2009 (4) TMI 5 - HC - Income Tax

Whether the provisions for set-on liability (to meet a future shortfall) u/s 15 of the Payment of Bonus Act was allowable deduction - shortfall and extent of the liability cannot be estimated with reasonable certainty - deduction claimed is 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 therefore amount is not allowable as a deduction further sur-tax payment is also not an allowable deduction u/s 37

Issues Involved:
1. Deductibility of sur-tax under the Companies (Profits) Sur-tax Act, 1964.
2. Deductibility of set-on liability under Section 15 of the Payment of Bonus Act.
3. Allowance of weighted deduction under Section 35B for interest paid on packing credit.

Detailed Analysis:

1. Deductibility of Sur-tax:
The Tribunal held that sur-tax payable under the Companies (Profits) Sur-tax Act, 1964, is not an admissible deduction in computing the total income. This conclusion aligns with the precedent set by various High Courts, including the Andhra Pradesh High Court in Vazir Sultan Tobacco Co. Ltd., 174 ITR 689. The Supreme Court in Smith Kline and French (India) Ltd. & Ors. vs. Commissioner of Income Tax, 219 ITR 581(S.C.), affirmed this position. Consequently, the question was answered in the affirmative against the assessee and in favor of the Revenue.

2. Deductibility of Set-on Liability under Section 15 of the Payment of Bonus Act:
The Tribunal examined whether the set-on liability under Section 15 of the Payment of Bonus Act, amounting to Rs.24,73,865/-, was an allowable deduction. Section 15(1) mandates that any allocable surplus exceeding the maximum bonus payable should be carried forward for up to four years to be used for future bonus payments.

Several High Courts have considered this issue:
- M.P. High Court in Malwa Vanaspati & Chemical Co. Ltd. vs. Commissioner of Income-tax, M.P., 154 ITR 655: Held that the set-on liability is a contingent liability, not a subsisting liability, as it is merely an accounting arrangement without an immediate payment requirement. It is not an allowable business expenditure.
- Andhra Pradesh High Court in Rayalaseema Mills Ltd. v. Commissioner of Income-tax, A.P. 155 ITR 19: Concluded that the set-on amount is not diverted under an overriding legal obligation. It is a reserve fund created voluntarily and not an allowable deduction.
- Kerala High Court in P.K. Mohammed Pvt. Ltd. vs. Commissioner of Income-tax, 162 ITR 587: Determined that the set-on liability is a reserve fund for future contingent liabilities, not a permissible deduction under Section 37 or Section 36(1)(ii) of the Income Tax Act.

A contrary view was taken by the Gauhati High Court in India Carbon Ltd. vs. Commissioner of Income-tax, 180 ITR 117, which held that the set-on amount is an allowable expenditure as it cannot be utilized for business purposes and must be reserved for future bonus payments.

The Supreme Court's judgment in Bharat Earth Movers vs. Commissioner of Income-tax, 245 ITR 428, was considered but found distinguishable. In Bharat Earth Movers, the provision for leave encashment was a certain liability, whereas the set-on liability under the Payment of Bonus Act is contingent and not ascertainable with reasonable certainty. Thus, the Tribunal concluded that the set-on liability is not an allowable deduction, answering the question in the affirmative in favor of the Revenue and against the assessee.

3. Allowance of Weighted Deduction under Section 35B:
The Tribunal considered whether a weighted deduction under Section 35B is allowable for interest paid on packing credit amounting to Rs.4,10,054/-. The Revenue's counsel did not press this issue due to the tax incidence. Therefore, the question was returned unanswered.

Conclusion:
The references were answered accordingly, with the Tribunal ruling against the assessee on the deductibility of sur-tax and set-on liability, while the question regarding the weighted deduction under Section 35B was returned unanswered.

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