1968 (8) TMI 53 - SC - Income Tax

Whether computation of bonus in respect of the accounting year ending 31st March, 1965, payable to the employees is in accordance with the Payment of Bonus Ordinance ? If not, what should be the quantum of bonus for the employees ? Held that - The error which the Tribunal fell into was in mixing up the development rebate reserve to which the company had to appropriate ₹ 7 lakhs in P. & L. account and the development rebate of ₹ 8.87 lakhs allowable to it under section 6 of the Act. Mr. Chari for the unions fairly conceded that he could not challenge this position. There was, therefore, no justification for the Tribunal to allow ₹ 7 lakhs only instead of ₹ 8.87 lakhs as development rebate. An estimated liability under gratuity schemes such as the ones before us, even if it amounts to a contingent liability and is not a, debt under the Wealth-tax Act, if properly ascertainable and its present value is fairly discounted is deductible from the gross receipts while preparing the P. & L. account. It is recognised in trading circles and we find no rule or direcion in the Bonus Act which prohibits such a practice. 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. In our view the contention urged by 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 section 6 but not the bonus payable to the employees is right. In the result, the appellant company succeeds on the questions of development rebate and the provision for gratuity amount. Its appeal on those question is, therefore, allowed and to that extent the award is set aside. As regards the question of depreciation amount, the Tribunal will ascertain the amount afresh after giving the parties opportunity to lead such evidence as they desire and taking that amount and the amounts of development

Issues Involved:
1. Computation of bonus under the Payment of Bonus Ordinance.
2. Depreciation claimed by the company.
3. Development rebate claimed by the company.
4. Provision for gratuity.
5. Interest on capital reserve.
6. Computation of direct taxes.

Detailed Analysis:

1. Computation of Bonus:
The dispute arose when the company computed the bonus payable to its employees under the Payment of Bonus Ordinance. The company declared a bonus at 13.28% of the total wages, while the employees disputed the computation, claiming that certain amounts should be added back to the gross profits, such as provision for gratuity and provision for doubtful debts. The Tribunal found the available surplus and the allocable surplus to be Rs. 54 lakhs and Rs. 32.42 lakhs respectively and directed payment of bonus at 14.55% of the total wages. Both the unions and the company filed appeals challenging the correctness of the award.

2. Depreciation Claimed by the Company:
The Tribunal allowed Rs. 23,48,226 instead of Rs. 28,82,261 claimed by the company as depreciation. The Tribunal was in error in confusing depreciation claimed under section 6 of the Act. The company produced a certificate of its auditors certifying the revised figure of Rs. 28.82 lakhs. The Tribunal should have insisted on reasonable proof of the correctness of the depreciation figure claimed by the employer. The question of the correct amount of depreciation was remanded back to the Tribunal for a fresh decision.

3. Development Rebate Claimed by the Company:
The Tribunal allowed Rs. 7 lakhs instead of Rs. 8.87 lakhs claimed by the company as development rebate. The error was in mixing up the development rebate reserve and the development rebate allowable under section 6 of the Act. The Tribunal was directed to allow Rs. 8.87 lakhs as development rebate.

4. Provision for Gratuity:
The company claimed Rs. 18.38 lakhs as a provision for gratuity, which was disputed by the unions. The Tribunal allowed only Rs. 10 lakhs and added back Rs. 6 lakhs to the gross profits. The court held that an estimated liability under gratuity schemes, even if it amounts to a contingent liability, is deductible from the gross receipts while preparing the P. & L. account. The Tribunal was directed to allow the whole of Rs. 16 lakhs as deductible while arriving at the net profits.

5. Interest on Capital Reserve:
The Tribunal allowed interest on the capital reserve at 6% in accordance with section 6(d) and clause 1(iii) of the 3rd Schedule. The revaluation of the company's fixed assets and the creation of a capital reserve were accepted as bona fide. The court held that the capital reserve created through revaluation is legitimate and interest on it is deductible from the gross profits.

6. Computation of Direct Taxes:
The company claimed Rs. 145 lakhs as direct taxes, while the Tribunal allowed this amount. The unions contended that the actual tax liability should be computed under the Income-tax Act. The court held that the Tribunal must estimate the amount of direct taxes on the balance of gross profits as worked out under sections 4 and 6, but without deducting the bonus. The Tribunal should then compute the quantum of taxes at rates applicable during that year and after deducting the amount of taxes, arrive at the available surplus.

Conclusion:
The company's appeal on the questions of development rebate and provision for gratuity was allowed, and the award was set aside to that extent. The Tribunal was directed to ascertain the amount of depreciation afresh and adjust its award accordingly. The appeal by the workmen was dismissed. There was no order as to costs.

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