Set-on under the Bonus Act is not a deductible trading liability for income-tax purposes.

Under section 15 of the Payment of Bonus Act, an amount carried forward as "set on" is kept by the assessee for up to four succeeding accounting years to cover possible later shortfalls. Because the amount is not paid to a third party, not placed beyond the assessee's control, and not diverted by an overriding legal obligation, it is neither expenditure actually incurred nor a liability that has accrued. It is only a compulsory provision for a future contingency and, on that basis, is not a deductible loss, expenditure, or trading liability under the Income-tax Act.

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Issues: Whether the amount carried forward as 'set on' under section 15 of the Payment of Bonus Act, 1965 was an allowable deduction in computing taxable income for the relevant assessment year.

Analysis: The statutory scheme of section 15 requires an allocable surplus exceeding the maximum bonus to be carried forward for up to four succeeding accounting years to meet possible shortfalls in later years. The amount remains with the assessee itself during that period and is not diverted to any third party or fund beyond the assessee's control. It is therefore not an expenditure actually incurred, nor a liability already accrued, nor a diversion of income under an overriding legal obligation. The reserve is only a compulsory provision for a future contingency, and the possibility that the balance may ultimately revert to the assessee reinforces that it is not a deductible loss, expenditure, or trading liability under the Income-tax Act, 1961.

Conclusion: The amount set on under section 15 of the Payment of Bonus Act, 1965 is not an admissible deduction for the assessment year in question and the answer is against the assessee.

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