Contingent liability and bonus-like payments were disallowable where no present obligation or lawful basis was proved.

A provision for leave salary and leave wages was not deductible because the liability was contingent, depending on uncertain future events, and was not shown to be an ascertained present obligation capable of reliable valuation. Ex gratia payments to employees and extra salary or bonus paid to the General Manager were also disallowed because they were not proved to be customary bonus, nor linked to any settlement, agreement, or special occasion, and bonus-like payments cannot escape statutory restriction merely by being labelled otherwise. The article states that deductible business expenditure requires a present liability in praesenti and a lawful basis for the payment.

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Issues: (i) Whether provision for leave salary and leave wages was deductible as a present liability or was a contingent liability not allowable as a deduction. (ii) Whether ex gratia payments to employees and extra salary or bonus paid to the General Manager were allowable as deductible business expenditure or were hit by the statutory restriction on bonus payments.

Issue (i): Whether provision for leave salary and leave wages was deductible as a present liability or was a contingent liability not allowable as a deduction.

Analysis: The leave rules did not provide for encashment on retirement, death, resignation or termination, and the liability depended on uncertain future contingencies such as an employee actually proceeding on leave, falling sick, or otherwise becoming entitled to payment. The provision was not shown to be an ascertained present obligation capable of reliable valuation on the material placed before the Tribunal. The principle governing deduction under the Income-tax Act required an existing liability in praesenti, not a mere future or contingent liability. The authorities relied on for allowing discounted liabilities were distinguished as dealing with different statutory contexts and with liabilities sufficiently ascertained for valuation.

Conclusion: The provision for leave salary and leave wages was not allowable, and the disallowance was upheld against the assessee.

Issue (ii): Whether ex gratia payments to employees and extra salary or bonus paid to the General Manager were allowable as deductible business expenditure or were hit by the statutory restriction on bonus payments.

Analysis: The payments were not proved to be customary bonus, nor were they shown to arise from any settlement, agreement, or special occasion. The Tribunal accepted the view that where an amount is in substance bonus, it cannot be shifted outside the statutory restrictions by being described as ex gratia payment or extra salary. The assessee failed to establish any recognised trade custom or other legal basis that would take the payments outside the prohibition applicable to such bonus-like disbursements.

Conclusion: The ex gratia and bonus-like payments were not allowable deductions, and the disallowance was upheld against the assessee.

Final Conclusion: The Tribunal found no basis to interfere with the disallowances in either assessment year, as both the leave salary provision and the disputed bonus-related payments lacked deductibility on the facts and in law.

Ratio Decidendi: A deduction cannot be claimed for a mere contingent liability; to be allowable, the liability must be a present ascertained obligation capable of reliable valuation, and bonus-like payments not shown to be customary or otherwise legally permissible remain disallowable.

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