INGERSOLL RAND (INDIA) LTD., BOMBAY. vs. C.I.T.-VII, BOMBAY.

-1- mgn IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX REFERENCE NO.58 OF 1991 Ingersoll-Rand (India) Ltd. ) Naybaker House, S.K. Ahire Marg, ) Bombay-25. )..Applicant Vs. Commissioner of Income-tax, ) Bombay City-IV, Bombay. )..Respondent Mr.P.J. Pardiwala, Sr.Counsel with Mr. Nishit Joshi i/b. Crowford Beylay & Co., for the Applicant. Mr. P.S. Sahadevan, for Respondent. CORAM: F.I. REBELLO & CORAM: F.I. REBELLO & CORAM: F.I. REBELLO & R.S.MOHITE, JJ. R.S.MOHITE, JJ. R.S.MOHITE, JJ. DATE: DATE: DATE: 4th April,2009 4th April,2009 4th April,2009 JUDGMENT: (PER F.I. REBELLO, J.). JUDGMENT: (PER F.I. REBELLO, J.). JUDGMENT: (PER F.I. REBELLO, J.). . The following questions have been referred for our consideration at the instance of the assessee. They read as under:- "(i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that sur-tax payable pursuant CNR No : HCBM020004781991 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:49

-2- to the Companies (Profits) Sur-tax Act, 1964 was not an admissible deduction in computing the total income for the year under reference? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the set-on liability under Section 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?’ 2. The following reference has been made by the Tribunal for our consideration at the instance of the Revenue:- "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that weighted deduction u/s.35B is allowable in respect of interest paid on packing credit amounting to Rs.4,10,054/-.? 3. We may first deal with question No.(i) as referred at the instance of the assessee. The Tribunal held that every High Court has decided the matter against the assessee by taking a view that the sur-tax payment is not an allowable deduction under Section 37 of the Act. Reliance was placed in the judgment of the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:49

-3- Andhra Pradesh High Court in the case of Vazir Sultan Vazir Sultan Vazir Sultan Tobacco Co. Ltd., (174 ITR 689. Tobacco Co. Ltd., (174 ITR 689. Tobacco Co. Ltd., (174 ITR 689. The issue is no longer res integra as now the question is covered by the judgment of the Supreme Court in Smith Kline and French Smith Kline and French Smith Kline and French (India) Ltd. & Ors. vs. Commissioner of Income Tax, (India) Ltd. & Ors. vs. Commissioner of Income Tax, (India) Ltd. & Ors. vs. Commissioner of Income Tax, 219 ITR 581(S.C.). 219 ITR 581(S.C.). 219 ITR 581(S.C.). In the light of the above the question is answered in the affirmative against the assessee and in favour of the Revenue. 4. That brings us to the second question referred at the instance of the assessee, whether the provisions for set-on liability under Section 15 of the Payment of Bonus Act was allowable deduction in computing the total income of the assessee for the year under reference. We may at once note that Section 15(1) of the Payment of Bonus Act lays down that 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. 5. The issue has been considered by several High Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:49

-4- Courts. We may firstly consider the judgment of the M.P. High Court in the case of Malwa Vanaspati & Malwa Vanaspati & Malwa Vanaspati & Chemical Co. Ltd. vs. Commissioner of Income-tax, Chemical Co. Ltd. vs. Commissioner of Income-tax, Chemical Co. Ltd. vs. Commissioner of Income-tax, M.P., 154 ITR 655. M.P., 154 ITR 655. M.P., 154 ITR 655. The M.P. High Court on considering the provisions was pleased to hold that the liability is not a subsisting liability as such for the accounting year, but it is a contingent liability as this section merely enforces an accounting arrangement on the assessee company so that the interest of the workers in the future years may be safeguarded. It further observed that the Section by itself does not create the liability. The amount is not required to be paid to the workers. It is also not required to be deposited with an authority under the Bonus Act. The workers have no claim on the amount and cannot enforce the payment thereof by any means. It is merely a reserve fund which the company has to create by reason of the provisions of Section 15(1) of the Payment of Bonus Act. It, therefore, arrived at a conclusion that set on bonus is not allowable as business expenditure in computing the assessee’s income. 6. The Andhra Pradesh High Court had also occasion to consider the issue in Rayalaseema Mills Ltd. v. Rayalaseema Mills Ltd. v. Rayalaseema Mills Ltd. v. Commissioner of Income-tax, A.P. 155 ITR 19. Commissioner of Income-tax, A.P. 155 ITR 19. Commissioner of Income-tax, A.P. 155 ITR 19. The learned Bench considering the provisions of Section 15 was pleased to hold that the statutory obligation for setting on is confined only to the four succeeding Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:49

-5- accounting years, whereafter the assessee is free to make such use of the amount, if any, remaining, as it thinks fit. Considering that the amount is required to be set apart with the assessee himself for a limited period to meet its bonus obligation in the succeeding account 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 cannot be said that the money is diverted from the assessee under an overriding legal obligation. It considered the aspect that deduction claimed does not fall under Section 37 not being expenditure expanded by the assessee. It was then sought to be put under Section 28 on the reasoning that the amount is diverted under an overriding legal obligation. Considering the argument obligation, the Court observed that 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 by virtue of the overriding legal obligation. As the allocable surplus is determined out of the profits of the assessee, all that Section 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. The bonus reserve the Court observed is created voluntarily for the same purpose and it will not be allowed as deduction. The Court then held that when the bonus reserve is created voluntarily for the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:49

-6- same purpose it would not be available as a debt. The money is required to be set apart and is not paid to third party, nor is it paid into a fund from which it never comes back to the assessee as after the expiry of the prescribed period if the amount is not utilised for payment of bonus it becomes part and parcel of the general revenue. The amount so set apart cannot be said to be "liability already accrued" and, therefore, arrived at a conclusion that it is not a permissible deduction. 6. The Kerala High Court considered the issue in P.K. Mohammed Pvt. Ltd. vs. Commissioner of P.K. Mohammed Pvt. Ltd. vs. Commissioner of P.K. Mohammed Pvt. Ltd. vs. Commissioner of Income-tax, 162 ITR 587 Income-tax, 162 ITR 587 Income-tax, 162 ITR 587. Considering the nature of the fund the Court held that it is a reserve fund statutorily created and retained by the assessee itself and could not be claimed as permissible deduction under Section 37 of the Income Tax Act. The amount to be paid as Bonus from out of the reserve fund could not be ascertained under the liability accrued in future covering the period of four years. A provision to meet an unascertained future contingent liability was not a permissible deduction. As the amount was not paid to the employee it was not a permissible deduction under Section 36(1)(ii) of the Income Tax Act. It noted that there is no diversion of fund in the hands of the assessee and the amount reserved is for the purpose of utilisation to meet the liability of the assessee Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:49

-7- himself if it may arise in the future. There is no 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. It is not a deduction with respect to accrued liability. It, therefore, held that it was not maintainable. 8. A contrary view has been taken by the Gauhati High Court in India Carbon Ltd. vs. Commissioner of India Carbon Ltd. vs. Commissioner of India Carbon Ltd. vs. Commissioner of Income-tax, 180 ITR 117. Income-tax, 180 ITR 117. Income-tax, 180 ITR 117. The Gauhati High Court proceeded to hold that the assessee cannot utilise the amount for business. On making deposit it is divested of the right to invest or utilise the amounts for business. The amounts have to be paid in future in the course of a cycle of four years. 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 and which cannot be utilised for the purposes of business amount to expenditure and allowable. . Amongst the High Courts, therefore, there are two different views, though the majority of the High Courts have taken a view that it is not an allowable deduction. 9. On behalf of the applicant, however, learned Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:49

-8- Counsel drew our attention to the judgment of the Supreme Court in Bharat Earth Movers vs. Commissioner Bharat Earth Movers vs. Commissioner Bharat Earth Movers vs. Commissioner of Income-tax, 245 ITR 428 of Income-tax, 245 ITR 428 of Income-tax, 245 ITR 428, to contend that considering the ratio of that judgment, the allocable surplus would be an allowable deduction.A few facts may be noted. The company had floated a scheme for its employees for encashment of leave. The officers were entitled to earned leave calculated at 30 days per year. The staff (other than officers) were entitled for vacation leave of 18 days in a year. Both earned leave and vacation leave could be accumulated upto a maximum of 240 days and 126 days respectively. The company created a found by making a provision for meeting such liability. If the employee accumulates leave in a particular year then in the succeeding year the employee may either avail of the leave or apply for encashment. If he avails of the leave then additional provision for encashment is not made in the reserve account. The earned leave/vacation leave, could be encashed subject to the ceiling on accumulation. A leave reserve account was maintained so as to provide for encashment. Encashment of both earned leave and vacation leave was paid from the leave reserve. The High Court took a view that the provision for accrued leave salary was a contingent liability and, therefore, was not a permissible deduction. In so holding the High Court observed that the liability will arise only if an employee does not go on leave and instead applies for Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:49

-9- encashment. If the employee avails of the leave as per his entitlement, then he would be paid salary for the period of leave and liability for encashment would not arise. The other event on the occurrence of which the employee may stake his claim is termination or retirement which again is an uncertainty. . Before the Supreme Court on behalf of the assessee it was contended that subject to the ceiling, every employee would either avail of the leave or seek encashment and, therefore, the liability is a certainty. It cannot be called a contingent liability. Dealing with the business liability the Court observed as under:- "The law is settled; if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual qualification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:49

-10- date on which the liability shall have to be discharged is not certain." Reliance was placed on the judgment in Metal Box Metal Box Metal Box Company of India Ltd. v. Their Workmen (1969) 73 ITR Company of India Ltd. v. Their Workmen (1969) 73 ITR Company of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC) 53 (SC) 53 (SC). The Company there had two gratuity schemes and the amount of liability was deducted from the gross receipts in the profit and loss account. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. The practice followed by the company was that every year the company worked out the additional liability incurred by it on the employees putting in every additional year of service. The gratuity was payable on the termination of an employee’s service either due to retirement, death or termination of service, the exact time of occurrence of the latter two events being not determinable with exactitude before hand. The Court then laid down principles which are referred to in the judgment. Based upon these principles the Court in Bharat Earth Movers (supra) held that the provision made by the appellant company for meeting the liability incurred by it and the leave encampment scheme is entitled to deduction out of the gross receipts for the accounting year during which the provision is made for the liability as the liability was certain and not contingent. The important aspect to be noted is that Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:49

-11- the provisions in the leave reserve was only made if the employee did not avail of the leave. 10. The question is whether the ratio of this judgment in Bharat Earth Movers (supra) can be made applicable in the case of making provision for allocation of surplus under Section 15 of the Payment of Bonus Act. The answer to the question would be whether the liability is a subsisting liability or a contingent liability in terms of the tests laid down in Bharat Earth Movers (supra). For it to be a subsisting liability, though it may have to be quantified and discharged at a future date, there must be a (1) incurring of liability (is) it should be capable of being estimated with reasonable certainty though actual. In Bharat Earth Movers (supra) the liability was certain as the amount was credited in the fund only in the event the employee had not availed of the leave The leave available to an employee in the course of the year is also known, based on whether he was an officer or employee. . In the instant case what the assessee is required by statute to do is to keep a reserve with itself, of what is known as allocable surplus to meet a future shortfall if any, for a period of four years. The shortfall cannot be estimated with reasonable certainty, though statutorily the liability has to be Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:49

-12- incurred. The extent of the liability also cannot 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 is merely a reserve fund which the Payment of Bonus Act mandates. After the expiry of four succeeding accounting years if the amount is not utilised the assessee is free to make use of the amount. The amount to be adjusted for the subsequent year, depends therefore on the shortfall which cannot be anticipated with reasonable certainty. The amount is not deducted in the hands of the assessee unless it is utilised. The deduction claimed is not an accrued liability but only a provision under Section 15(1) of the Payment of Bonus Act to meet a future liability, if any. It is, therefore, not certain nor is it capable of being ascertained with reasonable certainty. In our opinion it is a contingent liability. The judgment in Bharat Earth Movers (supra) is clearly distinguishable and, therefore, not applicable. The question No.2, therefore, referred at the instance of the assessee is answered in the affirmative in favour of the Revenue and against the assessee. 11. We lastly come to the question referred at the instance of the Revenue. The question as referred is Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:49

-13- as set out in para.2. Considering the tax incidence the learned Counsel for the Revenue does not press the same. In the light of that the question referred at the instance of the Revenue is returned unanswered. . Reference answered accordingly. (R.S. MOHITE,J.) (F.I.REBELLO,J.) (R.S. MOHITE,J.) (F.I.REBELLO,J.) (R.S. MOHITE,J.) (F.I.REBELLO,J.) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:48:49 Powered by TCPDF (www.tcpdf.org)