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					                             AIT-2009-151-HC
                  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

                                         Versus

                             Commissioner of Income-tax

                          Bombay City-IV, Bombay. ..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 of Judgment: 4th April, 2009

AIT Head Note: Whether, on the facts and in the circumstances of the case, the
Tribunal was right in law in holding that sur-tax payable pursuant to the Companies
(Profits) Sur-tax Act, 1964 was not an admissible deduction in computing the total
income for the year under reference?
Whether, 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?

J U D G M E N T

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 to the Companies (Profits) Sur-




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       tax Act, 1964 was 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 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 for set-on liability under Section 15 of the Payment of Bonus Act was
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 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. The amount is not required to be paid to the workers. 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



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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 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 37 not being expenditure expanded by the assessee. It
was 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
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.

7. The Kerala High Court considered the issue in P.K. Mohammed Pvt. Ltd. vs. Commissioner
of Income-tax, 162 ITR 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
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.




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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 to hold that
the assessee cannot utilise the amount for business. 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 Counsel drew our attention to the judgment
of the Supreme Court in Bharat Earth Movers vs. Commissioner of Income-tax, 245 ITR
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. The company created a found by 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
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. It cannot be called
a contingent liability. Dealing 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
       date on which the liability shall have to be discharged is not certain."




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Reliance was placed on the judgment in Metal Box Company of India Ltd. v. Their Workmen
(1969) 73 ITR 53 (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 followed by the
company was that every year the company worked out the additional liability 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 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, though it may have to be quantified and
discharged at a future date, there must be a (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 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.



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11. We lastly come to the question referred at the instance of the Revenue. The question
as referred is 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.




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