Workmen of William Jacks & Co.
Ltd., Madras Vs. Management of William Jacks & Co. Ltd., Madras  INSC
131 (28 April 1971)
BHARGAVA, VISHISHTHA BHARGAVA, VISHISHTHA
CITATION: 1971 AIR 1821 1971 SCR 540 1972 SCC
The Payment of Bonus Act (21 of 1965), s. 23,
Second Schedule, item 2(c) and Third Schedule, item (1)-Advance made by head
office to branch office-Interest paid by branch office--If deductible
expenditure in calculating profit and loss of branch office-Provision for
gratuity etc.--Difference between provision and reserve-Provision when
deductible--Deductible income tax calculated without taking into account bonus
payable--if correct--Payment of Bonus (Amendment) Act (8 of 1969)-Effect of.
The appellants workmen of the respondent
claimed that for the two years 1964 and 1965 they were entitled to bonus at the
maximum rate of 20% of their annual wages while the respondent contended that
there was no available surplus and consequently the liability to pay bonus for
these two years could not exceed the minimum of 4% of the wages. The
management, inter alia, claimed deductions: (1) with respect to interest
charged by the London office on advances made by the London office to the
respondent-branch during those two years; (2) provision for gratuity and other
and (3) income tax calculated without taking
into account the bonus which would be payable to the workmen.
The Tribunal allowed the claims.
In appeal to this Court,
HELD: (1) (a) The amounts claimed as interest
are really payments by the branch of the company to its head office. A payment
of interest could be justified only on the basis that the head office was a
creditor and the branch office a debtor.,. But a company could not be a creditor
and its own debtor simultaneously. The interest paid really represented amounts
of money transferred by the respondent-branch to the head office, and
similarly, the advances made by London office to the respondent-branch were
amounts which continue to be used by the company for its own business at a
different place. [544F] (b) This is also made manifest by the proviso to item 1
of the Third Schedule to the Act. In the deduction of the current liabilities
any amount shown as payable by a company to its head-office whether towards any
advance made by the head-office or otherwise, or any interest paid by the
company to its head-office is not to be treated as a deductible liability,
because, the advance made by the head office is also treated as a part of the investment
by the company. [545D] (c) Under s. 23 of the Payment of Bonus Act, 1965, there
is a presumption as to the correctness of the statements and particulars
contained in the balance-sheet and the profit and loss account of a company, if
the accounts had been properly audited by qualified auditors. The presumption,
however, is confined to the accuracy of the statements and particulars
contained in the balance sheet and the profit and loss account. If any item in
the accounts is wrongly shown as expenditure, when on the face 541 of it is not
so, the court is not! bound to hold that. the method adopted 'in preparing the
accounts is correct simply because the auditors raised no objection.
[544H-545C] Therefore, in the calculation of gross profits for purposes of
bonus the sums deducted as interest for the two years must be added back since
they were wrongly shown as deductible expenditure in calculating the profit and
(2) The provision for gratuity, and other
contingencies such as furlough salary, passage, service and commission. in the
present case, was made in respect of existing and known liabilities, though, in
some cases the exact amount could not be ascertained. It was not a case where
it was an anticipated loss or anticipated expenditure which would arise in the
future. Such provision is, not a reserve at all and it could not be added back
under item 2(c) of the Second Schedule to the Act. It was therefore rightly
shown by the respondent as a deductible expenditure in calculating profit and
loss. [547D] Metal Box Co. v. The Workmen,  1 S.C.R. 750, followed.
(3).The calculation of the amount of
income-tax shown as expenditure, without taking into account the bonus which would
be payable to the workmen under the Act, was correctly done in accordance with
the decision of this Court in the Metal Box Company case.: In that case, the
question was determined on the interpretation of ss. 6(c) and 7 of the Act, and
the amendments made by the Payment of Bonus (Amendment) Act,, 1969 do not make
any change in the law bearing on the question, as laid down by this Court.
CIVIL APPELLATE Jurisdiction : Civil Appeal
No, 1700 of 1968.
Appeal by special leave from 'the Award dated
March 9, 1968 of the Industrial Tribunal, Madras in Industrial Dispute No. II
M. K. Ramamurthi, I. Ramamurthy, Vineet Kumar
and Shyamala Pappu, for the appellants.
M. C. Chagla and D. N. Gupta for the
The Judgment of the Court was delivered by
Bhargava, J.--This appeal by special leave is directed against an Award of the
Industrial Tribunal, Madras, in a dispute relating to payment of bonus under
the Payment of Bonus Act, 1965 (No. 21 of 1965) (hereinafter referred to as
"the Act"). The respondent in the appeal is the employer, William
Jacks & Co. Ltd., Madras, while the appellant is the William Jacks &
Co. Employees' Union, Madras, representing the workmen employed by the
respondent. The appellant claimed that, for the two calendar years 1964 and
1965, the workmen were entitled to bonus at the maximum rate of 20 per cent of
their annual wages while the respondent Co. put forward the case that there was
no available 542 surplus and, consequently, the liability to pay bonus for
these two years could not exceed the minimum of 4 per cent of the wages. It may
be mentioned that the respondent Co.
is a Bench of, William Jacks & Co. Ltd.
registered in England with its Head Office in London. It appears that in India
this Company has three offices. One is in Calcutta which also functions at the
Regional Head Office for all the three Branches in India. The other two
Branches are in Bombay and in Madras, the latter being the branch to which the
dispute about bonus related. The Company is carrying business as engineers,
manufacturers, representatives and general merchants. The business of the
Company includes the buying of locally manufactured machinery and other
products and selling them to both private and public sector industries. The
income of the Company is derived primarily from the sale of imported and
indigenous goods at a profit.
In addition, the Branch at Madras earns
commission credited by London Office on direct shipments from London to
customers within the areas served by the Madras Branch, as well as commission
on sale of indigenous products, repairs and servicing of equipment sold and by
local purchase and sale. These features of the business have been enumerated by
us as they may have bearing on some of the questions raised in this appeal.
During the hearing of the reference before
the Tribunal, the Company filed its balance-sheets, profits, and loss account,
and calculations of available surplus in accordance with the provisions of the
Act and its schedules showing that there was no available surplus, so that
bonus in excess of 4 per cent was not payable by it. These calculations were
challenged on various grounds before the Tribunal, but none of them was
accepted and the Award was based on the calculations filed on behalf of the
Company. In this appeal before us, learned counsel appearing on behalf of the
appellant has challenged the calculations in respect of seven different items,
and we proceed to deal with them in the order in which they were argued by him.
The first claim on behalf of the appellant
was that there should be an add back of an estimated sum of Rs. 40,000 / which
was received as direct commission paid by the manufacturers to the London
Office for the benefit of the Branch at Madras, in calculating the gross
profits on the basis of which available surplus is to be worked out. On this
point, the Tribunal in its award did not give any specific finding, though,
after mentioning this argument raised before it, the Tribunal still proceeded
to accept the Company's account disregarding this objection. The only evidence
on this point is found in the statement of the Company's witness, M.
W. 1, Thiru S. S. Mani, who stated that the
direct commission received by this Company relating to this 543 Branch is
credited in the accounts of this Branch. The amount of commission received by
the Company is included under the head "Commission" in the Profit and
In 1964, the sum of Rs. 8,80,504/and, in
1965, the sum of Rs. 7,46,391/include the direct commission. 'According to his
evidence, therefore, the direct commission has already been taken into account
in calculating the gross profits, and no question can arise of any add back.
There is no cross-examination on this point on behalf of the appellant, nor has
any evidence been led by the appellant to show that the statement of this
witness is incorrect. In the circumstances, this claim has to be rejected.
The second item claimed is add back in
respect of handling charges which were included by the London Head Office in
the :invoices for goods sent to Madras. The argument was that a proportionate
amount of administrative (overhead) expenses of the Head Office in London
allocable to the Madras Branch have already been deducted as expenditure in
accordance with item 6(e) of the second Schedule to the Act, and the further
debit of the handling charges amounted to double deduction. This argument proceeds
on the basis that handling charges, which are included by the London Head
Office in the various invoices, form part of the administrative (overhead)
expenses of that office. There is no justification for such an assumption. The
only evidence on this point is again that of M. W. 1, Mani. He clearly stated
that, in the accounts no sum is shown for handling charges as expenditure as
such. The handling charges are only mentioned in the. invoices received from
the London Office for goods sent to India. These refer to the amount of
handling charges incurred by the London Commercial Departments and an these
amounts are recoverable from the customers in India along with the sale price.
He added that the administrative (overhead) expenses of the Head Office do not
include any portion of the London Commercial Departments expenses. Thus, it is
clear that these handling charges have no connection with the administrative
(overhead) expenses of the Head office which are taken into account under item
6(e) of the Second Schedule. The actual expenses incurred b y various
Commercial Departments of the Company in England in handling the particular
goods are added in the invoices to the cost of those goods and are realised as
part of the sale price. There is no separate entry of handling charges as an expenditure
in the accounts of the Company. Consequently, there can &rise no question
of making any addition in respect of these handling charges while calculating
The third item is in %respect of the
Director's and General Manager's Office expenses in Calcutta amounting to Rs.
44,768/for the year 1964 and Rs. 50,848 /for
the year 1965. The Office 544 in Calcutta, as we have indicated above, is a
sort of common office supervising the business of the Company at all the three
places in Calcutta, Bombay and Madras. The expenditure of this Regional Office
is of the same nature as the administrative (overhead) expenses of the Company
in London. These sums which have been shown as expenses in the accounts in the
Madras Branch are amounts allocable to that Branch. This has been again proved
by the same witness, M.
W. 1, Mani. There is no cross-examination and
no evidence to show that the case put forward by him is incorrect. In the
circumstances, this objection also fails.
The fourth objection, on which greatest
emphasis was laid by learned counsel for the parties, relates to the question
of interest charged by the London Office. in the sum of Rs.
1,00,657 / for 1964 and Rs. 1,65,255/for 1965
on advances made by the London Office to this Branch at Madras during these
years. It was urged that, having regard to the proviso to item 1(iii) of the
Third Schedule to the Act, this interest should be disallowed. It, however
appears to us that the question of this interest should be examined from a
different aspect and that is whether this interest can be held to be 'a
legitimate item of expenditure in calculating the profit and loss of the
'Company at Madras.
It is clear that these amounts have been paid
by the Branch at Madras to Head Office in London and represent interest which
the London Office demanded from the Madras Branch on the advances made by the
former to the latter. These payments are, thus, by a Branch of the 'Company to
its Head' Office. The Head Office and the Branch Office both belong to the same
Company. Such a payment of interest could be justified only on the basis that
the London Office was the creditor and the Madras Branch the debtor in respect
of the advances on which the interest has been claimed by the London Office. On
the face of it, a Company cannot be a creditor and its own debtor
simultaneously. No relationship of creditor and debtor can exist between two
different Offices of the same Company. The interest paid merely amounts to
money transferred by the Madras Branch o the Head Office and, similarly,
advances made by the London Office to the Madras Branch are amounts which
continue to be used by the Company for its business at a different place.
Learned counsel appearing for the Company
drew our attention to section 23. of the Act, under which there is a
presumption as to the correctness of statements and particulars contained in
the balance-sheet and profit and loss account of a Company if they had been
properly audited by qualified auditors, and urged that, since the interest
charged by the Head Office to the Branch 545 Office at Madras was accepted as a
proper expenditure for calculation of profit and loss account by the auditors,
the Court under section 23 must accept that it was correctly shown as an
expenditure. The presumption under section 23 is confined to the accuracy of
the statements and particulars contained in the balance-sheet and the profit
and loss account. If any item in the accounts is wrongly shown as expenditure
when, on the face of it, it is not so, the Court is not bound to hold that the
method adopted in preparing the accounts is correct simply because the auditors
raised no objection. While the interest was paid on advances not made by a
creditor to a debtor, but by the Company's one office to another, the money
purported to be transferred as interest cannot be held to be an expenditure
incurred by the Branch paying it to the other. In fact, there are indications
in the Act itself to support the view that such advances made to one office by
another of the same Company cannot be treated as liabilities. This is made
manifest by the proviso to item 1 of the Third Schedule.
Under this item, every Company, other than a
banking company, is allowed a return on paid up equity share capital and on
reserves shown in its balance-sheet. The proviso then deals with the case of a
foreign Company and permits a deduction of 8.5 per cent on the aggregate of the
value of the not fixed assets and the current assets of the company in India
after deducting the amount of the current liabilities. In deduction of the
current liabilities, however, any amount shown as payable by the Company to its
Head Office, whether towards any advance made by the Head Office or otherwise,
or any interest paid by the Company to its Head Office, is not be treated as a
liability. The reason very clearly is that the object of the deduction under
item 1 of the Third Schedule is to permit a Company a return on money invested
by it for its business as a prior charge when calculating the surplus for
purposes of bonus.
In the case of an Indian Company, this object
is achieved by giving a return of 8-5 per cent on the equity share capital and
6 per cent on reserves. In the case of a foreign Company, the same object is
served by working out the difference between the total of fixed assets and
current assets, and the current liabilities, which will represent the actual
value of the net holdings of the Company as its investment. The advances made
by the Head Office to a Branch Office are not deductible as liabilities,
because that amount is also treated as a part of the investment by the Company
on which the Cornpany should be given the return of 8.5 per cent. It does not,
therefore, partake of the nature of a loan on which interest can be charged by
the Head Office from the Branch Office. The principle of calculation laid down
in item 1 of the Third Schedule, thus, recognises the position that the Head
Office and the Branch Office do not function as creditor and debtor when only
interest could be legitimately charged by the Head Office from 35-1 S.C.
India/71 546 the Branch Office. In calculation of the gross profit for purposes
of bonus, therefore, the two sums of Rs. 1,00,657/for 1964 and Rs. 1,65,255/for
1965 must be added back on the basis that they are wrongly shown as expenditure
deductible in calculating profit and loss.
The fifth objection relates to a sum of Rs.
11,747/in 1964 and Rs. 7,251/in 1965 shown as expenses incurred in the Jax
Board Factory on the ground that the Jax Board Factory had ceased to function
for these two years. It is, no doubt, true that M. W. 1, Mani, admits that the
Jax Board Factory had no production in those two years; but there is nothing to
show that the Factory had completely ceased to function. The expenses are
actual expenses in the factory during those two years as certified by the
Auditors and there is no material on the basis of which it can be held that
these expenses were not incurred. This objection, therefore, fails.
The sixth claim on behalf of the appellant is
that the provision for gratuity and other contingencies should also be added
back as representing "other reserves" under item 2(c) of the Second
Schedule to the Act. The other contingencies referred to relate to provision made
for furlough salary, passage, service and commission. All these items are
clearly in respect of liabilities which had already accrued in the years in
which the provision was made. They are not in respect of anticipated
liabilities which may arise in future. The principles on which these have been
calculated were explained by the same witness M.
W. 1, Mani. In the case of gratuity, for
example, provision has been made in respect of the employees on the basis of
the amount of service put in by them up to the years to which the accounts
relate. In some cases, of course, where the exact liability was not
ascertainable, provision has been made on the basis of the estimated existing
Such provision is quite different and
distinct from a reserve. This Court in Metal Box Co. of India Ltd. v. Their
"The distinction between a provision and
a reserve is in commercial accountancy fairly well-known. Provisions made
against anticipated losses and contingencies are charges against profits and,
therefore, to be taken into account against gross receipts in the Profit and
Loss account and the balancesheet. On the other hand, reserves are
appropriations of profits, the assets by which they are represented being
retained to form part of the capital employed in the business.
Provisions are usually (1)  1 S. C. R.
547 shown in the balance-sheet by way of
deductions from the assets in respect of which they are made whereas general
reserves and reserve funds are shown as part of the proprietor's interest :
(See Spicer and Peglar's Bookkeeping and Accounts, 15th ed. p.
42). An amount set aside out of profit and
other surpluses, not designed to meet a liability contingency commitment or
diminution in value of assets known to exist at the date of the balance-sheet
is a reserve but an amount set aside out of profits and other surpluses to
provide for any known liability of which the amount cannot be determined with
substantial accuracy is a provision. (See William Pickles Accountancy, Second
Edn., 192, Part III, cl. 7, Sch. VI to the Companies Act, 1956 which defines
provision and reserve.) " The provision for gratuity, furlough salary,
passage, service and commission in the present case was all made in respect of
existing and known liabilities, though, in some cases, the amount could not be
ascertained with accuracy.
It was not a case where it was an anticipated
loss or anticipated expenditure which would arise in future. Such provision is,
therefore, not a reserve at all and cannot be added back under item 2(c) of the
The last ground for challenge of the award
relates to the deduction for income-tax. In the present case, the amount of
income-tax shown as expenditure has been calculated without taking into account
the bonus which would be payable to the workmen under the award. The point
raised that it should be calculated after taking into account the bonus is
fully met by the decision of this Court in the case of Metal Box Co. of
India(1). That case clearly lays down that, in calculating the income-tax
deductible in working out the gross profit, the bonus which would be payable
under the Act is not to be taken into account and the tax must be worked out
ignoring that bonus at the rates applicable in the relevant years. Learned
counsel for the appellant, however, drew out attention to the amendment made
subsequently by Parliament in the Act by the Payment of Bonus (Amendment) Act 8
of 1969, and urged that this amendment should be treated as the parliamentary
exposition of the law which was interpreted by this Court in the case of Metal
Box Co. of India(1). In that case, the question was determined by
interpretation of only sections 6(c) and 7 of the Act. The Amendment Act 8 of
1969 makes no substantial changes in either of these two sections. In fact,
section 6 remains un amended and in section 7, the only amendment is that the
principles laid down in that section are to be applied not only in respect of
section 6(c), but also other sections of the Act. This change became (1) 
1 S.C.R. 750.
548 necessary, because amendment was made in
section 5 of the Act by making certain additions which referred to direct tax,
including income-tax. That amendment in section 5 has no bearing at all 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. Consequently, there is no reason for us to differ from the
view expressed by this Court in Metal Box case(1). This ground of challenge
also, therefore, fails.
As a result, we hold that the Tribunal was
right in accepting the calculations made by the Company, except in respect of
the interest paid on advances made by the Head Office to the Branch at Madras. The interest shown as expenditure in the accounts has to be added back, as
indicated by us above, and the available surplus for purposes of calculation of
the bonus payable as well as for purposes of set on or set off must be amended
We leave this calculation to the Tribunal.
With this partial amendment in the award, the appeal is dismissed. In the
circumstances of this case, we make no order as to costs.
V.P.S. Appeal dismissed.
(1)  1 S.C.R. 750.