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1. The question referred for our opinion, is : "Whether, on the facts and in the circumstances of the case, the disallowance of the sum of Rs. 2,03,173 out of the provision made for bonus in the balance-sheet for the assessment year 1972-73 was in order ?"

2. The assessee is a public limited company running a spinning mill. Its accounting year is the financial year. For the year ending March 31, 1974, the assessee made a provision of Rs. 10,02,180 towards bonus under the Payment of Bonus Act, 1965, which amount represents the allocable surplus calculated under the provisions of the said Act. The maximum bonus payable for the said accounting year came to Rs. 7,98,007, thus leaving a balance of Rs. 2,03,177. This amount was "set on", i.e., carried forward, as contemplated by s. 15 of the said Act. The assessee claimed deduction even for this amount of Rs. 2,03,177 in the computation of its taxable income, which was rejected by the ITO. An appeal to the AAC proved fruitless. The assessee then preferred a second appeal to the Tribunal. Before the Tribunal, it was contended by the assessee that the allocable surplus set apart by it in the balance-sheet was in discharge of a statutory obligation; that the said amount belonged to the employees, payable in the future years and that, therefore, it should be allowed as a deduction. The Tribunal rejected this contention, whereupon the assessee applied for referring two questions for the opinion of this court, viz :

3. The Tribunal, however, referred only the second question. No complaint is made before us regarding refusal to refer the first question.

4. The Payment of Bonus Act, 1965, provides for both the minimum bonus and the maximum bonus. The maximum bonus for the relevant accounting year was 20% of the salary or wage of the employees, and the minimum bonus 4%. The allocable surplus calculated in accordance with the provisions of the Act and the Rules made thereunder, in the case of the assessee, exceeded the amount required for paying the maximum bonus. The assessee was, therefore, obliged to carry forward the surplus amount as required by s. 15, which must now be set out :

5. This section provides for what it calls "set on" and "set off" to ensure a consistent payment of bonus over the years. If, in a given year, the allocable surplus exceeds the maximum bonus amount, such surplus, subject to a ceiling of 20%, shall have to be carried forward to the succeeding year, up to and inclusive of the fourth accounting year, to be utilised for the purpose of payment of bonus. The method to be followed in this behalf is set out in the Fourth Schedule to the Act. If in any succeeding accounting year, there is no available surplus, or allocable surplus, or the allocable surplus falls short of the minimum bonus, the amount so carried forward has to be utilised for paying the bonus. At the end of four years, however, the amount still remaining, if any, becomes the income of the assessee. In other words, the statutory obligation for setting on is confined only to four succeeding accounting years, whereafter the assessee is free to make such use of the amount, if any remaining, as it thinks fit. The Tribunal was of the opinion that this provision is "no more than a provision for a contingent liability in respect of the subsequent years"; that this amount may not necessarily be required to pay bonus in the succeeding years and that, therefore, it cannot be allowed as an admissible deduction. The Tribunal observed that the existing liability of the assessee was only to the extent of actual amount of bonus payable, viz., Rs. 7,98,007, and that has been allowed as a deduction.

8. Admittedly, the deduction claimed does not fall under s. 37, not being an expenditure laid out or expended by the assessee. For this reason, the learned counsel for the assessee sought to put it under s. 28 on the reasoning that the amount is diverted under an overriding legal obligation. We are not prepared to agree with this contention either. Where an amount is diverted under an overriding legal obligation, the amount does not reach the hands of the assessee at all. Even before it reaches the assessee, it is diverted to another person or fund, as the case may be, by virtue of the overriding legal obligation. In this case, that is not the position. The allocable surplus is determined out of the profits of the assessee, and all that s. 15 of the Payment of Bonus Act requires is that the surplus amount, after paying the maximum bonus, should be carried forward for a limited period. Now, it is not disputed that if a bonus-reserve, by whatever name it is called, is created voluntarily for the same purpose, it would not be allowable as deduction. The question is where such a reserve is created under the compulsion of law, would it qualify for deduction ? Inasmuch as the amount is required to be set apart with the assessee himself for a limited period to meet its bonus obligation in the succeeding accounting years, if necessary, and also because, after the expiry of the prescribed period, the said amount or the balance, if any, becomes a part and parcel of the general revenues of the assessee, it is difficult to agree that the money is diverted from the assessee under an overriding legal obligation. The money is not paid to a third-party, nor is it paid into a fund from which it never comes back to the assessee; nor is the money meant exclusively for payment to the employees. It cannot also be said that this amount, so set apart, constitutes a "loss", "expenditure" or a "trading liability" within the meaning of s. 41(1). If so, the said amount, as and when it comes back to the revenues of the assessee, cannot also be treated as its income under sub-s. (1) of s. 41, which circumstance also shows that this amount cannot be allowed as a deduction. This is for the reason that, if this amount is allowed as a deduction in this accounting year, and if this amount is not used up in the succeeding four accounting years and it comes back to the revenues of the assessee after the fourth year, it must be treated as its income in that accounting year. But that can be done only if the allowance of deduction has been made "in respect of loss, expenditure or a trading liability incurred by the assessee" and which in the subsequent years, is remitted or ceases. No case has been brought to our notice treating such a provision as a loss, expenditure or a trading liability. In short, s. 15 merely requires creation of a compulsory reserve for a limited period to meet the contingency of a shortfall in the succeeding accounting years. But, it is difficult to say that the amount so set apart constitutes a "loss". Conceptually speaking, the said expression is totally inappropriate to such a provision. We find no analogy between this case, and the case of embezzlement of funds by an employee, which was treated as a loss by the Supreme Court in Badridas Daga v. CIT [1958] 34 ITR 10, notwithstanding the possibility of recovering the amount so misappropriated or a part thereof, at a later point of time.