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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX REFERENCE NO.58 OF 1991
Ingersoll-Rand (India) Ltd. )
Naybaker House, S.K. Ahire Marg, )
Bombay-25. )..Applicant
Vs.
Commissioner of Income-tax, )
Bombay City-IV, Bombay.
ig )..Respondent
Mr.P.J. Pardiwala, Sr.Counsel with Mr. Nishit Joshi
i/b. Crowford Beylay & Co., for the Applicant.
Mr. P.S. Sahadevan, for Respondent.
CORAM: F.I. REBELLO &
R.S.MOHITE, JJ.
DATE: 4th April,2009
JUDGMENT: (PER F.I. REBELLO, J.).
. The following questions have been referred for
our consideration at the instance of the assessee.
They read as under:-
“(i) Whether, on the facts and in the
circumstances of the case, the Tribunal was right
in law in holding that sur-tax payable pursuant
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not an admissible deduction in computing the
total income for the year under reference?
(ii) Whether, on the facts and in the
circumstances of the case, the Tribunal was right
in law in holding that the set-on liability under
Section 15 of the Payment of Bonus Act, amounting
to Rs.24,73,865/- was not allowable as a
deduction in computing the total income of the
assessee for the year under reference?’
2. The following
reference has been made by the
Tribunal for our consideration at the instance of the
Revenue:-
“Whether, on the facts and in the circumstances
of the case, the Tribunal was right in law in
holding that weighted deduction u/s.35B is
allowable in respect of interest paid on packing
credit amounting to Rs.4,10,054/-.?
3. We may first deal with question No.(i) as
referred at the instance of the assessee. The Tribunal
held that every High Court has decided the matter
against the assessee by taking a view that the sur-tax
payment is not an allowable deduction under Section 37
of the Act. Reliance was placed in the judgment of the
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Andhra Pradesh High Court in the case of Vazir Sultan
Tobacco Co. Ltd., (174 ITR 689. The issue is no
longer res integra as now the question is covered by the
judgment of the Supreme Court in Smith Kline and French
(India) Ltd. & Ors. vs. Commissioner of Income Tax,
219 ITR 581(S.C.). In the light of the above the
question is answered in the affirmative against the
assessee and in favour of the Revenue.
4. That brings us to the second question referred at
the instance of the assessee, whether the provisions
Bonus Act was
for set-on liability under Section 15 of the Payment of
allowable deduction in computing the
total income of the assessee for the year under
reference. We may at once note that Section 15(1) of
the Payment of Bonus Act lays down that where for any
accounting year the allocable surplus exceeds the
amount of maximum bonus payable to the employees in the
establishment under Section 11, then the excess shall,
subject to a limit of twenty per cent of the total
salary or wage of the employees employed in the
establishment in that accounting year, be carried
forward for being set on in the succeeding accounting
year and so on up to and inclusive of the fourth
accounting year to be utilised for the purpose of
payment of bonus.
5. The issue has been considered by several High
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Courts. We may firstly consider the judgment of the
M.P. High Court in the case of Malwa Vanaspati &
Chemical Co. Ltd. vs. Commissioner of Income-tax,
M.P., 154 ITR 655. The M.P. High Court on considering
the provisions was pleased to hold that the liability
is not a subsisting liability as such for the
accounting year, but it is a contingent liability as
this section merely enforces an accounting arrangement
on the assessee company so that the interest of the
workers in the future years may be safeguarded. It
further observed that the Section by itself does not
create the liability.
paid to the workers.
The amount is not required to be
It is also not required to be
deposited with an authority under the Bonus Act. The
workers have no claim on the amount and cannot enforce
the payment thereof by any means. It is merely a
reserve fund which the company has to create by reason
of the provisions of Section 15(1) of the Payment of
Bonus Act. It, therefore, arrived at a conclusion that
set on bonus is not allowable as business expenditure
in computing the assessee’s income.
6. The Andhra Pradesh High Court had also occasion
to consider the issue in Rayalaseema Mills Ltd. v.
Commissioner of Income-tax, A.P. 155 ITR 19. The
learned Bench considering the provisions of Section 15
was pleased to hold that the statutory obligation for
setting on is confined only to the four succeeding
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accounting years, whereafter the assessee is free to
make such use of the amount, if any, remaining, as it
thinks fit. Considering that the amount is required to
be set apart with the assessee himself for a limited
period to meet its bonus obligation in the succeeding
account years, if necessary, and also because, after
the expiry of the prescribed period, the said amount or
the balance, if any, becomes a part and parcel of the
general revenues of the assessee, it cannot be said
that the money is diverted from the assessee under an
overriding legal obligation. It considered the aspect
that
deduction claimed does not fall under Section
not being expenditure expanded by the assessee. It was
37
then sought to be put under Section 28 on the reasoning
that the amount is diverted under an overriding legal
obligation. Considering the argument obligation, the
Court observed that the amount does not reach the hands
of the assessee at all. Even before it reaches the
assessee, it is diverted to another person or fund by
virtue of the overriding legal obligation. As the
allocable surplus is determined out of the profits of
the assessee, all that Section 15 of the Payment of
Bonus Act requires is that the surplus amount, after
paying the maximum bonus, should be carried forward for
a limited period. The bonus reserve the Court observed
is created voluntarily for the same purpose and it will
not be allowed as deduction. The Court then held that
when the bonus reserve is created voluntarily for the
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same purpose it would not be available as a debt. The
money is required to be set apart and is not paid to
third party, nor is it paid into a fund from which it
never comes back to the assessee as after the expiry of
the prescribed period if the amount is not utilised for
payment of bonus it becomes part and parcel of the
general revenue. The amount so set apart cannot be
said to be “liability already accrued” and, therefore,
arrived at a conclusion that it is not a permissible
deduction.
6.
P.K.
The Kerala
Mohammed Pvt.
High Court considered the
Ltd. vs. Commissioner
issue in
of
Income-tax, 162 ITR 587.
587 Considering the nature of the
fund the Court held that it is a reserve fund
statutorily created and retained by the assessee itself
and could not be claimed as permissible deduction under
Section 37 of the Income Tax Act. The amount to be
paid as Bonus from out of the reserve fund could not be
ascertained under the liability accrued in future
covering the period of four years. A provision to meet
an unascertained future contingent liability was not a
permissible deduction. As the amount was not paid to
the employee it was not a permissible deduction under
Section 36(1)(ii) of the Income Tax Act. It noted that
there is no diversion of fund in the hands of the
assessee and the amount reserved is for the purpose of
utilisation to meet the liability of the assessee
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himself if it may arise in the future. There is no
diversion of revenue which has to be deducted for the
purpose of determining the real profits of the assessee
or that there is an expenditure liable to be deducted
under the Income-tax Act. It is not a deduction with
respect to accrued liability. It, therefore, held that
it was not maintainable.
8. A contrary view has been taken by the Gauhati
High Court in India Carbon Ltd. vs. Commissioner of
Income-tax, 180 ITR 117. The Gauhati High Court
proceeded
amount for business.
to hold that the assessee cannot utilise the
On making deposit it is divested
of the right to invest or utilise the amounts for
business. The amounts have to be paid in future in the
course of a cycle of four years. If utilised would be
in contravention of the Act and punishable. On this
basis it held that the amount deposited under the
provisions of the Act and which cannot be utilised for
the purposes of business amount to expenditure and
allowable.
. Amongst the High Courts, therefore, there are two
different views, though the majority of the High Courts
have taken a view that it is not an allowable
deduction.
9. On behalf of the applicant, however, learned
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Counsel drew our attention to the judgment of the
Supreme Court in Bharat Earth Movers vs. Commissioner
of Income-tax, 245 ITR 428,
428 to contend that considering
the ratio of that judgment, the allocable surplus would
be an allowable deduction.A few facts may be noted.
The company had floated a scheme for its employees for
encashment of leave. The officers were entitled to
earned leave calculated at 30 days per year. The staff
(other than officers) were entitled for vacation leave
of 18 days in a year. Both earned leave and vacation
leave could be accumulated upto a maximum of 240 days
and 126 days respectively.
by
ig The company created a found
making a provision for meeting such liability. If
the employee accumulates leave in a particular year
then in the succeeding year the employee may either
avail of the leave or apply for encashment. If he
avails of the leave then additional provision for
encashment is not made in the reserve account. The
earned leave/vacation leave, could be encashed subject
to the ceiling on accumulation. A leave reserve
account was maintained so as to provide for encashment.
Encashment of both earned leave and vacation leave was
paid from the leave reserve. The High Court took a
view that the provision for accrued leave salary was a
contingent liability and, therefore, was not a
permissible deduction. In so holding the High Court
observed that the liability will arise only if an
employee does not go on leave and instead applies for
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encashment. If the employee avails of the leave as per
his entitlement, then he would be paid salary for the
period of leave and liability for encashment would not
arise. The other event on the occurrence of which the
employee may stake his claim is termination or
retirement which again is an uncertainty.
. Before the Supreme Court on behalf of the
assessee it was contended that subject to the ceiling,
every employee would either avail of the leave or seek
encashment and, therefore, the liability is a
certainty.
Dealing
It cannot be called a contingent liability.
with the business liability the Court observed
as under:-
“The law is settled; if a business liability has
definitely arisen in the accounting year, the
deduction should be allowed although the
liability may have to be quantified and
discharged at a future date. What should be
certain is the incurring of the liability. It
should also be capable of being estimated with
reasonable certainty though the actual
qualification may not be possible. If these
requirements are satisfied the liability is not a
contingent one. The liability is in praesenti
though it will be discharged at a future date.
It does not make any difference if the future
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discharged is not certain.”
Reliance was placed on the judgment in Metal Box
Company of India Ltd. v. Their Workmen (1969) 73 ITR
53 (SC).
(SC) The Company there had two gratuity schemes
and the amount of liability was deducted from the gross
receipts in the profit and loss account. The company
had worked out on an actuarial valuation its estimated
liability and made provision for such liability not all
at once but spread over a number of years. The
practice
the company
followed
worked
by the company was that every
out the additional liability
year
incurred by it on the employees putting in every
additional year of service. The gratuity was payable
on the termination of an employee’s service either due
to retirement, death or termination of service, the
exact time of occurrence of the latter two events being
not determinable with exactitude before hand. The
Court then laid down principles which are referred to
in the judgment. Based upon these principles the Court
in Bharat Earth Movers (supra) held that the provision
made by the appellant company for meeting the liability
incurred by it and the leave encampment scheme is
entitled to deduction out of the gross receipts for the
accounting year during which the provision is made for
the liability as the liability was certain and not
contingent. The important aspect to be noted is that
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the provisions in the leave reserve was only made if
the employee did not avail of the leave.
10. The question is whether the ratio of this
judgment in Bharat Earth Movers (supra) can be made
applicable in the case of making provision for
allocation of surplus under Section 15 of the Payment
of Bonus Act. The answer to the question would be
whether the liability is a subsisting liability or a
contingent liability in terms of the tests laid down in
Bharat Earth Movers (supra). For it to be a subsisting
liability,
discharged
though
at a
it
future
may have to be
date, there must
quantified
be a
and
(1)
incurring of liability (is) it should be capable of
being estimated with reasonable certainty though
actual. In Bharat Earth Movers (supra) the liability
was certain as the amount was credited in the fund only
in the event the employee had not availed of the leave
The leave available to an employee in the course of the
year is also known, based on whether he was an officer
or employee.
. In the instant case what the assessee is required
by statute to do is to keep a reserve with itself, of
what is known as allocable surplus to meet a future
shortfall if any, for a period of four years. The
shortfall cannot be estimated with reasonable
certainty, though statutorily the liability has to be
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incurred. The extent of the liability also cannot be
estimated with reasonable certainty as if there were
profits to meet the bonus liability the reserve would
not be expended. Only in the event there were no
sufficient profits would the allocable surplus be
utilised to meet the liability. The amount is merely
a reserve fund which the Payment of Bonus Act mandates.
After the expiry of four succeeding accounting years if
the amount is not utilised the assessee is free to make
use of the amount. The amount to be adjusted for the
subsequent year, depends therefore on the shortfall
which
cannot be anticipated with reasonable certainty.
The amount is not deducted in the hands of the assessee
unless it is utilised. The deduction claimed is not an
accrued liability but only a provision under Section
15(1) of the Payment of Bonus Act to meet a future
liability, if any. It is, therefore, not certain nor
is it capable of being ascertained with reasonable
certainty. In our opinion it is a contingent
liability. The judgment in Bharat Earth Movers (supra)
is clearly distinguishable and, therefore, not
applicable. The question No.2, therefore, referred at
the instance of the assessee is answered in the
affirmative in favour of the Revenue and against the
assessee.
11. We lastly come to the question referred at the
instance of the Revenue. The question as referred is
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as set out in para.2. Considering the tax incidence
the learned Counsel for the Revenue does not press the
same. In the light of that the question referred at
the instance of the Revenue is returned unanswered.
. Reference answered accordingly.
(R.S. MOHITE,J.) (F.I.REBELLO,J.)
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