PETITIONER: INDIAN OXYGEN LIMITED Vs. RESPONDENT: THEIR WORKMEN DATE OF JUDGMENT09/12/1971 BENCH: VAIDYIALINGAM, C.A. BENCH: VAIDYIALINGAM, C.A. MATHEW, KUTTYIL KURIEN CITATION: 1972 AIR 471 1972 SCR (2) 816 1972 SCC (4) 578 CITATOR INFO : R 1972 SC2195 (10,14) ACT: Payment of Bonus Act, 1964 s. 6-Bonus paid in respect of accounting year not to be deducted from grows profit for computing direct taxes-Dividend declared during accounting year-Whether to be deducted from reserves shown at commencement- of accounting year-Doubtful debts' whether rightly treated as part of reserves-Bonus paid in respect of year preceding the accounting year to be deducted from gross profits-Set on, directions as to. HEADNOTE: For its accounting year 1964-65 the Indian Oxygen Ltd. was liable to pay bonus under the Payment of Bonus Act 1965. The accounts of the company for the said year were passed on February 12. 1966. The company calculated bonus at the rate of 17.58% of the total annual wages of salary plus Dearness Allowance and declared the said amount payable by notice dated March 23, 1966. The workmen demanded a higher rate of bonus. The resulting industrial dispute was referred to the National Industrial Tribunal. The Tribunal fixed the rate of bonus at 20%. Against the decision of the Tribunal appeals were filed in this Court. The questions that fell for consideration were- : (i) whether the tribunal was right in calculating the direct taxes after deducting the amount of bonus payable for the accounting year 1964-65 from the gross profits; (ii) whether the Tribunal was justified in deducting the amount earmarked for distribution of dividends from the reserves shown in the balance sheet at the commencement of the accounting year even though the dividend had not been declared at the commencement of the accounting year'. (iii) whether the Tribunal was justified in treating the amount shown against doubtful debts as part of the reserves; (iv) whether the Tribunal while calculating direct taxes was justified in not taking into account the bonus paid for the year 1963-64; (v) whether the directions given by the Tribunal regarding set on were justified. HELD : (i) In Metal Box Co. this Court laid down that an employer is entitled to compute his tax liability without deducting first the amount of bonus, he would be liable to pay, from and out of the amount computed under ss. 4 and 6 of the Act. After the above decision Parliament enacted the Payment of Bonus (Amendment) Act 1969. Parliament at that time was fully aware of the principle laid down by this Court that the tax liability has to be worked out by first working out the gross-profits and deducting therefrom the prior charges under s. 6 but not the bonus payable to the employees. Nevertheless Parliament did not make any change in the Act enacting that a different method is to be adopted for computing the direct taxes. If Parliament intended to make a departure from the principles laid down by this Court in Metal Box Co. that bonus amount should be calculated after a provision for tax was made and not before a provision to that effect would have been incorporated by the Amendment Act. That not having been done, the law as laid down by this Court in Metal Box Co. and reaffirmed by two later decisions namely William Jacks & Co. Ltd. and Delhi Cloth and General Mills Co. still holds the field. It follows that the view of the National Tribunal that bonus must be deducted from the gross-profits before income-tax is calculated, was not correct. [826 F-G; 829 C-F] 817 Further the view of the Tribunal that the tax concessions by way of rebate that an employer will get under the Indian Income-tax Act on the bonus found to be payable has also to be taken into consideration in dividing the surplus between the workmen and the company, was also erroneous in view of the fact that the Act which is a self contained Code has prescribed the manner in which available surplus and the allocable surplus are to be calculated. [829 G] Metal Box Co. of India Ltd. v. Workmen, [1969] 1 S.C.R. 750, Workment of William Jacks & Co. Ltd. v. Management of William Jacks & Co. [1971]1 L.L.J. 503 and Delhi Cloth & General Mills Co. Ltd. v. Workmen [1971] 2 S.C.C. 695, applied. (ii) The relevant accounting year in the present case was October 1, 1964 to September 30, 1965. In its balance sheet as on September 30, 1964 the appellant had shown a sum of Rs. 2,35,07,686 reserves. Similarly in its balance sheet as on September 30, 1965 apart from showing its reserves on that date, it had also shown a sum of Rs. 2,35,07,686 as reserves at the commencement of the accounting year. On December 5, 1964 a notice was issued regarding holding of the Annual General Meeting on February 12, 1965. The dividend was paid on March 9, 1965. From the notice calling for the General Meeting the Directors' Report and balance sheet as on September 30, 1964 it was clear that a sum of Rs. 43,68,000 out of the General Reserve of Rs. 2,35,07,686 had been set apart and was to be appropriated for payment of dividend for the previous year 1963-64. In the circumstances the Tribunal correctly applied the provisions of s. 6(d) of the Act read with item 1 cl. (iii) together with the material part of the Explanation to the Third Schedule of the Act when it deducted the sum earmarked to be paid as dividend, i.e., Rs. 43,68,000 from the General Revenue at the beginning of the accounting year, i.e., Rs. 2,35,07,686 for the purpose of determining the return on Reserves. The fact that the dividend had not been declared at the commencement of the accounting year was not material. In no case will a company be able to declare a dividend for the year ending September 30, 1964 on the morning of October 1, 1964. Once the Directors have, on the basis of auditor's report and other materials decided to declare a particular amount as dividend and have set apart the required amount from the General Reserve, it must relate back to the date of the commencement of the accounting year. [830 G-H; 832 C-F; 833 A-C] (iii) The Tribunal was justified in holding that the appellant was not in order in deducting Rs. 55,127 under the head 'doubtful debts' an item of expenditure. It was perfectly justified in adding back the amount in computing the gross profits. The creation of such an amount is really a reserve and not a provision as contended by the appellant. The appellant itself in its breach up had distinguished bad debts from doubtful debts. [834 F-835 B] Textile Machinery Corpn. Ltd. v. Workmen, [1960] 1 L.L.J. 34. applied. (iv) The Tribunal was justified in holding that in calculating direct taxes the bonus for the accounting year 1963-64 though paid during the accounting year 1964-65 should not be taken into account. As the bonus year must be taken as a unit, bonus paid for the previous accounting year from and out of the profits of the said previous year does not come into the picture. [836 E] (v) On a proper computation even the bonus already paid by the company at 17.58% was on the big side.It follows that the direction of 818 the National Tribunal regarding set on based as it was on the rate 20% bonus fixed by the Tribunal, could not be accepted. [836 F-G] JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 415, 813
and 1302 of 1967.
Appeals by special leave from the award dated January 20,
1967 of the National Industrial Tribunal, Calcutta in
Reference No. NIT-1. of 1966.
G. B. Pai and D. N. Mukherjee, for the appellant (in C.A.
No. 415 of 1967) and respondent No. 1 (in C.As. Nos. 813
and 1302 of 1967.
Janardan Sharma and Indira Jaisingh, for respondent No. 1
(in C.A. No. 415 of 1967), the appellants (in C.A. No. 813
of 1967) and respondent No. 2 (in C.A. No. 1302 of 1967).
K. R. Chaudhuri, for respondent No. 3 (in C.A. 415 of
1967).
C. L. Dudhia, C. G. Nadkarni, K. L. Hathi and P. C. Kapur,
for respondent No. 4 (in C.As. Nos. 415 and 813 of 1967) and
the appellants (in C.A. No. 1302 of 1967).
Janardan Sharma, for the intervener,
The Judgment of the Court was delivered by
Vaidiyalingam, J. AR these appeals, by special leave, are
directed against the Award dated January 20, 1967 of the
National Industrial Calcutta in Reference No. NIT-1 of 1966.
Civil Appeal No. 415 of 1967 is by the Company regarding the
disallowance of certain items by the Tribunal for arriving
at the available and allocable surplus for calculating bonus
to be paid for the accounting year 1964-65.
Civil Appeals Nos. 813 and 1302 of 1967 are by the two
Unions representing the workmen, against that part of the
Award rejecting the claim of the Unions for adding back
certain items for the purposes of calculating the rate of
bonus to be paid by the appellant Company.
As mentioned earlier, the year of account is 1964-65, which
is October 1, 1964 and ending September 30, 1965. The
appellant Company was incorporated under the Indian
Companies Act, in 1935 and was made into a public company in
1958. It is a venture of the British Oxygen Company
incorporated in England and the English Company still holds
a little over 66% of the shares of the Indian Company. The
main products of the Company are production of industrial
gases like oxygen, dissolved acetylene, nitrogen and
hydrogen and also electrodes and
819
welding equipment and medical equipment. The Company has
been paying bonus to its workmen from 1948; and since, then
it has been paying bonus by agreements with the union. The
bonus, so paid, has been more or less at five months basic
wages, subject to a minimum and maximum as per the
agreement. For the year in question, 1964-65, there was no
agreement, as the Payment of Bonus Act, 1965 (hereinafter to
be referred as the Act) came into force. There is no
controversy that this is the first accounting year, in
respect of which the bonus is to be paid under the Act.
The accounts of the Company were passed at the Annual
General Meeting held on February 12, 1966. The Company
calculated bonus at the rate of 17.58% of the total annual
wages or salary plus Dearness Allowance and declared the
said amount payable by notice dated March 23, 1966. The
Company originally worked out the allocable surplus under
the Act for the said year at Rs. 30,35,958. As the sum of
Rs. 1,72,69,770 was the total salary and wages including
Dearness Allowance payable for the said year, the allocable
surplus worked out at 17.58% of the said total wage bill and
hence bonus was declared at that rate.
The Unions protested against the rate of bonus declared by
the Company and demanded a substantial increase in the
quantum of bonus. The claim by the Indian Oxygen &
Acetylene Employees’ Federation was for payment of bonus
equal to eight months’ basic wages subject to a minimum of
Rs. 400/-. Another union, National Federation of Indian
Oxygen Workmen, Jamshedpur, claimed bonus at the maximum
rate of 20% provided under the Act. A third union, also the
Bombay Labour Union, claimed bonus at the maximum rate of
20%. A fourth union, Indian Oxygen Employees Union of
Rajawadi, Bombay, demanded bonus at 25% of the total
earnings or at six months’ basic wages, whichever was
higher.
As attempts at settlement failed, a strike notice was given
by some of the Unions. Originally, there was a reference of
the dispute by the Government of West Bengal to a Tribunal.
Later on, this order of reference by the State Government
was cancelled and the Central Government by order dated July
7, 1966 referred the dispute for adjudication to the
National Industrial Tribunal at Calcutta. The question
referred was as follows :
“Whether the, workmen are entitled to a higher
bonus than 17.5 per cent for the year 1964-65
as offered by the management? If so, what
should be the quantum of bonus for the said
year?”
820
Though the question referred was regarding the, claim for
higher bonus than 17.5 per cent, all parties were agreed
that the appellant Company had actually offered and paid as
bonus for the said year at 17.58 per cent. It is on this
basis that the dispute also was adjudicated by the National
Industrial Tribunal.
Though originally, the appellant, as mentioned earlier, had
calculated the allocable surplus in the sum of Rs.
30,35,958, during the proceedings before the Tribunal, they
recomputed the amount and filed a revised statement Ex.4, by
which the allocable surplus was worked out at only Rs.
23,30,396. This reduced figure was explained by the
appellant Company as due to omission in the previous
statement, to add back certain items in computing the gross
profits and higher figure for income-tax.
All the unions very strenuously contested both the
calculations of the Company. According to the unions,- in
the balance sheet and profit and loss accounts of the
Company various items of expenses have been inflated.
Details of such inflation were given by them. The unions
also contested the amount of direct taxes shown in the
statement of the Company. It was the further case of the
unions that if there is a proper computation, the allocable
surplus would be very much higher than 50 lacs as against
the figure of Rs. 30,35,958 shown in the original
calculation and miserably reduced in the subsequent
calculation Ex.4.
The National Industrial Tribunal, in its Award has disallow-
ed certain claims made by the appellant Company. It also
disallowed certain extreme claims made by the unions.
Ultimately, it fixed the available surplus in the sum of Rs.
65,29,507. On this basis it fixed the sum of Rs. 39,17,704
as the allowable surplus being 60% of available surplus. As
the allocable surplus so fixed was more than 20% of the
annual wage bill of Rs. 1,72,69,770, the ban-us was fixed by
the Tribunal at the maximum rate of 20%. It further gave a
direction that a set on of Rs. 4,63,750 is to be carried
forward. In the end the Tribunal made an Award that the
workmen are entitled to a higher bonus than 1.7.58% for the
accounting year 1964-65 and fixed the quantum of bonus so
payable, at the maximum rate of 20%, with a further
direction that there should be a set on to be carried
forward of Rs. 4,63,750.
In Civil Appeal No. 415 of 1967, certain items which the
Company claimed to be added back to the net profit’, shown
in the profit and loss account, for arriving at the gross-
profits and which have been rejected by the Tribunal are in
controversy. Further, there is also a controversy, in the
said appeal, regarding certain deductions sought to be made
from the gross-profits for the purpose of arriving at the
allocable surplus and which have
821
not been allowed by the Tribunal. But the major item in
controversy in the appeal of the Company is regarding the
manner in which the calculation of direct taxes have to be
made under the Act.
Though the Unions support the Award of the Tribunal, in so
far as it is against the Company,, grievance in their
appeals Nos. 813 and 1302 of 1967 relates to the Tribunal’s
declining to add back certain further items in calculating
the gross-profits and permitting the Company to deduct from
the gross-profits certain items for arriving at the
allocable surplus.
There are several items, which, according to the Unions,
should have been either added back to the gross-profits or
should not have been deducted from the gross-profits to
arrive at the allocable surplus. We are not referring in
detail to the various items, referred to in the two appeals
of the Unions, as their counsel have represented before us
that if the claim of the Company regarding the manner in
which the computation of direct taxes, is accepted’. by this
Court, they are not pressing their appeals.
In order to appreciate the points in controversy we are
giving below the statement, which will show the calculations
of the Company, as well as the computation made in the
Award.
“COMPUTATION OF ALLOCABLE SURPLUS FOR THE YEAR ENDED 30-9-
1965.
Appellant Company's Computation as per the
computation award
1. Net profit as per P & L
Account 67,74,315 67,74,315
2. Add back
(a) Bonus for 64-65 30,00,000 30,00,000
(b) Depreciation 70,44,600 70,44,600
(c) Direct taxer. 1,04,00,000 1,04,00,000
(d) Development rebate 5,00,000 5,00,000
(e) Other reserves pr-
ovision for doubtful 2,09,44,600 55,127 2,09,99,727
debts.
3. Add back also
(a) Bonus paid for pre-
vious year 25,21,347 25,21,347
(b) Donations in excess
of incometax 4,569 4,569
(c) Capital expenditure
(i)Patent fees 10,000
-L736 SupCI/72
822
(ii) Plant transfer
charges
72,516
(iii)Disallowable rent 25,25,960 74,000 26,82,432
4.Gross profits 3,02,44,8313,04,56,474
5. Less
(a) Depreciation 76,10,540 76,10,540
(b) Development rebate 6,11,42582,21,965 6,11,42582,21,965
2,20,22,8662,22,34,509
6. Less direct taxes
(a) Income-tax at 55%
of the balance 1,21,12,576 1,04,68,219
(b) Surtax 14,67,236 9,39,802
(e) Additional income-
tax 54,600 1,36,34,412 54,600 1,14,62,621
83,88,454 1,07,71,888
7. (a)Return on paid up capital at 8.5% on
Rs. 3,64,00,000 30,94,000 30,94,000
(b)Return on reserves at 6 % on Rs.
2,35,07,686 14,10,461 45,04,461 11,48,38142,42,381
Balance 38,83,993 65,29,507
8: Allocable Surplus 23,30,39639,17,704
9. Bonus at 20% on annual wages amounting to Rs.
1,72,69,770 34,53,954
10. Set on to be carried for-
ward 4,63,750
In the Award, the Tribunal has given its computationas
well as the manner in which direct taxes have been
calculatedfor the year 1964-1965.
At this stage we may indicate that while the Company com-
puted the direct taxes on the gross-profits, before
deducting any amount on account of bonus, the Tribunal has
calculated the taxes, after deducting the amount of bonus
from the gross-profits. A decision on this really depends
upon the construction of certain provisions of the Act,
having due regard to the principles laid down by this Court.
We have stated earlier that the claim for bonus is for the
year 1964-65, i.e., from October 1, 1964 to September 30,
1965. There is no controversy that for this period bonus is
to be calculated under the Act, which had become applicable.
The Company worked out the allocable surplus under the Act
and paid a sum of Rs. 30,35,958 as bonus for the said year.
If that calculation
823
is correct, there is no controversy that the amount
represents 17.58% of the total wages earned by the eligible
employees during the said accounting year. Later on, the
appellant Company in view of the provisions of the Finance
Act, 1966 recomputed the allocable surplus and fixed it in
the sum of Rs. 23,30,396. It is the, claim of the Company
that they paid bonus at a higher percentage than is,
warranted under the Act. There is also no controversy that
the Annual Wage Bill of the employees throughout the country
was Rs. 1,72,69,770. Though the claim of the Company was
that they paid bonus at a higher percentage, its Chief Exe-
cutive, Finance, M.W. 1 has given evidence to the effect
that the Company would not seek to recover the excess amount
paid. Before us also, Mr. G.B. Pai, learned counsel for the
appellant Company represented, that even, if on the basis of
the decision of,’ this Court, it is found that bonus at a
higher percentage has been paid to the employees, the
appellant Company will not seek to, recover any excess
amount paid. That is, even if after accepting any of the
contentions of the appellant. Company, it is found that
bonus is payable at a percentage lesser than the rate, at
which it has been paid, the excess amount will not be
recovered from the employees, nor adjusted in any other
manner.
From the chart, given above, the tribunal has computed the;
allocable surplus in the sum of Rs. 65,29,507 and fixed the
bonus at the rate mentioned in the Award. The main
controversy under this head centres round the question
whether the Tribunal should have estimated the amount of
direct taxes on the balance of gross-profits as worked out
under ss. 4 and 6 of the Act, but without deducting bonus,
as contended by the appellant Company or whether the
Tribunal was justified in deducting the amount of bonus from
the gross-profits before calculating the tax as urged on
behalf of the Unions.
The contention of the appellant Company in brief is as
follows: The Scheme of the Act clearly indicates that gross-
profits are first to be calculated and certain prior charges
are to be deducted therefrom. One of the Prior charges
under s. 6 is “direct tax”. The tax is to be calculated by
reference to the profits as they emerge at the stage when
deduction of prior charges begins. After the prior charges
are deducted from the gross-profits, the balance,left over
is the available surplus. 60% of the available surplus
represents the allocable surplus payable as bonus to the
employees. At the stage of calculating the tax, bonus does
not come into the picture as the same is ascertained after
deduction- the tax. Hence ,the order of the Tribunal
holding that bonus, which is payable on the profits of the
year in question, i.e., 1964-65, should be deducted from the
gross-profits for the purpose of computation of incometax
under s.6(c) of the Act, is erroneous. In this connection
824
Mr. G. B. Pai, learned counsel for the appellant, has
referred us to certain provisions of the, Act and in
particular to the decision of this Court in Metal Box Co. of
India Ltd. v. Their Workmen(1).
According to the Unions bonus for both the years 1963-64
and. 1964-65 included in the profit and loss account of the
appellant Company and added back for computation of gross-
profits have to be deducted for ascertaining the taxable
income for the yearyear 1964-65. They have made reference
to the debate in parliament at the time of the passing of
Act. In particular Mr. Dudhiya learned counsel for the
fourth respondent,whose contentions have been
acceptedby the learned counsel for other respondents, has
urged that the decision in Metal Box Co.(1) has not
considered several relevant matters, which, if taken into
account, would clearly indicate that the intention of
Parliament was that direct tax is to be computed after
deducting the bonus payable for the relevant accounting
year. The counsel, therefore urged that the decision of
this Court in Metal Box Co. (1) should be reconsidered.
The National Tribunal considered the question whether the
provision for bonus in question in the sum of Rs. 30,00,000
and the bonus paid to the employees in respect of the
previous accounting year, namely, Rs. 25,21,347, which have
been added in the Company’s statement in computing the
gross-profits under the Act should or should not be deducted
from the gross-profits before Income-tax is computed. It is
the view of the Tribunal that the bonus for the previous
accounting year 1963-64 is payable out of the profits of the
said previous year and that amount cannot be deducted in
calculating the Income-tax of the accounting year 1964-65.
But it accepted the contention of the Company that in order
to ascertain the gross-profits, bonus which is found payable
on the profits for the year 1964-65 can be added back to the
net profit shown in the Profit and Loss Account, but
rejected its contention that the tax liability is to be
computed without deducting the said amount. The Tribunal
has further held that it has to take into account the
concession by way of rebate which an employer is entitled to
get under the Income-tax Act on the amount of bonus paid to
workmen. On this basis the Tribunal held that a rough
calculation shows that the allocable surplus will exceed 20%
of the Annual Wage Bill and that the maximum statutory bonus
of 20% must be subtracted from the gross-profits before the
Incometax is calculated. It is now necessary to refer to
the provisions of, the Act, as it stood at the material
date, without the amendment effected to it in 1969.
Under section 1(4), the Act has effect in respect of the
accounting year commencing on any day in the year 1964 and
in
(1) [1969] 1 S.C.R. 750.
825
respect of every subsequent accounting Year. Section 2
contains definitions of various expressions. The
expressions “allocable surplus” “available surplus” “direct
tax” “gross-Profits” and the “Incometax Act” are defined in
clauses 4, 6, 12, 18 and 19 respectively. As the appellant
Company is not a Banking Company, its gross profits, in
respect of any accounting year, is to be calculated under
s. 4(b) in the manner specified in the Second Schedule. The
“available surplus” in respect of any accounting year, as
provided under s. 5, is the gross-profits for that year,
after deducting therefrom the sums referred to in section 6.
Section 6 enumerates the various sums which are to be
deducted from the gross-profits as prior charges. We are
concerned with the relevant provision in Cl. (c) which is as
follows:
“Section 6. The following sums shall be
deducted from the gross profits as prior
charges namely,
(c) subject to the provisions of section 7,
any direct tax which the employer is liable to
pay for the accounting year in respect of his
income, profits and gains during that year.”
Section 7 deals with the method of calculation of direct tax
payable by an employer “for the purpose of cl.(c) of section
6.” Section 11 fixes the maximum amount of bonus at 20% of
the salary or wage. Section 15 deals with set on and set
off of allocable surplus in the circumstances mentioned
therein. Section 19 fixes the time limit for payment of
bonus.
As the entire scheme of the Act, as well is the principle to
be adopted for ascertaining the direct tax, have been
considered by this Court in certain decisions, to which we
will refer presently, it is not necessary for us to cover
the ground over again. In Metal Box Co. of India Ltd. v.
Their Workmen(1), one of the questions that arose for
consideration was the method of working out the direct taxes
under the Act. The Company in that case claimed that direct
taxes are to be worked out under s. 6 (c) on the gross-
profits worked out under s. 4, less the prior charges
allowable under s. 6, namely, depreciation and development
rebate, but without deducting from such balance, the bonus
payable by the Company in the particular accounting year.
The Tribunal, in that case, had accepted the said claim of
the Company. On behalf of the workmen it was contended
before this Court that the said manner of calculation of
direct taxes was contrary to the scheme and provisions of
the Act. According to the workmen, the Tribunal must start
its calculation, from the net profits shown in the Profit
and Loss Account, which would have,
(1) [1969] 1 S.C.R. 750.
826
made provisions for direct taxes and then deduct from the
gross-profits calculated under s. 4 the prior charges
permissible under S. 6. The provisions for direct taxes made
in the Profit and Loss Account would have been computed
after deducting from gross receipts, such deductions,
allowances, reliefs and rebates etc. as are permissible
under the Income,-tax Act. It was the further case of the
workmen that the bonus amount payable during a particular
year would have been deducted from the gross receipts, as
without such deduction, the Profit and Loss Account would
not reflect the true net profit of an employer.
In dealing with the above contentions, this Court, in the
above decision, has referred to the views expressed by this
Court on earlier occasions that the deduction by way of
Income-tax is not the actual amount payable, but what would
be nationally payable on the profits determined under the
Full Bench Formula. This Court further considered the
question whether the concept of notional tax liability
adopted for a long time, has been altered or given the go-
bye by Parliament in enacting ss. 6(c) and 7. After a very
elaborate reference to the scheme of the Act and in
particular to ss. 4 to 7 read with the Second Schedule, this
Court ultimately accepted the contention of the Company that
the tax liability is to be worked out by first working out
the gross-profits and deducting therefrom the prior charges
under s. 6, but not the bonus payable to the employees.
This Court further observed as follows :
“If Parliament intended to make a departure
from the rule laid down by courts and
tribunals that the bonus amount should be
calculated after provision for tax was made
and not before, we would have expected an
express provision to that effect either in the
Act or in the Schedules.”
This decision has categorically laid down that an employer
is entitled to compute his tax liability, without deducting
first the amount of bonus, he would be liable to pay, from
and out of the amount computed under ss. 4 and 6.
After the decision of this Court in Metal Box Co.(1) Parlia-
ment enacted the Payment of Bonus (Amendment) Act, 1969,
(hereinafter to be referred as the Amendment Act). Section
2 of the Amendment Act, added a proviso to s. 5 of the Act.
Similarly section 3 of ‘the Amendment Act deleted in s. 7 of
the Act, the opening words “for the purpose of cl. (c) of s.
6 any direct tax payable by the employer’ and substituted
the words “any direct tax payable by the employer.”
(1) [1969] 1 S.C.R. 750.
827
In The Workmen of William Jacks and Co. Ltd. Madras v.
Management of Will lacks and Co. Ltd., Madras(1), one of the
questions that arose for consideration related to the
correctness of the method adopted by the Company therein in
calculating the amount of Income-tax, without taking into
account the bonus which would be payable to the workmen for
the relevant year. It was urged on behalf of the Union that
the Income-tax should be calculated after taking into
account the bonus. This contention again was rejected by
this Court relying on its previous decision in Metal Box
Co.(2) . The principle laid down in Metal Box Co. (2) was
approved and reiterated. That principle, we have already
pointed out, is that the Income-tax liability is to be
worked out by first working out the gross-profits and
deducting therefrom the prior charges under s. 6, but not
the bonus payable to the employees in a relevant accounting
year. It is significant to note that in William Jacks and
Co.(1) the Union referred to the Amendment Act and strongly
urged that the principle laid down by this Court in Metal
Box Co.(2) regarding the method of computing direct tax has
been modified by the Legislature. This Court, in the said
decision referred to the provisions of the Amendment Act,
and observed that no amendment has been effected to s. 6,
and that the amendment in s. 7 is only to, the effect that
the principles laid down therein are to be applied not only
in respect of s. 6(c) but also to other sections of the Act.
It was further stated that the change in s. 7 became
necessary cause of certain amendments effected in s. 5 by
making, certain additions, which referred to direct taxes
including Income-tax. It was further held that the
amendment in s. 5, has no bearing on the question whether
Income-tax, to be taken into account in calculation, should
be worked out after taking into account the bonus payable
under the Act or without having regard to it. Ultimately,
this Court wound up the discussion on this point as follows
:
“…….. Consequently, there is no reason for
us to differ from the view expressed by this
Court in Metal Box Co. (2). This ground of
challenge also, therefore, fails.”
Therefore, it will be noted that the principle laid down in
Metal Box Co. (2) regarding the manner of computation of
direct tax has been reiterated and reaffirmed in William
Jacks and Co.,(1) and it has also been further pointed out
that the Amendment Act had made no change whatsoever on this
aspect.
The same question again came, up for consideration before
this Court in Delhi Cloth and General Mills Co. Ltd. v.
Workmen(3)
(1) [1971] 1 L.L.J. 503. (2) [1969] 1 SC.R. 750.
(3) [4971] 2 S.C.C. 695.
828
The workmen therein again contended that many of the
observations in Metal Box Co.(1) were obiter and that the
said decision should not be followed as a precedent for
determination of the question regarding the manner in which
direct taxes have to be computed. Again, after a very
elaborate consideration of the scheme of the Act, this Court
rejected the contention of the Union, and observed as
follows :
“Strong reliance was placed by learned counsel
for the appellant on the decision of this
Court in Metal Box Co. v. Workmen. Counsel
for the respondents made valiant efforts to
persuade us to hold that many of the
observations therein were obiter and as such
the case should either be distinguished or be
not followed as a precedent for the
determination of the question before us. While
no doubt the dispute in that case was somewhat
different from the one which we have to
resolve and there are some distinguishing
features in that case, namely, that the Court
was not called upon to examine the computation
of the figures of gross profits, etc.,-for an
establishment which came within the proviso to
Section 3, the observations bearing on the
question of the computation of direct tax
under Section 6(c) of the Act are certainly in
point. It was pointed out there at p. 775 :
“What Section 7 really means is that the
Tribunal has to compute the direct taxes at
the rates at which the income, gains and
profits of the employer are taxed under the
Income-tax Act and other such Acts during the
accounting year in question. That is the
reason why Section 6(c) has the words “is
liable for” and the words “income, gains and
profits”. These words do not, however, mean
that the Tribunal while computing direct taxes
as a prior charge has to assess the actual
taxable income and the taxes thereon.”
With respect, we entirely agree with the above
observation and in our view no useful purpose
will be served by referring to the
other observations bearing on a question with
which we are not directly concerned.”
This decision again reiterates the principle laid down in
Metal Box Co.(1).
In view of the fact that the two later decisions, William
Jacks and Co. (2) and Delhi Cloth and General Mills Co. (s)
have approved and adopted the principles laid down by this
Court in
(1) [1969] 1 S.C.R. 750. (2) [1971] 1 L.L.J. 503.
(3) [1971] 2 S.C.C. 695.
829
Metal Box Co.(1) that decision holds good and governs the
principles to be applied to the case on hand.’ We are not
persuaded by the request made by Mr. Dudhiya that the
decision in Metal Box Co.(1) has to be reconsidered. In
fact we have already pointed out that even the effect of the
Amendment Act has been considered by this Court in William
Jacks and Co. Ltd.(2) and it has been held that the
Amendment Act has made no change in the principles laid down
by this Court in Metal Box Co. (1).
It is rather significant to note that the, Amendment Act was
passed, after the decision of this Court in Metal Box
Co.(1). Parliament at that time was fully aware of the
principle laid down by this Court that the tax liability has
to be worked out by first working out the gross-profits and
deducting therefrom the prior charges under s. 6, but not
the bonus payable to the employees. Nevertheless,
Parliament did not make any change in the Act enacting that
a different method is to be adopted for computing direct
taxes. If the Parliament intended to make a departure from
the principle laid down by this Court in Metal Box Co., (1)
that bonus amount should be calculated, after a provision
for tax was made and not before, a provision to that effect
would have been incorporated by the Amendment Act. That not
having been done, the law as laid down by this Court in
Metal Box Co.(1) and reaffirmed by the two later decisions,
referred to above, still holds the field.
One must in fairness state that the National Tribunal in the
case before us, was for the first time applying the
provisions of the Act and it did not have the benefit of the
decision of this Court in Metal Box Co. (1). From what is
stated above, it follows that the view of the National
Tribunal that bonus must be subtracted from the gross-
profits before Income-tax is calculated, is not correct.
Before closing the discussion on this aspect, it is
necessary to point out that the view of the National
Tribunal that the tax concession by way of rebate that an
employer will get under the Income-tax Act on the bonus
found to be payable has also to be taken into consideration
in dividing the surplus between the workmen and the Company,
is also erroneous in view of the fact that the Act, which is
a self-contained Code has prescribed the manner in which
available surplus and the allocable surplus are to be
calculated.
The second claim made by the Company related to deduction of
Rs. 14,10,461 from the gross-profits as Return on reserves
at 6% on Rs. 2,35,07,686. As against the amount claimed by
the Company, the National: Tribunal has allowed a sum of
(1) [1969] 1 S.C.R. 750.
(2) [1971] 1 L.L.J. 503.
830
Rs. 11,48,381. This claim of Return on reserves made by the
Company was based on s. 6, clause (d) read with Item 1 Cl.
(iii)together with the material part of the Explanation to
the ThirdSchedule of the Act. Section 6 enumerates the
various sums whichare to be deducted from the gross-
profits as prior charges. Section 6 (d) runs as follows :
“Section 6 : The following sums shall be
deducted from the gross-profits as prior
charges, namely
(d)such further sums as are specified in
respect of the employer in the Third
Schedule.”
In the Third Schedule there are three columns. As the
appellant is a Company other than a Banking Company, the
relevant item is Item No. 1, of Column I and clause (iii) of
Column 3, which are as follows :
Item Category of employer Further sums to be deducted
No.
1 2 3
1. Company, other than a banking company.
(iii) 6 per cent of its reserves shown in its
balance sheet as at the commencement of the
accounting year, including any profits carried
forward from the previous accounting year.
The material part of the Explanation in the Third Schedule
is as follows :
“The expression “reserves” occurring in column
(3) against Item No. 1 (iii) * * * shall not include any
amount set apart for the purpose of
(iii) payment of dividends which have been
declared…………
We have already referred to the fact that the relevant
accounting year with which we are concerned is October 1,
1964 to September 30, 1965. In its balance-sheet as on
September 30, 1964, the appellant had shown a sum of Rs.
2,35,07,686. as reserves. Similarly, in its balance sheet
as on September 30, 1965, apart from showing its reserves as
on that date, it had also shown a sum of Rs. 2,35,07,686 as
reserves at the commencement of the accounting year. In
view of the circumstances the claim for Return at 6% of this
amount has been made’ by the Company.
831
The National Tribunal,- on the other hand, though accepting
the figure as correct, held that from the reserves shown in
the balance-sheet a sum of Rs. 43,68,000 has been earmarked
and paid as dividend for the year ending September 30, 1964,
and, therefore, this amount will have to be deducted from
the reserves shown at the commencement of the accounting
year 1964-65. After so deducting this amount, the Tribunal
fixed the reserve at the commencement of the accounting year
in the sum of Rs. 1,91,39,686. It allowed 6% Return on this
amount and thus arrived at the sum of Rs. 11,48,381, as
against ‘,he claim of the Company in the sum of Rs.
14,10,486.
This method of approach by the National Tribunal is attacked
by Mr. G. B. Pai on the ground that it is clearly contrary
to the provisions referred to above. According to him the
amount claimed as reserve has been shown in the balance-
sheet “as at the commencement of the accounting year” i.e.
October 1, 1965. So according to him the essential
requirement of cl. (iii) in Column 3 relating to Item No. 1
in the Third Schedule is satisfied. In the said amount
shown as reserve, the appellant Company will not be entitled
to include any amount which is governed by the Explanation
in the Third Schedule. So far as Item No. 1 (iii) of the
Third Schedule is concerned, in order to attract the
Explanation, the amount should have been set apart for the
purpose of payment of dividend which have been declared.
In this case, the counsel pointed out, no amount has been
set apart for payment of dividend; nor has any payment of
dividend been declared as on October 1, 1964. Therefore,
going by the clear wordings of the relevant provision, the
counsel criticised, the deduction by the Tribunal of the
dividend declared for the year 1963-64 some time during the
accounting year, 1964-65.
Mr. Dudhiya, learned counsel for the Unions, pointed out
that the approach made by the Tribunal is correct. The
counsel pointed out that on no occasion will dividend be
declared for the accounting year ending September 30, 1964,
on October 1, 1964, which is the beginning of the relevant
accounting year now under consideration. The counsel
referred us to the notices issued calling for the general
meeting of the shareholders as well as the declaration made
by the Directors regarding setting apart of th e necessary
amounts in the General Reserve for payment of dividend for
the year 1963-64. He further pointed out that though
dividend for the year 1963-64 was actually paid only some
time in March, 1965, the appellant is not entitled to claim
Return on the entire amount shown as Reserve on October 1,
1964 as it is from and out of that Reserve that the dividend
for the previous year has been paid.
832
In our opinion, there is considerable force in the
contention ,of Mr. Dudhiya. Going by a strict
interpretation of the language of the provisions relied on
by Mr. G. B. Pai, his argument, no doubt, looks attractive.
But from the other proceedings, to which we will refer
immediately, it will be seen that the approach made by the
Tribunal is correct. In the Schedule to the balance-sheet
as on September 30, 1964, the appellant Company has shown a
sum of Rs. 1,23,00,000 as General Reserve. It has further
shown a sum of Rs. 43,68,000 as the amount transferred to
appropriation account for payment of dividend subject to tax
in respect of the previous year, namely, 1962-63. it has
also shown a sum of Rs. 63,00,000 as added to the General
Reserve during the year ended September 30, 1964. On
December 5, 1964, a notice was issued regarding holding of
the Annual General Meeting on February 12, 1965. One of the
items in the agenda for the said meeting was to declare
dividend. It is further stated in the said notice that the
dividend to be declared at the meeting will be payable on or
before March 9, 1965, to those members whose names are on
the Company’s Register of Members as on February 12, 1965.
In the Directors’ Report accompanying the notice, it is
stated that a sum of Rs. 43,68,000 has been appropriated
“for payment of dividend for the previous year’ (paid during
the year). The reference to the “previous year” obviously
is to the accounting year ended September 30, 1964. It is
also clear that the amount so appropriated for payment of
dividend is to be paid “during the year” namely, 1964-65. It
is also stated that this amount for payment of dividend has
been transferred from the General Reserve. The notice
further states that the Directors recommend payment of
dividend for the year ended September 30, 1964 at 12%
subject to deduction of tax at the appropriate rate and that
the said payment will absorb Rs. 43,68,000, out of the
General Reserve.
It will be seen that from the notice calling for the General
Meeting, the Directors’ Report and the balance-sheet,
referred to above, that a sum of Rs. 43,68,000 out of the
General Reserve ,of Rs. 2,35,07,686 has been set apart and
is to be appropriated for payment of dividend for the
previous year 1963-64. In no case will a Company be able to
declare a dividend for the year ending September 30, 1964 on
the morning of October 1, 1964. Therefore, it is clear that
from the Reserve shown at the commencement of the accounting
year i.e. October 1, 1964, a sum of Rs. 43,68,000 has to be
deducted as per the Explanation to the Third Schedule, as
the said amount must be considered to ‘have been set apart
for payment of dividend. No doubt, Mr. Pai urged that the
notice calling for a General Meeting on February
833
12, 1965 was issued on December 5, 1964 and that the
dividend was actually declared only on a later date and in
fact the dividend was paid only as late as March 9, 1965.
Therefore, he pointed out that in any event it cannot be
considered that the said amount has been set apart for
payment of dividend which have been declared.
It is not possible to accept this contention of Mr. Pai.
Once the Directors have, on the basis of the auditor’s
report and other materials, decided to declare a particular
amount as dividend and have set apart the required amount
from the General Reserve, it must relate back to the date of
the commencement of the accounting year. The mere fact that
dividend was actually paid only on March 9, 1965, in this
view, is of no consequence. Therefore, the National
Tribunal was perfectly justified in allowing interest at 6%
only on the sum of Rs. 1,91,39,686. Therefore is no
controversy that 6% Return on this amount, as correctly
stated in the Award, is the sum of Rs. 11,48,381.
Another amount that has been added back by the Tribunal to
the net profits shown in the Profit and Loss Account is the
sum of Rs. 55.127/-. According to the appellant this amount
represents doubtful debts and as such the Tribunal should
not have added back the same. In this connection Mr. G. B.
Pai, learned counsel for the appellant, drew our attention
to s. 211 of the Companies Act, 1956, which provides for the
Form and Contents of balance-sheet and Profit and Loss
Account. He also invited our attention to Part II and
Schedule Six of the same Act regarding the requirements as
to Profit and Loss Account as well as to Part HI regarding
the interpretation of the expressions contained in Parts I
and III of the said Schedule. He has also referred us to
the auditor’s report for the year ending September 30, 1965
and also to certain passages in Pickles and Dunkerley on
Accountancy.
All the above matters were relied on by the learned counsel
to support his contention that the doubtful debts have been
properly excluded by the Company in computing the gross-
profits, Here again, it is not possible to accept the
contention of Mr. Pai. In the Profit and Loss Account for
the year ended September 30, 1965, the appellant under the
column Expenses, had given one item as Miscellaneous. Under
this heading it had shown a sum of Rs. 71,71,072. Later on,
under Ex. 3B, the appellant gave a break up of this amount.
In particular, it is only necessary to note that it had
referred to two separate items, namely, Rs. 41,099 as bad
debts and the sum of Rs. 55,127 as doubtful debts. This
clearly shows that the appellant Company made a clear
distinc-
834
tion between bad debts and doubtful debts. The claim of the
appellant that this amount of Rs. 55,127, shown as doubtful
debts is really a Provision and not a Reserve.
Mr. Pai has referred us to the decision in Metal Box Co.(1)
to show that doubtful debts have been treated as Reserve.
We have gone through the said decision. This Court had no
occasion- at all to express any opinion on this point as
there appears to have been no controversy between the
parties therein. This Court in Textile Machinery
Corporation Ltd. v. Their Workmen(2) did not accept the
claim of the management therein regarding certain amount
treating it as a Reserve to meet possible losses in future.
The Tribunal added back the said amount for determining the
gross-profits. This Court in rejecting the contention of
the management that the Tribunal was in error in adding back
the said amount observed as follows :
“It is true that some of the debts due to the
appellant may not be fully realised but it is
difficult to understand how the appellant can
create a reserve solely for the purpose of
meeting any possible losses on account of bad
or irrecoverable debts and claim a deduction
of this amount while determining the available
surplus. The creation of such a reserve is
wholly inconsistent with the Full
Bench formula in question. There is,
therefore, no substance in the argument that
this amount should not have been added back.”
No doubt, this Court was considering the question on the
basis of the Full Bench formula; but in our opinion that
principle applies with equal force to the case on hand even
under the Act. In fact the above decision also shows that
creation of such an amount is really a reserve and not a
Provision, as contended by the appellant. Even apart from
the above circumstances, there is a crucial fact that the
appellant itself in its break-up has distinguished bad debts
from doubtful debts. The Tribunal had not added back the
amount shown by the appellant in the break-up sheet under
the heading “bad debts”. We may also refer to the evidence
of Mr. Banerji, W.W.1, who was a Chartered Accountant. In
chief examination he has stated that under the Act the
amount claimed by the appellant as doubtful debts has to be
added back for ascertaining the gross-profits. He has
further stated that under the Income-tax Act. Provision for
doubtful debts cannot be deducted in computing the net
profits. On this point, so far as we could see, there is
(1) [1969] 1 S.C.R. 750. (2) [1960] 1 L.L.J. 34.
835
no cross-examination on be-half of the, Company. The
Tribunal was justified in holding that the, appellant was
not in order in deducting Rs. 55,127 under the head
“doubtful debts” as an item of expenditure. It was
perfectly justified in adding back this amount in computing
the gross-profits.
The last point in controversy relates to three items shown
as capital expenditure in Ex.4. Those items are : (1) Patent
fees Rs. 10,000; (2) Plant transfer charges Rs. 72,516; and
(3) Disallowable rent Rs. 74,000. The above three items
were claimed by the appellant as revenue expenditure and
hence should not be added back for ascertaining the gross-
profits.
So far as Plant transfer charges of Rs. 72,516/- is concern-
ed, it is seen that though this was claimed as a revenue
expenditure, Mr. K. B. Bose, appearing for the appellant,
had conceded before the National Tribunal that this amount
is an item of capital expenditure which should be added
back. This concession has been recorded in the Award and it
has not been challenged before us on behalf of the
appellant. Therefore. it follows that the Tribunal was
justified in adding back this amount for ascertaining the
gross-profits.
Similarly, regarding Patent fees of Rs. 10,000, the appel-
lant’s witness Mr. Basu, M.W. I has admitted in cross-
examination that Patent fees is also regarded as an item of
capital expenditure. If that is so, the Tribunal was
justified in adding back this amount also.
The same witness has also admitted that rent paid for godown
for storing capital goods in the process of erection of a
factory is not allowable as an item of revenue expenditure
and that the Income-tax authorities would treat the same as
Part of capital expenditure for erecting a factory.
Therefore, from the evidence on the side of the appellant,
it is clear that this amount also is an item of capital
expenditure and has to be added back in computing the gross-
profits.
Similarly, Mr. Banjerji, Chartered Accountant, who gave
evidence on the side of the Union, as W.W. 1, has also
stated that the appellant itself originally added back in
computing gross-profits the amount under Patent Fees,
Disallowable Rent and Plant Transfer Charges and that it was
only at a later stage that it claimed these items as revenue
expenditure. Under these circumstances, the Tribunal was
justified in adding back the amount of Rs. 74,000/- under
the heading Disallowable Rent.
So far as the calculation of Surtax is concerned, the Tri-
bunal has held that the method of calculation made by the
836
Company in Ex. 4 is correct, but it has to be altered
because the income-tax calculated by it after deducting
bonus was less. Now, that we are accepting the claim of the
appellant that bonus should not be deducted for calculating
direct taxes, it follows that the view of the Tribunal in
this respect is not correct.
We have already pointed out that the National Tribunal has
held that direct tax has to be calculated without taking
into account the bonus paid for the year 1963-64 and the
bonus payable for the accounting year 1964-65. So far as
the bonus payable for the accounting year 1964-65 is
concerned, we have already discussed the matter and held
that the view of the Tribunal is erroneous. But, in our
opinion, the Tribunal was justified in holding that in
calculating direct taxes, the bonus for the accounting year
1963-64, though paid during the accounting year 1964-65
should not be taken into account, is correct. As the bonus
year must be taken as a unit, bonus paid for the previous
accounting year from and out of the profits of the said
previous year does not come into the picture.
From the discussion above, it follows that except the error
committed by the National Tribunal in the matter of computa-
tion of direct taxes after excluding bonus payable for the
accounting year 1964-65, in all other respects it was
justified in rejecting the various claims made by the
Company. Even on the basis of the rejection of the claim of
the appellant that the bonus paid for the previous
accounting year 1963-64 has also to be taken into account
for purposes of calculation of direct taxes, there is no
controvert that on a proper calculation, the bonus to which
the workmen will be entitled, will be very much less than
17.58% already given by the Company. Hence it is not
necessary for us to recompute the figure, as the appellant
has agreed not to claim a refund or in any other manner
adjust or collect the excess bonus that has been already
paid.
But it follows that the view of the Tribunal that the work-
men are entitled to bonus at the maximum rate of 20% and the
further direction regarding the set on to be carried
forward, cannot be sustained. From the calculation given by
us earlier, it will be seen that the National Tribunal had
directed that a sum of Rs. 4,63,750 had to be carried
forward as set on in the succeeding year.’ This direction’
has been given on its finding that the allocable surplus
work@ out at more than 20% of the Annual Wage, Bill. If
that finding is correct, the direction regarding set on will
be justified under s.. 15 of the Act. But as we have
already held that parties are agreed that on a proper
computation, on the basis, indicated by us in the earlier
part of
837
the judgment, even the bonus already paid at 17.58%, will be
on the high side, it follows that the direction of the,
National Tribunal regarding set on cannot be accepted.
In the view that we have taken about the appellant’s claim
regarding direct taxes, it has been represented by the
counsel appearing for the various unions that they are not
pressing their appeals Nos. 813 and 1302 of 1967.
In the result, the Award of the National Tribunal is modi-
fied to the extent indicated above and Civil Appeal No. 415
of 1967 allowed in part. In other respects the said appeal
will stand dismissed. Civil Appeals Nos. 813 and 1302 of
1967 are dismissed as not pressed. There will be no order
as to costs in all the appeals.
G.C.
6-L736Sup CI/72
838