Surtax and bonus set-on liabilities were treated as non-deductible contingent outgoings, not accrued business expenses.
Surtax payable under the Companies (Profits) Sur-tax Act, 1964 was treated as not deductible under Section 37 of the Income-tax Act because binding Supreme Court authority had already held it was not an admissible business deduction. The amount set apart as set-on liability under Section 15 of the Payment of Bonus Act was also held not deductible, since the statutory mechanism created only a reserve for a possible future shortfall, not an accrued liability capable of reasonable estimation. As the amount remained contingent and under the assessee's control if unused, it was not allowable as expenditure.
Issues: (i) Whether surtax payable under the Companies (Profits) Sur-tax Act, 1964 was deductible in computing total income under Section 37 of the Income-tax Act, 1961; (ii) whether the amount set apart as set-on liability under Section 15 of the Payment of Bonus Act was allowable as a deduction in computing total income.
Issue (i): Whether surtax payable under the Companies (Profits) Sur-tax Act, 1964 was deductible in computing total income under Section 37 of the Income-tax Act, 1961.
Analysis: The issue was treated as settled by the binding decision of the Supreme Court, which had already taken the view that surtax is not an admissible deduction while computing business income. The Tribunal's contrary view could not be sustained in light of that authority.
Conclusion: The deduction was not allowable and the issue was decided against the assessee and in favour of the Revenue.
Issue (ii): Whether the amount set apart as set-on liability under Section 15 of the Payment of Bonus Act was allowable as a deduction in computing total income.
Analysis: The statutory set-on mechanism was held to create only a reserve to meet a possible future shortfall in bonus liability over the succeeding accounting years. The amount did not represent an accrued liability in praesenti, could not be estimated with reasonable certainty, and remained available to the assessee if not utilised within the statutory period. On that footing, the provision was treated as a contingent liability and not a deductible expenditure. The principle applicable to certain accrued liabilities, including leave encashment provisions, was found distinguishable.
Conclusion: The amount was not deductible and the issue was decided against the assessee and in favour of the Revenue.
Final Conclusion: The reference was substantially answered in favour of the Revenue, with both substantive questions decided against the assessee and the remaining revenue question left unanswered for want of press.
Ratio Decidendi: A statutory reserve created to meet a possible future liability, which is neither accrued nor ascertainable with reasonable certainty and remains under the assessee's control if unused, is a contingent liability and not an allowable deduction.