TMI Blog1986 (1) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... ble deduction under the Income-tax Act, 1961 ? O.P. No. 1834 of 1977-B : (i) Whether the Tribunal was right in rejecting the contention of the assessee that the amount of Rs. 16,167 set apart in the profit and loss account pursuant to the provisions of the Bonus Act did not form part of the assessable income of the assessee ? (ii) Whether the Tribunal was right in rejecting the contention of the assessee that in any view of the matter, the said amount is an allowable deduction under the Income-tax Act, 1961 ? " The assessee is a private limited company carrying on the business of clearing and forwarding. During the year ending September 30, 1972, the company had paid to its employees by way of bonus Rs. 23,058. In the profit and loss account for that year, the company had made a provision of Rs. 18,446 towards its future liability for bonus under section 15 of the Payment of Bonus Act, 1965 ("the Bonus Act ", for short). In the year ending September 30, 1974, the assessee had paid Rs. 39,094 by way of bonus to its employees. In the profit and loss account for that year, the company had debited Rs. 16,167 as reserve for payment of bonus under section 15 of the Bonus Act. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf retains the reserve fund created under the compulsion of section 15(1) of the Bonus Act and it is only a provision to satisfy a contingent liability that may arise in future. Any sum paid to an employee as bonus is a permissible deduction under section 36(1)(ii) of the Income-tax Act; but a reserve fund statutorily created and retained by the assessee himself forms part of his income and cannot also be claimed as a permissible deduction under the residuary section 37 of the Income-tax Act. The amount to be paid as bonus from out of the reserve fund cannot be ascertained until the liability accrues in future covering a period of four years. A provision to meet an unascertained future contingent liability is not permissible deduction under the Income-tax Act as the profits earned in the particular year should be assessed as assessable income during the year. Counsel for the assessee places considerable reliance on the decision of the Supreme Court in CIT v. Travancore Sugars and Chemicals Ltd. [1973] 88 ITR 1 in support of his proposition that the statutory reserve created under section 15(1) of the Bonus Act cannot be treated as part of the assessee's income during the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verriding charge on the profit-making apparatus or as laid out and expended wholly and exclusively for purposes of trade, the answer must be in the affirmative and against the Revenue ". Since the obligation of the assessee-company was found to be an overriding charge of the profit-making apparatus and was diverted at source, it was held not to constitute part of the income of the assessee-company, and, even if considered as an item of revenue expenditure, it is a permissible deduction. That the allocable surplus referred to in section 15(1) of the Bonus Act is a part of the profits of the assessee-company is clear from section 2(4) read with section 5 of the Act. Part of the profits is set apart to constitute a separate fund to make provision for certain contingencies that may arise in future, limited to a period of four years from the accounting year. There is no diversion of the income of the assessee at its source. Nor is it an expenditure incurred during the accounting period. The amount set apart under section 15 of the Act is not expended. It is only to meet certain future contingencies that may or may not arise and the amount so set apart or so much of it as remains unspe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of utilisation to meet the liability of the assessee himself if it may arise in future. The decisions of the Kerala High Court in Cochin State Power Light Corporation Ltd. v. CIT [1974] 93 ITR 582 and the Bombay High Court in Amalgamated Electricity Co. Led. v. CIT [1974] 97 ITR 334 were concerned with the question whether the respective assessees, namely, the licensees under the Electricity (Supply) Act, 1948, are entitled to deduction of part of the revenue appropriated towards certain reserves statutorily required to be made under the said Act. It was found that the " development reserve " which would be available to the assessee for the purpose of investment in the business of the electricity supply undertaking is not a diversion of the assessee's income and is not a permissible deduction under the Income-tax Act. " Contingencies reserve ", on the other hand, not being available to the assessee for any purpose of his own and is to be a permanent reserve to be utilised for specific purposes enumerated in the statute with the approval of the State Government, was held to be a diversion of part of the revenue by reason of the overriding obligation created by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting year could be appropriated in annual instalments spread over for a period not exceeding five years. The benefit of the amount so set apart as reserve is available to the assessee directly. It could be applied by him as he pleases as investment in the business of the electricity supply undertaking. We do not think that this is in the nature of the consumers' benefit reserve with which the Supreme Court was dealing in Poona Electric Supply Co.'s case [1965] 57 ITR 521. As indicated earlier, the consumers' benefit reserve was intended for the benefit of the consumer alone and there is no direct or indirect return of the benefit to the licensee under any circumstances. That is not the case here and we do not think there is a 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. In fact, it is not a diversion in the real sense of the term since a diversion should be one which goes oat and is no longer that of the person who so diverts it. We, therefore, hold that the assessee's claim for deduction of the amount under the development reserve oug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not actually present but only contingent, cannot bear the character of expense till the liability becomes real." This decision was followed in a recent decision of the Supreme Court in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585, where the question was whether a provision made for payment of gratuity to the employees of the assessee is a permissible deduction. It was held that contributions made to an approved gratuity and created for the benefit of the employees under an irrevocable trust will be a permissible deduction under section 36(1)(v) of the Income-tax Act. But in the absence of such a fund, it will not be permissible deduction under section 40A(7) of the Act. A provision made in the profit and loss account for the estimated present value of the contingent liability for payment of gratuity, properly ascertained and discounted on an accrued basis as falling on the assessee in the year of account was, however, held to be deductible either under section 28 or under section 37 of the Income-tax Act. It is stated at page 598: " Contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early of the view that the sums set apart as a provision made under section 15(1) of the Bonus Act would form part of the assessable income of the assessee and is not a permissible deduction under the Income-tax Act. We are, however, of the view that the audit note is not " information " within the meaning of section 147(b) of the Income-tax Act and the Income-tax Officer was not justified in reopening the assessment for the year 1973-74. The Supreme Court in Indian and Eastern Newspaper Society v. CIT [1979] 119 ITR 996 stated at page 1004: " That part alone of the note of an audit party which mentions the law which escaped the notice of the ITO constitutes 'information' within the meaning of s. 147(b); the part which embodies the opinion of the audit party in regard to the application or interpretation of the law cannot be taken into account by the ITO. In every case, the ITO must determine for himself what is the effect and consequence of the law mentioned in the audit note and whether in consequence of the law which has now come to his notice he can reasonably believe that income has escaped assessment. The basis of his belief must be the law of which he has now become awar ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
