(a) Income-tax---

----Capital or revenue expenditure---Foreign exchange---Purchase of machinery from foreign company---Additional expenditure due to fluctuation in rate of exchange---Capital expenditure---Indian Income Tax Act, 1961, S.37.

Additional expenditure incurred in the discharge of liability towards purchase of capital assets on account of fluctuation in the rate of exchange of foreign currency is capital expenditure. It is not deductible.

CIT v. Elgi Rubber Products Ltd. (1996) 219 ITR 109 (Mad.) fol.

(b) Income-tax---

----Business expenditure---Surtax not deductible---Indian Income Tax Act, 1961, S.37---Indian Companies (Profits) Surtax Act, 1964.

Surtax paid is not an allowable deduction in the computation of business income.

Smith Kline and French (India) Ltd. v. CIT (1996) 219 ITR 581 (SC) fol.

(c) Income-tax---

----Business expenditure---Income---Diversion of income by overriding title--Amounts transferred to general reserve under S.205(2A) of Companies Act-- Amounts transferred from company's profits---Declaration of entire profits of company as dividends prohibited but no other restriction on user of such amount ---Amount not diverted by overriding title---Not deductible---Indian Income Tax Act 1961, S.37.

A fair reading of section 205(2A) of the Companies Act, 1956, makes it clear that a certain percentage of the company's profit is set apart and transferred to the reserve fund before declaration of dividends. In other words, section 205(2A) of the Companies Act prohibits the declaration of the entire profits of the company as dividends, but there are no other restrictions on its -user. The amount transferred under the above provision is out of the income of the assessee. Though the statute mandates that a portion of the profits should be set apart, there is no diversion of income by overriding title, nor can the amount set apart be claimed as expenditure, and it cannot also be stated that it was a loss.

(d) Income-tax---

----Business expenditure---Income---Diversion of income by overriding title- Amount set on under Payment of Bonus Act to meet bonus liability in subsequent years---Contingent liability---Amount set apart after profit is earned---Amount not diverted by overriding title---Not deductible---Indian 'Income Tax Act. 1961, S.37---Indian Payment of Bonus Act, 1965---[India Carbon Ltd. v. CIT (1989) 180 ITR 117 and (1989) 75 FJR 287 (Gauhati) dissented from]

The money set apart as set on for bonus as per the provisions of subsection (1) of section 15 of the Payment of Bonus Act, 1965, is not paid to the employees and the employees have no right over the money and the money can be used in the subsequent years for the business purposes of the assessee when there is shortfall in the amount of allocable surplus. Therefore, it cannot be said that there is a diversion of income by overriding title as the amount is set apart after the profit is earned, nor can it be regarded as an expenditure incurred by the assessee as there is no subsisting legal obligation to pay bonus during the relevant accounting year. Further, the liability of the assessee during the accounting year is only a contingent liability and only to make up a shortfall that may arise in the subsequent accounting year. The amount is set apart and the liability to pay bonus will arise only in succeeding assessment years. Therefore, it cyan neither be called an expenditure. nor a loss, nor can it be regarded as trading liability.

Associated Power Co. Ltd. v. CIT. (1996) 218 ITR 195 (SC); Vellore. Electric Corporation Ltd. v. CIT 1:1997) 227 ITR 557 (SC) and CIT v. Pallavan Transport Corporation Ltd. (1998) 230 ITR 288 (Mad.) applied.

Malwa Vanaspati and Chemical Co. Ltd. v. CIT (1985) 154 ITR 655; (1985) 67 FJR 117 (MP); Rayalaseema Mills Ltd. v. CIT (1985) 155 ITR 19 (AP); P.K. Mohammed (P.) Ltd. v. CIT (1986) 162 ITR 587 (Ker.) and Mysore Lamp Works Ltd. v. CIT (1990) 185 ITR 96 (Kar.) fol.

CIT (Addl.) v. Anamallais Bus Transports (P':) Ltd. (1979) 118 ITR 739 (Mad.);. CIT v. Pandavapura Sahakara Kharkane Ltd. (1992) 198 ITR 690 (Kar.); CI T v. Bhopal Sugar Industries Ltd. (1996) 221 ITR 449 (MP); Somaiya Orgeno-Chemicals Ltd. v. CIT (1995) 216 ITR 291 (Bom.); CIT v. Salem Cooperative Sugar Mills Ltd. (1998) 229 ITR 285 (Mad.) and CIT v. Andhra Prabha (P.) Ltd. (1980) 123 ITR 760 (Mad.) distinguished.

India Carbon .Ltd. v. CIT (1989) 180 ITR 117 and (1989) 75 FJR 287 (Gauhati) dissented from.

S.A. Balasubramanian for the Assessee.

C. V. Rajan for the Commissioner.

JUDGMENT

The questions of law referred to us both at the instance of the assessee as well as at the instance of the Revenue for the assessment years 1975-76, 1976-77, 1978-79 and 1979-80 run as under:

At the instance of the assessee (for all assessment Years):

"(1) Whether, on the facts and in the circumstances of the case. the decision of the Tribunal that the amounts representing the additional expenditure which the assessee, had to incur on account of the fluctuation in the exchange rate is not liable to be allowed as revenue expenditure incidental to its business, is correct?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the assessee is not entitled to claim deduction in computing its profits for the assessment year by reason of section 43A of the Income-tax Act?

(3) Whether the Tribunal is justified in law in holding that the. sums transferred to reserve as required by section 205(2A) of the Companies Act, 1956, are not liable to be taken into account in the computation of the real income of the assessee for the assessment years concerned or in the alternative it is liable to be allowed as deduction under section 37(1) of the Income-tax Act?"

For the assessment years 1975-76 and 1976-77:

"(4)Whether, on the facts and in the circumstances of the case, -the Tribunal is right in holding that the surtax liability of the assessee under the Companies (Profits) Surtax Act, 1964, is not eligible for deduction in computing the assessee's income from business?"

At the instance of the Revenue (for the assessment years 1975-76 and 1976-77):

"(5) Whether, on the facts and circumstances of the case, the Appellate Tribunal is right in law in holding that the amount set on under section 15(l) of the Payment of Bonus Act, to meet the bonus liability of the subsequent years and actually paid in subsequent years should be deducted in computing the assessee's profit for the concerned years?"

The assessee is engaged in the manufacture of paper and paper boards. Now, we will take up for consideration the- first and the set on questions. The assessee claimed during the assessment years 1975-76 to 1979-80, certain expenditure on certain additional payments which it had to make with reference to the loans borrowed from the Industrial Credit and Investment. Corporation of India (ICICI) and also from Swedish Credit Institution. The assessee had purchased a machinery on credit from Sweden and the purchase was partly advanced by the Industrial Credit and Investment Corporation of India and a Swedish Corporation. The assessee has to pay to these institutions the amount borrowed in a phased manner and due to fluctuation in the value of Indian currency, the amount payable by the assessee became larger than the amount calculated at the rate of exchange between two countries prevailing at the time when. the machinery was purchased.. The assessee claimed the difference between the two amounts as revenue expenditure which was rejected by the Assessing Officer which was upheld by the Commissioner (Appeals). The Tribunal also held that the said expenditure would constitute capital expenditure and rejected .the claim of the assessee and . on this finding the Appellate Tribunal has

referred at the instance of the assessee the first and second questions of law set out above.

In so far as the expenditure incurred in the discharge of the liability towards the purchase of tile capital assets on account of fluctuation in currency is concerned, the, decision of this Court in CIT v. Elgi Rubber Products Limited (1996) 219 ITR 109 would apply wherein this Court held that such expenditure cannot be regarded as revenue expenditure, but only a capital expenditure. Following the said decision, the first and second questions of law relating to the liability on the expenditure on account of fluctuation of currency have to be answered against the assessee.

Now, we will take up for consideration the third question. The assessee during the -previous years relevant to the said assessment years transferred certain amounts to the general reserve in accordance with the provisions of section 205(2A) of the Companies Act, 1956, and claimed that those amounts should be deducted in determining the assessee s total income for the years. The assessee claimed deduction for the various assessment years as under:---

The claim of the assessee was rejected by the Income-tax Officer which was upheld by the Commissioner of Income-tax (Appeals). The Appellate Tribunal also did not agree with the contention of the assessee that it should be deducted and it is, with reference to the said finding of the Appellate Tribunal, the third question of law set out above has been referred.

In so far as the third question relating to the amount transferred as reserve under section 205(2A) of the Companies Act is concerned, we are of the view that though the amount was transferred under. the provisions of section 205(2A) of the Companies Act, the assessee transferred the amount as reserve out of its own profits. Though. the statute mandates that a portion of the profits should be set apart, we are of the view that there is no diversion of income by overriding title, nor the amount set apart can be claimed as expenditure, and it cannot also be stated that it was a loss. Section 205(2A) of the Companies Act reads as under: .

"Notwithstanding anything contained in subsection (1), on and, from the commencement of the Companies (Amendment) Act, 1974, no dividend shall be declared or paid by a company for any financial year out of the profits of the company for that year arrived at after providing for depreciation in accordance with the provisions of subsection (2), except after the transfer to the reserves of the company of such percentage of its profits for that year, not exceeding ten percent. as may be prescribed. "

A fair reading of section 205(2A) of the Companies Act makes it clear that a certain percentage of the company's profit is set apart and transferred to the reserve .fund before declaration of dividends. In other words, section 205(2A) of the Companies Act prohibits the declaration of the entire profits of the company as dividends, but there are no other restrictions on its user. The amount transferred under the above provisions, in our opinion, is out of the income of the assessee and the Appellate Tribunal was justified in holding that the assessee is not entitled to claim deduction of the money transferred to the reserve of the company as required under section 205(2A) of the Companies Act. In this view of the matter, the third question of law referred to us with reference to the claim for deduction of the amount transferred-to the reserve as required under section 205(2A) of the Companies Act has to be -answered in the affirmative and against the assessed.

In so far as the assessment years 1975-76 and 1976-77 are concerned, the assessed claimed deduction of surtax liability under the provisions of the Companies (Profits) Surtax Act, 1964. This claim was rejected by the Income-tax Officer and the Commissioner (Appeals) upheld the order of the Income-tax Officer and the Appellate Tribunal also held that the surtax liability cannot be allowed as a deduction. Challenging the said finding of the Appellate Tribunal, the assessee has sought .for and obtained a statement of case for the fourth question of law set out above for the assessment years 1975-76 and 1976-77

In so far as the claim for deduction of surtax liability is concerned, it is now settled by the decision of the Supreme Court in the case of Smith Kline and French (I) Ltd. v. CIT (1996) 219.ITR 581 that the surtax paid is not an allowable deduction in the computation of business income and following the decision of the apex Court, we hold that the Tribunal is correct in holding that the assessee is not entitled to claim deduction of the surtax paid. Accordingly, the fourth question of law relating to the deduction of surtax paid is liable to be answered against the assessed.

Now, we take the fifth question of law referred at the instance of the Revenue. It relates to two assessment years 1975-76 and 1976-77. The assessee claimed during the assessment proceedings for the assessment year 1975-76, a deduction of a sum of Rs.13,24,295 being the amount set on under the provisions of the Payment of Bonus Act. The assessee also made a similar claim for deduction of Rs.13,96,661 for the assessment year 1976-77. The assessee made the claim for deduction in the following circumstances. Under the provisions of the Payment of Bonus Act every employer is required to pay a minimum bonus irrespective of the fact that it had made any profit or not and the employer is required to pay the maximum bonus when there are adequate profits up. to the extent of 20 percent. of the wages. Section 15- of the said Act provides that there in any accounting year, the allocable surplus exceeds the amount of maximum bonus payable to the employees under section 11 of the Payment of Bonus Act, the excess shall, subject to the limit of 20 percent. or the total salary or wage of the employees be carried forward and set on in the succeeding year and to be utilised for the purpose of payment of bonus in the manner stated in the Fourth Schedule. The assessee calculated the amount which was required to be set apart or set on for the assessment years 1975-76 and 1976-77 and Rs.13,24,295 and Rs.13,96,661, respectively. The claim of the assessee was that it was a statutory liability imposed on the assessee and the money was not available to the assessee except for the purpose of payment of bonus to the employees in the year in which there is an inadequate profit and to cover up the deficiency, the amount set on can be used. According to the assessee, the said amount was not the income of the assessee at all and was diverted by overriding title by virtue of a statutory obligation imposed on it and since it as a statutory liability, the amount is deductible in the year in which the amount was set on as-required by the provisions of the Payment of Bonus Act. The Income-tax Officer rejected the claim of the assessee, The claim of the assessee was also rejected by the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that the amount set on was available with the assessee arid the amount was set apart to meet a contingent liability and hence it was not deductible in the computation of income. The Appellate Tribunal, however, held that under the provisions of section 15 of the Payment of Bonus Act, 'the amount set on was statutorily diverted towards the payment of bonus and cannot be regarded as income or profit available to the assessee. The above view of the Appellate Tribunal was arrived at on the basis of the pre-amended law in the Payment of Bonus Act as it was not possible for the assessee to use the amount set on except for the purpose of payment of bonus and hence the amount set on should be allowed as a deduction in the year in which the amount was set on.

Against the order of the Appellate Tribunal, the Revenue sought a reference and the Appellate Tribunal has referred the fifth question oflaw referred to above.

Mr. C.V. Rajan, learned counsel for the Revenue submitted that the amount set on would not qualify for deduction as the amount is set on only to meet a contingent liability and it is only a compulsory reserve for an unknown liability and the workers have no claim with reference to the amount. According to him, though there is a statutory obligation on the part of the employer to set on the amount, and though there are penal provisions for the enforcement of the provision. it cannot be said that there was a diversion of income. According to learned counsel for the Revenue, the money was still in the hands of the assessee to be utilised for the assessee's business purposes, and the necessary deduction would tie granted in the year when the liability for bonus arises in future years. The further submission of learned counsel for the Revenue was that though the user was prohibited, it did not mean that there was a loss to the assessee nor any expenditure was incurred by the assessee to claim the same as deduction. He also submitted that the money was set apart after the income was earned by the assessee and, therefore, it cannot be said that there is a diversion of income by overriding title.

S. A. Balasubramanian, learned counsel for the assessee, on the other hand, submitted that there is a statutory obligation under section 15 of the Payment of Bonus Act and under section 15 of the said Act, as it stood then the assessee has lost money irretrievably and the money has gone out of the hands of the assessee. The submission of learned counsel for the assessee is that the assessee is holding the money as a trustee and during the lien period, the assessee is permitted to use the money and since the assessee has no control or lost entire domain over the money, the amount set on should be allowed either as a business expenditure or on the ground that there was a diversion of income by overriding title. He also submitted that the liability fastened on by section -15 of the Act is akin to the gratuity liability and, therefore, when this Court as well as the Supreme Court has held that the provision made for gratuity liability is deductible, applying and extending the same principle, the amount set on should also be deducted. In support of their respective contentions, learned counsel relied upon several decisions of various other High Courts.

Before discussing various case laws on this topic, it is necessary to note the provisions of sections 15 of the Payment of Bonus Act, as it stood when the Act was enacted which reads as under:

"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 under section 11, then, the excess shall, subject to a limit of twenty percent. 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 under section 10, and there is no amount or sufficient amount carried forward and set on under subsection (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. "

The above section 1.5 of the Payment of Bonus Act was amended by Central Act 23 of 1976 with effect from September 25, 1975, and sub section (1) after the amendment reads as under:

"Where for any accounting year, the allocable surplus exceeds the amount of bonus payable to, the employees in the establishment under section 10, then, the excess shall, subject to a limit of twenty percent. of the toted 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, to be utilised for the purposes of payment of bonus, in the manner illustrated in the Third Schedule."

The above section 15 was again amended by the Payment of Bonus (Second Amendment) Act, 1980, and the subsection '(1) of section 15 after the said amendment reads under:

"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 percent. of the total salary or wage of the employees employed in the establishment in that accounting year, be carried forward for being set on to 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 to the manner illustrated in the Fourth Schedule."

The legislative history of the above provisions clearly shows that prior to 1976, on the expiry of four accounting years the employers were given party to utilise the amount set on out of allocable surplus for their own business. It is only by Central Act 23 of 1976, a time limit of four years found in earlier was removed. But again, it was re-imposed by the Payment of Bonus (Second Amendment) ?pct, 1980. In so far as the assessment years 1975-76 and 1976-77 are concerned, the authorities proceeded on the basis that section 15 of the Bonus Act as amended by the Central Act 23 of 1976 with effect from September 25, 1975, would apply and we also proceed on the same, basis that the provisions of law as amended by Act 23 of 1976 with effect from September 25, 1!)75, would-apply to the facts of the present case. Under section 15 of the Payment of Bonus Act, if in a given year, the allocable surplus exceeds the maximum bonus amount payable to all employees, such surplus subject to ceiling of twenty percent. shall be carried forward to the succeeding years to be utilised for the purpose of payment of bonus. There is no doubt, a statutory obligation cast upon an employer to set apart a portion of the profits for the utilisation for the payment of bonus and that amount cannot be used by the employer during the relevant year or during subsequent years except for the purposes of payment of bonus. The amount is set apart to meet the bonus obligation, that may arise in the subsequent accounting years, if necessary, where there are no sufficient profits to declare the bonus to the employees.

In this statutory background, the case-law cited by learned counsel have to be examined. In Malwa Vanaspati and Chemical Co. Ltd. v. CIT (1985) 154 ITR 655, the Madliya Pradesh High Court held that there was no subsisting liability when the amount was set apart towards the payment of bonus, and the amount was set apart to meet the contingent liability. The Madhya Pradesh High Court also held that the amount was not required to be paid to the workers or required to be deposited to any authority under the Bonus Act. The Court also held that the workers have no claim on the amount and cannot enforce a payment thereof by any means. We entirely agree with the-decision of the Madhya Pradesh High Court that the amount set apart as "set on for bonus" as per the provisions of subsection (1). of section 15 of the Payment of Bonus Act, is not allowable as the amount is set apart to meet a contingent liability of the assessee.

In Rayalaseema Mills Ltd. v. CIT (1985) 155 ITR 19, the Andhra Pradesh High Court held that the money was not diverted by overriding title, nor the money was paid to a fund or the money was not exclusively meant for the payment to the employees. It is no doubt true that the Andhra Pradesh High Court was dealing with a situation where an employer was required to' keep money set on for four succeeding accounting years.

We are also of the view that the principle laid down by the Andhra Pradesh High Court would equally apply to the facts of the case as regards the character of the money set apart by the assessee for the payment of bonus. The money is not paid to the employees and the employees have no right over. the money and the money can be used in the subsequent years for the business purposes of the assessee when there is shortfall in the amount of allocable surplus. Therefore, it cannot be said that there is a diversion of income by overriding title as the amount is set apart after the profit is earned, nor can it be regarded as an expenditure incurred by the assessee as there is no subsisting legal obligation to pay bonus during the relevant accounting year. Further, the liability of the assessee during the accounting year is only a contingent liability and only to make up a shortfall that may arise in the subsequent accounting year, the amount is set apart and the liability to pay bonus will arise only in the succeeding assessment years. Therefore, it can neither be called an expenditure, nor a loss, nor it can be regarded as trading liability.

In P.K. Muhammad (Private) Limited v. CIT (1986) 162 ITR 587, the Kerala High Court has also taken a view that there was no diversion of fund out of the hands of the assessee and the amount is reserved for the purpose of utilisation to meet the liability of the assessee itself that might arise in the future. The Court also held that the amount set apart is to meet an unascertained future contingent liability.

In Mysore Lamp Works Ltd. v. CIT (1990) 185 ITR 96, the Karanataka High Court has also taken the view that the amount set apart under subsection (1) of section 15 of the Payment of Bonus Act is not an allowable deduction. The Court held that it is not an expenditure and the amount was set apart to meet a possible liability, that may arise in future and the amount set apart cannot be regarded as an expenditure. It is significant to notice that the Karanataka High Court has noticed a decision of the Gauhati High Court in the case of India Carbon Ltd. v. CIT (1989) 180 ITR 117 and expressly dissented from the view taken by the Gauhati High Court. The basis for such a dissent is that the test of commercial expediency as noticed by the Gauhati High Court would arise only when there is an expenditure of the amount and the test has relevance to test the second ingredient of section 37 of the Act, namely, whether the money was laid out or expended wholly or exclusively for the purpose of business or not and where there is no expenditure at all, the test of commercial expenditure has no relevance. We entirely agree with the view of the Karnataka High Court in holding that there is .no expenditure incurred by setting aside certain money which may become payable on the happening of certain contingencies in, future and hence, the amount set apart cannot be regarded as expenditure at all.

In CIT v. Pallavan Transport Corporation Ltd. (1998) 230 ITR 288, this Court was considering a provision set apart to insurance fund under the provisions of section 94(3) of the Motor Vehicles Act, in fulfilment of the statutory obligation cast upon it and this Court held that the amount appropriated to an insurance fund under the relevant provisions of the Motor Vehicles Act, to meet ,third party liability which may arise on the happening of the accident is a contingent liability and not an allowable deduction. The reasoning given by this Court would equally apply in considering the deductibility of the amount set on under section 15 of the Payment of Bonus Act.

The Supreme Court in the case of Associated Power Co. Ltd. v. CIT (1996) 218 ITR 195 was considering the provision set apart by an electricity supply undertaking to the contingent reserve fund made under the relevant statutory provisions and the Supreme Court held that the amount belonged to the electricity supply undertaking and the amount was not diverted by overriding title and no expenditure of the amount was also involved. The Supreme Court held that the mere fact that the electricity supply undertaking had used the money for the purposes mentioned in the Act would not make any difference as the amount credited to the reserve was set apart to meet a possible exigency and it is not a provision made for a, known existing liability. The; Supreme Court, therefore, held that the amount set apart cannot be regarded as business expenditure, nor can it be held that the amount was diverted by overriding. obligation. The reasoning of the Supreme Court that the amount remains at the disposal of the assessee and for the benefit of the assessee would equally apply to the amount set on under section 15 of the Payment of Bonus Act. The other reasoning of the Supreme Court that the amount could be used only for specific purposes is also relevant as the money set on under section 15 of the Payment of Bonus Act would be used for the business purposes of the assessee. The next decision that is relied upon is a decision of the Supreme Court in the case of Vellore Electric Corporation Ltd. v. CIT (1997) 227 ITR 557 wherein the Supreme Court was dealing with a case where the amount was set apart both for contingent reserve as well as development reserve. The Supreme Court held that these two reserves cannot be deducted in the computation. In our view, the decisions of the Supreme Court though rendered with reference to the amount set apart towards contingent reserve and development rebate reserve by the electricity supply, undertakings, would apply with equal force to the amount set on under section 15 of the Payment of Bonus Act as well.

It is now necessary to consider the decisions relied upon by learned counsel for the assessee. Mr. S. A. Balasubramanian learned counsel for the assessee placed strong reliance on a decision of the Gauhati High Court in the case of India Carbon Limited v CIT (1989) 180 ITR 117 wherein the Gauhati High Court held that the amount deposited in business in "certain. accounts" cannot be utilised by the assessee and since the assessee is divested of the right to use the money or utilise the money in his business and the amount of bonus "set on" deposited under the provisions of the Payment of Bonus Act amounted to business expenditure and deductible in the computation of income. We are, however, unable to agree with the decision of the Gauhati High Court. The Gauhati High Court has proceeded on the basis that the amount set on by the assessee cannot be utilised and since the amount was deposited under the provisions of the statute, it would amount to expenditure. We are of the view that the amount set on cannot be regarded as expenditure incurred by the assessee. The title over the money is not lost to the assessee and correspondingly, the employees for whose benefit the amount was set apart have not gained any right, title or interest over the money set on. Under the provisions of the Payment of Bonus Act, the amount set on has to be utilised for the payment of bonus in case there is deficiency in the succeeding years in the quantum of allocable surplus. Therefore, it cannot be stated that the money has been expended by the assessee.

Furthermore, the expression, "control" has various shades of meaning. It may tantamount to complete divestiture of the control over the disposal of the funds or it may also amount to exercise of some control over the money not amounting to full control over the disposal of the money in question. The assessee by setting apart the money in question has not lost complete control over the money in question. It has title over the money in question and it has the statutory right to spend the money in future years for its own business. It cannot, therefore, be stated that the assessee has lost complete control over the money in question and the fact that it can utilise the money in future years for its business expenditure clearly shows that it retained and exercised control over the money in question, though under the provisions of the statute, it has to use the money for the purposes of payment of bonus to its workers. In other words, the fact that it can utilise the money in future years for the payment of bonus would show that it had dominion over the money subject to the statutory control imposed by the Bonus Act. Therefore, we are unable to agree with the decision of the Gauhati High Court that the amount set on under section 15 of the Payment of Bonus Act would amount to expenditure and, therefore, the assessee would be entitled to deduction of the amount. We also agree with the decision of the Karanatka High Court in Mysore Lamp Works Limited's case (1990) 185 ITR 96, wherein the Karanataka High Court expressly dissented from the view of the Gauhati High Court and held that the amount set on cannot be regarded as expenditure at all.

The next decision is a decision of this Court in the case of Addl. CIT v. Anamallais Bus Transports (P.) Ltd. (1979) 118 ITR 739, wherein this Court has held that the liability towards bonus would arise by virtue of statutory provisions and the amount which would accrue from the statutory provision could be claimed as deduction has no application to the facts of the case. This Court in Anamallais Bus Transports (P.) Ltd.'s case (1979) 118 ITR 739, was dealing with a case of accrued liability. On the other hand, as already seen, in the instant case, the amount was set apart by the assessee only to meet the future unascertained contingent liability and, therefore, the decision of this Court in Anamallais Bus Transports (P.) Ltd.'s case (1979) 118 ITR 739 would support the case of the Revenue to that extent. A series of decisions arising under the Molasses Control Order decided by . various High Courts relied upon by learned counsel for the assessee, viz., (i) CIT v. Pandavapura Sahakara Sakkare Kharkane Ltd. (1992) 198 ITR 400 (Kar.), (ii) CIT v. Bhopal Sugar Industries Ltd. (1996) 221 ITR 449 (MP) and (iii) Somaiya Orgeno-Chemicals Ltd. v. CIT (1995) 216 ITR 291 (Bom.) are all cases dealing with the case of funds set apart under a statutory order and the question arose in the circumstances of those cases, whether the amount can be regarded as diverted by overriding title. In all those cases, it is relevant to notice that there was diversion of income even at the time of collection of sale proceeds and the income was diverted by overruling title by statutory compulsion. Further, when the selling price of the commodities was fixed by the Government, the amount received by the assessee had to be utilised only according to the Molasses Control Order and by virtue of the statutory mandate, the amount was received by the assessee towards a molasses storage fund and the utilisation of the amount was also according to the directions of the Government of India from time to time. Therefore, the Courts have taken a view that the right to the fund was diverted from the hands of the assessee even at the time of receipt of the selling price of the molasses and, therefore, the amount was not assessable to tax. It is, only in that context, the Courts have taken the view that the assessee had lost domain and control over the amount and, therefore, the amount could not be regarded as part of the income of the assessee. The above decisions were followed by this Court in the case of CIT v. Salem Cooperative Sugar Mills Ltd. (1998) 229 ITR 285 on the ground that a portion of sale proceeds of the molasses funded under the statutory order for the construction of the molagses storage tank was diverted at the source and not assessable as income. In our view, the above decisions rendered with reference to the Molasses Storage Control Order have no application to the facts of the case. It cannot be stated, in the instant case, that the amount was diverted by overriding title as the assessee set apart the amount under section 15 of the Payment of Bonus Act only after the ascertainment of allocable surplus and it means that it is only after the receipt of the income and ascertainment of the profits, the amount was set apart. Therefore, it cannot be stated that the income got diverted even at the time of receipt of the income from the assessee. Therefore, the decisions relied upon by learned counsel for the assessee with reference to molasses storage fund case are not applicable to the facts of the case.

Learned counsel for the assessee then relied upon a decision of this Court in the case of CIT v. Andhra Prabha (Private) Limited (1980) 123 ITR 760 and submitted that the amount set apart under the Payment of Bonus Act would be akin to the provision for gratuity made in the books of account and on the same principle, the amount set on under section 15 of the Payment of Bonus Act is liable to be deducted. In our view the comparison is not covered and it is well-settled that in so far as the liability towards gratuity is concerned, the Courts have held that the- claim for provision for gratuity is admissible provided the liability for provision was made on legal and scientific basis. The Courts have taken the view that in so far as the gratuity liability is concerned, when the employees have put in continuous service of work as contemplated in the Payment of Gratuity Act though the liability to pay gratuity arises at the time of retirement or retrenchment from service, it is possible to evaluate the gratuity liability that arises during the year and if the gratuity liability for that year is properly ascertainable on a scientific basis, that would call for deduction. In so far the amount set apart under the payment of Bonus Act is concerned, it is not an ascertained liability and the amount is set apart only to meet the contingent liability or a future or unascertained liability and the amount set apart cannot be equated or compared to the provision of gratuity made in its accounts on scientific basis. Further, it is not possible to evaluate the- amount of bonus that may be payable in future on the date when the amount was set apart and since it is not possible to quantify the value of the liability in the year in which the amount was set apart, the decisions relating to the deduction on the provision of gratuity have no application to the facts of the case.

In this view of the matter, we hold that the Appellate Tribunal was not right in holding that the amount set on under section 15 of the Payment of Bonus Act was statutorily diverted towards bonus and cannot be regarded as income or profit of the assessee. We hold that there was no diversion of income by overriding title as the amount set on was made after the ascertainment of the profits. We also hold that there is no question of expenditure by setting on the amount as the assessee has not expended any money towards the payment of bonus. It cannot also be regarded that the amount set on was towards trading liability or a loss as the liability towards bonus has not arisen during the year. It cannot also be regarded as a provision made for an existing and ascertained liability. As earlier stated, the amount was set on only for future, contingent and unascertained liability for the payment of bonus It cannot also be stared that the assessee has lost complete control or dominion over the money as the assessee is entitled to utilise the same for the purposes of the business of the assessee. Viewed from any angle, we are of the view, the amount set on under section 15 of the Payment of Bonus Act is not deductible in the computation of business income of the assessee. We agree with the decisions of the Madhya Pradesh, Andhra Pradesh, Kerala and Karnataka High Courts cited supra and hold that the amount set on under section 15 of the Payment of Bonus Act is not deductible in the computation of business income, of the assessee. Accordingly, the fifth question of law referred at the instance of the Revenue for both the assessment years 1975=76 and 1976-77 is liable to be answered in favour of the Revenue.

We answer the questions of. law referred to us as under:

However, in the circumstances of the case, there will be no order as to costs.

M.B.A./35/FCReference answered.