Karnataka High Court
Mysore Lamp Works Ltd. vs Commissioner Of Income-Tax on 12 April, 1990
Equivalent citations: (1990)84CTR(KAR)221, [1990]185ITR96(KAR), [1990]185ITR96(KARN), [1990]52TAXMAN260(KAR)
JUDGMENT K. Shivashankar Bhat, J.
1. The questions referred to us pertain to the assessment year 1980-81. The following questions were referred under section 256(1) of the Income-tax Act, 1961 (shortly called "the Act") :
"(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the claim of bonus set on amounting to Rs. 5,11,000 ?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount paid towards surtax liability is not an admissible deduction in computing the total income of the applicant under the provisions of the Income-tax Act, 1961 ?"
2. The assessee claimed the surtax liability as an allowable deduction. This claim was disallowed throughout. Hence, the second question stated above. Further, the assessee also claimed deduction of an amount of Rs. 5,11,000 which was set apart by the assessee under the provisions of section 15 of the Payment of Bonus Act, 1965 (hereinafter referred to as "the Bonus Act"). This sum was not actually paid to the workmen, but had to be set apart by virtue of the aforesaid provision and the assessee claimed the sum to be a deductible item under section 37 of the Act. This claim was also disallowed. The order of the Income-tax Officer was upheld throughout. Hence, the first question.
3. The second question need not detain us any longer because the same is covered by the decision of this court in CIT v. International Instruments (P.) l, [1983] 144 ITR 936. It was held therein that surtax levied is nothing but an additional tax on the profits and gains of business and essentially the surtax remains a charge on the profits and gains of the business of companies. Therefore, it was held that an assessee is not entitled to claim deduction of surtax payable by it in computing the total income. Following the aforesaid decision, the second question referred to us has to be answered in favour of the Revenue and against the assessee and in the affirmative.
4. On the first question, it was contended by Sri Sarangan, learned counsel for the assessee, that the setting apart of a certain amount under section 15 of the Bonus Act is a statutory duty imposed on an employer and the carrying of such a duty on the part of the employer results in the deprivation of the beneficial use of the said fund by the assessee for his own purposes and that, therefore, it is an expenditure, but not in the nature of a capital expenditure, and that the setting apart of the fund is nothing but an expenditure laid out or expended wholly and exclusively for the purposes of the business or profession. Learned counsel pointed out that failure on the part of the employer to set apart the amount referred in section 15(1) of the Bonus Act entails penal liability for the employer and, therefore, there cannot be any escape from the conclusion that such setting apart of the amount for a period of four years is absolutely necessary to carry out the business operations. Learned counsel substantially repeated the reasoning of a Bench decision of the Gauhati High Court in Indian Carbon Ltd. v. CIT [1989] 180 ITR 117. Learned counsel also referred to section 41(1) of the Act in support of his proposition, according to Sri Sarangan, the amount set apart under section 15 of the Bonus Act, if not utilised for the purpose of the payment of bonus during subsequent years, will be available to the assessee for being utilised as he pleases and if so, in that particular year, the same can be charged as provided under section 41. Learned counsel for the Revenue on the other hand, referred to a decision of the Madhya Pradesh High Court in Malwa Vanaspati and Chemical Co. Ltd. v. CIT and urged that the amount set apart under section 15 of the Bonus Act was in the nature of a reserve fund necessarily to be created by virtue of the statutory mandate and that it was not at all an expenditure. The said fund was to meet a contingent liability and the mere possibility of a liability having to be met out of such a fund cannot result in an expenditure.
5. To appreciate the rival contentions, it is necessary to refer to the relevant provisions. Section 15 of the Payment of Bonus Act reads as follows :
CXXA"15(1). 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 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 section 10, and there is no amount or sufficient amount carried forward and set on under sub-section (1) which could be utilised for that 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 accounting year and so on up to and inclusive of the fourth accounting year in the manner illustrated in the Fourth Schedule.
(3) The principle of set-on and set-off as illustrated in the Fourth Schedule shall apply to all other cases not covered by sub-section (1) or sub-section (2) for the purpose of payment of bonus under this Act.
(4) Where in any accounting year, any amount has been carried forward and set on or set off under this section, then, in calculating bonus for the succeeding accounting year, the amount of set-on or set-off carried forward from the earliest accounting year shall first be taken into account."
6. Section 37(1) of the Act says that any expenditure (omitting matters not relevant here) not being in the nature of capital expenditure, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head"Profits and gains of business or profession".
7. Two ingredients of the section are to be noted - (i) the amount sought to be excluded should be an expenditure; and (ii) the said expenditure should have been laid out or expended wholly and exclusively for the purposes of the business, etc., Even here, the basic ingredient is the nature of the amount sought to be excluded being an "expenditure". It is only thereafter that the second ingredient will have to be considered. Therefore, before considering further, it is necessary to understand the concept of "expenditure" under the provisions of the Act.
8. In Indian Molasses Co. (P.) Ltd. v. CIT , the Supreme Court had occasion to deal with the concept of expenditure. Certain amounts were held on trust and the assessee-company made payments to the said trust. The purpose of the trust was to meet the obligation of the assessee-company to provide for a pension to the managing director of the assessee-company. This obligation arose out of an agreement between the assessee-company and the said managing director. The assessee-company claimed the payments made to the trust in this regard as a deductible expenditure under the provisions of section 10(2)(xv) of the Indian Income-tax Act, 1922 (the present section 37 being the reincarnation of the said section 10(2)(xv). After discussing the English law on the question, the Supreme Court deduced the following principles at page 75 : "(i) a capital expenditure cannot be attributed to revenue and vice versa; (ii) a payment in a lump sum does not necessarily make the payment a capital one; (iii) if there is a lump sum payment but there is no possibility of a recurrence, it is probably of a capital nature, though this is by no means a decisive test; (iv) if the payment of a lump sum closes the liability to make repeated and periodic payments in the future, it may generally be regarded as a payment of a revenue character; and (v) if the ownership of the money whether in point of the fact or by a resulting trust be still in the taxpayer, then there is acquisition of a capital asset and not an expenditure of a revenue character."
9. The Supreme Court also pointed out that law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity. The Supreme Court proceeded to state further that (at page 76) :
"The test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader's pocket. Thus, in finding out what profits there be, the normal accountancy practice maybe 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.
10. Regarding the facts before the Supreme Court, it was observed that the pension itself was not payable as an obligation and if there be a possibility that no such payment is necessary in the future, the whole of the amount cannot be deducted but only the present value of the future liability, if it can be estimated. The meaning of the word "expenditure" was stated as equal to "expense" and, (at page 78) :
"expense" is money laid out by calculation and intention though in many uses of the word this element may not be present, as when we speak of a joke at another's expense, but the idea of 'spending' in the sense of 'paying out or away' money is the primary meaning and it is with that meaning that we are concerned.'Expenditure' is thus what is 'paid out or away' and is something which is gone irretrievably".
11. Thus the Supreme Court posed the question in the said case as to whether, in a business sense, the amount was spent, that is to say, paid out or away. Thereafter, it was answered at page 79 thus :
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 has not been spent, i.e., paid out or away, but the amount must be treated as set apart to meet a contingency. There is a distinction between a contingent liability and a payment depending upon a contingency. The question is whether in the years of account, one can describe the assessee-company's liability as contingent or merely depending upon a contingency."
12. The Supreme Court ultimately negatived the claim of the assessee in the said case by observing that the payment was not merely contingent but the liability was itself was also contingent. Expenditure which is deductible for income-tax purposes is one which is towards a liability actually existing at the time, but the putting aside the money which may become expenditure on the happening of an event is not expenditure.
13. Therefore, the fact that an assessee has to set apart a particular amount to meet a possible liability in the future by itself cannot make it an expenditure. The money is not lossed to the assessee. It has not gone irretrievably. If the setting apart of the amount is only to meet a contingency which may arise or may not arise, the assessee cannot be held to have incurred any expenditure.
14. However, Sri Sarangan cited another decision in the same volume in Calcutta Co. Ltd. v. CIT . But the said decision is of no assistance to Sri Sarangan because it pertains to the method of accounting and the mode of computing the allowable expenditure under the mercantile system of accounting, the liability was an accrued liability. There was no doubt that it was not a mere contingent liability in the said case.
15. What is the nature of the liability under section 15 of the Bonus Act ? The amount to be set apart under section 15(1) is not to discharge any present liability at all. The very provision is attracted only in case there is an allocable surplus during a particular accounting year. If the said allocable surplus exceeds the payment of the maximum bonus payable under section 11 of the said Act, the excess, subject to a limit of 20 per cent. of the total salary of the employees, is to be carried forward for being set on in the succeeding accounting year and to continue to be carried forward for a period of four years. The fund is to be used for the payment of bonus in case there is no available surplus fund during one of these years, or there is shortage of available surplus for the payment of surplus during these four years. The idea is to make a provision for meeting a liability to make the payment of bonus during any relevant years when the employer does not earn sufficient income to have an allocable surplus. The purpose is to safeguard the interest of the workmen when the employer is not in a position to pay the minimum bonus prescribed under section 10 of the said Act.
16. Now, this situation, to draw the amount set apart under section 15(1) of the Bonus Act during any relevant accounting year may or may not arise. The possibility of a liability in a future year which may have to be met out of this reserve fund, no doubt, exists; but that is only a "mere possibility". It will arise only in case the apprehended contingency arises. Therefore, the setting apart of this amount under section 15 is not a payment at all in respect of an accrued or definite liability. Depending upon the contingency, that amount may revert to the employer absolutely for being utilised as he pleases or he may have to make payment out of this towards computing the allocable surplus. Therefore, following the principles enunciated by the Supreme Court in Indian Molasses Co.'s case , we have no hesitation in holding that the amount set apart under section 15 of the Bonus Act cannot be treated as an expenditure at all and, if so, applying the other ingredient of section 37 of the Act, does not arise at all here.
17. We are also in respectful agreement with the view expressed by the Kerala High Court in P K Mohammed Pvt. Ltd. v. CIT , that the setting apart of this amount under section 15 of the Bonus Act is only a provision to satisfy an unascertained liability in future and there is no diversion of the fund at source by overriding title.
18. We respectfully disagree with the view expressed by the Gauhati High Court in India Carbom Ltd.'s case [1988] 180 ITR 117. The ratio of the decision of the Supreme Court in CIT v. Walchand and Co. P. Ltd., , referred to by the Gauhati High Court, with utmost respect, has no bearing on the question before us. The test of commercial expediency could arise only when the amount set apart could be treated as an expenditure and this test has relevancy only to the second ingredient of section 37 already referred to by us above.
19. In view of the above discussion, the first question referred to us also will have to be answered in the affirmative and against the assessee.
20. The reference is, accordingly, answered.