P. V. Dixit C. J.:-

In this reference under section 66 (1) of the Income-tax Act at the instance of the assesses, the questions referred to this Court arise out of the assessment for the year 1950-51, the previous year in relation to which is the calendar year 1949. The assessee is a limited company owning and running a textile mill at Indore. During the year of account, the company paid Rs. 1,08,325-9-3 as bonus to its workers for the calendar year 1947. The award under which the bonus became payable to the employees was made on 13th January 1949 under the Industrial Disputes Act. This amount was debited by the company in its profits and losses account for the year 1948. The assessee did not close its books of account for 1948 till the date of the making of the order by the Industrial Tribunal on 13th January 1949. In the assessment year in question, the assessee claimed a deduction under section 10 (2) (x) of the Act on account of the bonus amount paid to its employees for the year 1947. The Income-Tax Officer disallowed the claim holding that in regard to bonus the assessee maintained its accounts on the mercantile basis and not on the cash basis and that, therefore, the bonus that the assessee could be allowed to deduct would be only the bonus payable for the year 1949.

2. The Appellate Assistant Commissioner took the view that the bonus amount became a definite ascertained liability only when the Industrial Court's award was made and till then it was only a contingent liability; and that the assessee's method of accounting for bonus was not strictly the mercantile basis but it was not one which could be rejected as a method from which the true profits could not be ascertained. On an examination of the method and system of accounts of the assessee, the Appellate Assistant Commissioner expressed the opinion that till 1946 the order for payment of bonus used to be received before the company's accounts for the year were finalised and the amount used to be in fact debited to the profit and loss account of the respective year; that in 1947 an

"Independence bonus was awarded and actually paid in the year of account and the account was debited in the accounts of 1947 itself"

; and that the amount of RP. 1,08,325-9-3 was the amount of additional bonus for 1947 which became payable by the award dated the 13th January 1949 and was debited in the books of 1948 which were open at the date of the award. He, therefore, came to the conclusion that on the method of accounting adopted by the assessee the additional bonus amount for the year 1947 could not be allowed as a deduction in the computation of the profits and gains of the assesiee's business of the account year 1949.

3. Before the Tribunal, the aesessee again pressed the claim for deduction contending that the liability for the bonus amount of Rs. 1,08,325-9-3 became a legal liability when the award was made on 13th January 1949; that for the purposes of deduction it made no difference whether the bonus related to an earlier year, namely, 1947; and that the assessee had the right to claim the deduction in the year in which the award was made. The Tribunal rejected this contention observing that in the past the assessee bad never claimed bonus on the basis of the date of the award of the Industrial Tribunal or on the basis of the date of actual payment; that till 1946 the aseessee debited bonus in the accounts for the particular year to which it related; that it never claimed bonus for more than one year in any particular accounting year; and that the true profits of the assessee must be computed in accordance with the method of accounting regularly employed by it.

4. The second contention of the assessee, which was rejected by the taxing authorities, related to the computation of the written-down value of its assets. The Income-tax Officer computed the written-down value of the assets by deducting the deprication already allowed to the aseessee under the Industrial Tax Rules of the former Holkar State. This he did under paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950. It was urged by the assessee that the value should have been computed under sec­tion 10 (2) (vi) of the Income-tax Act itself and that paragraph 2 of the Order of 1950 being repugnant to the provisions of the Income-tax Act was ultra vires and could not be given effect to. This contention was rejected by the Income-tax Officer, the Appellate Assistant Commissioner, and by the Appellate Tribu­nal also. According to the Tribunal, paragraph 2 of the Order of 1950 was intended to apply to the aseessee in Part B States who were previously not liable to assessment under the Income-Tax Act; that if section 10 (2) (vi) and section 10 (5) (b) of the Act had been uniformly applied to the aseessees in Part A States and Part B States there would have been discrimination in that, while the written-down value of the assets of an aesessee in a Part A State would be the value of the assets acquired before the 'Previous year' under section 10 (5) (b), in the case of the assets of a Part B State aesessee depreciation would have been allowed on the original cost of the at sets as the depreciation already allowed to such an asseesee under the relevant State law could not have been deducted under the provisions of section 10 (5) (b); that paragraph 2 of the Order of 1950 was complimentary to section 10 (5) (b) of the Act; and that having been made under section 12 of the Finance Act, 1950, it had the force of a statute and did not in any way conflict with the provisions of the Income-tax Act.

5. On these contentions, the questions referred to this Court for decision are-

"1. Whether on the facts and in the circumstances of the case the assessee is entitled to claim a deduction of bonus of Rs. 1,08,326 relating to the Calendar year 1947 in the assessment year 1950-51 ?

2. Whether on the facts and in the circumstances of the case the provisions of Taxation Laws (Fart B States) (Removal of Difficulties) Order, 1960, are applic­able to the assessee in computing the written-down value of its assets ?"

6. The questions stated for our opinion thus concern the deductions claimed by the assessee in making up the profits and gains of the business for the Calen­dar year 1949 which in the year of account. The question about the deduction of bonus amount has to be decided with reference to clause (x) of section 10 (2) of the Act. This clause, which allows a deduction in respect of bonus, so far as is material here, runs as follows-

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

*****

(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 profits or dividend if it had not been paid as bonus or commission:

* * * * *

The word 'paid' in this clause has the meaning given to it in sub-section (5). It says: "In sub-section (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;......" According to this definition, where the cash system of accounting is adopted by an assessee "paid" would mean the actual payment and where the system of accounting is the mercantile system, it would denote the liability incurred though not paid for. Now, here, the amount of Rs. 1,08,325-9-3 was, as has been found by the Tribunal, actually paid to the employees in the calendar year 1949. But the method of accounting adopted by the assessee, according to the finding of the Tribunal and the taxing authorities, is not the receipt basis. The assessee's method of accounting was described by the Appellate Assistant Commissioner as one which though not strictly the mercantile basis was one from which the profits and gains could properly be deducted. The assessee's system of accounting was, therefore, accepted as the basis of computation by the taxing authorities. The question, therefore, that requires consideration is whether the bonus amount of Rs. 1,08,325-9-3 was a liability incurred in the year of account. The Department disallowed the deduction in the computation of the profits and gains of the calendar year 1949 on the basis that the bonus related to the year 1947; that according to the system of accounting adopted by the assessee the bonus amount was debited in the accounts of the year to which it related; and that according to that method the assessee never claimed bonus on the basis of the date of the award of the Indus­trial Tribunal or on the basis of the date of the actual payment. This is a mis­taken view. If the system of accounting adopted by the assessee was not the cash basis, but one of adjustment irrespective of whether the profits and gains have been actually received or not and whether the expenditure has been actually paid or not, then, in view of the definition of the word 'paid' in section 10 (5) the taxing authorities had no other alterative but to allow the deduction in that accounting year in which the liability to pay bonus arose. Under section 13 the assessee's method of accounting having been accepted as one from which true profits could be correctly determined, the taxing authorities were bound to accept it as the basis of computation and were precluded from computing the profits under the proviso in a manner determined by them. But even under the mer­cantile system of accounting or one which though not strictly a mercantile system is a system of adjustment where the profits and gains computed are the profits and gains actually earned though not necessarily realised in cash and the loss or expenditure computed is the loss or expenditure actually sustained though not necessarily paid no deduction can be made in respect of a liability which has not definitely arisen or incurred.

7. In the present case, the assessee incurred the obligation to make payment of the bonus amount when the Industrial Tribunal made its award on 13th January 1949. The liability to pay the additional bonus amount of Rs. 1,08,325-9-3 for the year 1947 did not materialise or crystalise in 1947. Nor could it be foreseen in that year. Learned Advocate-General pressed into service the observations of the Supreme Court in State Of Mysore v. Workers Of Gold Mines, AIR 1958 S C 923 at p. 928, para. 9 on the nature and character of the workmen's claim for bonus, and argued that as bonus was not an ex gratia payment but a cash incentive, and as its payment depended on the quantum of the profits and as the assessee knew the extent of its profits in 1947 the liability for the payment of bonus arose in 1947 and all that the award of the Industrial Tribunal did in 1949 was to determine the surplus profit and not the liability. We are unable to accede to this contention. For the purpose of deduction under section 10 (2) (x) of the Income-Tax Act what is necessary is that the liability must be an accrued liability and not a contingent or future liability. No doubt, as laid down by the Supreme Court in Meenakshi Mills Ltd. v. Their Workmen, A I R 1958 S C 153 and State Of Mysore v. Workers Of Gold Mines, AIR 1958 S C 923 at p. 928, para. 9 and other cases, bonus is not a mere matter of bounty. But, as indicated in those cases, the claim for bonus cannot be effectively made unless two conditions are satisfied viz. the wages paid to workmen fall short of what can be properly described as living wages, and the industry must be shown to have made profits which are partly the result of the contribution made by the workmen in increasing production. In fixing the amount of bonus payable to workmen, the amount of the available surplus in the hands of the employer has to be determined. From this it follows that the liability to pay bonus is not incurred from the time the employer knows the extent of his profits. At that time the liability in the matter of bonus can at the most be a provisional or contingent liability. It does not become certain unless and until the actual liability is determined by admission or by adjudication of the Court after taking all the relevant factors into consideration.

8. A great point was made by the Appellate Tribunal and the taxing authorities that the aseessee's method of accounting was to debit the amount of bonus in the accounts for the particular year to which it related and that the books of 1948 were not closed till the date of the making of the order by the Industrial Tribunal on 13th January 1949. We do not think this makes any difference in the question as to when the obligation to pay bonus became a certain obligation. Even if the assessee had foreseen in 1947 or 1948 the possibility of its being required to pay additional bonus for the year 1947 and made an estimated provision in its accounts during 1947-48 that would not have assisted in any way either the assessee of the Department. Such a provision would have been no doubt prudent and in consonance with the principles of accountancy. But the liability would have remained a contingent liability in the year 1947-48 and could not have been taken into account as a permissible deduction if the profits of that year had been taxable. It is thus clear that the liability in respect of the bonus amount of Rs. 1,08, 325-9-3 did not become an ascertained liability until 13th January 1949 when the award of the Industrial Tribunal was made.

9. There is a great deal of authority on this matter. A reference to a few cases would be pertinent. In Calcutta Co. Ltd. v. I. T. Commr., (1959) 37 I T R 1 the assessee was a company dealing in land and property and carrying on land development by building roads, drainage etc. In the accounting year relating to the assessment year 1948-49 the Company sold a number of plots with an undertaking incorporated in the deeds of sale themselves that it would carry out the requisite developments within six months from the date of the sale. The assessee maintained its accounts on the mercantile basis. In the accounting year the Company received only a part of the full price of the sale of lands, namely, Rs. 43,692-11-9. It estimated a sum of Rs. 24,809 as expenditure for the developments to be carried out in respect of the plots sold and debited the same in its books of accounts. The assessee claimed a deduction of Rs. 24,809 in the computation of the profits and gains of its business for the accounting year. The claim of the assessee was rejected by the taxing authorities as well as by the Calcutta High Court in a reference under section 66 (1) of the Act. The Supreme Court held that under the mercantile system deduction could be claimed in respect of a liability which had definitely arisen in the accounting year although the liability might be one to be discharged at a future date and the amount to be expended for the discharge of the liability would have to be estimated; that the difficulty in the estimation thereof would not convert an accrued liability into a conditional one; and that the undertaking given by the company in the sale deeds imported a liability which accrued on the dates of the deeds of sale. The Supreme Court referred to Peter Merchant Ltd. v. Stedeford, (1948) 30 T C 496 to emphasize the distinction between a legal liability which is deductible and a liability which is future or contingent and for which no deduction can be made, and quoted with approval the statement contained in paragraph 230 at page 203 of Simon's "Income-Tax" which is as follows -

"In computing the profits of a trade it is the normal accountancy practice to allow as an expense any sum in respect of liabilities which have accrued over the accounting period, and to make a deduction of such sums from the profile. Following the decision in Peter Merchant, Ltd. v. Stedeford (Inspector of Taxes), (1948) 30 T C 496 however, it appears that the nature of liabilities which may be deducted on business and accountancy principles does not accord with the nature of liabilities deductible for income-tax purposes. For income-tax purposes it was held that a distinction must be drawn between an actual, i. e., legal, liability, which is deductible, and a liability which is future or contingent and for which no deduction can be made."

10. The same principle has been laid down in Senthikumara Nadar and Sons v. Commr. of Inc.-Tax, 32 I T R 138. That was a case in which the assessee-firm entered into contracts with the India Coffee Board, Delhi, for the purchase of coffee for export to Middle East and Australia. The firm failed to export in 1942 the coffee-seeds outside India as per the terms of the agreement. Thereupon in 1946 the Controller of Coffee assessed the damages which the firm was liable to pay for the breach of the contractual obligation at Rs. 1,19,177. The assessee claimed that this sum which it had paid as liquidated damages should be deducted from the profits of the accounting year 1942-43 under section 10 (2) (xv) of the Income-tax Act. The claim was disallowed by the Income-tax Department and the Tribunal. On a reference under section 66 (2) of the Act, it was held by the Madras High Court that the amount of damages could not be excluded in com­puting the assessible income of the assessee during the accounting year 1942-43 as the liability arose and was ascertained in 1946; and that in 1942 the liability to pay damages for the breach of contract was only a contingent liability. It was further held that only an ascertained liability justifies an entry in the accounts maintained on the mercantile basis and deductions are not permissible for anticipated losses or contingent liabilities even if they are inevitable. On the omission of the assessee to debit itself in the year of account with the amount it eventually had to pay in 1945-46, the learned Judges of the Madras high Court expressed themselves thus: -

"It could not claim to be in a better position than it would have been had it debited itself with that amount in its account during 1947-43. Even so, that debit would have represented only a, reserve provided by the asseesee against the enforcement in future of what was still a contingent liability in 1942-43. However prudent such a provision might have been from the point of view of accountancy, that would not have sustained a claim for deduction under section 10 (2) (xv) of the Act with reference to the account year 1942-43. It would still have been an unascertained claim for damages for breach of con­tract. The claim itself was not made in the year of account. That there could be no defence to the claim when it was made did not alter the fact that the claim had yet to be made and the damages yet to be ascertained."

This decision makes it very clear that even if the assessee here knew in 1947 that it would have to pay an additional amount of bonus and had made a provision in its accounts during the year 1947-48 for the payment of the amount, that would not have converted the uncertain liability into an ascertained liability. The decisions in Commr. of Inc.-Tax v. Burmah Oil Co., 34 ITR 750 and Kanpur Tannery Ltd, v. Commr. of Inc.-Tax, 34 ITR 863 are also in a similar vein.

11. The Lord President put the matter thus in J. Spencer and Co. v. Inland Revenue, (1960) I T R 149: -

"It seems to follow that, if in the earlier period there is only a provisional or contingent liability, it is not until it has been subsequently determined to be an actual liability by admission or decision that it can properly be brought into computation."

The matter was put as clearly as it can be in Edward Collins and Sons Ltd. v. Commissioner of Inland Revenue, (1924) 12 T C 773 where the Lord President said -

"It is a general principle, in the computation of the annual profits of a trade or business under the Income tax Acts, that those elements of profit or gain, and those only, enter into the computation which are earned or ascertained in the year to which the enquiry refers; and in like manner, only those elements of loss or expense enter into the comput­ation which are suffered for incurred during that year..........a prudent commercial man may put part of the profits made in one year to reserve, and carry forward that reserve to the next year, in order to provide against an expected, or (it may be) an inevitable, loss which he foresees will fall upon his business during the next year. The process is a familiar one. But its adoption has no effect on the true amount of the profits actually made, and does not prevent the whole of the profits, whereof a part is put to reserve, from being taken into computation in the year in question for purposes of assessment. On the contrary, the balance of profits and gains is determined independently altogether of the way in which the trader uses that balance when he has got it; and, if he puts part of it to reserve and carries it forward into the next year, that has no effect whatever upon his taxable income for the year in which he makes the profit."

12. These observations make it very clear that a deduction on account of bonus amount would be admissible in that accounting year in which the liability in respect of it accrued, even if the bonus amount has no relation to the profits of that accounting year.

13. One more decision, which must be noted, is of the Bombay High Court in Commr. of Inc.-Tax v. Nagri Mills Co. Ltd., 33 I T R 681. That case dealt with the question of deduction of a certain amount on account of bonus paid by the assessee-Mills to its employees. The assessee maintained its accounts on the mercantile basis and did not make any entry in its account books for the year 1951 about a provision for payment of bonus. It was in June, 1952, that the Conciliation Board gave its award regarding the bonus payable to the workers for the calendar year 1951 when a dispute arose in regard to the bonus payable to the workers. The bonus was actually distributed in December, 1952. The assessee claimed to deduct bonus for the year 1951 in computing the business profits for the assessment year 1952-53 of which the accounting year was the calendar year 1951. The award granting the bonus was made after the end of that accounting year. But the Bombay High Court upheld the claim of the asseseeee to deduct bonus from the profits of the accounting year to which the bonus related, with all due deference to the learned Judges of the Bombay High Court, this decision does not seem to be in accord with the well settled principle that deductions are not permissible for anticipatory losses or for contingent liabilities even if they are inevitable. On a perusal of the judgment, it seems to us that in coming to the conclusion that they did in the case before them, the learned Judges of the Bombay High Court were considerably influenced by the fact that the question as to the year in which the bonus deduction was allowable was not material in that particular case. As the learned authors have pointed out in Kanga and Palkhivala's Supplement to the Law and Practice of Income-Tax (1959 Edn., at p. 192), that

"decision should have been different if the real point in favour of the Department - viz. that the liability to pay bonus not having arisen in the accounting year, no deduction could be claimed for that year even under the mercantile system of accounting-had been urged before the Court."

14. For all these reasons, we are of the opinion that the liability for the payment of Rs. 1,08,325-9-3 as bonus for the calendar year 1947 became a legal liability on 13th January 1949 and the assessee is, therefore, entitled to claim a deduction in respect of that amount in computing the profits for the assessment year 1950-51.

15. In regard to the second question referred to us for decision, the argument of Shri Chitale, learned counsel for the asseseee, was that under section 12 of the Finance Act, 1950, the Central Government could make a provision or give a direction only if there was any difficulty in giving effect to the provisions of any of the Acts, rules or orders extended by section 3 or section 11 of the Act; that there was no difficulty in giving effect to the provisions of sections 10 (2) (vi) and 10 (5) (b) of the Income-tax Act; and that, therefore, paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, was ultra vires. It was also urged that even if there was any difficulty in giving effect to the aforesaid provisions, the provision or direction which the Central Government could make under section 12 of the } Finance Act, 1950, was limited to the removal of a difficulty in giving effect to sections 10 (2) (vi) and 10 (5) (b) of the Income-tax Act; that this meant that the difficulty should be removed by such provision or direction without sub­stantially affecting the provisions giving rise to the difficulty; and that section 12 did not empower the Central Government to alter radically the provision causing difficulty.,

16. In our judgment, the question about the validity of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, is now concluded by a recent decision of the Supreme Court in The Commissioner of Income-tax, Hyderabad v. Dewan Bahadur Ramgopal Mills Ltd, C. A. No. 5 of 1959, D/- 8-11-1960. In that case also it was urged that the condition for the exercise of power under section 12 of the Finance Act, 1960, was the existence of any difficulty in giving effect to the provisions of the Acts, rules or orders extended by section 3 of the Finance Act; that no difficulty existed in giving effect to the provisions of sections 10 (2) (vi) and 10 (6) (b) of the Income-tax Act; and that, therefore, the Explanation to paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, was invalid. The Supreme Court negatived the contention after pointing out how there was a difficulty in applying section 10 (5) (b) to an assessee in a Part B State. It was also observed that, it was for the Central Government to determine if any difficulty of the nature indicated in section 12 of the Finance Act, 1950, had arisen and that Parliament had left the matter to the executive. A reference was made to the observations in Banarsi Das v. State of M. P., A I R 1958 S C 909 that it was not unconstitutional for the Legislature to leave it to the executive to determine details relating to the working of taxation laws, such as the selection of persons on whom the tax is to be laid, the rates at which it is to be charged in respect of different classes of goods and the like. The validity of the Explanation to paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950, was upheld by the Supreme Court. If the Explan­ation is valid, it follows that the substantive provision must also be held to be valid. In view of the decision of the Supreme Court the power given to the Central Government under section 12 of the Finance Act, 1650, must be held to be a wide one permitting the Government to modify a provision substantially if it becomes necessary for the removal of a difficulty. The second question must, therefore, be answered in the affirmative.

17. Both the questions referred to us for decision are, therefore, answered in the affirmative. The assessee shall have costs of this reference. Counsel's fee is fixed at Rs. 250.

Reference answered in the affirmative.

section 10 (5) (b)