TMI Blog1961 (2) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... rial Disputes Act provided for the enforcement of the award against the successor, where there had been a succession to business. The claim for bonus for Deepavali in 1950 was settled by direct negotiation between the assessee company and its workmen on the same lines, namely, one and a half months wages. That agreement was arrived at on June 30, 1961. The total amount thus payable as bonus for the two years amounted to ₹ 54,140, and that amount was debited in the accounts of the assessee company in its year of account which ended on January 31, 1952. Out of this amount ₹ 51,936 appears to have been disbursed to the workmen in the course of that year. The balance of ₹ 3,204 remained undisbursed even in the next year, and it was shown as a liability of the assessee company in the next years account. The assessee company deducted the amount of ₹ 54,140 as an allowable item of expenditure in computing its losses in the assessment year 1952-53. That claim was disallowed by the Income Tax Officer, who added back the sum of ₹ 54,140 to compute the loss that the assessee could be allowed to carry forward. In the assessment year 1953-54 the undisbursed bonus o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. The assessee company succeeded to the business on February 1, 1950. The dispute over the 1949 bonus was settled by an award which became enforceable on February 9, 1951, and the claim for the 1950 bonus was settled by agreement on June 30, 1951. Consistently with the mercantile system of accounting the assessee company adopted, the liability that accrued under the award and under the agreement was shown in the books of account the same year. That the assessee treated it as a liability of its year of account 1951-52 did not admit of any doubt. The genuineness of that liability and that of its discharge were never in issue either. 5. The grounds on which the Tribunal disallowed the claim of the assessee that the payment of the bonus constituted an allowable item of its trading expenses of its year of account 1951-52 were summarised in paragraph 15 of the statement of the case : The Tribunal held in the above appeals in the absence of annexure A aforesaid which was not before it at that time : (i) that the liability of the workers under the awards was primarily the liability of the predecessors; (ii) by an omission to evaluate the contingent liability for purposes of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inly been an industrial dispute and, section 18 of the Industrial Disputes Act would then have imposed a statutory liability on the assessee company. It was in form a contractual liability under a contract with the workmen, but it was obviously undertaken to avoid an industrial dispute. Thus it was a liability legally enforceable against it that the assessee company discharged by providing for the payment of bonus for the two years 1949 and 1950. 7. The liability itself accrued only after the date of the transfer. It is not clear when the claim for 1949 was preferred by the workers. Obviously it was not admitted, as that claim was eventually referred as an industrial dispute for adjudication by the Industrial Tribunal. The claim for bonus, to whatever period it relates, is at best a contingent liability even at the stage the claim is preferred. It becomes an accrued liability even at the stage the claim is preferred. It becomes an accrued liability if the claim is admitted by the employer. If the claim is denied and the workmen do not pursue the claim it will never accrue as a liability. If the claim is denied by the employer and it is referred as an industrial dispute, no liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee company, the assessee company had no contractual right to recover it from its vendor predecessor company. As we pointed out, factually that liability - the Tribunal itself was alive to the feature that it was only a contingent liability at that stage - was not one of the factors taken into account in determining the price the assessee company had to pay for the transfer of the business. Though annexure A was not before the Tribunal when it disposed of the appeal, there fact that the liability to pay bonus payments did not enter the determination of the purchase price was apparently never in dispute, because the Tribunal took the view that by the omission to evaluate the contingent liability for purposes of transfer, the assessee only voluntarily lost the amount in favour of the predecessor. The assessee company was not bound to evaluate that contingent liability before effecting the purchase of the business. Factually it did not. When the legal liability to pay the bonus for 1949 and 1950 accrued, and that legal liability was that of the assessee company, it would be erroneous to view the discharge of that liability as constituting a loss voluntarily undertaken by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its predecessor vendor would constitute expenditure of a capital nature in the absence of any express provision in the contract of transfer for the discharge of that liability. We are unable to see anything in principle or authority to support this contention. The payment made in discharge of a contractual liability imposed in express terms by the contract of transfer or sale and equated to payment in part of the purchase price is laid out to complete the purchase and to discharge the purchasers liability. The principle applicable to such payments, that they constitute expenditure of a capital nature, cannot be extended to a case like the present, where the liability devolved on the assessee company by operation of law. That liability itself accrued only after the transfer, that is the liability under the award and the subsequent liability under the agreement between the workmen and the assessee company. As we have pointed out, factually the discharge of that liability was not part of the contract of transfer, and the payment of bonus was not : part of the purchase price. The discharge of the legal obligation was not part of the contract of transfer. 15. In Cooke v. Quick Shoe R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout a break. Unless the workmen were paid the bonus, apart from the statutory penalties to which the assessee company would be exposed for failing to implement the award for 1949 and the agreement for 1950, continuance of the business itself would have been imperiled. It was an expenditure incurred to continue the business and to secure industrial peace and harmony in which the business could be continued. By no known test could such an expenditure be viewed as a capital expenditure. 18. In S. R. V. G. Press Co. v. Commissioner of Excess Profits Tax while holding that the payment towards sales tax was an item of expenditure that could be lawfully deducted to ascertain the assessable profits the learned judge observed : Sales tax is a compulsory levy under the sanction of the Legislature and there is no discretion left to the assessee as regards the extent of the payment... The expenditure is unremunerative but is not the less a proper deduction, for without such expenditure the business of purchasing and selling could not be carried on... The payment of sales tax has no doubt the effect of diminishing the assessees taxable income but such payment is necessary if the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y legal liability or necessity on his part to do so, such a voluntary payment is not a permissible deduction from income. 22. In the present case we are dealing with a payment made by the assessee company in discharge of a legal liability imposed on it. 23. The next question is, whether the payment satisfied the other requirement of section 10(2)(xv), that the expenditure was laid out wholly and exclusively for purposes of the business of the assessee. It was common ground that this was not a claim that fell within the scope of section 10(2)(x). What we have already pointed out, that it was an obligation legally enforceable against the assessee, and that even independently of that, the assessee had to discharge that obligation to carry on the business to secure the industrial peace and harmony necessary to carry on that business, should suffice to hold that the further requirement of section 10(2)(xv) has also been satisfied in this case. The Tribunal was of the view, that the assessee received no direct benefit by such payments as the award related to the period of employment of the labour force buy the predecessors. Even if the test of direct benefit were to apply, that was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... That a provision for meeting a contingent liability is not an allowable item of deduction was clearly explained by the Supreme Court in Indian Molasses Co. v. Commissioner of Income Tax 1. At page 76 Hidayatullah J. said : Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the traders pocket. Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the Income Tax laws do not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter. 27. This principle was reaffirmed at page 79 : To be a payment which is made irrevocably there should be no possibility of the money forming, once again, a part of the funds of the assessee company. If this condition be not fulfilled and there is a possibility of there being a resulting trust in favour of the company, then the money h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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