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Judgment
Paripoornan, J.—These are two connected cases. The Income tax Appellate Tribunal, Cochin Bench has referred these cases, at the instance of an assessee to income tax. ITR No. 90 of 1984 relates to the assessment year 1977-78 and I.T.R No. 89 of 1984 relates to the assessment year 1978-79. We are concerned, in these cases, with regard to eligibility of the assessee for the deduction of amounts paid or payable by way of bonus for the said two years. The assessee is a non resident sterling company. It is running tea and rubber plantations in Kerala and Tamilnadu. Admittedly, it keeps its accounts on mercantile basis. The accounting period for the above two assessment years ended on 31-3-1977 and 31-3-1978. The respondent is the Revenue in both the cases. The questions of law referred in ITR No. 90 of 1984 (relating to the assessment year 1977-78) and ITR No. 89 of 1984 (relating to the assessment year 1978-79) are as follows :
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in disallowing an amount of Rs. 19,53,904/- being bonus paid during the accounting year, but relating to the year preceding the accounting year, when this was treated as an allowable deduction for computation of taxable income by the Incometax Officer and when there was no appeal cross objection by the department in respect of the same before the Appellate Tribunal ?
Having come to the conclusion that the assessee was entitled to deduct the provision of accrued liability for bonus payable to employees for the previous year that is Rs. 42,67,500/- was the Appellate Tribunal right in disallowing the amount of Rs. 19,53,904/- being bonus of the year preceding the previous year?
Whether, on the facts and in the circumstances of the case, the assessee is not entitled to the deduction of the bonus paid to the employees in the previous year towards liability for the same in the year preceding the previous year as well as the amount towards provision being accrued liability in respect of bonus payable to the employees for the previous year ?
I.T.R. No. 89 of 1984 :
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in disallowing an amount of Rs. 37,84,808 being bonus paid during the accounting year, but relating to the year preceding the accounting year, when this was treated as an allowable deduction for computation of taxable income by the Incometax Officer and when there was no appeal cross objection by the department in respect of the same before the Appellate Tribunal?
Having come to the conclusion that the assessee was entitled to deduct the provision of accrued liability for bonus payable to employees for the previous year that is Rs. 54,86,496 was the Appellate Tribunal right in disallowing the amount of Rs. 37,84,808/- being bonus of the year preceding the previous year?
Whether, on the facts and in the circumstances of the case, the assessee is not entitled to the deduction of the bonus paid to the employees in the previous year towards liability for the same in the year preceding the previous year as well as the amount towards provision being accrued liability in respect of bonus payable to the employees for the previous year?
Whether, on the facts and in the circumstances of the case, was the Appellate Tribunal right in law in holding that the entire expenditure incurred by the assessee for the maintenance of their buildings given for the residence of their employees and the depreciation thereon should be subjected to the disallowance u/s 40A (5) of the Incometax Act, 1961?
Except the variation regarding the amounts, the questions that arise for consideration, for both the years, are substantially the same. We shall proceed to state the facts with reference to the assessment year 1977-78, which is the subject matter of ITR No. 90 of 1984. As stated, admittedly the assessee follows the mercantile system of accounting. The practice of the assessee in the past, till the assessment year in question, was to make a provision in the accounts, of the bonus that is payable relating to the year of account, add back such provision to the profits according to the profit and loss account and deduct from such amount the bonus that is actually paid during the previous year. For the first time, in the assessment year 1977-78, the assessee desired to depart from this practice. It wrote a letter dated 20-8-1979 to the Income Tax Officer. It stated that in addition to the claim for the payment relating to the preceding year, that was actually paid, for this assessment year the assessee has decided to claim the bonus for the current year''s "accrued liability". The reason stated was that the company was converted into a rupee company. The assessee claimed Rs. 42,67,500/- as "a provision" for this (current) assessment year and Rs. 19,53,904/- as bonus "paid" relating to the preceding accounting year. The bonus related to the estate staff and labour. The Income Tax Officer held that the reason stated for deviation from the practice neither to adopted was untenable and only allowed the liability of the preceding accounting year, that was ''actually paid'', as deduction. This was confirmed in appeal by the Commissioner of Incometax (Appeals) He added that regarding the bonus payment, the assessee was following the cash system of accounting or the actual payment basis. Before the Appellate Tribunal, the assessee claimed that it is entitled to deduction on actual payment basis relating to the previous year as also for the deduction of bonus payable for the current year on the basis of accrued liability. The Tribunal noticed that the assessee was following the mercantile system of accounting, but in the assessement stage, the bonus has been allowed only on an "actual payment" basis and such assessments were not disputed by the assessee in the" past. Relying on the decision of the Calcutta High Court in Seth Chemical Works Vs. Commissioner of Income Tax, , the Tribunal directed the Income Tax Officer to allow the sum of Rs. 42,67,500/- in the place of Rs. 19,53,904/- (limited to accnued liability). The decision of the Madras High Court in Commissioner of Income Tax, Coimbatore Vs. Coimbatore Cotton Mills Ltd., , relied on by the assessee, was distinguished and held to be inapplicable.
For the assessment year 1978-79, the assessee claimed bonus to estate staff and labour provided for this year and paid in the subsequent year as a deduction. It was in the sum of Rs. 54,86,496/-. The Income Tax Officer allowed the payment actually made in the year and relating to the preceding accounting year in a sum of Rs. 42,64,464/-. It was affirmed in appeal by the Commissioner of Incometax (Appeals). In further appeal, the Tribunal referred to the order passed by it for the earlier assessment year, and stating that the assessee has been following the mercantile system of accounting, held that it was only entitled to the deduction of the bonus that had "accrued" as a liability during the previous year, for the assessment year. In this view of the matter, it was held that the assessee would be entitled to a deduction of the sum of Rs. 54,86,496/- in the place of Rs. 37,84,808/- allowed by the Incometax Officer. The original appellate order of the Tribunal, for the assessment year 1978-79 [dated 21-5-1983 was rectified or amended, where in the Tribunal substituted a figure of Rs. 61,14,513/- for Rs. 54,86,496/- and Rs. 42,64,464/- for Rs. 37,84,808/-. This amended order is dated 22-12-1983. It is, thereafter, at the instance of the assessee, the questions of law formulated herein above, have been referred by the Incometax Appellate Tribunal, for the decision of this Court.
We heard counsel for the assessee, Mr. P.K. Kurian, as also counsel for the Revenue, Mr. P.K.R. Menon. Counsel for the assessee broadly highlighted two points or aspects, which are germane to answer the questions referred by the Appellate Tribunal for the decision of this Court. They are:(1) The Income Tax Officer allowed deduction of bonus that was actually paid during the previous year. This is on actual payment basis or on cash basis. It was upheld by the Commissioner of Incometax (Appeals). There was no appeal by the Revenue against that portion of the order. Even at the assessment stage, the assessee had also claimed deduction for payment of bonus for the current year, on the basis of accrued liability. The Appellate Tribunal upheld this claim. In doing so, the Tribunal negatived the claim allowed by the Incometax Officer and upheld by the C.I.T. (Appeals), on the basis of actual payment basis. The Appellate Tribunal was incompetent to do so in an appeal filed by the assessee. The relief granted by the Incometax Officer and upheld by C.I.T. (A) cannot be interfered with. This is all the more so, in the absence of an appeal by the Revenue. Reliance was placed on the decisions reported in C.I.T. v. Mahalakshmi Textile Mills Ltd. 66 ITR 710 - S.C; L.K. Shaik Mohammed Brothers v. Commissioner of Incometax 112 I.T.R 622, 623 & 624 - Madras) and Reform Flour Mills (Pvt) Ltd. v. C.I.T. (115 ITR 598 at p. 608 - Cal.) (2) No doubt, the assessee was following the mercantile system of accounting. Consistent with the past practice, it is entitled to deduction of the bonus actually paid during the previous year, on actual payment basis. In addition, in view of the mercantile system of accounting adopted by the assessee, the assessee is also entitled to claim bonus for the current year''s accrued liability. The deduction for payment of bonus, on both counts, can be claimed. Both of them should have been allowed. Reliance was placed on the following decisions : Central Paints Ltd. Vs. Commissioner of Income Tax, .; Commissioner of Income Tax, Madhya Pradesh, Nagpur and Bhandara Vs. Swadeshi Cotton and Flour Mills Private Ltd., and C.I.T. v. Coimbatore Cotton Mills Ltd. 140 ITR 562, 564 - Madras).
On the other hand, counsel for the Revenue submitted that whatever may be the past practice adopted by the assessee, the assessee is only entitled to deduction of that amount, which is permissible in law. The assessee is following the mercantile system of accounting. It is entitled to deduction of payments to meet the liability of the current year which has accrued. It is not entitled to deduction of amounts paid by way of bonus, actually paid during the previous year, since the said amount does not relate to the current year''s earning of the income. The assessee is not entitled to deduction of payment by way of bonus on both counts actual payment basis and accrual basis. It is entitled to only that amount which is permissible in law. In the mercantile system of accounting, the assessee is entitled to deduction on the basis of accrual and not on actual payment basis of Reliance was placed on the following decisions: Commissioner of Income Tax Vs. Travancore Timbers and Products, ; CTI K.A. Karim & Sons (133 ITR 515-Kerala FB) and Oil India Ltd. v. C.I.T. 135 I.T.K. 713- Cal.).
On evaluating the rival pleas urged before us, we are of the view that the Appellate Tribunal was justified in holding that the assessee is entitled to deduction of amounts for payment of bonus only on the basis of accrual. The Appellate Tribunal was justified in directing the Income Tax Officer to allow the provisions so made in the place of amounts actually allowed by it, on the basis of actual payment basis. We shall proceed to give our reasons for the said conclusion. Section 254(1) of the Incometax deals with the powers of the Appellate Tribunal to pass orders in the appeal. It is extracted herein below.
Orders of Appellate Tribunal -- (1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.
The income tax (Appellate Tribunal) Rules, 1963 contains rules and regulations relating to the proceedings of the Appellate Tribunal. Rules 11 and 27 of the said rules, extracted herein below, are also relevant.
Grounds which may be taken in appeal -- The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule :
Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground.
Respondent may support order on grounds decided against him.
--The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him.
The words in section 254 (1) of the Incometax Act, that the Appellate Tribunal shall pass such orders "thereon" (in the appeal) as it thinks fit, are crucial. The said words occurring in section 254 (1) of the Act restricts the jurisdiction of the Tribunal to the subject matter of the appeal See Hakumchand Mills Ltd. v. C.I.T. 63 ITR 232, 236 & 237. But, what is the subject matter of an appeal before the Appellate Tribunal is largely a question of fact. Section 254(1) of the Act should be read along with rules 11 and 27 of the Appellate Tribunal Rules. In C.I.T. v. Sundaram & Co. Pr. Ltd. 52 ITR 763, 773, the Madras High Court said:
The object of a tax appeal is the relief sought by the assessee and objected to by the department. The grounds are only missiles employed by the combatants to achieve their respective desired ends. It would not be possible to circumscribe the subject of the appeal by taking into account the rival contentions or the reasons or the grounds which are put forward either by the department or by the assessee.
In C.I.T. v. Edward Keventer (Successors Pr. Ltd. 123 T.R. 200 , 212, the Delhi High Court stated that the subject matter of an appeal should be understood not in a narrow and unrealistic manner but should be so comprehended as to encompass the entire controversy between the parties which is sought to be got adjudicated upon by the Tribunal. In adjudicating the rival contentions of the parties, the Tribunal is not restricted to the determination of questions raised before the lower authorities. All questions of fact and law which relate to the assessment of the assessee may be raised before the Tribunal and adjudicated by the Tribunal. In C.I.T. v. Mahalakshmi Textile Mills Ltd. 66 ITR 710, 713, after referring to the corresponding provision in 1922 Act (Sec, 33 (4) of the Act), the Supreme Court said as follows:
Under sub-section (4) of section 33 of the Indian Incometax Act, 1922, the Appellate Tribunal is competent to pass such orders on the appeal "as it thinks fit". There is nothing in the income tax Act which restricts the Tribunal to the determination of questions raised before the departmental authorities. All questions whether of law or of fact which relate to the assessment of the assesses may be raised before the Tribunal: If for reasons recorded by the departmental authorities in rejecting a contention raised by the assessee, grant of relief to him on another ground is justified, it would be open to the departmental authorities and the Tribunal, and indeed they would be under a duty, to grant that relief. The right of the assessee to relief is not restricted to the plea raised by him.
The Appellate Tribunal is competent to grant relief to an assessee, not merely the head under which the assessee had made its claim, but even in the alternative under another head, though not put forward. (See C.I.T. v. R.B. Rungta & Co. 50 ITR 233 - Bombay). It is settled law that the Tribunal is not precluded from adjusting the tax liability of (he assessee in the light of its findings, merely because the findings are inconsistent with the case pleaded by the assessee. (See C.I.T. v. S. Nelliappan - 66 ITR 722, 725). Law is fairly clear that where the Tribunal lands that disallowance of a particular expenditure by the authorities below is not proper, or unjustified it is open to the Tribunal to sustain the disallowance, wholly or partially, under a different section under which it can be properly disallowed. In Steel Containers Ltd. Vs. Commissioner of Income Tax, , the question arose thus:
The authority below disallowed a portion of the remuneration paid to Balmer Lawrie & Co. Ltd., as excessive in terms of section 40(c)(i) of the Act. A portion of the expenditure claimed was disallowed. The Appellate Tribunal found that section 40 (c) (i) of the Act could not apply to the allowance or remuneration paid to Balmer Lawrie & Co. Ltd., - a corporate entity. The disallowance could not be made under the said section. The allowable or permissible remuneration paid to B. L., could be evaluated or fixed u/s 37 of the Act. One of the questions referred to the High Court was, whether it was open to the Appellate Tribunal, after finding that section 40 (c)(i) of the Act was not applicable, to sustain the disallowance partially u/s 37 of the Act in the absence of cross appeal or cross objection by the Revenue. Dealing with the rival contentions of the parties, at pages 1004 and 1005 of the reports, Sabyasachi Mukharji, J. delivering the judgment of the Bench, stated the law thus, at page 1006:
......... The Supreme Court observed that u/s 33(4) of the Indian Incometax Act, 1922, which is in similar terms to section 254 of the income tax Act, 1962, the Tribunal was competent to pass such orders on appeal "as it thinks fit". There was nothing in the income tax Act which restricted the Tribunal to the determination of the questions raised before the departmental authority. All questions, whether of law or of fact, which related to the assessment of the assessee might be raised before the Tribunal. If for reasons recorded by the departmental authority in respect of a contention raised by the assessee, grant of relief to him on another ground was justified, it would be open to the departmental authority and the Tribunal, and indeed they would be under a duty, to grant that relief. Similarly, if the disallowance of certain expenditure to an assessee was warranted by certain provision of law where the allowance and disallowance were the subject-matter of the appeal, in our opinion, the Tribunal was competent u/s 254 to deal with that question and decide the same in accordance with law.........
Applying the above said principles to the case on hand, we should state that the question mooted before the Appellate Tribunal was the relief, the assessee was entitled to, by way of deduction, regarding payment of bonus. The assessee claimed it under two counts : (1) actual payment basis and (2) accrual basis. The authorities below granted partial relief and allowed deduction in part, on actual payment basis. They disallowed deduction claimed on accrual basis-When the matter came up before the Appellate Tribunal, noticing that the assessee was following the mercantile system of accounting, held that it is entitled in law to deduction for payment on accrual basis only. Relief was granted on that basis. It followed that the assessee was not entitled to any deduction on actual payment basis. The Appellate Tribunal negatived that part of the plea and allowed deduction on the basis of accrual basis, which the assessee was entitled to, in law. We are of the view that the course adopted by the Appellate Tribunal is justified and is consistent in the light of the law laid down by the Supreme Court in Mahalakshmi Textile Mills Ltd. case 66 ITR 110, 713) the decision in Steel Containers Ltd. case (112 ITR 995-Cal.) and Karim''s case (133 ITR 515-FB).
In Seth Chemical Works Vs. Commissioner of Income Tax, , the assessee was maintaining its account on mercantile basis. The bonus paid to employees were claimed on cash basis up to the assessment year 1970-71 For the first time, from 1971-72, the system relating thereto was changed from cash to mercantile system. In the said year, 1971-72, the assessee claimed bonus actually paid in the previous year relevant to the assessment year, and also the provision made for bonus for the assessment year 1971-72. The Court held that the assessee was entitled only to provision for bonus made on accrual basis, for the assessment year 1971-72 It was further held, that in order to decide the question, it is necessary to decide whether, according to the system of accounting followed by the assessee, the assessee was entitled to any relief. Therefore, the ground of appeal was intimately connected with the question of allowing the appellant to follow a particular method of accounting. The Court said that looked at from that angle, the real question was what system of accountancy was allowed to be followed by the assessee and if so under that, what are the allowances or deductions the assessee is entitled to. Based on this test, the Court held that since the assessee was following the mercantile system of accounting, the system of accountancy was inter-linked, in deciding the said issue (re: permissible deductions) and in that perspective, the assessee was entitled only to deduction of such amount which he is entitled to on accrual basis. We are of the view that the decision of the Calcutta High Court in Seth Chemical Works Vs. Commissioner of Income Tax, is squarely applicable in the instant case.
We should bear in mind that in these cases, the assessee was claiming larger relief by way of deduction--may be under different, distinct and alternate pleas--, but in substance, the sole question that arose was, as to what is the amount or quantum the assessee is entitled to, by way of relief (deduction) for payment of "bonus". The assessee put forward the claim in two ways. The smaller amount was allowed by the officer and the appellate authority; but the Tribunal allowed the larger amount, and negatived the smaller amount. But, it should be noticed that the relief, by way of deduction, was under the "one and same head". The assessing authority, having granted the smaller relief, could not appeal against it. But, when the entire matter was before the Tribunal, it was within the competence of the Tribunal, to grant the larger relief. It was so done at the instance of the assessee. It could be so done, in order to adjust adjudicate the exact relief, the assessee was entitled to. It is not a ca where the Revenue was or could be aggrieved by the assessing authority, allowing the smaller relief only. The Revenue could not file an appeal from the order of the assessing authority. It was also not aggrieved by the grant of the smaller relief. It was the Appellate Tribunal which substituted the larger relief, in the place of the smaller one granted by the lower authorities and the Revenue can be aggrieved, if at all, only when such larger relief was granted. The assessee has only gained an additional amount, by way of relief, at the hands of the Tribunal; it was not in a worse and more disadvantageous position. The assessee''s complaint that in the absence of an appeal by the Revenue, the Appellate Tribunal while granting the larger relief, in effect and substance, negatived the smaller relief unauthorisedly lacks substance The Appellate Tribunal, as the final fact finding authority, was competent to do so, more particularly because, the assessee was not placed in a worse and more disadvantageous position.
We should also state that the decisions brought to our notice, by counsel for the assessee, are distinguishable and the decisions were rendered on the particular facts. In none of them, the situation, similar to the one in the instant case, arose for consideration. That apart, we are of the view that the aforesaid decisions did not consider the nature and extent of the jurisdiction of the Appellate Tribunal, in disposing of an appeal, with reference to the statutory provisions, the scheme of the Act and the decisions of the Supreme Court and other High Courts adverted to in paragraphs 7 and 10 supra. On the other hand, the decisions cited by the Revenue, are in accord with the scheme and provisions of the Incometax Act, the extent of the jurisdiction of the Appellate Tribunal and are also in accord with the law laid down by the Supreme Court and other High Courts discussed in paragraphs 7 and 10 supra. In the light of the above, we are of the view that the common appellate order of the Tribunal, rendered for the years 1977-78 and 1978-79 dated 25-3-1983, is in accordance with law. We answer the questions thus :
ITR Nos. 89 & 90 of 1984
Question No. (1) and (2) :- In the affirmative--against the assessee and in favour of the Revenue, in both the cases.
Question No. (3):- In the negative -- in favour of the Revenue and against the assessee, in both the cases.
Question No. (4) in ITR No. 89 of 1984 :- In the affirmative - against the assessee and in favour of the Revenue, in the light of the Full Bench decision of this Court in C.I.T. Forbes Ewart. & Figgis (P) Ltd. (138 ITR 1-FB).
The references are answered as above.
A copy of this judgment, under, the seal of this Court and the signature of the Registrar shall be forwarded to the Incometax Appellate Tribunal, Cochin Bench.