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TMI Blog1972 (7) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... ear after the relevant valuation date is debt owed by the assessee so as to be deductible in computing the net wealth of the assessee. The question is not free from difficulty and it is with some hesitation that we have arrived at a decision against the assessee. The assessee which is a public limited company submitted a return showing a net wealth of Rs. 89,39,671 for the assessment year 1959-60, the relevant valuation date being 31st March 1959. There was no provision for the accounting year 1st April, 1958, to 31st March, 1959, but in the return submitted by it the assessee claimed a deduction of Rs. 5,33,000 on account of liability for bonus for the said accounting year on the ground that it was a debt owed by the assessee on the relevant valuation date, namely, 31st March, 1959. This claim for deduction was negatived by the Wealth-tax Officer and hence the assessee preferred an appeal to the Appellate Assistant Commissioner. Before the Appellate Assistant Commissioner, the claim for deduction was revised, since, in the meantime, the amount of bonus payable to the workmen was settled and Rs. 2,62,279 and Rs. 1,82,007 were paid to the workmen of Baroda unit and Sayaji Mills No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the Supreme Court in Kesoram Industries & Cotton Mills Ltd. v. Commissior of Wealth-tax. There the question was whether income-tax payable in respect of the profits of the previous year was a "debt owed" by the assessee on the relevant valuation date so as to be deductible in computing the net wealth of the assessee. The determination of this question rested on the true interpretation of the expression "debt owed" in section 2(m) and the Supreme Court was, therefore, called upon to consider what that expression means. The Supreme Court, after referring to various decisions, English as well as Indian, pointed out that all these decisions agree-- "...that the meaning of the expression 'debt' may take colour from the provisions of concerned Act: it may have different shades of meaning. But the following definition is unanimously accepted : 'A debt is a sum of money which is now payable or will become payable in future by reason of a present obligation: debitum in praesnti, solvendum in futuro.' The said decisions also accept the legal position that a liability depending upon a contingency is not a debt in praesnti or in futuro till the contingency happened. But if there is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iculated in so many words and that is that the liability must be to pay a liquidated amount. A "debt" in the legal sense of the word, as pointed out by B. K. Mukherjee J., in Jabed Sheikh v. Taher Mallick, a case referred to by the Supreme Court with approval in Kesoram Industries case, "means a liquidated money obligation". Lord Justice Lindley in his decision in Webb v. Stenton clearly indicated that a debt is a liquidated sum of money which is now payable or will become payable in future and this was quoted with approval by Sir Lawrence Jenkins in the Full Bench case in Banchharam Majumdar v. Adyanath Bhattacharjee which was a case accepted by the Supreme Court in Kesoram Industries case, as laying down the correct meaning of the word "debt". To quote again the words of B. K. Mukherjee J. in Jabed Sheikh v. Taker Mallick, " there cannot be a debt in law unless there is a liquidated money claim". This, of course, does not mean that the amount of the claim must be an ascertained amount. It may be ascertainable in future as was the case in O'Driscoll v. Manchester Insurance Committee, or Kesoram Industries case. But it must be a liquidated amount which is certain and definite thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rises only when a claim for bonus is made by the workmen and it is settled amicably or by industrial adjudication and, therefore, it becomes a "debt owed" by the assessee only when this contingency is fulfilled. The argument of the revenue was that since in the present case there was nothing to show that a claim for bonus was made by the workmen of the assessee on or before the relevant valuation date and in any event the records showed that the claim for bonus was settled amicably or by industrial adjudication subsequent to the relevant valuation date the liability for bonus was not a "debt owed" by the assessee on the relevant valuation date so as to be deductible in computing the net wealth of the assessee. Now, there can be no doubt that if this interpretation of the decision of the Supreme Court in Swadeshi Cotton & Flour Mills case is correct, it would be unnecessary for us to examine the question on principle and we would have to proceed on the basis that liability for bonus becomes a "debt owed" by the assessee only when a claim for bonus is made by the workmen and it is settled amicably or by industrial adjudication. But a little scrutiny will reveal that this reading of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to when the liability for bonus could be said to have become an ascertained liability so that it could be regarded as a liability debitable according to the mercantile system of accounting. The Supreme Court examined the nature of bonus and after referring to several of its earlier decisions observed that it was clear from those decisions that : (a) workmen are entitled to make a claim to profit bonus if certain conditions are satisfied ; (b) the workmen have to make a claim from year to year ; (c) this claim has either to be settled amicably or by industrial adjudication ; and (d) if there is a loss or if no claim is made, no bonus will be permissible. The Supreme Court then proceeded to hold on the basis of these observations that "...is only when the claim to profit bonus, if made, is settled amicably or by industrial adjudication that a liability is incurred by the employer, who follows the mercantile system of accounting, within section 10(2)(x), read with section 10(5) of the Act". It will be seen from these observations that the Supreme Court was not concerned with the wider question as to when liability for bonus arises or when it can be said to become a "debt owed" by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to claim a legitimate return out of the profits and evolved a formula for charging certain prior liabilities on the gross profits of the accounting year, and awarding a percentage of the balance as bonus to the workmen. This formula for computing bonus as a payment of surplus profit received the broad approval of the Labour Appellate Tribunal in appeals against the award relating to the year 1949. According to this formula, which came to be known as the "Full Bench Formula", surplus available for distribution had to be determined by debiting the following prior charges against gross profits : (1) provision for depreciation (2) reserve for rehabilitation ; (3) return of six per cent. on the paid up capital ; and (4) return on the working capital at a lower rate than the return on paid up capital and, from the balance called "available surplus", the workmen were to be awarded a reasonable share by way of bonus for the year. The Full Bench Formula came up for consideration before the Supreme Court in several cases. The Supreme Court did not commit itself to acceptance of the formula in its entirety but ruled that bonus is not a gratuitous payment made by the employer to the workmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there is available surplus in the hands of the employer calculating on the basis of the Full Bench Formula, the workmen must be held entitled to receive bonus and a part of the available surplus must be awarded to them by way of bonus. The right of the workmen to claim bonus and the liability of the employer to pay bonus are the right and the liability recognisable only in industrial adjudication and they would have no meaning and existence so far as civil courts are concerned. It may, therefore, be a matter for consideration whether a liability to pay bonus, which is not recognised by the civil courts but is recognisable only in industrial adjudication can be said to be a "debt owed" within the meaning of that expression as used in section 2(m). But we do not propose to decide this question since we are of the view that even otherwise the liability to pay bonus does not become a "debt owed" by the employer until a claim is made by the workmen and it is settled by mutual agreement or industrial adjudication. Now, bonus which workmen are entitled to claim and the employer is liable to pay is not a liquidated sum of money which is merely ascertained by mutual agreement or indust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled by mutual agreement or industrial adjudication. It is only then that it becomes a "debt" owed by the employer. We find that the Calcutta High Court has taken a different view in Textile Machinery Corporation v. Commissioner of Wealth-tax, but with the greatest respect to the learned judges who decided that case, we cannot agree with their view and we must express our dissent from it. The learned judges held that, having regard to the industrial law as laid down by the Supreme Court, the workmen have a right to claim and the employer is liable to pay bonus when it is shown that there is available surplus in his hands and there we agree with them, but the next step taken by the learned judge is, in our opinion, erroneous. The learned judges concluded that because there is a liability on the employer to pay bonus under the industrial law, it is a "debt owed" by the employer. But this conclusion is based on an assumption that every liability to pay necessarily constitutes a debt. That assumption is, as we have already pointed out above, plainly incorrect. Every liability to pay does not necessarily constitute a debt. We have to examine the nature of the liability in order to see ..... X X X X Extracts X X X X X X X X Extracts X X X X
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