Madras H.C : The amounts representing the additional expenditure which the assessee had to incur on account of the fluctuation in the exchange rate is not liable to be allowed as revenue expenditure incidental to its business, is correct

High Court Of Madras

Seshasayee Paper & Boards Ltd. vs. CIT

Sections 4, 37(1)

Asst. Year 1975-76, 1976-77, 1977-78, 1978-79, 1979-80

N.V. Balasubramanian & P. Thangavel, JJ.

TC Nos. 109 to 114 of 1985

28th November, 1997

Counsel Appeared

S.A. Balasubramanian, for the Applicant : C.V. Rajan, for the Respondent

N.V. BALASUBRAMANIAN, J. :

The questions of law referred to us both at the instance of the assessee as well as at the instance of the Revenue for the asst. yrs. 1975-76, 1976-77, 1978-79 and 1979-80 run as under : At the instance of the assessee : (for all assessment years)

“1. Whether, on the facts and in the circumstances of the case, the decision of the Tribunal that the amounts representing the additional expenditure which the assessee had to incur on account of the fluctuation in the exchange rate is not liable to be allowed as revenue expenditure incidental to its business, is correct?

Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the assessee is not entitled to claim deduction in computing its profits for the assessment years by reason of s. 43A of the IT Act?

Whether the Tribunal is justified in law in holding that the sums transferred to reserve as required by s. 205(2A) of the Companies Act 1956 is not liable to be taken into account in computation of the real income of the assessee for the assessment years concerned or in the alternative it is liable to be allowed as deduction under s.37(1) of the IT Act?”

(For the asst. yrs. 1975-76 & 1976-77)

“4. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the surtax liability of the assessee under the Companies (Profits) Surtax Act, 1964 is not eligible for deduction in computing the assessee’s income from business?”

At the instance of the Revenue: (for the asst. yrs. 1975-76 & 1976-77)

“5. Whether, on the facts and circumstances of the case, the Tribunal is right in law in holding that the amount set on under s. 15(1) of the Payment of Bonus Act to meet the bonus liability of the subsequent years and actually paid in subsequent years should be deducted in computing the assessee’s profit for the concerned years?”

2. The assessee is engaged in the manufacture of paper and paper boards. Now we will take up for consideration the first and second questions. The assessee claimed during the asst. yrs. 1975-76 to 1979-80, certain expenditure on certain additional payments which it had to make with reference to the loans borrowed from the Industrial Credit and Investment Corporation of India (ICICI) and also from Swedish Credit Institution. The assessee had purchased a machinery on credit from Sweden and the purchase was partly advanced by ICICI and a Swedish Corporation. The assessee has to pay to these institutions the amount borrowed in a phased manner, and due to fluctuation in the value of Indian currency, the amount payable by the assessee became larger than the amount calculated at the rate of exchange between two countries prevailing at the time when the machinery waspurchased. The assessee claimed the difference between the two amounts as revenue expenditure which was rejected by the AO which was upheld by the CIT(A). The Tribunal also held that the said expenditure would constitute capital expenditure and rejected the claim of the assessee and on this finding the Tribunal has referred, at the instance of the assessee the first and second questions of law set out above. Insofar as the expenditure incurred in the discharge of the liability towards the purchase of the capital assets on account of fluctuation in currency is concerned, the decision of this Court in CIT vs. Elgi Rubber Products Ltd. (1996) 133 CTR (Mad) 417 : (1996)

219 ITR 109 (Mad), would apply wherein this Court held that such expenditure cannot be regarded as revenue expenditure, but only as capital expenditure. Following the said decision, the first and second questions of law relating to the liability on the expenditure on account of fluctuation of currency have to be answered against assessee. Now we will take up for consideration the third question. The assessee during the previous years relevant to the said assessment years transferred certain amounts to the general reserve in accordance with the provisions of s. 205(2A) of the Companies Act, 1956 and claimed that those amounts should be deducted in determining the assessee’s total income for those years. The assessee claimed deduction for the various assessment years as under : The claim of the assessee was rejected by the ITO which was upheld by the CIT(A). The Tribunal also did not agree with the contention of the assessee that it should be deducted and it is, with reference to the said finding of the Tribunal, the third question of law set out above has been referred to.

5. In so far as the third question relating to the amount transferred as reserve under s. 205(2A) of the Companies Act is concerned, we are of the view that though the amount was transferred under the provisions of s. 205(2A) of the Companies Act, the assessee transferred the amount as reserve out of its own profits. Though the statute mandates that a portion of the profits should be set apart, we are of the view that there is no diversion of income by overriding title, nor the amount set apart can be claimed as expenditure, and it cannot also be stated that it was a loss. Sec. 205 (2A) of the Companies Act, reads as under : “Notwithstanding anything contained in sub-s. (1), on and from the commencement of the companies (Amendment) Act, 1974, no dividend shall be declared or paid by a company for any financial year out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of sub-s. (2), except after the transfer to the reserves of the company of such percentage of its profits for that year, not exceeding ten per cent, as may be described.” A fair reading of s. 205(2A) of the Companies Act makes it clear that a certain percentage of company’s profit is set apart and transferred to the reserve fund before declaration of dividends. In other words, s. 205(2A) of the Companies Act prohibits the declaration of entire profits of the company as dividends, but there are no other restrictions on its user. The amount transferred under the above provision, in our opinion, is out of the income of the assessee and the Tribunal was justified in holding that the assessee is not entitled to claim deduction of the money transferred to the reserve of the company as required under s. 205(2A) of the Companies Act. In this view of the matter, the third question of law referred to us with reference to the claim for deduction of the amount transferred to the reserve as required under s. 205(2A) of the Companies Act has to be answered in the affirmative and against the assessee.

Insofar as the asst. yrs. 1975-76 and 1976-77 are concerned, the assessee claimed deduction on surtax liability under the provisions of the Companies (Profits) Surtax Act, 1964. This claim was rejected by the ITO and the CIT(A) upheld the order of the ITO and the Tribunal also held that the surtax liability cannot be allowed as deduction. Challenging the said finding of the Tribunal, the assessee has sought for and obtained a statement of case for the fourth question of law set out above for the asst. yrs. 1975-76 and 1976-77. Insofar as the claim for deduction on surtax liability is concerned, it is now settled by the decision of the Supreme Court in the case of Smith Kline & French (I) Ltd. vs. CIT (1996) 132 CTR (SC) 500 : (1996) 219 ITR 581 (SC) that the surtax paid is not an allowable deduction in the computation of business income and following the decision of the apex Court, we hold that the Tribunal is correct in holding that the assessee is not entitled to claim deduction on the surtax paid. Accordingly, the fourth question of law relating to the deduction on surtax paid is liable to be answered against the assessee. Now, we take the fifth question of law referred to at the instance of the Revenue. It relates to two asst. yrs. 1975-76 and 1976-77. The assessee claimed during the assessment proceedings for the asst. yr. 1975-76, a deduction of a sum of Rs. 13,24,295 being the amount set on under the provisions of the Payment of Bonus Act. The assessee also made a similar claim for deduction of Rs. 13,96,661 for the asst. yr. 1976-77. The assessee made the claim for deduction in the following circumstances : Under the provisions of the Payment of Bonus Act, every employer is required to pay minimum bonus irrespective of the fact that it had made any profit or not and the employer is required to pay maximum bonus when there are adequate profits upto the extent of 20 per cent of the wages. Sec. 15 of the said Act provides that where in any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the employees under s. 11 of the Payment of Bonus Act, the excess shall, subject to the limit of 20 per cent of the total salary or wages of the employees be carried forward as set on in the succeeding year and to be utilised for the purpose of payment of bonus in the manner stated in the Fourth Schedule. The assessee calculated the amount which was required to be set apart or set on for the asst. yrs. 1975-76 and 1976-77 as Rs. 13,24,295 and Rs. 13,96,661 respectively. The claim of the assessee was that it was a statutory liability imposed on the assessee and the money was not available to the assessee except for the purpose of payment of bonus to the employees in the year in which there is an inadequate profit and to cover up the deficiency, the amount set on can be used. According to the assessee, the said amount was not the income of the assessee at all and was diverted by overriding title by virtue of statutory obligation imposed on it and since it is a statutory liability, the amount is deductible in the year in which the amount was set on as required by the provisions of the Payment of Bonus Act. The ITO rejected the claim of the assessee. The claim of the assessee was also rejected by the CIT(A). The CIT(A) held that the amount set on was available with the assessee and the amount was set apart to meet a contingent liability and hence, it was not deductible in the computation of income. The Tribunal however, held that under the provisions of s. 15 of the Payment of Bonus Act, the amount set on was statutorily diverted towards the payment of bonus and cannot be regarded as income or profit available to the assessee. The above view of the Tribunal was arrived at on the basis the preamended law in the Payment of Bonus Act as it was not possible for the assessee to use the amount set on except for the purpose of payment of bonus and hence, the amount set on should be allowed as deduction in the year in which the amount was set on.

Against the order of the Tribunal, the Revenue sought a reference and the Tribunal has referred the fifth question of law referred to above. Mr. C.V. Rajan, learned counsel for the Revenue submitted that the amount set onwould not qualify for deduction as the amount is set on only to meet a contingent liability and it is only a compulsory reserve for an unknown liability and the workers have no claim with reference to the amount. According to him, though there is a statutory obligation on the part of the employer to set on the amount and though there are penal provisions for the enforcement of the provision, it cannot be said that there was a diversion of income. According to the learned counsel for the Revenue, the money was still in the hands of the assessee to be utilised for the assessee’s business purposes, and the necessary deduction would be granted in the year when the liability for bonus arises in future years. The further submission of the learned counsel for the Revenue was that though the user was prohibited, it did not mean that there was a loss to the assessee nor any expenditure was incurred by the assessee to claim the same as deduction. He also submitted that the money was set apart after the income was earned by the assessee and therefore, it cannot be said that there is a diversion of income by overriding title. Mr. S. A. Balasubramanian, learned counsel for the assessee, on the other hand, submitted that there is a statutory obligation under s. 15 of the Payment of Bonus Act and under s. 15 of the said Act, as it stood then, the assessee has lost money irretrievably and the money has gone out of the hands of the assessee. The submission of the learned counsel for the assessee is that the assessee is holding the money as a trustee and during the lien period, the assessee is permitted to use the money and since the assessee has no control or lost entire domain over the money, the amount set on should be allowed either as a business expenditure or on the ground that there was a diversion of income by overriding title. He also submitted that the liability fastened on s. 15 of the Act is akin to the gratuity liability and therefore, when this Court as well as the Supreme Court has held that the provision made for gratuity liability is deductible, applying and extending the same principle, the amount set on should also be deducted. In support of their respective contention, learned counsel relied upon several decisions of various other High Courts. Before discussing various case law on this topic, it is necessary to note the provisions of s. 15 of the Payment of Bonus Act, as it stood when the Act was enacted which reads as under : “Set on and set off of allocable surplus :—(1) Where for any accounting year the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment under s. 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 upto and inclusive of the fourth accounting year to be utilised in the manner illustrated in the Fourth Schedule. (2) Where for any accounting year, there is no available surplus or the allocable surplus in respect of that year falls short of the amount of minimum bonus payable to the employees in the establishment under s. 10, and there is no amount or sufficient amount carried forward and set on under sub-s. (1) which could be utilised for the purpose of payment of the minimum bonus, then such minimum amount or the deficiency, as the case may be, shall be carried forward for being set off in the succeeding account year and so on up to and inclusive of the fourth accounting year in the manner illustrated in the Fourth Schedule.”

The above s. 15 of the Payment of Bonus Act was amended by Central Act 23 of 1976 w.e.f. 25th Sept., 1975, and sub-s. (1) after the amendment reads as under:— “Where for any accounting year, the allocable surplus exceeds the amount of bonus payable to the employees in the establishment under s. 10, 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 account year and so on, to be utilised for the purpose of payment of bonus, in the manner illustrated in the Third Schedule.” The above s. 15 was again amended by the Payment of Bonus (Second Amendment) Act, 1980 and the sub-s. (1) of s. 15 after the said amendment reads as under : “Where for any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment under s. 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 in the manner illustrated in the Fourth Schedule.” The legislative history of the above provision clearly shows that prior to 1975, on the expiry of four accounting years, the employers were given liberty to utilise the amount set on out of allocable surplus for their own business. It is only by Central Act 23 of 1976, a time-limit of four years found in earlier was removed. But again, it was reimposed by the Payment of Bonus (Second Amendment) Act, 1980. Insofar as the asst. yrs. 1975-76 and 1976-77 are concerned, the authorities proceeded on the basis that s. 15 of the Bonus Act as amended by the Central Act 23 of 1976 w.e.f. 25th Sept., 1975 would apply and we also proceed on the same basis that the provision of law as amended by Act 23 of 1976 w.e.f. 25th Sept., 1975, would apply to the facts of the present case. Under s. 15 of the Payment of Bonus Act, if in a given year, allocable surplus exceeds the maximum bonus amount payable to all employees, such surplus subject to ceiling of twenty per cent shall be carried forward to the succeeding years to be utilised for the purpose of payment of bonus. There is no doubt, a statutory obligation is cast upon an employer to set apart a portion of the profits for the utilisation for the payment of bonus and that amount cannot be used by the employer during the relevant year or during subsequent years except for the purposes of payment of bonus. The amount is set apart to meet the bonus obligation that may arise in the subsequent accounting years, if necessary, where there are no sufficient profits to declare the bonus to the employees.

13. In this statutory background, the case law cited by the learned counsel have to be examined. In Malwa Vanaspati & Chemicals Co. Ltd. vs. CIT (1985) 44 CTR (MP) 90 : (1985) 154 ITR 655 (MP) : TC 16R.655, the Madhya Pradesh High Court held that there was no subsisting liability when the amount was set apart towards the payment of bonus, and the amount was set apart to meet the contingent liability. The Madhya Pradesh High Court also held that the amount was not required to be paid to the workers or required to be deposited to any authority under the Bonus Act. The Court also held that the workers have no claim on the amount and cannot enforce a payment thereof by any means. We entirely agree with the decision of the Madhya Pradesh High Court that the amount set apart as ‘set on for bonus’ as per the provisions of sub-s. (1) of s. 15 of the Payment of Bonus Act, is not allowable as the amount is set apart to meet a contingent liability of the assessee.

14. In Rayalaseema Mills Ltd. vs. CIT (1984) 42 CTR (AP) 348 : (1985) 155 ITR 19 (AP), the Andhra Pradesh High Court held that the money was not diverted by overriding title, nor the money was paid to a fund or the money was not exclusively meant for the payment to the employees. It is no doubt true that the Andhra Pradesh High Court was dealing with a situation where an employer was required to keep money set on for four succeeding accounting years.

15. We are also of the view that the principle laid down by the Andhra Pradesh High Court would equally apply to the facts of the case as regards the character of the money set apart by the assessee for the payment of bonus. The money is not paid to the employees and the employers have no right over the money and the money can be used in the subsequent years for the business purposes of the assessee when there is shortfall in the amount of allocable surplus. Therefore, it cannot be said that there is a diversion of income by overriding title as the amount is set apart after the profit is earned, nor can to be regarded as an expenditure incurred by the assessee as there is no subsisting legal obligation to pay bonus during the relevant accounting year. Further, the liability of the assessee during the accounting year is only a contingent liability and only to make up a shortfall that may arise in the subsequent accounting year, the amount is set apart and the liability to pay bonus will arise only in succeeding assessment years. Therefore, it cannot neither be called an expenditure, nor a loss, nor it can be regarded as trading liability.

16. In P.K. Mohammed (P) Ltd. vs. CIT (1987) 61 CTR (Ker) 40 : (1986) 162 ITR 587 (Ker) : TC 16R.1553, the Kerala High Court has also taken a view that there was no diversion of fund out of the hands of the assessee and the amount is reserved for the purpose of utilisation to meet the liability of the assessee itself that might arise in the future. The Court also held that the amount set apart is to meet the un-ascertained future contingent liability.

17. In Mysore Lamp Works Ltd. vs. CIT (1990) 84 CTR (Kar) 221 : (1990) 185 ITR 96 (Kar) : TC 16R.1560, the Karnataka High Court also taken a view that the amount set apart under sub-s. (1) of s. 15 of the Payment of Bonus Act is not an allowable deduction. The Court held that it is not an expenditure and the amount was set apart to meet a possible liability that may arise in future and the amount set apart cannot be regarded as an expenditure. It is significant to notice that the Karnataka High Court has noticed a decision of Gauhati High Court in the case of Indian Carbon Ltd. vs. CIT (1989) 78 CTR (Gau) 3 : (1989) 180 ITR 117 (Gau) : TC 16R.1546, and expressly dissented from the view taken by the Gauhati High Court. The basis for such a dissent is that the test of commercial expediency as noticed by the Gauhati High Court would arise only when there is an expenditure of the amount and the test has relevance to test the second ingredient of s. 37 of the Act, namely, whether the money was laid out or expended wholly or exclusively for the purpose of business or not and where there is no expenditure at all, the test of commercial expediency has no relevance. We entirely agree with the view of the Karnataka High Court in holding that there is no expenditure incurred by setting aside certain money which may become payable on the happening of certain contingencies in future and hence, the amount set apart cannot be regarded as expenditure at all.

18. In CIT vs. Pallavan Transport Corporation Ltd. (1997) 137 CTR (Mad) 609, this Court was considering the provision set apart to insurance fund under the provisions of s. 94(3) of the Motor Vehicles Act, in fulfilment of the statutory obligation cast upon it and this Court held that the amount appropriated to an insurance fund under the relevant provisions of the Motor Vehicles Act, to meet third party liability which may arise on the happening of the accident is a contingent liability and not an allowable deduction. The reasoning given by this Court would equally apply in considering the deductibility of the amount set on under s. 15 of the Payment of Bonus Act.

19. The Supreme Court in the case of Associated Power Co. Ltd. vs. CIT (1996) 130 CTR (SC) 393 : (1996) 218 ITR 195 (SC) : TC 38R.675, was considering the provision set apart by electricity supply undertaking to the contingent reserve fund made under the relevant statutory provisions and the Supreme Court held that the amount belonged to the electricity supply undertaking and the amount was not diverted by overriding title and no expenditure of the amount was also involved. The Supreme Court held that the mere fact that the electricity supply undertaking had used the money for the purposes mentioned in the Act would not make any difference as the amount credited to the reserve was set apart to meet a possible exigency and it is not a provision made for a known existing liability. The Supreme Court, therefore, held that the amount set apart cannot be regarded as business expenditure, nor can be held that the amount was diverted by overriding obligation. The reasoning of the Supreme Court that the amount remains at the disposal of the assessee and for the benefit of the assessee would equally apply to the amount set on under s. 15 of the Payment of Bonus Act. The other reasoning of the Supreme Court that the amount could be used only for specific purposes is also relevant as the money set on under s. 15 of the Payment of Bonus Act would be used for the business purposes of the assessee. The next decision that is relied upon is a decision of the Supreme Court in the case of Vellore Electric Corporation Ltd. vs. CIT (1997) 141 CTR (SC) 398 : (1997) 6 SCC 705 wherein the Supreme Court was dealing with a case where the amount was set apart both for contingent reserve as well as development reserve. The Supreme Court held that these two reserves cannot be deducted in the computation. In our view, the decisions of the Supreme Court though rendered with reference to the amount set apart towards contingent reserve and development rebate reserve by the electricity supply undertakings, would apply with equal force to the amount set on under s. 15 of the Payment of Bonus Act as well.

It is now necessary to consider the decisions relied upon by the learned counsel for the assessee. Mr. S.A. Balasubramanian, learned counsel for the assessee, placed strong reliance on a decision of the Gauhati High Court in the case of India Carbon Ltd. vs. CIT (supra), wherein Gauhati High Court held that the amount deposited in business in ‘certain accounts’ cannot be utilised by the assessee and since the assessee is divested of the right to use the money or utilise the money in his business amount and the amount of bonus ‘set on’ deposited under the provisions of the Payment of Bonus Act amounted to business expenditure and deductible in the computation of income. We are, however, unable to agree with the decision of the Gauhati High Court. The Gauhati High Court has proceeded on the basis that the amount set on by the assessee cannot be utilised and since the amount was deposited under the provisions of the statute, it would amount to expenditure. We are of the view that the amount set on cannot be regarded as expenditure incurred by the assessee. The title over the money is not lost to the assessee and correspondingly, the employees for whose benefit the amount was set apart have not gained any right, title or interest over the money set on. Under the provisions of the Payment of Bonus Act, the amount set on has to be utilised for the payment of bonus in case there is deficiency in the succeeding years in the quantum of allocable surplus. Therefore, it cannot be stated that the money has been expended by the assessee. Furthermore, the expression, ‘control’ has various shades of meaning. It may tantamount to complete divestiture of the control over the disposal of the funds, or it may also amount to exercise of some control over the money not amounting to full control over the disposal of the money in question. The assessee by setting apart the money in question has not lost complete control over the money in question. It has title over the money in question and it has the statutory right to spend the money in future years for its own business. It cannot, therefore, be stated that the assessee has lost complete control over the money in question and the fact that it can utilise the money in future years for its business expenditure clearly shows that it retained and exercised control over the money in question, though under the provisions of the statute, it has to use the money for the purposes of payment of bonus to its workers. In other words, the fact that it can utilise the money in future years for the payment of bonus would show that it had dominion over the money subject to the statutory control imposed by the Bonus Act. Therefore, we are unable to agree with the decision of the Gauhati High Court that the amount set on under s. 15 of the Payment of Bonus Act would amount to expenditure and therefore, the assessee would be entitled to deduction of the amount. We also agree with the decision of the Karnataka High Court in Mysore Lamp Works Ltd. case, cited supra, wherein the Karnataka High Court expressly dissented from the view of the Gauhati High Court and held that the amount set on cannot be regarded as expenditure at all.

The next decision is a decision of this Court in the case of Addl. CIT vs. Anamallais Bus Transports (P) Ltd. (1979) 9 CTR (Mad) 219 : (1979) 118 ITR 739 (Mad) : TC 15R.807, wherein this Court has held that the liability towards bonus would arise by virtue of statutory provisions and the amount which would accrue from the statutory provision could be claimed as deduction has no application to the facts of the case. This Court in Anamallais Bus Transports (P) Ltd. case, cited supra, was dealing, with a case of accrued liability. On the other hand, as already seen, in the instant case, the amount was set apart by the assessee only to meet the future un-ascertainedcontingent liability and therefore, the decision of this Court in Anamallais Bus Transport (P) Ltd. case (supra) would support the case of the Revenue to that extent. A series of decisions arising under the Molasses Control Order decided by various High Courts were relied upon by the learned counsel for the assessee viz., (i) CIT vs. PandavpuraSahakara Sakkare Kharkane Ltd. (1992) 198 ITR 690 (Kar) : TC 38R.694, CIT vs. Bhopal Sugar Industries Ltd. (1996) 134 CTR (MP) 409 : (1996) 221 ITR 449 (MP) and Somaiya Organo-Chemicals Ltd. vs. CIT (1994) 117 CTR (Bom) 1 : (1995) 216 ITR 291 (Bom) : TC 38R.697, are all cases dealing with the cases of funds set apart under a statutory order and thequestion arose in the circumstances of those cases, whether the amount can be regarded as diverted by overriding title. In all those cases, it is relevant to notice that there was diversion of income even at the time of collection of sale proceeds and the income was diverted by overriding title by statutory compulsion. Further, when the selling price of the commodities was fixed by the Government, the amount received by the assessee had to be utilised only according to the molasses control order and by virtue of the statutory mandate, the amount was received by the assessee towards a molasses storage fund and the utilisation of the amount was also according to the directions of the Government of India from time to time. Therefore, the Courts have taken a view that the right to the fund was diverted from the hands of the assessee even at the time of receipt of the selling price of the molasses and therefore, the amount was not assessable to tax. It is, only in that context, the Courts have taken the view that the assessee had lost domain and control over the amount and therefore, the amount could not be regarded as part of the income of the assessee. The above decisions were followed by this Court in the case of CIT vs. Salem Co-operative Sugar Mills Ltd. (1997) 138 CTR (Mad) 352) on the ground that a portion of sale proceeds of the molasses funded under the statutory order for the construction of the molasses storage tank was diverted to the source and not assessable as income. In our view, the above decisions rendered with reference to the molasses storage control order have no application to the facts of the case. It cannot be stated, in the instant case, the amount was diverted by overriding title as the assessee set apart the amount under s. 15 of the Payment of Bonus Act only after the ascertainment of allocable surplus and it means that it is only after the receipt of the income and ascertainment of the profits, the amount was set apart. Therefore, it cannot be stated that the income got diverted even at the time of receipt of the income from the assessee. Therefore, the decisions relied upon by the learned counsel for the assessee with reference to molasses storage fund cases are not applicable to the facts of the case.

23. Learned counsel for the assessee then relied upon a decision of this Court in the case of CIT vs. AndhraPrabha (P) Ltd. (1980) 14 CTR (Mad) 269 : (1980) 123 ITR 760 (Mad) : TC 16R.169, and submitted that the amount set apart under the Payment of Bonus Act would be akin to the provision for gratuity made in the books of accounts and on the same principle, the amount set on under s. 15 of the Payment of Bonus Act is liable to be deducted. In our view, the comparison is not covered and it is well-settled that in so far as the liability towards gratuity is concerned, the Courts have held that the claim for provision for gratuity is admissible provided the liability for provision was made on legal and scientific basis. The Courts have taken the view that in so far as the gratuity liability is concerned, when the employees have put in continuous service of work as contemplated in the Payment of Gratuity Act, the liability to pay gratuity though arises at the time of retirement or retrenchment from service, it is possible to evaluate the gratuity liability that arises during the year and if the gratuity liability for that year is properly ascertainable on a scientific basis, that would call for deduction. Insofar as the amount set apart under the Payment of Bonus Act is concerned, it is not an ascertained liability and the amount is set apart only to meet the contingent liability or a future or un-ascertained liability and the amount set apart cannot be equated or compared to the provision of gratuity made on, in its accounts on scientific basis. Further, it is not possible to evaluate the amount of bonus that may be payable in future on the date when the amount was set apart and since it is not possible to quantify the value of the liability in the year in which the amount was set apart, the decisions relating to the deduction on the provision of gratuity have no application to the facts of the case.

24. In this view of the matter, we hold that the Tribunal was not right in holding that the amount set on under s. 15 of the Payment of Bonus Act was statutorily diverted towards bonus and cannot be regarded as income or profit of the assessee. We hold that there was no diversion of income by overriding title as the amount set on was made after the ascertainment of the profits. We also hold that there is no question of expenditure by setting on the amount as the assessee has not expended any money towards the payment of bonus. It cannot also be regarded that the amount set on was towards trading liability or a loss as the liability towards bonus has not arisen during the year. It cannot also be regarded as a provision made for an existing and ascertained liability. As earlier stated, the amount was set on only for future, contingent and un-ascertained liability for the payment of bonus. It cannot also be stated that the assessee has lost complete control or dominion over the money as the assessee is entitled to utilise the same for the purposes of the business of the assessee. Viewed from any angle, we are of the view, the amount set on under s. 15 of the Payment of Bonus Act is not deductible in the computation of business income of the assessee. We agree with the decisions of Madhya Pradesh, Andhra Pradesh, Kerala and Karnataka High Courts cited supra and hold that the amount set on under s. 15 of the Payment of Bonus Act is not deductible in the computation of business income of the assessee. Accordingly, the fifth question of law referred to at the instance of the Revenue for both the asst. yrs. 1975-76 and 1976-77 is liable to be answered in favour of the Revenue.

25. In fine, we answer the questions of law referred to us as under : (a) Question of law 1 and 2 :— It is answered in the negative and against the assessee. (b) Question of law No. 3 :— It is answered in the affirmative and against the assessee. (c) Question of law No. 4 :— It is answered in the affirmative and against the assessee. (d) Question of law No. 5 :— It is answered in the negative and in favour of the Revenue. However, in the circumstances of the case, there will be no order as to costs.

[Citation : 237 ITR 488]

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