Contingent bonus provision and surtax are not deductible under income tax law; both claims were disallowed.

A provision set apart under section 15 of the Payment of Bonus Act for a possible future deficiency in allocable surplus was not "expenditure" under section 37 of the Income-tax Act because it did not discharge any existing liability and remained available if the contingency did not arise; the deduction was therefore disallowed. Surtax was also held not deductible in computing total income, as it was treated as an additional impost on business profits rather than an admissible business outgo; that deduction was likewise disallowed. Both questions were answered in favour of the Revenue.

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Issues: (i) Whether the amount set apart under section 15 of the Payment of Bonus Act, 1965, as bonus set on was an allowable deduction under section 37 of the Income-tax Act, 1961; (ii) Whether surtax liability was deductible in computing total income under the Income-tax Act, 1961.

Issue (i): Whether the amount set apart under section 15 of the Payment of Bonus Act, 1965, as bonus set on was an allowable deduction under section 37 of the Income-tax Act, 1961.

Analysis: The statutory set-on under section 15 does not discharge any present ascertained liability. It is created only to meet a possible future deficiency in allocable surplus and may or may not be required for payment of bonus in later accounting years. Applying the settled meaning of "expenditure", only money paid out or irretrievably gone in discharge of an existing liability can qualify; a provision made for a contingent future liability does not. The amount remains available to the employer if the contingency does not arise, and the setting apart therefore lacks the character of expenditure within section 37.

Conclusion: The deduction was not allowable, and the issue was decided against the assessee.

Issue (ii): Whether surtax liability was deductible in computing total income under the Income-tax Act, 1961.

Analysis: Surtax was treated as an additional impost on business profits and not as an admissible business deduction. Following the binding view already taken on the point, the liability could not be deducted in computing taxable income.

Conclusion: The deduction was not allowable, and the issue was decided against the assessee.

Final Conclusion: Both referred questions were answered in favour of the Revenue, leaving no allowance of the assessee's claims in the reference.

Ratio Decidendi: A provision created to meet a possible future liability is not "expenditure" under section 37 unless it represents an existing liability that has been actually laid out or irretrievably spent; surtax, being an additional charge on business profits, is not deductible in computing total income.

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