed by way of bonus subsequently against the provision. It was said that if the provision is in excess of disbursement, the excess was disallowed in the relevant assessment. If, on the contrary, the disbursements were in excess of the provision, the entire provision and the excess amount actually disbursed were allowed as expenses in the relevant assessment to which the bonus payment related. This practice has been followed up to 1956-57 assessment. In fact, for the assessment year 1949-50, when the department refused to allow any deduction over and above the sum of Rs. 75,000 for which amount alone provision has been made in the accounts, the assessee took the matter in appeal and the Appellate Assistant Commissioner held that the assessees were entitled to an allowance of Rs. 1,36,719 being the total amount disbursed subsequent to December 31, 1958, on account of bonus. The learned counsel further submitted that this practice proceeds on the basis of an implied agreement between the assessee and its employees and such an agreement could be spelled out from the aforesaid conduct. The learned counsel wanted that this method of making provision for bonus in the year of account be treated as a system of accounting itself followed by the assessee for a long number of years enabling it to treat the provision as one for a current liability. We are unable to accept this contention of the learned counsel for the assessee. There is no evidence as to the basis on which the provision was made in the earlier years. For the assessment year 1957-68, Rs. 1,50,000 is said to have been arrived at on the basis of 3| months' salary. To find out whether the same basis was adopted in the earlier year or any different basis was adopted, there is no evidence. There is also no evidence that these provisions were made in the earlier years in pursuance of any agreement between the parties. Even the Tribunal did not accept the contention of the assessee that any particular system of accounting which contemplated a provision being made on any definite basis was systematically followed. The Tribunal considered that to the extent of Rs. 1,50,000 the liability is an admitted liability and, therefore, allowable as a deduction. There is no evidence of any claim having been made by the workers during the accounting year 1956. No question of admitting any liability could, therefore, arise. The entries in the account books were also not communicated to the workers and the workers could not have made any claim for bonus on the basis of these entries. It is in the nature of a prudent provision for a possible contingent liability, but not an accrued liability. The question is whether, in these circumstances, the assessee is entitled to a deduction of this amount.

3. In Associated Printers (Madras) Private Ltd. v. Commissioner of Income-tax, [1961] 43 I.T.R. 281, 289 (Mad.). the facts are these: The assessee took over a running business on, February 1, 1950, at a time when a dispute between its predecessor and its workmen regarding their claim for Deepavali bonus for 1949 was pending adjudication by the industrial tribunal. After the transfer of the business the assessee was also made a party to the industrial dispute. The award of the tribunal awarding payment of one and a half months' basic wages as bonus to each of the workmen was published on February 9, 1951. The claim for bonus for Deepavali in 1950 was settled by direct negotiations between the assessee-company and its workmen and an agreement was arrived at on June 30, 1951. The total amount thus payable as bonus for the two years amounted to Rs. 54,140 and that amount was debited in the accounts of the assessee-company in its year of account which ended on January 31, 1952. The question for consideration was whether the liability to pay Rs. 54,140 as bonus which was undertaken by the assessee in the year of account 1951-52 was an allowable item of expenditure in assessing the profits and losses of that year of account in the assessment year 1952-53. While holding that the expenditure was properly debitable in the accounting year ending January 3), 1952, this court observed :

" The claim for bonus, to whatever period it relates, is at best a contingent liability even at the stage the claim is preferred. It becomes an accrued liability if the claim is admitted by the employer. If the claim is denied and the workmen do not pursue the claim it will never accrue as a liability. If the claim is denied by the employer and it is referred as an industrial dispute, no liability accrues, if the industrial tribunal negatives it. If, however, the claim is upheld by the industrial tribunal after adjudication, it becomes an accrued liability when the award becomes enforceable. If, as happened in the case of the claim for 1950, the claim for bonus is settled by agreement between the employer and the employees, it becomes an accrued liability on the date of the agreement."

4. On the question whether the bonus payment was properly debitable only for the years of account 1949 and 1950, this court observed that it was only in the year of account ending January 31, 1952, that the liability accrued because the award was made on February 9, 1951, in respect of 1949 and the agreement in respect of 1950 was arrived at only on June 30, 1951. In the earlier years, it was at best a claim for bonus which is a contingent liability. A provision for meeting a contingent liability was not an allowable item of deduction. For this opinion, the learned judges also relied on the decision of the Supreme Court in Indian Molasses Co. (Private) Ltd. v. Commissioner of Income-tax, .. This decision was followed by another Division Bench of this court in Pankaja Mills Ltd. v. Commissioner of Income-tax, [1963] 50 I.T.R. 665 (Mad.). That was a case where the assessee who kept its accounts on mercantile system debited a sum of Rs. 70,000 in the accounting year ending December 31, 1951, by way of bonus for the workers for the years 1948 and 1950. The debit entry for the bonus for the year 1948 was based on an award of the industrial tribunal dated October 24, 1951, and published on December 4, 1951. With regard to the bonus for 1950, the debit was made following a resolution of the Southern India Mill Owners' Association, of which the assessee was a member, advising its members to pay two months' salary as wages. The amounts of bonus were, however actually paid to the workers only after the close of the accounting year ending December 31, 1951. The question for consideration was whether the assessee was entitled to claim deduction of this amount in the assessment year 1952-53 corresponding to the accounting year ending December 31 1951. This court held, following the decision in Associated Printers (Madras) Private Ltd. v. Commissioner of Income-tax, that with regard to the bonus for 1948, the award imposed a legal liability on the assessee to pay the amount fixed by the award as bonus to its workers and this being an accrued liability, the assessee was entitled to have this amount deducted. With regard to the bonus for 1950, it was found that no claim had actually been made by the workers, but the amount was paid only on the advice of the Southern India Mill Owners' Association. It was not on the basis of any agreement between the assessee and its workmen either. Since it was a voluntary payment, this court held that notwithstanding that accounts are maintained on the mercantile basis, it was no more than a contingent liability which the assessee was not entitled to estimate and debit in advance of the date when it became converted into an accrued liability or when it was actually paid.

5. A similar question arose for consideration before the Supreme Court in Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Private Ltd., . In that case, the assessee paid as bonus to its employees a sum of Rs. 1,08,325-9-3 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 1947-48 and the corresponding credit was given to the bonus payable account. The books for 1948 had not been closed till the date of the order of the industrial tribunal on January 13, 1949. This bonus was in fact paid to the employees in the calendar year 1949, the relevant assessment year being 1950-51. It was also found in that case that up to 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 debited to the profit and loss account of the respective year. The question for consideration was whether and in what year the liability of the sum of Rs. 1,08,325 arose according to the mercantile system. It was held that it was only in 1949 when an award was passed by the industrial tribunal, that the liability was incurred and that, therefore, the assessee was entitled to claim the deduction of bonus for the assessment year 1950-51. It will be seen from these judgments that a liability to pay bonus arises only when an award under the Industrial Disputes Act is made or an agreement is reached between the employer and the employee, which assumes a claim by the workers for payment and a settlement of the same by agreement. Thus, if a legal liability had accrued or was incurred, an assessee keeping the mercantile system of accounting could debit such liability in the accounting year in which such liability was incurred or had accrued. In this case, the provision of the sum of Rs. 1,50,000 made in the accounts was not towards liability incurred under an award or a settlement by agreement arrived at between the employer and the employee. As such, though the assessee was keeping a mercantile system of accounting, it is not an admissible deduction in law.

6. The learned counsel for the assessee relied on Textile Machinery Corporation Ltd. v. Commissioner of Wealth-tax, [1968] 67 I.T.R. 122 (Cal.) and Symonds Distributors (P.) Ltd. v. Commissioner of Income-tax, . Textile Machinery Corporation's case1 related to a wealth-tax assessment. One of the questions for consideration in that case was whether, in determining the net wealth of the assessee, provision for bonus was a permissible deduction as a debt owing on the valuation date. For the assessment years 1957-58, 1958-59 and 1959-60, the assessee which was a public limited company made a provision in the accounts for payment of bonus likely to become payable to the workmen in a total sum of Rs. 16,93,000. Though there was no agreement or award in respect of bonus, a Division Bench of the Calcutta High Court held that the liability to pay bonus is a debt and not a contingent liability and therefore, is liable to be taken into consideration in the computation of wealth under Section 2(m) of the Wealth-tax Act. But it is seen from page 137 of the report that there was no dispute between the assessee and the workmen for the payment of bonus up to the extent provided for by the assessee; but the workmen were asking for more and that is why the industrial adjudication was going on. Up to the extent of Rs. 16,93,000 spread over the years of assessment, the assessee admitted the liability and was making payments of considerable sums towards bonus. The learned judges considered this as an agreed and admitted liability and the dispute was only with reference to the additional amount and, therefore, held that it is an accrued liability. In our case, as already stated, the provision was not made on the basis of any agreement between the parties and it was only a provision for meeting a contingent liability. In Symonds Distributors' case also, the decision proceeded on the assumption that-

" they must have made a claim and the management must have accepted it or that there must have been a subsisting understanding between the company and its employees for the payment of bonus in case the company earned good profits."

7. We cannot make any such assumptions in the present case for the reasons already set out. Further, in Symonds, Distributors' case, there was a resolution of the board of directors to pay bonus at a particular rate even during the accounting year in question and the provision was made only on the basis of the resolution. It was not disputed in that case that the assessee had incurred a liability when it passed the resolution. Clearly, therefore, the ratio of this decision is not applicable to the present case.

8. For the foregoing reasons, we hold that the sum of Rs. 1,50,000 was not an admissible deduction. We, accordingly, answer the reference in the negative and in favour of the revenue.

9. The learned counsel for the assessee submitted that if the amount is not an admissible deduction in the assessment year 1957-58, it should be directed to be deducted in the assessment year 1958-59 at least when the amount was actually paid. It is true that in view of our finding that he is not entitled to get the amount deducted for the assessment year 1957-58, he would be entitled to a deduction in 1958-59 assessment. But the question referred to us does not cover that issue. As such, we are unable to give any direction in this regard. But it will be open to the assessee to raise this point before the Tribunal in Section 66(5) proceedings.

10. The revenue will be entitled to its costs. Counsel's fee Rs. 250.