TMI Blog1967 (5) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... f recent origin. In the year 1955, the employees made a claim for bonus and carried the matter before an Industrial Tribunal, which made an award of Rs. 5,65,000 in favour of the employees. This award was implemented in the year 1956. For similar claims concerning the years 1956, 1957 and 1958, there were disputes pending before Industrial Tribunals but as late as the year 1961, the Tribunals did not make any award. Be that as it may, the assessee seems to have learnt a lesson from the award made in respect of the claim for bonus for the year 1955 and made provision for Rs. 6,00,000 in the year 1956, Rs. 12,00,000 in the year 1957 and Rs. 16,93,000 in the year 1958, for bonuses likely to become payable to the workmen in the respective years. Not only was such provision made, but the assessee made advances to the workmen during the year 1956, 1957 and 1958 against bonuses, that might become payable to them in future, the amounts advanced being Rs. 1,76,414 as on December 31, 1956, Rs. 5,93,824 as on December 31, 1957 and Rs. 11,75,468 as on December 31, 1958. The amounts, which the assessee had provided for bonuses, were included in the accounts under the head "Sundry provisions ", ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own value of the assets as per income-tax records of the assessee took into account not only the normal depreciation allowance allowed under section 10(2(vi) but also additional depreciation allowance under section 10(2)(via). The deductions claimed by the assessee, in all the three assessment years, were four-fold, firstly, on account of bonus payable to the employees, secondly, for income-tax payable in respect of profits earned before the valuation dates, thirdly, for bad and doubtful debts in respect of which provisions had been made in the accounts and, fourthly, for sales-tax liability for the assessment year 1958-59, which liability had not been provided for in the books. The assessee further claimed that in determining the net value of the assets of its business, buildings and machinery should be taken at their written down value, as per income-tax records, instead of the value of those assets as shown in the balance-sheet. The Wealth-tax Officer rejected all these claims of the assessee-company, except the claim in respect of the tax liabilities for the three years which he partly allowed. In respect of the claim for deduction for income-tax liabilities, he allowed R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present their true value, (3) that the proper valuation of fixed assets could only be arrived at by making allowance for the wear and tear of the assets and since the assessee had not made adequate allowance for the depreciation of the assets, adjustment should have been made by substitution of the written down value of these assets as per income-tax records of the assessee, in place of the value shown in the balance-sheet on the respective valuation dates. The arguments advanced on behalf of the assessee were sought to be repelled, by the revenue, with the contention that the claim for deduction of provisions for bonus, income-tax and sales tax liabilities had not ripened into debts and therefore could not be deducted from the net assets of the assessee under section 2(m) of the Wealth-tax Act. With regard to the claim for deduction under the head of bad and doubtful debts and the substitution of the written down value of fixed assets in place of the value shown in the balance-sheets, it was contended that, since the valuation of the assets of the business as a whole had been done under section 7(2) of the Wealth-tax Act, the assessee was not entitled to choose an individual ite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d debt within the meaning of section 2(m) and was clearly deductible from the net wealth of the assessee. For the assessment year 1958-59 we find that the demand for the tax was made after the valuation date and in view of that fact the liability had not become a debt on the valuation date and the amount was not deductible from the net wealth of the assessee company." The Tribunal also rejected the claim for bad and doubtful debts but we are not concerned with the reasons given therefor any more, because the order of the Tribunal was not challenged in that respect. The alternative contention by the assessee for deduction, at least, of sums advanced to the workmen against bonus from the bonus fund was disposed of by the Tribunal by later order, under section 35 of the Wealth-tax Act, in the following language : " The amounts advanced to employees are pure advances and although they may be adjusted in future against bonus that may be due to the employees as a result of the award of the Industrial Tribunal, so long as the award has not been given the amounts advanced are on the personal credit of the employees with the security of the salaries for which they are entitled. from m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x was admittedly limited to the year 1958-59 and not to 1959-60 Mr. Sen made it clear that, although the provision for liability of sales tax concerned the assessment year 1958-59, a part of the last quarter of that year may have travelled beyond that year and that was the reason why the Tribunal tagged on the year 1959-60 to the year 1958-59. We, therefore, read question No. 1(d) with the clarification that the provision for liability of sales tax principally concerned the year 1958-59. This is so far as clarifications which are necessary to be made to the questions. But Mr. Gouri Mitter, learned counsel for the revenue, very pertinently pointed out that section 7(2)(a) of the Wealth-tax Act was merely a valuation section and did not concern itself with deductions of debts and liabilities, which could only be considered under section 2(m) of the Wealth-tax Act. In this submission Mr. Mitter is right. In the case of Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax Shah J., in his dissenting judgment, referred to this aspect of the matter and observed (page 793) : " The argument raised by counsel for the assessee is that substantially section 7(2) is a defini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed by the assessee." Thus, the Tribunal correctly stated the law but in framing the questions fell into the same error which they themselves had pointed out. Mr. Sen, for the assessee, prayed that in these circumstances we should reframe the question in such a manner so that the real controversy between the assessee and the taxing department may be included in the question. In our opinion, there is wisdom in the prayer made by him. Where an assessee is entitled to certain deductions under a taxing statute, if he claims those deductions under a wrong section of the statute, that should not be over-emphasised. If, in negativing a claim of the assessee otherwise allowable, a Tribunal quotes a wrong section, in the question referred to this court, and seeks an answer whether the claim of the assessee is allowable under that wrong section, it is open for this court to say that the assessee is entitled to claim for deduction not under the erroneous section quoted by the Tribunal but under some other section. This was the view which was expressed by Chagla C. J. in Ismailia Grain Merchants Association Ltd. v. Commissioner of Income-tax and we respectfully agree with his Lordship. The o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted that in view of that decision he was unable to contend that the provisions made by the assessee in respect of income-tax was not allowable as deduction. We, therefore, answer question No. 1(b) in the affirmative and in favour of the assessee. The liability for sales tax does not stand on a different footing and this amply appears from section 4 of the Bengal Finance (Sales Tax) Act, 1941, which is couched in the following language : " With effect from such date as the State Government may by notification in the Official Gazette, appoint, being not earlier than 30 days after the date of the said notification every dealer whose gross turnover during the year immediately preceding the commencement of this Act exceed taxable ,quantum shall be liable to pay tax under this Act on all sales effected after the date so notified : ........ " If provision made for taxation under the Indian Income-tax Act and the Bengal Finance (Sales Tax) Act stand on the same footing, the answer to question No. 1(d) must also be in the affirmative and in favour of the assessee. This is not disputed by Mr. Mitter on behalf of the revenue. We answer the question accordingly. We are thus left wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn 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 workmen. In adjudicating upon the claim for bonus, an industrial court excluded establishments which had suffered losses in the year under consideration from liability to pay bonus. In several appeals against the award, the Labour Appellate Tribunal particularly approved of the method for computing bonus as a fraction of surplus profit. According to the 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, (a) provision for depreciation, (b) reserve for rehabilitation, (c) return of 6% on the paid up capital, (d) and return on the working capital at a lower rate than the return on the paid up capital ; and from the balance called " available surplus " the workmen were to be given a reasonable share by way of bonus for the year. The " Full Bench Formula " came up for consideration before the Supreme Court in many cases, for example, Muir Mills Co. Ltd. v. Suti Mills M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt observed : " The plea for revision of the formula raises an issue which affects all industries ; but before any change is made in it all industries and their workmen would have to be heard and their pleas carefully considered. It is obvious that while dealing with the present group of appeals it would be difficult, unreasonable and inexpedient to attempt such a task." This was the view which was repeated by the Supreme Court in Ahmedabad Miscellaneous Industrial Workers' Union v. Ahmedabad Electricity Co. Ltd. Thus ended the second phase of the evolution of the claim for bonus. The third phase has started with the passing of the Payment of Bonus Act, 1965, which has cast upon the employers a statutory obligation to pay bonus. It may be broadly stated that bonus, which was originally a voluntary payment out of profits to workmen to keep them contented, acquired the character, under the Full Bench Formula, of a right to share in the surplus profits and enforceable through the machinery of the Industrial Disputes Act. Under the Payment of Bonus Act, 1965, liability to pay bonus has become a statutory obligation imposed upon employers covered by the Act, (vide the observation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceding year, whichever is more favourable to the assessee. All the ingredients of a ' debt ' are present. It is a present liability of an ascertainable amount." The aforesaid observations were no doubt made in the context of liability for payment of income-tax debt. Mr. Sen argued that the liability to pay bonus to workmen arose as soon as the industry made a profit. How much bonus to pay was also ascertainable, at the material time, under the Full Bench Formula as explained by the Supreme Court. Therefore, the liability was not a contingent liability and the quantification of the liability was a matter of calculation in accordance with a formula. In the hands of the workmen the claim for bonus was a right, correspondingly for the assessee it was a liability ascertainable either by settlement or by application of the Full Bench Formula, might be through the medium of industrial adjudication. The claim, he submitted, was very much an enforceable claim, which could be enforced through the medium of industrial adjudication. He, therefore, submitted that there was no difference between a provision made for payment of income-tax and a provision made for payment of bonus. He rounded up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is due, immediately it becomes legally due and before it is actually received, and it brings into debit expenditure the amount for which the legal liability has been incurred before it is actually disbursed. These observations were quoted with approval in Calcutta Co. Ltd. v. Commissioner of Income-tax. On the facts of this case, then when did the legal liability arise in respect of the bonus ? This depends on the facts of the case and the nature of the bonus awarded in this case. This court has examined the nature of profit bonus---it is common ground that the bonus with which we are concerned was a profit bonus---in various cases. Then, his Lordship examined the cases of Muir Mills Co. Ltd., Associated Cement Co., and Indian Tea Association v. Workmen and observed : " It follows from the above decisions of this court that : (a) workmen are entitled to make a claim to profit bonus if certain conditions are satisfied. (b) the workmen are 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. In our opinion, it is only whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the context in which the Supreme Court observed that the liability to pay bonus did not become a liability until it was amicably settled or covered by an award of the industrial tribunal was made in a different context and their Lordships had not to consider the case in the context that we are now doing. In our opinion, the liability to pay a bonus is a debt and not a contingent liability and, therefore, is liable to be taken into consideration in the computation of the not wealth under section 2(m) of the Wealth-tax Act. There is another aspect of the matter. Here, it does not appear that there was any dispute between the assessee and the workmen over the payment of bonus up to the extent provided for by the assessee. The workmen were possibly asking for more and that is why industrial adjudication was going on. But up to a total sum of Rs. 16,93,000 spread over the years of assessment, the assessee admitted liability and was making payment of considerable sums towards bonus. This is an indication that up to that amount the payment of bonus was not disputed. If that was so, and we have every reason to think that it was so, then this is an additional reason why the liability shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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