1980 PLP 210 (PTD)

On 30‑4‑1971, the Income‑tax Officer, Company Circle II, Peshawar, while passing the assessment order on the return pertaining to the above mentioned claims, disallowed these claims, on the ground that the bonus had not actually been paid during the year and that the fee paid on account of the appeals was an inadmissible expenditure and similarly on the same ground he disallowed the audit fee of Rs. 1,

500. Being aggrieved of the aforesaid assessment, the assessee filed an appeal before the Income‑tax Appellate Tribunal, which was accepted on 17‑5‑1973 ride its order 'Annexure B' to this application. The Tribunal held that all the three claims of the assessee were allowable to him. It has been urged in the present application that the learned Tribunal had failed to appreciate correctly the provisions of section 10(2) of the Income tax Act, in that only an expenditure actually incurred and bonus paid to the employees can be claimed as an admissible allowance and that a mere provi sion in the profit and loss account for an expenditure or payment of bonus cannot be equated with the actual expenditure. Similarly, the expenses incurred on account of prosecuting appeals against the Income‑tax Depart ment by an assessee or the audit fee was legally not an admissible deduction. The Tribunal, in the opinion of the referring authority, had thus erred in granting the allowance in question to the respondent and their order, therefore, gave rise to the question of law reproduced above. Mr. Amirzada Khan, Assistant Advocate‑General, urged the case of the tiring authority before us while the assessee‑respondent was represented by Mr. Hidayatullah Khan, Advocate. The learned counsel for the assessee has urged that the provision of bonus to the workmen was compulsory under the relevant Labour laws and there‑fore no company can escape this liability. It was for this reason that the Board of Directors had determined the payment of bonus against the performances of the workmen during the accounting year and as it was an ascertained amount of money payable in the succeeding year it was deductable from the income of the assessee for the purposes of the assessment. Similar, according to the learned counsel was the case of the provision made for the payment of audit fee in the sum of Rs. 1,500, as this provision was spent in the last year and could not be claimed in the succeeding year, because of the audit being relative to the accounting year. The learned Assistant Advocate‑General has very frankly conceded in at the outset that the objection to the payment of fee for appeals being a genuine legal expense on the necessary litigation by the assessee was allowable to him. This concession, on the part of the referring authority, excludes the said item from the purview of this reference and we are now confined only to the resolution of the controvency on the other two items. The learned counsel for the referring authority has placed his stress over the word "paid" occurring in clause (x) of subsection (2) of section 10 of the Income‑tax Act, 1922. This clause reads as under: ‑ "(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 of dividend if it had not been paid as bonus or commission." Learned counsel contends that the word "paid" connotes the actual payment having been made and anticipated payment which has to be made in future for the deduction from the income of an assessee. The assessment in question pertains to the assessment year 1970‑71 when it was not compulsory for an employer to make provision of bonus for employees in a financial year. The payment of the bonus to the workmen was made compulsory for every employer raking profit, if any, by the addi tion of Standing Order No. 10‑C to the West Pakistan (Standing Orders) Ordinance, 1968 by Labour Laws (Amendment) Ordinance, 1972, which came into force on 13‑4‑1972. Before the said amendment in the West Pakistan (Standing Orders) Ordinance, 1968, to which period the assessment under reference relates, an employer was not compulsorily required to pay any bonus to his workmen. It was, 0:erefore, discretionary with the employer to allow any bonus to the workmen as a compensation for good performance during the year. Such being the position, any provision made for payment of bonus to workmen in the balance-sheet of the year would still remain subject to the approval of the directors or to the economic conditions of the establishment and was, therefore, liable to fluctuation or revision. A mere provision for payment of bonus in the account would, therefore, not be tantamount to actual payment during the year. The interpretation of word "paid" in another context came before the Supreme Court of Pakistan in case of Commissioner of Income‑tax, North Zone, West Pakistan, Lahore v. Mst. Wazirunnisa Begum 1972 S C M R

116. In this case a provision was made in the year's account of the assessee for the payment of dividend to the share holders in the next succeeding year. The declared dividend pertained to the accounting year under assessment and the case fell under subsection (1975) 31 Taxation I (S C) of section 16 of the Act, which deals with the payment of dividend by a company or the purposes of inclusion in the total income of an assessee. The same word "paid" also occurs in the corresponding provision of section 10(2)(x), quoted above, which governs the payment of bonus. Their Lordships inter preted word "paid" in the following manners: ‑ 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 that is due or deserved etc., and that it is obvious that the words as used in the aforesaid provisions 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 Com pany amount only to a decision by the Company to pay to the share holders dividend at a certain rate. It creates a right in favour of the shareholders a d 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. Since the dividend warrant: in this case was issued n the 1st of June 1956, it obviously pertained to the assessment year 1957‑58, the previous account year having ended on the 31st of March 1956." In a case from the Indian jurisdiction reported in volume 31 of "Taxa tion" (A journal of Pakistan's Taxation Laws) namely, Keseram Industries & Cotton Mills Ltd. v. Commissioner of Wealth Tax (Central), Calcutta (1975) 31 Taxation I (S C) the Supreme Court of India, wild: dealing with section 2 (m) and section 7 of the Indian Wealth Tax Act. 1957, considered the question whether proposed dividends in an annual general meeting were debts owed by the assessee for the purposes of the said Act, Held that the proposal was not the actual debt :‑ The directors cannot distribute dividends but they can only recommend to the general body of the company the quantum of dividend to be distributed. Under section 217 of the Indian Companies Act, there shall be attached to every balance‑sheet laid before a company in general erecting a report b y its Board of Directors with respect to, inter alia, the amount if any, which it recommends to be paid by way of dividend. Till the company in its general body meeting accepts the recommendation and declares the dividend, the report of the Directors in that regard is only a recommendation which may be withdrawn or modified as the case may be. As on the valuation date nothing further happened than a mere recommendation by the Directors as to the amount that might be distributed as dividend, it is not possible to hold that there was any debt owned by the assessee to the shareholders on the valuation date. The High Court highly answered the second question in the negative." The learned Appellate Tribunal, while allowing the sum of Rs. 20,804 as bonus payable to the employees, has held that it was a provision provided at the end of the accounting year. In view of the decisions 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 section 16, subsection (2) 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. In regard to the provision of Rs. 1,500 on account of audit fee we find from the order of the Income-tax Officer, Company Circle II, Peshawar, dated 30‑4‑1971, that this provision was allowed during the last assessment years and therefore, it could not be claimed again during the year under assessment. If this factual position is correct that it would not require any effort on our part to fully agree to the disallowance of this provision by the Income‑tax Officer. It seems that the learned Tribunal has not paid its due attention to the finding of the Income‑tax Officer. Our reference to the actual reasons prevailing with the Income‑tax Officer for the disallowance of this sum would make it purely a question of fact. The learned appellate Tribunal, in allowing the said disallowance, should have considered the factual position and should have not dealt with the matter in the manner, as they have done. The upsetting of the decision of the lower Tribunal on a question of fact by the Appellate Authority without controverting the correct ness of the factual position would render the order of the appellate authority illegal and in excess of jurisdiction. A Division Bench of the Lahore High Court in Messers Mian Abdul Rahim & Sons v. Commissioner of Income‑tax, Rawalpindi P L D 1,973 Lah. 416 have held that, "where an ultimate finding on an issue is an inference to be drawn from the facts found, on the application of any principles of law, there is a mixed question of law and fact, and the inference from the facts found, is in such a case, a question of law". We would, therefore, treat, the decision of the learned Appellate Tribunal on this particular provision as a question of law and would not hesitate to say that the order of the learned Tribunal has no legal basis and is bad in law. For the foregoing reasons, we consider that the allowance of Rs. 20,804 as a provision of bonus in the assessment year by the learned Income‑tax Appel late Tribunal and the provision of Rs. 1,500 for the audit fee was not admis sible allowance in law and the facts of the case did not justify allowing the same. As far as the admissibility of the expenditure on account of the prose cution of the income‑tax appeals is concerned we do not feel obliged to make a reply to the question as the said provision stands conceded on behalf of the referring authority. With the exception of the latter mentioned expenditure our reply to the rest of the question under reference is, therefore, in the negative Reference returned as above. Reference answered in negative.