Law:

Section:

I. Section 37(1), read with section 36(1)(ii) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Whether provision for set-on liability under section 15 of the Payment of Bonus Act is allowable as a deduction in computing total income of assessee - Held, no II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Whether surtax payable pursuant to Companies (Profits) Sur-tax Act, 1964 is an admissible deduction - Held, no FACTS-I The assessee had claimed the provision for set-on liability under section 15 of the Payment of Bonus Act as a deduction in computing its total income. The Tribunal held the same to be not allowable. On reference : HELD-I In the instant case, what the assessee was required by statute to do, was to keep a reserve with itself, which is known as 'allocable surplus' to meet a future shortfall, if any, for a period of four years. The shortfall could not be estimated with a reasonable certainty, though statutorily the liability had to be incurred. The extent of the liability also could not be estimated with a 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 utilized to meet the liability. The amount was merely a reserve fund which the Payment of Bonus Act mandates. After the expiry of four succeeding accounting years, if the amount is not utilized, 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 a reasonable certainty. The amount is not deducted in the hands of the assessee unless it is utilized. Thus, the deduction claimed by the assessee was not an accrued liability, but only a provision under section 15(1) to meet a future liability, if any. It was, therefore, not certain nor was it capable of being ascertained with a reasonable certainty. It was, thus, a contingent liability. Therefore, the set-on liability under section 15 of the Payment of Bonus Act was not allowable as a deduction in computing the total income of the…

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