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TMI Blog1971 (12) TMI 121X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant Company. 3. 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 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. 4. The accounts of the Company were passed at the Annual General ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and filed a revised statement Ex.4, by which the allocable surplus was worked out at only ₹ 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. 9. 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 ₹ 30,35,958 shown in the original calculation and miserably reduced in the subsequent calculation Ex.4. 10. 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 ₹ 65,29,507. On this basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as given its computation as well as the manner in which direct taxes have been calculated for the year 1964-1965. 16. 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. 17. 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 ₹ 30,35,958 as bonus for the said year. If that calculation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 (1969)ILLJ785SC . 20. 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 the 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 C0. (1969)ILLJ785SC 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 af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The "available surplus" in respect of any accounting year, as provided under Section 5, is the gross-profits for that year, after deducting therefrom 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 Clause (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. 23. Section 7 deals with the method of calculation of direct tax payable by an employer "for the purpose of Clause (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. 24. As the entire scheme of the Act, as well as the principle to be adopted for ascertaining the direct tax, have been considered by this Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orking out the gross-profits and deducting therefrom the prior charges under Section 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. 26. 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 Sections 4 and 6. 27. After the decision of this Court in Metal Box Co. (1969)ILLJ785SC 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 Section 5 of the Act. Similarly Section 3 of the Amendment Act deleted in Section 7 of the Act, the opening words "for the purpose of Clause (c) of Section 6 any direct tax payable by the employer" and substituted the words "any direct tax payable by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. (1969)ILLJ785SC regarding the manner of computation of direct tax has been reiterated and reaffirmed in William Jacks and Co. (1971)ILLJ503SC and it has also been further pointed out that the Amendment Act had made no change whatsoever on this aspect. 30. The same question again came up for consideration before this Court in Delhi Cloth and General Mills Co. Ltd. v. Workmen (1971)IILLJ539SC The workmen therein again contended that many of the observations in Metal Box Co. (1969)ILLJ785SC 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. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and deducting therefrom the prior charges under Section 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. (1969)ILLJ785SC 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, title law as laid down by this Court in Metal Box Co. (1969)ILLJ785SC and reaffirmed by the two later decisions, referred to above, still holds the field. 34. One must in fairness state that the National Tribunal in the case before us, was for the first tune applying the provisions of the Act and it did not have the benefit of the decision of this Court in Metal Box Co. (1969)ILLJ785SC . 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. 35. Before closing the discussion on this aspect, it is nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her hand, though accepting the figure as correct, held that from the reserves shown in the balance-sheet a sum of ₹ 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 ₹ 1,91,39,686. It allowed 6% Return on this amount and thus arrived at the sum of ₹ 11,48,381, as against the claim of the Company in the sum of ₹ 14,10,486. 41. 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 Clause (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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding 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 ₹ 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 ₹ 43,68,000, out of the General Reserve. 45. It will be seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct regarding the requirements as to Profit and Loss Account as well as to Part III regarding the interpretation of the expressions contained in Parts I and II 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. 48. 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 gross-profits, 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 ₹ 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, ₹ 41,099 as bad debts and the sum of ₹ 55,127 as doubtful debts. This clearly shows that the appellant Company made a clear distinction between bad debts and doubtful debts. The claim, of the appellant that this am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s we could see, there is no cross-examination on behalf of the Company. The Tribunal was justified in holding that the appellant was not in order in deducting ₹ 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. 51. The last point in controversy relates to three items shown as capital expenditure in Ex.4. Those items are : (1) Patent fees ₹ 10,000"; (2) Plant transfer charges ₹ 72,516; and (3) Disallowable rent ₹ 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. 52. So far as Plant transfer charges of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, bonus paid for the previous accounting year from and out of the profits of the said previous year does not come into the picture. 58. 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 controversy 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 recompute 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. 59. 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 sust ..... X X X X Extracts X X X X X X X X Extracts X X X X
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