Jeevan Reddy, J.
1. The question referred for our opinion, is : 'Whether, on the facts and in the circumstances of the case, the disallowance of the sum of Rs. 2,03,173 out of the provision made for bonus in the balance-sheet for the assessment year 1972-73 was in order ?'
2. The assessee is a public limited company running a spinning mill. Its accounting year is the financial year. For the year ending March 31, 1974, the assessee made a provision of Rs. 10,02,180 towards bonus under the Payment of Bonus Act, 1965, which amount represents the allocable surplus calculated under the provisions of the said Act. The maximum bonus payable for the said accounting year came to Rs. 7,98,007, thus leaving a balance of Rs. 2,03,177. This amount was 'set on', i.e., carried forward, as contemplated by s. 15 of the said Act. The assessee claimed deduction even for this amount of Rs. 2,03,177 in the computation of its taxable income, which was rejected by the ITO. An appeal to the AAC proved fruitless. The assessee then preferred a second appeal to the Tribunal. Before the Tribunal, it was contended by the assessee that the allocable surplus set apart by it in the balance-sheet was in discharge of a statutory obligation; that the said amount belonged to the employees, payable in the future years and that, therefore, it should be allowed as a deduction. The Tribunal rejected this contention, whereupon the assessee applied for referring two questions for the opinion of this court, viz :
'(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the liability of the assessee towards bonus to its employees is limited to the extent of actual payment made out of the allocable surplus irrespective of the provisions of section 15 of the Payment of Bonus Act, 1965 and
(2) Whether, on the facts and in the circumstances of the case, the balance of Rs. 2,03,177 standing to the credit of the bonus account is not an allowable deduction under the Income-tax Act, 1961 ?'
3. The Tribunal, however, referred only the second question. No complaint is made before us regarding refusal to refer the first question.
4. The Payment of Bonus Act, 1965, provides for both the minimum bonus and the maximum bonus. The maximum bonus for the relevant accounting year was 20% of the salary or wage of the employees, and the minimum bonus 4%. The allocable surplus calculated in accordance with the provisions of the Act and the Rules made thereunder, in the case of the assessee, exceeded the amount required for paying the maximum bonus. The assessee was, therefore, obliged to carry forward the surplus amount as required by s. 15, which must now be set out :
'15. 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 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 in the manner illustrated in the Fourth Schedule.
(2) Where for any account 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 s. 10, and there is no amount or sufficient amount carried forward and set on under sub-section (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.'
5. This section provides for what it calls 'set on' and 'set off' to ensure a consistent payment of bonus over the years. If, in a given year, the allocable surplus exceeds the maximum bonus amount, such surplus, subject to a ceiling of 20%, shall have to be carried forward to the succeeding year, up to and inclusive of the fourth accounting year, to be utilised for the purpose of payment of bonus. The method to be followed in this behalf is set out in the Fourth Schedule to the Act. If in any succeeding accounting year, there is no available surplus, or allocable surplus, or the allocable surplus falls short of the minimum bonus, the amount so carried forward has to be utilised for paying the bonus. At the end of four years, however, the amount still remaining, if any, becomes the income of the assessee. In other words, the statutory obligation for setting on is confined only to four succeeding accounting years, whereafter the assessee is free to make such use of the amount, if any remaining, as it thinks fit. The Tribunal was of the opinion that this provision is 'no more than a provision for a contingent liability in respect of the subsequent years'; that this amount may not necessarily be required to pay bonus in the succeeding years and that, therefore, it cannot be allowed as an admissible deduction. The Tribunal observed that the existing liability of the assessee was only to the extent of actual amount of bonus payable, viz., Rs. 7,98,007, and that has been allowed as a deduction.
6. Sri Ch. Sreerama Rao, the learned counsel for the assessee, submitted that, inasmuch as the said amount of Rs. 2,03,173 has been set apart pursuant to an overriding statutory obligation, and because the assessee is denied the use of the said amount for the concerned accounting year, it has to be allowed as a deduction either under s. 37 or, at any rate, under s. 28 of the I.T. Act, 1961. He submitted that the mere fact that this amount, or a part of it, is likely to come back to the revenues of the assessee after the expiry of the fourth accounting year, is no ground for denying the deduction for the year in question.
7. Mr. M. Suryanarayana Murthy, the learned standing counsel for the Department, however, supported the reasoning and the finding of the Tribunal, and submitted that the Payment of Bonus Act merely provides for making a provision for a limited period of four years and that, the money is not diverted or paid over to any person, or put beyond the reach of the assessee. He submitted that the money is either used for paying bonus in the subsequent years -when it would be allowed as a deduction - or it comes back as revenue to the assessee after the expiry of the prescribed period.
8. Admittedly, the deduction claimed does not fall under s. 37, not being an expenditure laid out or expended by the assessee. For this reason, the learned counsel for the assessee sought to put it under s. 28 on the reasoning that the amount is diverted under an overriding legal obligation. We are not prepared to agree with this contention either. Where an amount is diverted under an overriding legal obligation, 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, as the case may be, by virtue of the overriding legal obligation. In this case, that is not the position. The allocable surplus is determined out of the profits of the assessee, and all that s. 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. Now, it is not disputed that if a bonus-reserve, by whatever name it is called, is created voluntarily for the same purpose, it would not be allowable as deduction. The question is where such a reserve is created under the compulsion of law, would it qualify for deduction Inasmuch as the amount is required to be set apart with the assessee himself for a limited period to meet its bonus obligation in the succeeding accounting 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 is difficult to agree that the money is diverted from the assessee under an overriding legal obligation. The money is not paid to a third-party, nor is it paid into a fund from which it never comes back to the assessee; nor is the money meant exclusively for payment to the employees. It cannot also be said that this amount, so set apart, constitutes a 'loss', 'expenditure' or a 'trading liability' within the meaning of s. 41(1). If so, the said amount, as and when it comes back to the revenues of the assessee, cannot also be treated as its income under sub-s. (1) of s. 41, which circumstance also shows that this amount cannot be allowed as a deduction. This is for the reason that, if this amount is allowed as a deduction in this accounting year, and if this amount is not used up in the succeeding four accounting years and it comes back to the revenues of the assessee after the fourth year, it must be treated as its income in that accounting year. But that can be done only if the allowance of deduction has been made 'in respect of loss, expenditure or a trading liability incurred by the assessee' and which in the subsequent years, is remitted or ceases. No case has been brought to our notice treating such a provision as a loss, expenditure or a trading liability. In short, s. 15 merely requires creation of a compulsory reserve for a limited period to meet the contingency of a shortfall in the succeeding accounting years. But, it is difficult to say that the amount so set apart constitutes a 'loss'. Conceptually speaking, the said expression is totally inappropriate to such a provision. We find no analogy between this case, and the case of embezzlement of funds by an employee, which was treated as a loss by the Supreme Court in Badridas Daga v. CIT : 34ITR10(SC) notwithstanding the possibility of recovering the amount so misappropriated or a part thereof, at a later point of time.
9. We shall now deal briefly with the decisions cited by Sri Ch. Sreerama Rao, in support of his contention.
10. Reliance is placed upon the following observations at pages 62-63 in Metal Box Company of India Ltd. v. Their Workmen : (1969)ILLJ785SC :
'In the case of an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business...'
11. We are unable to see how the said principle comes to the help of the assessee. In this case, it cannot be said that the said amount is set apart to meet 'a liability already accrued'. The amount is set apart to meet any future contingent liability, which may, or may not accrue.
12. The next case relied upon is in CIT v. Bombay State Road Transport Corporation : 106ITR303(Bom) . As required by r. 11 of the Bombay State Road Transport Corporations Rules, 1952, framed under s. 44 of the Road Transport Corporations Act, 1950, the Corporation created a Third-Party Liability Fund, into which the Corporation was obliged to pay, every year, out of its revenues, such sum as may be directed by the State Government for meeting any liability arising out of the use of any vehicle of the Corporation by third-parties. It was held that the amounts so paid into the fund are admissible deductions. But, that was a case where the moneys paid into the fund were lost for ever to the Corporation. At no stage would the money come back to the Corporation. In other words, it was a case of money being expended by the Corporation in pursuance of a statutory liability. It was not a case of a mere provision for a temporary period to meet a contingent liability, as in this case.
13. The next case cited is in Poona Electric Supply Company Ltd. v. CIT : 57ITR521(SC) . As required by the Electricity (Supply) Act, 1948, the Poona Electric Supply Company Ltd.. a licensee under the Act, was obliged to create a 'Consumers' Benefit reserve Account'. It was held by the Supreme Court that the amount credited by the undertaking during the relevant accounting years, to the Consumers' Benefit Reserve Account, being a part of the excess amount paid to the undertaking, is reserved to be returned to the consumers and, therefore, does not form part of the assessee's real profits. It was held that, to arrive at the taxable income of the undertaking from the business under s. 10(1) of the 1922 Act, the amount so paid out should be deducted. We are unable to see any analogy between the case before us and the facts of this case. There, the amount paid out represented the excess amount paid to the undertaking and was reserved to be returned to the consumers and, therefore, was not treated as the income of the undertaking at all.
14. Reliance was also placed upon the decision in Cochin State Power & Light Corporation Ltd. v. CIT : 93ITR582(Ker) , which is again a case of an electricity undertaking, by law required to create certain reserves called 'Contingencies reserve' and 'Development reserve'. It was held by the Kerala High Court that the amount paid into the 'contingencies reserve' is a diversion by reason of the overriding obligation created by the statute and, therefore, does not constitute the profits of the assessee-undertaking at all. It was also observed that the amount appropriated towards this reserve has to be invested in trust securities within a fixed period, and the assessee was not getting any benefit out of it. It was held that 'development reserve' too was of the same character.
15. The last decision cited is in Amalgamated Electricity Company Ltd. v. CIT : 97ITR334(Bom) a decision of the Bombay High Court. This too is a case of an electricity undertaking governed by the Electricity (Supply) Act, 1948. It was held that the 'tariffs and dividends control reserve' created in pursuance of the requirement of the Act, though apparently created for the benefit of the licensee or its shareholders, is in truth and in ultimate analysis designed to see that the tariffs leviable on the consumers in the relevant years are not increased or enhanced. In other words, it was held that the said reserve was created really for the benefit of consumers and that it is not available to the licensee for any purpose of its own. This again is a case where the moneys paid into a particular reserve are lost to the assessee and, therefore, constitute 'expenditure'.
16. We are of the opinion for the above reasons that the amount 'set on' in pursuance of s. 15 of the Payment of Bonus Act is not a permissible deduction for the accounting year relevant to the assessment year 1972-73 and, accordingly, we answer the question referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee. No costs.