1971 (4) TMI 95 - SC - Indian Laws

Summary

Issues Involved:
1. Add back of direct commission received by the London Office.
2. Add back of handling charges included in invoices.
3. Add back of Director's and General Manager's Office expenses in Calcutta.
4. Disallowance of interest charged by the London Office.
5. Expenses incurred in the Jax Board Factory.
6. Provision for gratuity and other contingencies as "other reserves."
7. Calculation of income-tax without considering the bonus payable.

Issue-wise Detailed Analysis:

1. Add back of direct commission received by the London Office:
The appellant claimed that an estimated sum of Rs. 40,000 received as direct commission by the London Office for the benefit of the Madras Branch should be added back in calculating the gross profits. The Tribunal did not give a specific finding on this, but accepted the Company's account. The Company's witness, M. W. 1, Thiru S. S. Mani, testified that the direct commission was already included under the head "Commission" in the Profit and Loss Account. There was no cross-examination or evidence to show this statement was incorrect. Thus, this claim was rejected.

2. Add back of handling charges included in invoices:
The appellant argued that handling charges included by the London Head Office in invoices amounted to double deduction since administrative (overhead) expenses were already deducted. The Company's witness clarified that handling charges were not shown as an expenditure but were recoverable from customers along with the sale price. These charges were separate from administrative (overhead) expenses. Therefore, no addition was required for handling charges in calculating gross profit.

3. Add back of Director's and General Manager's Office expenses in Calcutta:
The appellant contested the expenses of Rs. 44,768 for 1964 and Rs. 50,848 for 1965 incurred by the Regional Office in Calcutta. These expenses were allocable to the Madras Branch. The Company's witness confirmed this, and there was no cross-examination or evidence to contradict this testimony. Hence, this objection failed.

4. Disallowance of interest charged by the London Office:
The appellant argued that interest charged by the London Office on advances to the Madras Branch should be disallowed as per the proviso to item 1(iii) of the Third Schedule to the Act. The Court held that a Company cannot be a creditor and debtor to itself. Payments of interest between the Head Office and Branch Office are not legitimate expenditures. The interest amounts of Rs. 1,00,657 for 1964 and Rs. 1,65,255 for 1965 were to be added back as they were wrongly shown as expenditures.

5. Expenses incurred in the Jax Board Factory:
The appellant objected to expenses of Rs. 11,747 in 1964 and Rs. 7,251 in 1965, arguing that the Jax Board Factory had ceased to function. The Company's witness admitted no production occurred but there was no evidence to show the factory had completely ceased to function. The expenses were certified by auditors as actual expenses. This objection was therefore rejected.

6. Provision for gratuity and other contingencies as "other reserves":
The appellant claimed that provisions for gratuity and other contingencies should be added back as "other reserves." The Court distinguished between provisions and reserves, citing the Metal Box Co. of India Ltd. case. Provisions for existing liabilities, even if estimated, are not reserves. The provisions in question were for existing liabilities, not anticipated losses. Thus, they could not be added back as reserves.

7. Calculation of income-tax without considering the bonus payable:
The appellant argued that income-tax should be calculated after taking into account the bonus payable. The Court referred to the Metal Box Co. of India case, which held that income-tax must be calculated without considering the bonus. The subsequent amendment to the Act did not change this interpretation. Therefore, this ground of challenge also failed.

Conclusion:
The Tribunal's calculations were upheld except for the interest paid on advances from the Head Office, which was to be added back. The available surplus for bonus calculation and set on or set off was to be amended accordingly. The appeal was dismissed with no order as to costs.