TMI Blog1971 (4) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... as no available surplus and, consequently, the liability to pay bonus for these two years could not exceed the minimum of 4 per cent of the wages. It may be mentioned that the respondent Co. is a Bench of, William Jacks Co. Ltd. registered in England with its Head Office in London. It appears that in India this Company has three offices. One is in Calcutta which also functions at the Regional Head Office for all the three Branches in India. The other two Branches are in Bombay and in Madras, the latter being the branch to which the dispute about bonus related. The Company is carrying business as engineers, manufacturers, representatives and general merchants. The business of the Company includes the buying of locally manufactured machinery and other products and selling them to both private and public sector industries. The income of the Company is derived primarily from the sale of imported and indigenous goods at a profit. In addition, the Branch at Madras earns commission credited by London Office on direct shipments from London to customers within the areas served by the Madras Branch, as well as commission on sale of indigenous products, repairs and servicing of equipment so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of handling charges which were included by the London Head Office in the :invoices for goods sent to Madras. The argument was that a proportionate amount of administrative (overhead) expenses of the Head Office in London allocable to the Madras Branch have already been deducted as expenditure in accordance with item 6(e) of the second Schedule to the Act, and the further debit of the handling charges amounted to double deduction. This argument proceeds on the basis that handling charges, which are included by the London Head Office in the various invoices, form part of the administrative (overhead) expenses of that office. There is no justification for such an assumption. The only evidence on this point is again that of M. W. 1, Mani. He clearly stated that, in the accounts.no sum is shown for handling charges as an expenditure as such. The handling charges are only mentioned in the.invoices received from the London Office for goods sent to India. These refer to the amount of handling charges incurred by the London Commercial Departments and an these amounts are recoverable from the customers in India along with the sale price. He added that the administrative (overhead) expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the London Office demanded from the Madras Branch on the advances made by the former to the latter. These payments are, thus, by a Branch of the Company to its Head Office. The Head Office and the Branch Office both belong to the same Company. Such a payment of interest could be justified only on the basis that the London Office was the creditor and the Madras Branch the debtor in respect of the advances on which the interest has been claimed by the London Office. On the face of it, a Company cannot be a creditor and its own debtor simultaneously. No relationship of creditor and debtor can exist between two different Offices of the same Company. The interest paid merely amounts to money transferred by the Madras Branch o the Head Office and, similarly, advances made by the London Office to the Madras Branch are amounts which continue to be used by the Company for its business at a different place. Learned counsel appearing for the Company drew our attention to section 23. of the Act, under which there is a presumption as to the correctness of statements and particulars contained in the balance-sheet and profit and loss account of a Company if they had been properly audited b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts, and the current liabilities, which will represent the actual value of the net holdings of the Company as its investment. The advances made by the Head Office to a Branch Office are not deductible as liabilities, because that amount is also treated as a part of the investment by the Company on which the Cornpany should be given the return of 8.5 per cent. It does not, therefore, partake of the nature of a loan on which interest can be charged by the Head Office from the Branch Office. The principle of calculation laid down in item 1 of the Third Schedule, thus, recognises the position that the Head Office and the Branch Office do not function as creditor and debtor when only interest could be legitimately charged by the Head Office from the Branch Office. In calculation of the gross profit for purposes of bonus, therefore, the two sums of ₹ 1,00,657/- for 1964 and ₹ 1,65,255/- for 1965 must be added back on the basis that they are wrongly shown as expenditure deductible in calculating profit and loss. The fifth objection relates to a sum of ₹ 11,747/- in 1964 and ₹ 7,251/- in 1965 shown as expenses incurred in the Jax Board Factory on the ground that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of profit and other surpluses, not designed to meet a liability contingency commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an amount set aside out of profits and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision. (See William Pickles Accountancy, Second Edn., 192, Part III, cl. 7, Sch. VI to the Companies Act, 1956 which defines provision and reserve.) The provision for gratuity, furlough salary, passage, service and commission in the present case was all made in respect of existing and known liabilities, though, in some cases, the amount could not be ascertained with accuracy. It was not a case where it was an anticipated loss or anticipated expenditure which would arise in future. Such provision is, therefore, not a reserve at all and cannot be added back under item 2(c) of the Second Schedule. The last ground for challenge of the award relates to the deduction for income-tax. In the present case, the amount of income-tax shown as expenditure has been calculated without taking into account the bonus which would be payable to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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