Indian Oxygen Limited Vs. Their
Workmen [1971] INSC 342 (9 December 1971)
VAIDYIALINGAM, C.A.
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 commencementof 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]
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 disallowed 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 30-91965.
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 provision for doubtful 2,09,44,600
55,127 2,09,99,727 debts.
3. Add back also (a) Bonus paid for previous 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 forward 4,63,750 In the
Award, the Tribunal has given its computation as well as the manner in which direct
taxes have been calculated for the year 1964-1965.
At this stage we may indicate that while the Company
computed 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 Executive, 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 centers 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 there from. 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 income tax 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 year 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 accepted by 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 "Incom etax 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
there from 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 god 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 there from 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) Parliament 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 there from 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
there from 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 Third Schedule of the Act. Section 6 enumerates the various sums which are
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 the 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 sometime 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 grossprofits, 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 distinc834 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 occasionat 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
concerned, 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 appellant'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 grossprofits.
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 Tribunal 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 computation 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 recomputed 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 workmen 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 modified 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.
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