R. Jayasimha Babu, J.:— An assessee who follows the mercantile system of accounting and had a statutory liability to pay bonus to its workmen had made a provision for bonus at a figure lower than that ultimately paid in terms of the settlement reached subsequent to the end of the accounting year. Whether the assessee can claim the amount so determined after the end of the accounting year to the extent the same was in excess of the provision that had been made in the accounts, as an item of expenditure in the year of account, is the question that is posed before us by the Revenue. The second question is whether the assessee is entitled to the expenditure incurred by it on food and drinks provided to customers which had no element of entertainment.
2. The assessment years are 1972–73, 1973–74 and 1974–75, and the assessee is an industrial undertaking which is a manufacturer of machinery.
3. The assessee had during these three assessment years, claimed sums of Rs. 7,58,754, Rs. 11,24,351 and Rs. 12,34,766, respectively, for the assessment years 1972–73, 1973–74 and 1974–75 as the amount paid by it as statutory bonus for the relevant previous years. The Income-tax Officer took note only of the amounts that had actually been paid and did not allow any amount for the year 1972–73, allowed Rs. 7,58,754 for the assessment year 1973–74; allowed Rs. 11,24,351 for the assessment year 1974–75 and the assessee had made provisions for sums of Rs. 3,50,000, Rs. 10,12,981 and Rs. 5,03,160, respectively, for these three assessment years. The amounts paid in excess of the provision thus was Rs. 7,58,754, Rs. 2,65,597, Rs. 1,10,415 and Rs. 7,65,597.
4. On appeal the Commissioner held that the claim made by the assessee with regard to the sums was quite “unexceptionable in as much as the company maintained its accounts on the mercantile system of accounting and it was entitled to claim the deduction of the liability to pay bonus for any year by reference to accrual although the payment might have been made only in the subsequent year. He held that the disallowance made by the Income-tax Officer was unwarranted. He further held that the liability was a “statutory liability” which arose by virtue of the relevant provisions in the Payment of Bonus Act, 1965.
5. Aggrieved by the order of the Commissioner, the Revenue took up the matter in appeal to the Tribunal. It was not the case of the Revenue that the payment made by the assessee towards bonus was not a statutory liability or that the amounts paid were in excess of the maximum provided for in the Act. Further, there was no dispute that the amount paid out as bonus was quantified in terms of the settlement which had been reached between the assessee and its workmen, though after the end of the accounting year, and that the amount so quantified was payable as bonus for the year of account. The Tribunal in a fairly elaborate order, held that the assessee which follows the mercantile system of accounting is entitled to provide for bonus and get the same allowed as deduction and it also held that figures relating to the additional bonus payment, consequent on the settlement had been available in all these years, well before the assessment and that it was for this reason that the assessee substituted the actual payment of bonus relating to the accounting year, for the provision made in the accounts in the adjustment statement for income-tax purposes. Thus, the Tribunal observed that that statement had been accepted in the past as was evident from the assessment for the assessment year 1971–72. The Tribunal observed that it did not find anything wrong in this method of substituting the right amount of liability for the one which was estimated at the time of closing the accounts as long as such information was available before the assessment. That in the case of a statutory liability, when the assessee follows the mercantile system of accounting, it is entitled to the deduction of the amount of that liability though the quantification had taken place subsequent to the year of account, is well established. It was so held by the apex court in Kedarnath Jute Mfg. Co. Ltd. v. CIT, [1971] 82 ITR 363 and in later decisions as well.
6. Learned counsel for the Revenue, however, contended placing reliance on the decision in CIT v. Swadeshi Cotton and Flour Mills Pvt. Ltd., [1964] 53 ITR 134 (SC), that even in respect of an assessee who claims deduction of an amount incurred by it as an expenditure to the extent the same is in excess of the provisions made in the accounts it can only be allowed in the year in which the payment was effected and not in the year of account. Though that case relates to profit bonus, the bonus is a statutory liability in the year in which the payment came to be made and which payment was considered by the Supreme Court in that case. After the enactment of the Payment of Bonus Act, 1965, every employer employing ten or more workmen and who is not otherwise exempted under the provisions of the Act is required to pay bonus to its workmen if the employment is in a factory or a mine, irrespective of the number of workmen, and in cases of other establishments if ten or more persons are employed in any day during an accounting year. Failure to pay the bonus under the Act is an offence punishable with imprisonment for a term which may extend to six months, as provided under section 28 of the Payment of Bonus Act. Section 10 of the Act provides for payment of minimum bonus at the rate of 8.35 per cent, although at the time the Act was enacted that percentage was less. Section 11 prescribes a ceiling at the rate of 20 per cent. Section 15 provides for a set on and set off of allocable surplus. Section 19 of the Act is significant. It sets a time limit for payment of bonus and provides that the bonus payable shall be paid in cash by the employer within eight months from the close of the accounting year, where there is no dispute, and where there is a dispute pending before any authority under section 22 of the Act, within one month from the date on which the award becomes enforceable or the settlement comes into operation, in respect of such dispute. Therefore, there can be no doubt whatsoever that the assessee/employer who is subject to the Payment of Bonus Act, is under a statutory duty to pay bonus to its employees and in cases where there is no dispute pending under section 22 before any authority, such payment must be effected within eight months from the date of closing of the accounting year. The assessee who follows the mercantile system of accounting, therefore, must necessarily provide for the payment of bonus to its employees and it is only the quantification that is postponed. If the provision made by the assessee is less than the amount which it is required to pay and in fact pays, that amount having been determined after the end oif the accounting year and if the amount so determined does not exceed the maximum of 20 per cent, the liability of the employer in relation to that payment has to be regarded as a statutory liability for the purpose of allowing’ the same as an item of expenditure while computing the income for the purpose of taxation.
7. Learned counsel for the Revenue contended that this was not statutory liability as even according to the assessee, the assessee had entered into a settlement. This argument overlooks the fact that whether there is a settlement or not, the employer was bound to pay bonus to the workmen and that payment was a statutory obligation which he could not avoid as he would expose himself to the penalties imposable under the Act. The Revenue's case is not that the assessee had paid in excess, of that provided for in the Act, as there is no material to show that the figure arrived at, as a result of the settlement was a figure which would not have been payable on a proper calculation of the amount of the allocable surplus. According to the employer/assessee, it had been the habit of the employer in the past to offer to pay bonus at a lower rate while the employees made claim for payment at a higher rate and the actual rate at which the payment was to be made was worked out in a settlement. The settlement, therefore, cannot be regarded as one which is contrary to any of the provisions of the Act, or as an instrument by which a statutory liability is transferred into a non-statutory liability. In the circumstances of the case, the settlement is the quantification of the liability with the willing co-operation of the employer. The amounts paid towards discharge of the statutory liability, therefore, are amounts which are relatable to the relevant years of account and the assessee/employer who follows the mercantile system is entitled to claim the same as an item of expenditure in the year of account.
8. The first question, therefore, is answered in favour of the assessee and against the Revenue. With regard to the second question, that also had to be answered in favour of the assessee. The expenditure on hospitality incurred by the assessee is for the years 1972–73 and 1973–74 to which the amended provision of section 37(2A) is not applicable, as that came into effect from April 1, 1976. The Tribunal has found that the expenditure incurred was not by way of entertainment but only by way of hospitality. Both the questions are, therefore, answered against the Revenue and in favour of the assessee. It is proper that the assessee be awarded costs and the assessee shall be entitled to costs quantified at Rs. 1,500.