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Issues involved: Determination of whether the set on of bonus as per section 15(1) of the Payment of Bonus Act, 1965, at Rs. 3,24,800 is allowable as business expenditure in computing the assessee's income for the assessment year 1978-79.
The High Court of Madhya Pradesh considered a case where the assessee, a private limited company engaged in the manufacture of hydrogenated oil and allied products, claimed an amount as "set on of bonus" under the Payment of Bonus Act, 1965. The Income-tax Appellate Tribunal, Commissioner of Income-tax (Appeal), and the Tribunal upheld the disallowance of the claim, leading to the reference before the High Court. The assessee relied on section 15(1) of the Payment of Bonus Act, 1965, which deals with the carry forward of excess allocable surplus for payment of bonus in subsequent years. The court noted that this provision creates a contingent liability for future years, not a subsisting liability for the accounting year in question. The court emphasized that the provision does not create an enforceable right for the workers to claim the bonus amount. The assessee argued that under section 37 of the Income Tax Act, amounts accrued due under statutory provisions could be claimed as a deduction. However, the Revenue contended that there was no accrued liability in the present case, and the provision made for future contingency did not qualify as business expenditure. The court examined relevant case law and statutory provisions to determine the deductibility of the claimed amount. The court held that for an expenditure to be allowable, it must be incurred wholly and exclusively for the purpose of the business. It emphasized that the expenditure must be incidental to the trade and aimed at keeping the trade profitable. The court found that the connection between the claimed expenditure and the business activity was lacking in the present case, leading to the disallowance of the claim as business expenditure. In conclusion, the High Court ruled in favor of the Revenue, stating that the set on of bonus under section 15(1) of the Payment of Bonus Act, 1965, was not allowable as business expenditure for the assessment year 1978-79. The reference was answered accordingly, with no order as to costs.
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