TMI Blog1997 (11) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... x Act ? 3. Whether the Tribunal is justified in law in holding that the sums transferred to reserve as required by section 205(2A) of the Companies Act, 1956, are not liable to be taken into account in the computation of the real income of the assessee for the assessment years concerned or in the alter native it is liable to be allowed as deduction under section 37(1) of the Income-tax Act ?" For the assessment years 1975-76 and 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 assessment years 1975-76 and 1976 77) : "5. Whether, on the facts and circumstances of the case, the Appellate Tribunal is right in law in holding that the amount set on under section 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 ?" The assessee is engaged in the manufacture of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 1975-76 3,25,000 ; For the assessment year 1976-77 2,20,000 ; For the assessment year 1978-79 4,05,000 ; For the assessment year 1979-80 2,00,000. The claim of the assessee was rejected by the Income-tax Officer which was upheld by the Commissioner of Income-tax (Appeals). The Appellate 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 Appellate Tribunal, the third question of law set out above has been referred. In so far as the third question relating to the amount transferred as reserve under section 205(2A) of the Companies Act is concerned, we are of the view that though the amount was transferred under the provisions of section 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. Section 205(2A) of the Companies Act reads as under : "Notwithstanding anything contain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold that the Tribunal is correct in holding that the assessee is not entitled to claim deduction of the surtax paid. Accordingly, the fourth question of law relating to the deduction of surtax paid is liable to be answered against the assessee. Now, we take the fifth question of law referred at the instance of the Revenue. It relates to two assessment years 1975-76 and 1976-77. The assessee claimed during the assessment proceedings for the assessment year 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 assessment year 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 a minimum bonus irrespective of the fact that it had made any profit or not and the employer is required to pay the maximum bonus when there are adequate profits up to the extent of 20 per cent. of the wages. Section 15 of the said Act provides that where in any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontingent 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 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 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. S. A. Balasubramanian, learned counsel for the assessee, on the other hand, submitted that there is a statutory obligation under section 15 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar in the manner illustrated in the Fourth Schedule." The above section 15 of the Payment of Bonus Act was amended by Central Act 23 of 1976 with effect from September 25, 1975, and sub-section (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 section 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 accounting year and so on, to be utilised for the purpose of payment of bonus, in the manner illustrated in the Third Schedule." The above section 15 was again amended by the Payment of Bonus (Second Amendment) Act, 1980, and the sub-section (1) of section 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 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 establishmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-section (1) of section 15 of the Payment of Bonus Act, is not allowable as the amount is set apart to meet a contingent liability of the assessee. In Rayalaseema Mills Ltd. v. CIT [1985] 155 ITR 19, 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. 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 employees have no right over the money and the money can be used in the subsequent years for the business purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In CIT v. Pallavan Transport Corporation Ltd. [1998] 230 ITR 288, this court was considering a provision set apart to insurance fund under the provisions of section 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 section 15 of the Payment of Bonus Act. The Supreme Court in the case of Associated Power Co. Ltd. v. CIT [1996] 218 ITR 195 was considering the provision set apart by an 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustries Ltd. [1996] 221 ITR 449 (MP) and (iii) Somaiya Orgeno-Chemicals Ltd. v. CIT [1995] 216 ITR 291 (Bom) are all cases dealing with the cases, of funds set apart under a statutory order and the question 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 assess able to tax. It is, only in that context, the courts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a scientific basis, that would call for deduction. In so far 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 unascertained liability and the amount set apart cannot be equated or compared to the provision of gratuity made 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. In this view of the matter, we hold that the Appellate Tribunal was not right in holding that the amount set on under section 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 exp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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