Gauhati High Court
India Carbon Ltd. vs Commissioner Of Income-Tax on 4 April, 1989
Equivalent citations: [1989]180ITR117(GAUHATI)
JUDGMENT A. Raguvir, C.J.
1. The assessee in this case is India Carbon Ltd. at Gauhati and the questions in the reference relate to the assessment year 1976-77. The subject-matter in the questions pertains to whether bonus amounts set apart (called "set-on" amount) whether can be deducted from the profit and loss account of the assessee.
2. The assessee claimed deduction of two amounts, Rs. 8,56,241 as bonus paid and Rs. 7,36,915, the amount deposited in the "set-on" account. The former was claimed under Section 36(1)(ii) and the latter under Section 37 of the Income-tax Act, 1961. The Income-tax Officer allowed the deduction of Rs. 8,56,241 but rejected the claim for Rs. 7,36,915. The Appellate Assistant Commissioner at Shillong ordered both to be deducted. The Tribunal held that the latter cannot be held to have been paid and following a decision in I. T. A. No. 5429(Cal) of 1975-76 dated May 11, 1978, overturned the decision of the appellate authority.
3. In the past, like claims made by the assessee were allowed in the assessment years 1966-67 to 1969-70 and in the assessment years 1970-71 to 1973-74. The Tribunal, therefore, directed the Income-tax Officer to recompute the amounts in the assessment years 1972-73, 1973-74 and 1975-76. The assessee thereupon was heard to protest that the assessee adopted the mercantile method of accounts and without any ostensible reason if assessments are reopened, the interests of the assessee will be adversely affected. Finally, at the instance of the assessee, under Sub-section (1) of Section 256, the following three questions are referred to this court :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in reversing the order of the Appellate Assistant Commissioner and disallowing the statutory liability of bonus set-on computed according to the provisions of the Payment of Bonus Act, 1965 ?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disregarding and rejecting the method of accounting regularly employed by the appellant company ?
(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that bonus set-on cannot be regarded as a liability of the year in which the computed amount should be carried forward for being set-on in the manner prescribed under the Payment of Bonus Act, 1965 ?"
4. The questions turn on the meaning of the word "bonus" and, therefore, a brief discussion on the etymological sense of that word is not out of place. Bonus in the past was understood conceptually as a premium paid in addition to what is strictly due ; a gratuity to which the recipient had no right to make a demand ; a premium of extra remuneration to encourage the performance of workman or workmen ; a gift in recognition of successful performance of work. Bonus at times is used in invidious terms. Sometimes, the word is used to mean what is offered by the vendors. These nuances of the word "bonus" are found/defined in Black's Law Dictionary, 5th edn., p. 165. We are concerned in this case with what is paid to workmen as bonus.
5. Whenever bonus was paid to a workman in the past, it was understood as a gift and workmen had no claim or a legal right to it. The conceptual meaning of the word gave rise to numerous disputes in industrially advanced countries. Speaking of the textile industry in India, it started at two textile centres Bombay and Ahmedabad. In both these centres, bonus was paid. In the two centres, after the First World War in 1917, 10 per cent. of the wages was paid and 15 per cent. of the wages was paid in the calendar year 1918 (as bonus). The conceptual difficulty however persisted. A committee of mill owners in 1920 recommended that a month's pay be paid to the workers in 1921 as bonus. But, in the succeeding year, when bonus was not paid due to adverse circumstances in the textile trade, a general strike of workers ensued. Similar disputes arose in other industries intermittently. Thereupon, the Provincial Government of Bombay formed a Bonus Dispute Committee to report whether bonus was an enforceable legal right or whether bonus was a customary or gratuitous claim. Before the Committee could submit a report, the country was engulfed in the shadows of the great economic depression of the mid-twenties of the century. However, some mills, even during the days of depression, paid bonus. After the depression in the period of the Second World War due to sterling balances in the United Kingdom, there was a boom in the trade and workmen were paid bonus. After the Second World War, the conceptual question resurfaced. The Labour Courts in the country held that textile mills which did not earn profits need not pay bonus. The other mills were ordered to pay bonus. The issue whether bonus was a right continued to be raised. In cases where bonus was paid, the issue relating to the methods adopted for ascertainment of profits was raised ; whether depreciation and rehabilitation amounts were to be deducted before profit was declared. In some cases, interest paid on capital and working capital was deducted and such deductions were disputed.
6. In 1958, the Supreme Court in State of Mysore v. Workers of Gold Mines, AIR 1958 SC 923, held that bonus was not a gratuitous payment nor was bonus deferred wage. With this dicta, the conceptual controversy came to an end. But, in this case, methods adopted for ascertainment of bonus were not considered. That aspect was scrutinised in Associated Cement Companies Ltd. v. Their Workmen, AIR 1959 SC 967, and by and large what was held by the Labour Courts were approved. The disputes did not abate and instead they spread into all industrial fields in the fifties.
7. The Government of India in 1961 to obtain industrial peace appointed a Committee called the Tripartite Commission. The Committee on June 24, 1964, submitted its report. The report was accepted on December 6, 1964, with modifications. The Government of India promulgated on May 29, 1965, an Ordinance and Parliament by Act No. 21 of 1965 replaced the Ordinance. That Act was called the Payment of Bonus Act, 1965, to regulate the bonus payments in the country with some exceptions.
8. The Act contains 40 Sections 4 schedules and under Section 38, rules are promulgated by the Government. How gross profits are to be ascertained is explained in the Act ( Section 4). Two expressions--available surplus and allocable surplus--are elucidated (section 5). What sums are to be deducted from gross profits is set out (section 6). How taxes are calculated is explained (section 7). The workmen who are eligible (section 8) or those who are not eligible for bonus are specified (section 9). When a minimum bonus is to be paid (section 10) and when maximum bonus is payable is stated in the Act (section 11). Ascertainment of bonus in certain cases is dealt with in Sections 12 and 13. Section 14 of the Act sets out how the number of working days is to be reckoned. How amounts are to be carried forward (referred to as "set-on") and when the set-on amount is to be utilised is elucidated (section 15) with the help of the Fourth Schedule. The utilised amount is called the "set-off" amount. Two registers are prescribed to be maintained in the Rules. One of the two shows the set-on and set-off amounts in Form B. The following table extracted from the register "B" of the assessee is self-explanatory. Since nothing turns on the maintenance of accounts in this case, we may now turn to the issues in the case.
Sl. No. Accounting year Assessment year Particulars Amount Rs.
A B C D E
1. 1964-65 1966-67 Set-on created for the year after payment of bonus for the year under the Pay- ment of Bonus Act, 1965 1,07,200
2. 1965-66 1967-68 ....
1,35,300
3. 1966-67 1968-69 ....
1,64,800
4. 1967-68 1969-70 ....
1,85,200 5,92,500
5. 1968-69 1970-71 Set-on of 1964-65 credited to profit and loss account after expiry of four year period 1,07,200 4,85,300 ....
2,06,032 6,91,332
6. 1969-70 1971-72 Set-on of 1965-66 credited to profit and loss account after expiry of four year period 1,35,300 5,56,032 ....
2,00,279 7,56,311
7. 1970-71 1972-73 Set-on of 1966-67 credited to profit and loss account after expiry of four year period 1,64,800 5,91,511 ....
2,26,060 8,17,571
8. 1971-72 1973-74 Set-on of 1968-69 credited to profit and loss account after expiry of four year period 1,85,200 6,32,371 ....
3,92,356 10,24,726
9. 1972-73 1974-75 Set-on of 1968-69 utilised for payment of bonus 2,06,032 8,18,694
10. 1973-74 1975-76 Set-on of 1969-70 credited to profit and loss account after expiry of four year period 2,00,280 6,18,414 ....
6,97,002 13,15,416
11. 1974-75 1976-77 Set-on of 1970-71 credited to profit and loss account after expiry of four year period 2,26,059 10,89,357 ....
7,36,915 18,26,272
9. The assessee, in the relevant accounting year, paid bonus of Rs. 8,56,241 and that amount was deducted. There is no controversy about this amount. The amount of Rs. 7,36,915 was carried forward in set-on amount. That amount is not allowed to be deducted as it is not an expenditure.
10. What constitutes "expenditure" in fiscal enactments like the word "jurisdiction" in jurisprudence is a many-splendoured controversy. The meaning of the word "expenditure" gained many facets and dimensions over the years in fiscal statutes. The learning in its wake brought to surface many fresh controversies. We recount some cases out of the large number of cases cited at the debate in the instant case. The cases related to the 1922 Indian Income-tax Act repealed and the extant 1961 Act. We have avoided reference to cases of the United Kingdom to avoid bulk to the opinion.
11. The Supreme Court dealt in Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66, with the meaning of the word "expenditure" in the 1922 Act and pointed out that what is paid out and paid away is the primary meaning of the word "expenditure". The meaning was emphasised to show that amounts which passed out irretrievably from the hands of the asses-see alone are "expenditure". This elaboration later generated further controversies which are not relevant now in this case. There is an illuminating discussion in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), where cases of the apex court including the decisions from the United Kingdom were reviewed. Expenditure, it was pointed out, is wider in meaning and scope than when used to mean expenditure for earning profits. In explaining the content in the two, it was pointed out that all that is spent in a business cannot be construed as expenditure. A case with reference to taxes paid under the Wealth-tax Act, 1957, arose in Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 (SC), viz., whether tax paid by the assessees under the Wealth-tax Act was expenditure. The dictum in the case was very widely answered to hold in the negative. In Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735, 747, that case was explained later. When an assessee possessed assets connected with business and unconnected with business, the wealth-tax paid for the former alone was expenditure and taxes paid in connection with the latter is not expenditure. The next case is CIT v. Walchand and Co. (P.) Ltd. [1967] 65 ITR 381 (SC), where two difficult expressions "commercial expediency" and "reasonableness of expenditure" were considered. The question of reasonableness juxtaposed with expenditure is often disputed in fiscal cases. The court pointed out that commercial expediency and reasonableness have to be viewed not from the Revenue point of view. This was emphasised so as not to get obsessed with the interests of the Revenue but is to be looked at from the point of view of business. In looking at the business, it is implied not (sic) to look at the businessman's point of view. These interdictions and aids are explained in that case. These are thorny problems no doubt but these aspects do help the adjudicators. Finally, as of today, in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC), a case dealing with gratuity fund created for the benefit of employees in an irrevocable trust, it was allowed to be deducted. This is the same in shade and in content with what we referred to as irretrievable expenditure in the first case to which we have referred.
12. Among the reported cases, there are three cases from the Madras High Court wherein Act No. 21 of 1965 was not considered but that court was aware of the incoming shadow of the statute. The first case is CIT v. Somasundaram Mills (P.) Ltd. [1974] 95 ITR 365 (Mad), which was considered in the second case CIT v. Anamallais Bus Transports (P.) Ltd. [19751 99 ITR 445 (Mad). The two cases were considered in Addl. CIT v. Anamallais Bus Transports (P.) Ltd. [1979] 118 ITR 739 (Mad). In the first and the second cases, the case of a prudent businessman when he sets apart amounts for bonus was considered, whether it can be allowed as expenditure. The prudence, it was said, results in a contingent liability but cannot be allowed as expenditure. In the last of the three cases, it was emphasised that workmen do not have a right in such amounts (resulting even out of prudence) and the amounts are not expenditure and cannot be deducted.
13. There are three other cases where the issue was considered under the Act No. 21 of 1965. The decision in Malwa Vanaspati and Chemical Co. Ltd. v. CIT [1985] 154 ITR 655 was a case from the Madhya Pradesh High Court, where it was held that Section 15 did create a liability and set on amounts do not discharge a subsisting liability and, therefore such amounts were held reserved for future contingent liability. The assessee did not deposit the amount with the Bonus Act authority, and, therefore, it was additionally stated to support the contention that the reserved amount is not expenditure.
14. The second case is from the Andhra Pradesh High Court in Rayala-seema Mills Ltd. v. CIT [1985] 155 ITR 19. In that case, it was held that set-on is not covered by Sections 28 and 37 of the Income-tax Act and, therefore, not an expenditure. The conclusion was elaborated as the set-on amount was carried forward for a limited period for four years and, therefore, such amounts are not amounts paid to a third party, and, therefore, not loss, not a trading liability and not an expenditure. The third case is from the Kerala High Court in P. K. Mohammed Pvt. Ltd. v. CIT [1986] 162 ITR 587 where the set-on amount was construed to be deposits made under the compulsion of a statute to satisfy a contingent liability to be paid in future. The amount is retained by the assessee and the assessee is shown to hold the amount and the amount is not expended. To this aspect, we will return anon.
15. Learned counsel for the assessee in this case argued that the set-on amount is not prohibited to be deducted under Section 40(a)(ii) and, therefore, such amounts are expenditure for the business. Learned counsel elaborated that the assessee cannot utilise the amount and in that sense the assessee has parted with the amounts irretrievably. This plea, we consider, is the nub of the issue raised in the instant reference.
16. Standing counsel for the Revenue argued that the amount is a reserve fund. The amount stand's deposited in the account books of the assessee. The amount can be utilised by the assessee and, therefore, is not an expenditure. Such an amount, it is argued, is to be paid in future and cannot be allowed either under Section 28 or under Sections 30 to 36 or under Section 37 of the Income-tax Act.
17. We have earlier indicated that under the Rules, two sets of registers are to be maintained by every industrial unit The Register "B" shows set-on and set-off of allocable surplus and amounts payable as bonus and amounts carried forward are to be shown. The Fourth Schedule, in the prefatory para, shows that employees are entitled to be paid, in column 3 the amount payable as bonus and in column 4 the set-on or set-off of the year carried forward and in column 5 the total amount that is carried forward for payment. The words used in Section 15 of the Act are "utilised for the purpose of payment of bonus" which indicate that the amounts shown in columns 3, 4 and 5 of the Fourth Schedule are amounts which are to be paid or have been paid to the employees. Likewise, columns 2 to 5 in Form "B" shows the amounts paid or to be paid. These columns indicate, coupled with the words in Section 15 of the Act, that the amounts deposited are for the benefit of workmen. In such a case, the amounts, we hold, cannot be used or utilised by the assessee for business purposes. In case such amounts are used by the assessee and the amounts are lost in the business, can a businessman be heard to contend that amounts are lost in business, that there is nothing left to be paid to workmen and that as such he may be absolved from paying the bonus to workmen ?
18. This question, in our view, is crucial. The answer to the question is that the assessee cannot utilise for the business the set-on amount, The assessee, on making the deposit, is divested of the right to invest or utilise the amount for business. May be, in the Rules, these aspects are to be dealt with more elaborately. But, as at present, the column shown in the Fourth Schedule, the column shown in Form B and the language used in the prefatory para of the Schedule and the language employed in Section 15 of the Act do indicate that the set-on amounts after deposit is made cannot be utilised by the assessee. They are to be paid in future in the course of a cycle of four years. If this interpretation is accepted, the contention that the assessee can utilise the amounts in business cannot be sustained. In answering this question, we are also aware that we have repeatedly relied on the word "utilisation". We also steer clear of ownership of amounts as the amounts in set-on are akin to funds in an irrevocable trust such as referred to in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC). We may also state that we are looking at the issue from the point of view of business in CIT v. Walchand and Co. (P.) Ltd. [1967] 65 ITR 381 (SC). Thus, we hold that the amount which cannot be utilised and deposited perforce under the statute, in our view, is expenditure. If the assessee utilises or uses the amount in such a case, it would be a contravention of the Act and he would be liable to be punished under Section 28 of the Act. He can be imprisoned, fined or inflicted with both the punishments.
19. The next point that has been argued on behalf of the assessee is on the basis of "commercial expediency". We have answered earlier that the apex court stated that whether it is an expenditure or not has to be looked at from the perspective of a businessman, not from the perspective of the Revenue and if we look at the matter from that perspective, as we have concluded, the set-on amount is not available for business. This answer, we are conscious, does not cover on all fours the expression of "commercial expediency". We have earlier referred that this expression takes more than one concept and we may have to grapple with all aspects in a future case. For the present the question pivots on expenditure and we hold that the set-on amount fop the aforesaid reasons is an expenditure incurred by the assessee, and therefore, has to be deducted.
20. Before parting with this opinion, we may refer to one argument advanced by learned counsel for the Revenue, i.e., that if an amount deposited should gain interest and that interest should form part of the corpus of the deposit, then, since no indication is given in the statute or in the rules, therefore, the mere deposit of amounts cannot be expenditure under the Income-tax Act. What is pointed out by learned counsel for the Revenue is an omission on the part of the rule-making authority. If deposits remain unutilised for four years or for any fraction of a period, some rule could be prescribed to provide for accrual of interest, as such a measure will prove beneficial to workmen and employers.
21. We answer the three questions in the negative, in favour of the asses-see and against the Revenue. No costs.
W.A. Shishak, J.
22. I agree.