1965 PLP 46 (PTD)

(b) the profits of the business, profession or vocation for the year in question; and (c) the general practice, in similar businesses, professions or vocations." Section (10) (S): "In subsection (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 . . . . . . ." If we insert the definition of the word "paid" in sub‑clause (x) it would read as follows: "any sum actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section, to an employee as bonus ‑ ‑ ." As the assessee's profits and gains have been computed accord ing to the mercantile system, the question, using for the time being the terms of the clauses, comes to this: "Has the sum of Rs. 1,08,325 been incurred by the assessee according to the mercantile system in the calendar year 1947 or 1949 ?" At first sight the sentence does not read well, but the mean ing of the word "incur" includes "to become liable to". There fore, the question boils down to: "In what year did the liability of this sum of Rs. 1,08,325 arise according to the mercantile system." The mercantile system of accounting was explained in a judgment of this Court in Keshav Mills Ltd. v. Commissioner of Income- tax (1953) 23 I T R 230) thus: "That system brings into credit what is due, immediately it becomes legally due and before it is actually received, and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed." These observations were quoted with approval in Calcutta Co. Ltd. v. Commissioner of Income‑tax ((1959) 37 I T R 1). On the facts of this case, then when did the legal liability arise in respect of the bonus? This depends on the facts of the case and the nature of the bonus awarded in this case. This Court has examined the nature of profit bonus‑it is common ground that the bonus with which we are concerned with was a profit bonus‑in various cases. It is explained in Muir Mills Co. v. Suti Mills Mazdoor Union ((1955) 1 S C R 991) that "there are two conditions which have to be satisfied before a demand for bonus can be justi fied and they are: (1) when wages fall short of the living standard, and (2) the industry makes huge profits part of which are due to the contribution which the workmen make in increasing production. The demand for bonus becomes an industrial claim when either or both these conditions are satisfied." This matter was again considered in the case of Associated Cement Cos. v. Their Workmen (1959 S C R 925). This Court observed: "It is relevant to add that in dealing with the concept of bonus this Court ruled that bonus is neither a gratuitous pay ment made by the employer to his workmen nor can it be regarded as a deferred wage. According to this decision, where wages fall short of the living standard and the industry makes profit part of which is due to the contribution of labour, a claim for bonus can be legitimately made." In 1961, this Court was able to say that "the right to claim bonus which has been universally recognised by industrial adjudi cation in cases of employment falling under the said Act has n9w attained the status of a legal right. Bonus can be claimed as a matter of right provided of course by the application of the Full Bench Formula it is shown that for the relevant year the employer has sufficient available surplus in hand" (vide Gajendragadkar, J., as he then was, in Workmen v. Hercules Insurance Co. ((1961) 2 S C R 995)). In Indian Tea Association v. Workmen ((1962) Supp. 1 S C R 557) this Court held that "the profit bonus can be awarded only by reference to a relevant year and a claim for such bonus has therefore to be made from year to year and has to be settled either amicably between the parties or if a reference is made, it has to be determined by industrial adjudication. A general claim for the introduction of profit bonus cannot be made or entertained in the form in which it has been done in the present proceedings". It follows from the above decisions of this Court that: (a) workmen are entitled to make a claim to profit bonus if certain conditions are satisfied; (b) the workmen have to make a claim from year to year; (c) this claim has either to be settled amicably or by industrial adjudication; and (d) if there is a loss or if no claim is made, no bonus will be permissible. In our opinion, it is only when the claim to profit bonus, if made, is settled amicably or by industrial adjudication that a liability is incurred by the employer, who follows the mercantile system of accounting, within section 10 (2) (x), read with section 10 (5) of the Act. On the facts of this case, it is clear that it was only in 1949 that the claim to profit bonus was settled by an award of the industrial tribunal. Therefore, the only year the liability can be properly attributed to is 1949, and hence we are of the opinion that the High Court was right in answering the question in favour of the assessee. The second contention of the learned counsel does not appeal to us. We are of the opinion that this system of reopening accounts does not fit in with the scheme of the Indian Income-tax Act. We have already held in Commissioner of Income-tax v. Gajapathy Naidu ((1964) 53 I T R 114 (S C)) that, as far as receipts are concerned, there can be no reopening of accounts. The same would be the position in respect of expenses. But even in England accounts are not opened in every case. Halsbury gives various instances in footnote (m) at page 148, Vol.

20. Mr. Sastri has relied on various English cases but it is unnecessary to refer to them as Lord Radcliffe explains the position in England, in Southern Railway of Peru Ltd. v. Owen (1957 A C 334), thus: "The Courts have not found it impossible hitherto to make considerable adjustments in the actual fall of receipts or payments in order to arrive at a truer statement of the profits of successive years. After all, that is why income and expenditure accounting is preferred to cash accounting for this purpose. As I understand the matter, the principle that justified the attribution of something that was, in fact, received in one year to the profits of an earlier year, as in such cases as Isaac Holden & Sons v. Inland Revenue Commissioners (1924) 12 T C 768 and Newcastle Breweries Ltd. v. Inland Revenue Commissioners (1927) 12 T C 927 was just this, that the payment had been earned by services given in the earlier year and, therefore, a true statement of profit required that the year which had borne the burden of the cost should have appropriated to it the benefit of the receipt." The principle mentioned by Lord Radcliffe would not apply to a profit bonus. As stated above, a profit bonus is strictly not wages, at least not for the purpose of computing liability to income-tax; it is not an expense, in the ordinary sense of the term, incurred for the purpose of earning profits. A fortiori profits have already been made. It is more like sharing of profits on the basis of a certain formula. One other point raised by Mr. Sastri remains. He urged that the words "for the year in question" in the proviso to subsection 10 (2) (x) mean "for the year in which allowance is claimed". We are unable to agree with him. The words "for the year in question" mean the year in respect of which bonus is paid. In the result, the appeal fails and is dismissed with costs. Appeal dismissed.