1. The Income-tax Appellate Tribunal, Indore Bench, Indore, at the instance of the assessee, has made this reference under Section 256(1) of the I.T. Act, 1961, for the opinion of this court on the following question of law :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that set on of bonus as per Section 15(2) of the Payment of Bonus Act, 1965, at Rs. 3,24,800 is not allowable as business expenditure, in computing the assessee's income for the assessment year 1978-79?'
2. The relevant facts of the case as per the statement of facts furnished by the Tribunal may be stated in brief, thus : The assessee, the Malwa Vanaspati and Chemical Company Ltd., Indore, is a private limited company carrying on business of manufacture of hydrogenated oil and allied products. For the assessment year 1978-79, the assessee-company claimed, inter alia, an amount of Rs, 3,24,800 as 'set on of bonus' representing a sum out of the allocable surplus payable to the employees in subsequent years as provided under Section 15(1) of the Payment of Bonus Act, 1965, The IAC (Assessment) disallowed this claim following the reasonings given by him in the assessment order for the earlier assessment year, i.e., 1977-78. On appeal, the Commissioner of Income-tax (Appeal) dismissed the appeal, following in his turn his own decision on the point in the assessee-company's ease for the assessment year 1977-78.
3. Aggrieved by this decision of the Commissioner of Income-tax (Appeals), the assessee-company went up in appeal before the Tribunal, who by its order dated March 4, 1982, upheld the decision of the Commissioner of Income-tax (Appeals) on this point for which it placed reliance on the decision in Chhaganlal Textile Mills Private Ltd. v. CIT : 62ITR274(MP) . It is in these circumstances that this reference has come up before us at the instance of the assessee.
4. In order to appreciate the submission made by the learned counsel for the assessee-company, it is necessary to quote the provisions of Section 15(1) of the Payment of Bonus Act, 1965, on which the learned counsel has placed reliance:
'15. (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 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 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.
(3) The principle of set on and set off as illustrated in the Fourth Schedule shall apply to all other cases not covered by Sub-section (1) or Sub-section (2) for the purpose of payment of bonus under this Act.
(4) Where in any accounting year any amount has been carried forward and set on or set off under this section, then, in calculating bonus for the succeeding accounting year, the amount of set on or set off carried forward from the earliest accounting year shall first be taken into account.'
5. A bare reading of the above provisions would indicate that this is not a subsisting liability as such for the accounting year, but it is a contingent liability as this section merely enforces an accounting arrangement on the assessee-company so that the interest of the workers in futureyears may be safeguarded. This section by itself does not create the liability. This amount is not required to be paid to the workers. It is also not required to be deposited with the Bonus Act authority. The workers have no claim on this amount and cannot enforce the payment thereof by any means. It is merely a reserve fund which the company has to create by reason of the provisions of Section 15(1) of the Bonus Act.
6. Admittedly, in the present case, the claim of the assessee is one regarding the liability which it may have to meet in future years on account of bonus payable to the workers, but this is only a contingent liability as it requires determination of number of employees, length of service, etc. In other words, the liability of the assessee did not exist in praesenti. In a similar case in Chhaganlal Textile Mills P. Ltd. v. CIT : 62ITR274(MP) , it was held in that case that the liabilities for which provision was made were only contingent liabilities and cannot be allowed in computing the income, even though the accounts were kept on mercantile basis, as in the present case. The learned counsel for the assessee was unable to convince us on the wording of Section 15(1) of the Bonus Act, that the assessee-company has got a liability to the workers who could enforce the right to receive such bonus in future years. Enforceability by legal process subject to some qualifications is a sine qua non of a legal right which is either enforceable or an assertable claim. Further, in the present case, the said liability, if any, is not an accrued liability. There is nothing on record to hold that the workers are vested with the right to claim the amount of bonus from the assessee and if such claim cannot be legally enforceable, it cannot be said that the assessee was saddled with the liability to pay any bonus as such.
7. However, the learned counsel for the assessee relying on the provisions of Section 37 of the I.T. Act submitted that though under Section 36 of the said Act bonus actually paid in the assessment year is deductible as expenditure, the liability to pay might arise by virtue of some statutory provisions, and those amounts which had accrued due under the statutory provision could be claimed as a deduction and in support of this submission, he placed reliance on the decisions in Indian Molasses Co. (Pvt.) Ltd. v. CIT : 37ITR66(SC) and CIT v. Coimbatore Cotton Mills Ltd. 0065/1982 : 140ITR562(Mad) , though he did not dispute the fact that there is no agreement or promise between the assessee-company and its workers to make such a payment. He also submitted that the words 'laid out' as mentioned in Section 37 of the I.T. Act, 1961, apply to such type of cases.
8. On the other hand, the learned counsel for the Revenue, also relying on the provisions of Section 40A as also Section 145 of the I.T. Act, contended that there is no accrued liability in the present case and, consequently, this being a provision made for future contingency, the assessee is not entitled to claim deduction thereof as business expenditure as the amount lay with the assessee-company by way of reserve and in support of his submission, he placed reliance on the decisions in CIT v. Jethalal Zaverchand Patalia : 61ITR357(Guj) , CIT v. Sundararaj : 99ITR226(Mad) , CIT v. Gemini Cashew Sales Corporation : 65ITR643(SC) and CIT v. Andhra Prabha P. Ltd. : 123ITR760(Mad) .
9. After hearing the learned counsel and after going through the case law cited as also the facts and circumstances of the case, we are unable to agree with the submission made by the learned counsel for the assessee. The question as to whether an item of expenditure is wholly and exclusively laid out for the purpose of business or not has to be decided on the facts of each case, the necessary condition being that it must be laid out or expended wholly or exclusively for the purpose of the assessee's business. The true test of an expenditure laid out wholly and exclusively for the purpose of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any capacity other than as a trader. Section 37(1) of the I.T. Act, 1961, being a residual provision, it cannot be taken aid of, unless and until it is established that none of the provisions of Sections 30 to 36 are applicable to a given case. The scope of Section 37(1) is essentially wider. The word 'business' used in Section 37(1) in association with the expression 'for the purpose of' is a word of wide connotation. In the context of taxing statute, the word 'business' would signify an organised and continuous course of commercial activity which is carried on with the end in view of making and earning profits. Therefore, under Section 37(1) of the Act, the connection has to be established between the expenditure incurred and the activity undertaken by the assessee with such object which is wanting in the present case.
10. In the result, our answer to the question referred is in favour of the Revenue and against the assessee that :
'on the facts and in the circumstances of the case, the Tribunal was justified in holding that set on of bonus as per Section 15(1) of the Payment of Bonus Act, 1965, at Rs. 3,24,800 is not allowable as business expenditure, in computing the assessee's income for the assessment year 1978-79.'
11. The reference is answered accordingly with no order as to costs.