Controversies
1. Issue for consideration :
1.1 The Payment of Bonus Act, 1965 requires an employer,
running a factory or an establishment where twenty or more workers are employed,
to pay to the employees such amount or amounts by way of bonus as prescribed
under the said Act, subject to a maximum amount prescribed therein. The amount
payable is calculated with reference to the allocable surplus to be computed in
accordance with the provisions of the Act and the rules framed thereunder.
1.2 The Act inter alia provides for setting aside an
amount, out of the allocable surplus, that is found to be in excess of the
maximum amount payable towards bonus for an year, subject to a maximum of twenty
per cent of the salary, wages, etc. Such a provision, prescribed u/s.15 of the
Act, is allowed for meeting the shortfall, if any, in any of the four years
including the fourth year. The amount so provided for becomes free at the expiry
of the four years, provided there was no shortfall in any of the said years. S.
28 of the said Act provides for punishment with fine and imprisonment for
non-compliance of the provisions of the Act.
1.3 The excess so set aside is known as ‘set-on’ amount for
which a provision is made in the books of account by debiting the profit & loss
account of the year. The issue has arisen about the deductibility of this
provision of set-on amount. The Gauhati High Court has held that the set-on
amount is allowable as deduction while several High Courts including the Bombay
High Court recently held that such an amount is not deductible.
2. India Carbon Ltd.’s case :
2.1 In India Carbon Ltd. v. CIT, 180 ITR 117 (Gau.),
the question in the reference arose as to whether bonus amounts set apart
(called ‘set-on’ amount) debited to the profit & loss account of the company
could be deducted from the income of the company or not for A.Y. 1976-77. The
assessee a company claimed deduction of two amounts, Rs.8,56,241 as bonus paid,
and Rs.7,36,915 the amount deposited in ‘set-on’ account. The former was claimed
u/s.36(1)(ii) and the latter u/s.37 of the Income-tax Act, 1961. The ITO allowed
the deduction of Rs.8,56,241 but rejected the claim for Rs.7,36,915. The
Appellate Authority allowed deduction for both the payments. The Tribunal
however overturned the decision of the Appellate Authority and rejected the
claim for deduction of the set-on amount of Rs.7,36,915. The Tribunal was not
impressed with the contention of the company that it regularly adopted the
mercantile method of accounting and the deduction in the past assessment years
was allowed to the company.
2.2 Being aggrieved by the order of the Tribunal, the company
referred the following questions for consideration of the Gauhati High Court
under Ss.(1) of S. 256, :
(i) “Whether, on the facts and in the circumstances of the
case, the Tribunal was justified in reversing the order of the AAC 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 ?”
2.3 The company contended that the set-on amount is not
prohibited to be deducted u/s. 40(a)(ii) and, therefore, such amounts were
expenditure for the business; the assessee could not utilise the amount
irretrievably and it was commercially expedient to provide for such set-on.
2.4 In reply the Revenue argued that the amount in question
was a reserve fund; the amount stood deposited in the account books of the
assessee and could be utilised by the assessee and, therefore, was not an
expenditure; such an amount, to be paid in future, could not be allowed either
u/s.28 or u/s.30 to u/s.36 or u/s.37 of the Income-tax Act.
2.5 The Gauhati High Court noted the following amongst other
things :
-
The
Government of India in 1961 to obtain industrial peace, appointed a committee
called the Tripartite Commission and on acceptance of the committee’s report
on 6-12-1964, with modifications, the Government of India promulgated on
29-5-1965, an Ordinance which was replaced by the Act No. 21 of 1965 called
the Payment of Bonus Act, 1965, to regulate the bonus payments in the country
with some exceptions.
-
The
Act contained 40 Sections, 4 Schedules and the Rules. They provided together
for ascertainment of gross profits, available surplus and allocable surplus
and set out the sums to be deducted from gross profits besides the manner of
calculation of taxes. The Act also provided for eligibility of workmen for
bonus and for a minimum bonus to be paid and defined the limit of maximum
bonus. Rules were provided explaining how the number of working days was to be
reckoned.
-
The
Act inter alia vide S. 15 provided for how amounts were to be carried
forward (referred to as ‘set-on’) and when the set-on amount was to be
utilised with the help of the Fourth Schedule. The utilised amount was called
the ‘set-off’ amount. Register was prescribed to show the set-on and set-off
amounts.
2.6 The Court further noted that what constituted ‘expenditure’ was a many splendoured controversy; its meaning had gained many facets and dimensions over the years in fiscal statutes and in its trail had brought to surface many fresh controversies. It referred to the decision of the Supreme Court in Indian Molasses Co. (P.) Ltd. v. CIT, 37 ITR 66, to notice that an ‘expenditure’ was that which was paid out and paid away; an amount which passed out irretrievably from the hands of the assessee was ‘expenditure’. Referring to CIT v. Malayalam Plantations Ltd., 53 ITR 140 (SC), the Court noted that the expenditure was wider in meaning and scope than when used to mean expenditure for earning profits; not all that was spent in a business could be construed as expenditure. ‘Commercial expediency’ and ‘reasonableness of expenditure’ were considered relevant for allowing a deduction, as was held in CIT v. Walchand & Co. (P.) Ltd., 65 ITR 381 (SC), and these aspects were to be looked at from the point of view of business. In Shree Sajjan Mills Ltd. v. 156 ITR 585 (SC), the Gauhati High Court noted, that contribution to the gratuity fund created for the benefit of employees in an irrevocable trust, was allowed to be deducted.
2.7 The three cases where the issue was considered under the Payment of Bonus Act, against the assessee’s claim for deduction, were noted by the Court:
- In Malwa Vanaspati & Chemical Co. Ltd. v. CIT, 154 ITR 655 (MP), it was held that S. 15 created a liability which was not a subsisting liability and, therefore, such amounts were held in reserve for meeting a future liability which contingent in nature, more so where the assessee did not deposit the amount with the Bonus Act authority.
- In Rayalaseema Mills Ltd. v. CIT, 155 ITR 19 (AP), it was held that set-on was not covered by S. 28 and S. 37 of the Income-tax Act and therefore, not an expenditure and the set-on amount was carried forward for a limited period for four years which was not the same as amounts paid to a third party, and, therefore, not loss, not a trading liability and not an expenditure.
- In P. K. Mohammed Pvt. Ltd. v. CIT, 162 ITR 587 (Ker.) 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.
2.8 The Gauhati High Court also noted that in three other cases, the Madras High Court had examined the issue of deductibility of an amount set aside for payment of bonus to workers independent of the Payment of Bonus Act. In CIT v. Somasundaram Mills (P.) Ltd., 95 ITR 365 (Mad.), CIT v. Anamallais Bus Transports (P.) Ltd., 99 ITR 445 (Mad.) and again in 118 ITR 739 (Mad.), it was held that the amount set aside as such for payment of bonus represented a contingent liability and could not be allowed as expenditure; the workmen did not have a right in such amounts.
2.9 The Court referred to the rule that required the statutory maintenance of registers and the columns therein. It noted that the Register ‘B’ showed set-on and set-off; that the amounts shown in columns, 3, 4 and 5 of the Fourth Schedule were amounts which were to be paid or have been paid to the employees; columns 2 to 5 in Form ‘B’ showed the amounts paid or to be paid. The Court observed that these columns, coupled with the language of S. 15 of the Act, indicated that the set-on amount could not be used or utilised by the assessee for business purposes and the amount deposited was held for the benefit of workmen; the use of words ‘utilised for the purpose of payment of bonus’ in S. 15 made this clear.
2.10 The Court posed itself a question, the answer thereto was considered crucial for deciding the issue whether a set-on amount was deductible or not. “In case such amounts were used by the assessee and the amounts were lost in the business, could a businessman be heard to contend that amounts were lost in business, there was nothing left to be paid to workmen and that as such he might be absolved from paying the bonus to workmen?”
2.11 The Court answered that the assessee could not utilise the set-on amount for business; that on making the deposit the assessee was divested of the right to invest or utilise the amount for business; the columns shown in the Fourth Schedule, Form B and the language used in the Schedule and in S. 15 of the Act indicated that the set-on amount, after it was deposited, could not be utilised; the amount was to be paid in four years. The Court was not impressed by the contention that the assessee could utilise the amount in business as the amounts set on were akin to the funds in an irrevocable trust such as referred to in Shree Sajjan Mills Ltd. v. CIT (supra) and the assessee was not an owner of the funds. The issue of deduction when viewed from the point of business as was done in CIT v. Walchand and Co. (P.) Ltd. (supra), would lead to an inevitable answer in favour of allowance of claim of the assessee.
2.12 The set-on amount could not be utilised by the assessee and had to be deposited perforce under the statute, and in that view of the matter such amount was an expenditure allowable for deduction. The Court observed that the company would be liable for punishment for fine and imprisonment u/s.28 of the Act for contravention where it utilised or used the amount. The set-on amount for the aforesaid reasons was an expenditure incurred by the assessee, and, therefore, had to be deducted.
3. Ingersoll-Rand’s case:
3.1 In Ingersoll-Rand (India) Ltd. v. CIT, 320 ITR 513 (Bom.), the question that had been referred for consideration of the High Court at the instance of the assessee read as?: “Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the set-on liability u/s.15 of the Payment of Bonus Act, amounting to Rs.24,73,865 was not allowable as a deduction in computing the total income of the assessee for the year under reference?”
3.2 The Court in the beginning took notice of the fact that S. 15(1) of the Payment of Bonus Act laid down that where for any accounting year the allocable surplus exceeded the amount of maximum bonus payable to the employees in the establishment u/s.11, then the excess should, 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.
3.3 The Court also noted that the issue of deduc-tion of set-on bonus was already considered by several High Courts and particularly, in favour of the Revenue by the Madhya Pradesh High Court in the case of Malwa Vanaspati & Chemical Co. Ltd. v. CIT, 154 ITR 655, the Andhra Pradesh High Court in Rayalaseema Mills Ltd. v. CIT, 155 ITR 19 and the Kerala High Court in P. K. Mohammed (P) Ltd. v. CIT, 162 ITR 587. It also took note of the contrary view taken by the Gauhati High Court in India Carbon Ltd. v. CIT, 180 ITR 117. The Court noted that amongst the High Courts, there were two different views, though the majority of the High Courts have taken a view that the sum in question was not an allowable deduction.
3.4 The Bombay High Court observed that in India Carbon’s case (supra) the Gauhati High Court proceeded to hold that; the assessee could not utilise the amount for business; that on making deposit it was divested of the right to invest or utilise the amount for business; the amount had to be paid in future in the course of a cycle of four years; the amount if utilised would be in contravention of the Act and punishable. On this basis it held that the amount deposited under the provisions of the Act, which could not be utilised for the purposes of business, amounted to expenditure allowable.
3.5 Attention of the Court, on behalf of the company, was drawn to the judgment of the Supreme Court in Bharat Earth Movers v. CIT, 245 ITR 428 (SC), to contend that considering the ratio of that judgment, the allocable surplus would be an allowable deduction. In that case, the company had floated a scheme for its employees for encashment of leave and created a fund by making a provision for meeting such liability under a leave reserve account which was maintained so as to provide for encashment and payment of leave and vacation leave was paid from the leave reserve. On the basis of facts, the Court held that the provision made by the appellant company for meeting the liability incurred by it and the leave encashment scheme was entitled to deduction.
3.6 The Court relying on the precedents in favour of the Revenue held that an amount set on u/s.15 of the Payment of Bonus Act was not an accrued liability, but only a provision to meet a future liability, if any, and therefore, being a contingent liability, it was not allowable as deduction. It observed that; what the assessee was required by statute to do was to keep a reserve with itself, of what was known as allocable surplus to meet a future shortfall, if any, for a period of four years; the shortfall could not be estimated with reasonable certainty, though statutorily the liability had to be incurred; the extent of the liability also could not be estimated with reasonable certainty as if there were profits to meet the bonus liability the reserve would not be expended; only in the event there were no sufficient profits would the allocable surplus be utilised to meet the liability; the amount was merely a reserve fund which the Payment of Bonus Act mandated; after the expiry of four succeeding accounting years if the amount was not utilised the assessee was free to make use of the amount; the amount to be adjusted for the subsequent year, depended therefore on the shortfall which could not be anticipated with reasonable certainty; the amount was not deducted in the hands of the assessee unless it was utilised; the deduction claimed was not an accrued liability, but only a provision u/s.15(1) of the Payment of Bonus Act to meet a future liability, if any; the Tribunal was right in law in holding that the set-on liability u/s.15 of the Payment of Bonus Act was not allowable as a deduction in computing the total income of the assessee for the year under reference.
3.7 The judgment in Bharat Earth Movers (supra) case was found by the Bombay High Court to be clearly distinguishable and, therefore, not applicable.
4. Observations:
4.1 S. 15 of the Payment of Bonus Act reads as under:
1) “Set-on and set-off of allocable surplus — (1) Where for any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment u/s.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 u/s.10, and there is no amount or sufficient amount carried forward and set on U/ss.(1) which could be utilised for the 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 Ss.(1) or Ss.(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.”
4.2 S. 28 provides for penalty for violation of any of the provisions of the Act. It reads as:
“If any person —
a) contravenes any of the provisions of this Act or any rule made thereunder; or
b) to whom a direction is given or a requisition is made under this Act fails to comply with the direction or requisition, he shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to one thousand rupees, or with both.”
4.3 The primary thing that emerges out of the provisions of the Act is that the setting aside of the prescribed amount of ‘set-on’ is a statutory requirement and non-compliance thereof attracts the stringent punishment. Also emerges is the fact that the Income-tax Act does not provide for any express disallowance of the amount of ‘set-on’ un-less a view is taken that it is hit by S. 43B. It is also clear that such amount is not free for utilisation at the whims and fancies of the establishment which is rather duty bound to utilise the said amount for meeting the shortfall of any of the four years. Specific formula are provided by the Act for scientifically calculating the ‘set-on’ amount with the precision. There is nothing uncertain about the quantum of the provision. There is every possibility that the liability might emerge as had that not been anticipated, the law would not make any provision for such ‘set-on’. The sum is set aside for the labour welfare under a statutory stipulation.
4.4 The establishment is made presently liable for setting aside an amount not out of the profit, but out of the allocable surplus under a provision of law and under the mercantile system of accounting, it falls for allowance u/s.37 of the Income-tax Act. The establishment is divested of the set-on amount on creating a provision as per statute and on provision ceases to be the owner of the funds and holds thereafter as trustee or a custodian of the funds. The employees have an overriding title for the pre-scribed period of four years and the set-on money cannot be frittered away at the sweet will of the employer during the said period of four years.
4.5 For allowance of a deduction, actual parting of funds is not necessary and in any case, settlement by accounts is also an expenditure. The Supreme Court in the case of Metal Box Ltd., 73 ITR 53 held that an accrued but undischarged liability is allowable and a discounted value of a contingent liability in given circumstances be sometimes an expenditure. The Calcutta High Court in case of Electric Lamp Mfg. (India) Ltd., 165 ITR 115 (Cal.) held that a provision of a statutory liability on actuarial valuation is allowable as a deduction.
4.6 It may be true that the payment as also the quantum thereof is not certain, that fact alone should not deter the allowance of the claim for deduction. In the event the amount or part thereof was found to be not payable, the same nonetheless will be liable for taxation u/s.41 of the Act. No income escapes taxation by allowing the claim. In fact the Andhra Pradesh High Court in Rayalaseema Mills Ltd. v. CIT, 155 ITR 19 (AP) was pleased to hold that the obligation for setting on was statutory, but was confined only to the four succeeding accounting years, whereafter the assessee was free to make such use of the amount, if any, remaining, as it thinks fit. The Court accordingly confirmed that for the period of four years, the assessee was prevented from using the said funds at his will leading to a reasonable inference that the liability cannot at least be construed to be contingent and the funds set aside were not free. The said decision also noted the fact that the set-on amount could be utilised for payments in case of the need and only after the expiry of the four year period that the funds will be a part of the general revenue. The better view appears to be in favour of allowance of a set-on amount more importantly in view of provisions of S. 41 of the Act which ensures that no expenditure, that is not incurred finally, escapes taxation.
