1971 (12) TMI 121 - SC - Indian Laws

Summary

Issues Involved:

1. Calculation of allocable surplus for bonus determination.
2. Method of computing direct taxes for bonus calculation.
3. Inclusion of certain items in the gross-profits for bonus calculation.
4. Deduction of certain items from the gross-profits for bonus calculation.
5. Return on reserves.
6. Treatment of doubtful debts.
7. Classification of capital and revenue expenditures.

Issue-wise Detailed Analysis:

1. Calculation of Allocable Surplus for Bonus Determination:
The appeals were directed against the Award of the National Industrial Tribunal, which fixed the available surplus at Rs. 65,29,507 and the allocable surplus at Rs. 39,17,704, leading to a bonus rate of 20%. The Company initially calculated the allocable surplus at Rs. 30,35,958 but revised it to Rs. 23,30,396. The Tribunal's computation was contested by both the Company and the Unions.

2. Method of Computing Direct Taxes for Bonus Calculation:
The primary controversy was whether direct taxes should be calculated before or after deducting the bonus from the gross-profits. The Tribunal deducted the bonus before calculating taxes, while the Company argued that taxes should be computed without considering the bonus. The Supreme Court referenced previous decisions (Metal Box Co. of India Ltd. v. Their Workmen, William Jacks and Co. Ltd., and Delhi Cloth and General Mills Co. Ltd.) and reaffirmed that direct taxes should be calculated without deducting the bonus, adhering to the principle that the tax liability is to be worked out by first calculating the gross-profits and then deducting prior charges, excluding the bonus.

3. Inclusion of Certain Items in the Gross-Profits for Bonus Calculation:
The Unions argued that several items should be added back to the gross-profits, which the Tribunal partially accepted. The Supreme Court upheld the Tribunal's decision to add back items like doubtful debts and certain capital expenditures, rejecting the Company's contention that these should not be included.

4. Deduction of Certain Items from the Gross-Profits for Bonus Calculation:
The Company sought to deduct certain items from the gross-profits, which the Tribunal disallowed. The Supreme Court supported the Tribunal's approach, emphasizing that proper computation should exclude certain deductions claimed by the Company.

5. Return on Reserves:
The Company claimed a deduction of Rs. 14,10,461 as Return on reserves, but the Tribunal allowed only Rs. 11,48,381. The Supreme Court agreed with the Tribunal's method of excluding Rs. 43,68,000 earmarked for dividend payment from the reserves, thus validating the lower amount for Return on reserves.

6. Treatment of Doubtful Debts:
The Tribunal added back Rs. 55,127 shown as doubtful debts to the gross-profits. The Supreme Court upheld this, noting that the appellant Company itself distinguished between bad debts and doubtful debts, and the latter should be considered a reserve, not a provision.

7. Classification of Capital and Revenue Expenditures:
The Tribunal added back three items: Patent fees (Rs. 10,000), Plant transfer charges (Rs. 72,516), and Disallowable rent (Rs. 74,000), treating them as capital expenditures. The Supreme Court upheld this classification, referencing admissions by the Company's witnesses and the nature of these expenditures.

Conclusion:
The Supreme Court modified the Tribunal's Award by correcting the method of computing direct taxes, excluding the bonus for the accounting year 1964-65 from the gross-profits before tax calculation. The Company's appeal was allowed in part, and the Unions' appeals were dismissed as not pressed. The Tribunal's direction for a set on to be carried forward was also invalidated, as the correct computation showed the bonus already paid was on the higher side. No costs were ordered in all appeals.