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TMI Blog1968 (8) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... its computation to the three respondent unions representing its employees. The available surplus and allocable surplus, according to this computation, were Rs. 49.96 lakhs and Rs. 29.98 lakhs respectively. On this basis the company declared the bonus at 13.28 per cent. of the total wages paid to the employees. According to this computation, the gross profits came to Rs. 2,70,64,234. Out of this the company deducted the following amounts allowed under the Ordinance, namely : Rs. 28,64,000 as depreciation admissible under the Income-tax Act, 1961 ; Rs. 9,00,000 as development rebate ; Rs. 1,36,33,000 as direct taxes ; Rs. 1,50,000 as dividend on preference shares ; Rs. 23,37,000 as interest at 8.5 per cent. on paid up capital ; Rs. 17,80,358 as interest at 6 per cent. on reserves. Thus the available surplus came to Rs. 49,96,876, sixty per cent. of which, namely, Rs. 29,98,125 was the allocable surplus. The employees disputed the computation contending that the company had wrongly reduced the gross profits and the available surplus and that the following amounts should be added back, viz., provision for gratuity, Rs. 18,38,605, and provision for doubtful debts, Rs. 50, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28.82 lakhs and (2) that since the profit and loss account mentioned Rs. 23.48 lakhs as depreciation, the company could claim that amount only. The Tribunal accepted the unions' contention stating that there was nothing to show that the company through mistake had shown Rs. 23.48 lakhs as depreciation in the profit and loss account and that subsequently on finding out the mistake it had revised in its computation depreciation at Rs. 28.82 lakhs. The Tribunal, as we shall presently show, was in error in confusing depreciation claimed by it as a deduction under section 6 of the Act and in thinking that the company had made or claimed to have made a mistake and was trying to correct such mistake. Under section 205(1) of the Companies Act, 1956, no dividend can be declared or paid by a company for any financial year except out of profits arrived at after providing for depreciation in accordance with sub-section (2). Sub-section (2) provides different methods of calculating depreciation, one of which is to calculate it by dividing 95 per cent. of the original cost of each of the depreciable assets by a specified period in respect of each such asset. The depreciation deducted in the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the P. & L. account, Rs. 28.64 lakhs shown in the computation and Rs. 28.82 lakhs subsequently claimed by the company as the revised figure of depreciation. The last two figures were taken by the company from its auditors' certificate certifying first Rs. 28.64 lakhs and, later on, revising that figure to Rs. 28.82 lakhs on certain further records and information produced before them. The evidence of Verma shows clearly that the unions disputed the company's calculations of depreciation. When questioned by them, Verma could only say that the calculations were done not by him but by the secretarial department, and, therefore, he was not in a position to answer questions in that regard. No witness from the secretarial department was produced. As regards their books and records produced before the auditors, his only answer was :--- "So far as books and records mentioned in the first part of exhibit U-2 are concerned, the books and records relating to the branches were produced before the representatives of the auditors' firm there, and the other books and records were produced there before the auditors' firm. So far as the records mentioned in the second part of the certificate are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt are also prepared by the company's officers. The labour have no concern in it. When so much depends on this item, the principles of equity and justice demand that an industrial court should insist upon a clear proof of the same and also give a real and adequate opportunity to the labour to canvass the correctness of the particulars furnished by the employer. The necessity of proper proof of the correctness of statements in the balance-sheet was repeated in Petlad Turkey Red Dye Works Ltd. v. Dyes & Chemical Workers' Union. These observations made with regard to balance-sheets and P. & L. accounts would equally apply to statements made in the auditiors' certificates prepared on the instructions and information supplied to them by employers. Mere production of auditors' certificate, especially when it is not admitted by labour, not by the auditor but by the employees of the company who admitted not to have been concerned with its preparation or the calculations on which it was based, would not be conclusive. We do not say that in such a case the Tribunal should insist upon proof of depreciation on each and every item of the assets. It should, however, insist on some reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igure of Rs. 9 lakhs instead of Rs. 8.87 lakhs for development rebate and credited Rs. 7 lakhs, being 75 per cent. thereof, to the development rebate reserve. Under the Second Schedule to the Bonus Act, read with section 4 thereof, the company is required while computing its gross profit to add the development rebate and as footnote 1 in that Schedule shows, " to the extent charged to profit and loss account ", that is, Rs. 7 lakhs. Under section 6(b) of the Bonus Act, the company is entitled, however, to deduct out of the gross profits arrived at under section 4, the whole of the development rebate admissible under the Income-tax Act, i.e., the amount, 75 per cent. of which come to Rs. 7 lakhs. The error which the Tribunal fell into was in mixing up the development rebate reserve to which the company had to appropriate Rs. 7 lakhs in P. & L. account and the development rebate of Rs. 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 Rs. 7 lakhs only instead of Rs. 8.87 lakhs as development rebate. The next question relates to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd odd actually paid during the year. The company, on the other hand, maintained that what it had done was legitimate and was warranted by the principles of accountancy and, therefore, the whole amount of Rs. 18.38 lakhs was deductible in arriving at its net profits. What the Tribunal did, however, was that instead of squarely facing this controversy, it held that as the company had in the former years debited Rs. 5 lakhs, e.g., in 1959-60 and 1961-62, it would allow only Rs. 5 lakhs for each of the two schemes. Thus it allowed Rs. 10 lakhs as debitable in the P. & L. account in addition to the said Rs. 1.31 lakhs and Rs. 87,000 and disallowing the balance of Rs. 6 lakhs added back that amount in the net profits shown in the P. & L. account. The contention of Mr. Chari was two-fold : (1) that the amount which could be debited was that which was actually paid and the company was not entitled to debit in the P. & L. account any amount worked out by it as estimated liability. The Tribunal, therefore, was not justified in allowing the company to debit any such amount and that the Tribunal arbitrarily fixed Rs. 10 lakhs and allowed wrongly that amount to be deducted ; and (2) even if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealth-tax Act, 1957. In Commissioner of Wealth-tax v. Standard Vacuum Oil Company Ltd., demands in respect of payment of tax under section 18A of the Income-tax Act, 1922, were made against the assessee-company for 1956-57. The final instalment of Rs. 47 lakhs and odd for each of the two years was outstanding on the respective valuation dates. The question was whether the demand for such tax could be deducted while determining the net wealth of the company. This court held that a debt is " owed " when an order is passed under section 18A and a notice of demand is sent. The amount mentioned in the notice begins to be " owed " till a new figure is substituted by the assessee under section 18A(2) of the Income-tax Act. But, till that is done, the amount is ascertained and there is a statutory liability to pay the amounts mentioned in the order under section 18A(1) and were debts on the valuation dates, and, therefore, deductible for the purpose of arriving at the company's net wealth. The court also held that a condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act while computing the taxable profits. In the instant case, the question is not whether such estimated liability arising under the gratuity schemes amounts to a debt or not. The question that concerns us is whether, while working out the net profits, a trader can provide from his gross receipts his liability to pay a certain sum for every additional year of service which be receives from his employees. This, in our view, he can do, if such liability is properly ascertainable and it is possible to arrive at a proper discounted present value. Even if the liability is a contingent liability, provided its discounted present value is ascertainable, it can be, taken into account. Contingent liabilities discounted and valued as necessary can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into account. Contingent rights, if capable of valuation, can similarly be taken into account as trading receipts where it is necessary to do so in order to ascertain the true profits : (see C. N. Beatti's Elements of the Law of Income and Capital Gains Taxation, 8th edition, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of service and, therefore, the whole sum should be debited in the account of the last year of service. This contention was not upheld. In the course of his opinion, Lord Radcliffe cited with approval the dictum of Lord Haldane in Sun Insurance Office v. Clark, namely : " It is plain that the question of what is or is not profit or gain must primarily be one of fact, and of fact to be ascertained by the tests applied in ordinary business. Questions of law can only arise when (as was not the case here) some express statutory direction applies and excludes ordinary commercial practice, or where, by reason of its being impracticable to ascertain the facts sufficiently, some presumption has to be invoked to fill the gap. " Holding that there was no such statutory rule prohibiting the commercial practice of providing for such an estimated liability for each year, he compared the two systems and observed at pages 351-352 as follows :--- " Now the question is, how ought the effects of this statutory scheme to be reflected in the appellant's accounts of the annual profits arising from its trade ? One way, which is certainly the simplest one, is to let the payments made fall entirely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which falls upon it in respect of the year's employment. " Agreeing with the company's claim he observed that provision for retirement payments would give an accurate reflection of the true costs of earning the year's receipts than merely charging against them the year's payment to employees who retired in the year. That there is no rule gainst providing for any such contingent liability but on the contrary such a provision is permissible can be seen from the form of balance-sheet in Schedule VI to the Companies Act, 1956, where provisions for taxation, dividends. provident fund schemes, staff benefit schemes and other items for which a company is contingently liable are to be treated as current liabilities and, therefore, debitable against the gross receipts. Schedule VI, Part 2, lays down the requirements of profit and loss account and clause 3(ix) of it provides that a profit and loss account shall set out amongst other things the aggregate of amounts set aside or provisions made for meeting specific liabilities,contingencies or commitments. But the contention was that though Schedule VI to the Companies Act may permit a provision for contingent liabilities, the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neness of the P. & L. account produced by the company unless it is challenged in the manner provided therein. The company's case was that the estimated liability under the gratuity schemes in respect of the accounting year was ascertainable with fair accuracy under the actuarial valuation and Rs. 16 lakhs which it took into account while making its P. & L. account was the present discounted liability. This position does not seem to have been disputed before the Tribunal. The principal contention urged against that figure was not that the estimated liability was not ascertainable or as in the case of Southern Railway of Peru, that it did not represent the present discounted value, but that the Bonus Act permits only the deduction of the amount actually paid during the accounting year. This was also the principal contention of Mr. Chari before us. Mr. Ramamurthi, appearing for one of the interveners, argued that, though it may be possible to take into account such a contingent liability in arriving at the true profits and gains under the Income-tax Act, it would not be so under the Bonus Act as the scheme of the Act treats the accounting year as a unit and, therefore, reserves or pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst blush it would seem as if there is some force in this contention, for it would be possible for a company to deflate its gross profits by fictitiously revaluing its fixed assets at regular intervals and claiming interest on the excess by carrying such excess to capital reserve and to reduce thus labour's claim to bonus. In the present case the revaluation was made as early as in 1956 and it does not appear that it was ever objected to either by the company's auditors or by any one else concerned with the company's management. It cannot, therefore, be legitimately said that it was done for any oblique purpose, much less with a view to defeat the labour's claim to bonus. It is true that such revaluation does not bring in any tangible additional amount into the company's coffers which it can use for its business. But under section 211 of the Companies Act every balance-sheet of a company must give a true and fair view of the state of affairs of the company as at the end of the financial year. Schedule VI to the Companies Act also provides that where sums have been written off on a reduction of capital or a re-valuation of assets, the balance-sheet, subsequent to such reduction or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of his income, profits and gains during that year... " Section 7, inter alia, provides : " For the purpose of clause (c) of section 6, any direct tax payable by the employer for any accounting year shall, subject to the following provisions, be calculated at the rates applicable to the income of the employer for that year ......... " The company claimed a deduction from the gross profits of Rs. 145 lakhs as direct taxes. It had made provision, however, for Rs. 130 lakhs for direct taxes in the P. & L. account. In its computation it had made a provision for Rs. 136 lakhs. At the stage of the evidence and arguments it contended, however, that the proper amount would be Rs. 145 lakhs. It claimed that direct taxes are to be worked out under section 6(c) on the gross profits worked out under section 4 less the prior charges allowable under section 6, namely, depreciation and development rebate, but without deducting from such balance the bonus payable by the company in the particular accounting year. The Tribunal accepted the contention and allowed Rs. 145 lakhs as direct taxes to be deducted under section 6(c). This conclusion has been seriously disputed by the unions. Mr. Cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act is concerned with gross profits calculated in accordance with section 4 and Schedule II, and that section 7, to which section 6(c) is made subject, militates against the concept of actual tax liability as worked out under the Income-tax Act. The contention was that prior to the enactment of the Act, when available surplus was worked out under the Full Bench Formula, bonus was not deducted while arriving at the amount of income-tax deductible from gross profits, that Parliament could not possibly have contemplated a departure from the course followed in a number of decisions both of courts and Tribunals and suddenly decided to incorporate into this Act the complicated and elaborate provisions of the Income-tax Act and throw the burden on Industrial Tribunals to work out deductions, allowances, reliefs, rebates, etc., under the Income-tax Act, and then finally to assess the actual tax liability. It was submitted that what has to be done by the Tribunal is first to work out gross profits under section 4 and Schedule II and then to deduct therefrom the prior charges under section 6(a) and (b) and estimate direct taxes on the balance and thus arrive at the available surplus. The con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Crompton Parkinson (Works) Private Ltd. v. Its Workmen, disapproval of the said procedure was once again voiced, Das C.J. observing that such a procedure is certainly not giving effect to the bonus formula " but amounts to ad hoc determination which may vary according to the length of the proverbial foot of the Lord Chancellor and is nound to lead to chaos and industrial unrest ". In Workmen of India Explosives Ltd. v. India Explosives Ltd., the labour relied on the report of the directors which was to the effect that no income-tax was payable on the year's result and a total of Rs. 62.39 lakhs made up of income-tax and development rebate was being carried forward. On this report it was argued that no deduction should be made for income-tax. Negativing the contention it was held that in the application of the Full Bench Formula the deduction of income-tax is notional, the gross profits are arrived at by adding back certain items to the net profits and then the gross profits are reduced by making certain notional deductions ; one such deduction is under the head of income-tax. It was held that this deduction is not made on the actual amount payable, but what would be notionally p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich would adjudicate disputes under the Act would be the least efficacious for such a purpose, apart from the fact that such enquiries would be prolonged and bitter enquiries. That is why section 23 was enacted to raise a presumption about the correctness of the P. & L. account and balance-sheets of companies duly certified by auditors qualified under section 226 of the Companies Act, 1956. Since the P. &. L. account would have taken into account, besides expenditure allowable under the income-tax Act, bonus payable to labour, provisions for tax, development rebate or development allowance and reserves, Item 2 of Schedule 11 requires these amounts to be added back. Similarly, the amounts set out in Items 3 and 4 in Schedule II are also to be added back. Item 5 provides for certain deductions such as capital receipts, capital profits, profit and receipts relating to business outside India, income of foreign concerns from investments outside India, etc. It is clear from the nature of these deductible items that they are items in which generally labour would not have made any contribution. Having thus arrived at the gross profits, section 6 provides for deduction of prior charges set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head and the Income-tax Act. Coming now to clause (c) of section 6, is it the actual taxable income, the direct tax on which is a prior charge, which is to be worked out, or the tax on the estimated balance of gross profits after deducting depreciation and development charges but without deducting the bonus payable during the year ? In other words, when the Tribunal reaches the stage of clause (c), does it have to assess the taxable income in accordance with the various provisions of the Income-tax Act just as an Income-tax Officer would do and assess the liability of income tax on such taxable income according to the rates applicable during the particular accounting year, or should it compute the balance of gross profits as stated above and apply the said rates and estimate the amount of direct taxes and deduct them from the remaining gross profits ? Bonus being payable within eight months after the close of the accounting year in cases where there is no dispute pending before an authority under section 22 of the Act as provided by section 19, it is hardly possible, except in rare cases, that assessment under the Income-tax Act and other such Acts would be completed by the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of sections 6 and 7, the distinction between the liability of an individual and a Hindu undivided family under the Income-tax Act and provides that the income derived by such a Hindu undivided family is to be treated as the income of that employer as an individual. Likewise, where profits and gains of an employer include profits from export, a rebate allowed under the Income-tax Act on such profits is not to be taken into account while working out the tax liability under section 6(c). Also, the rebate allowed under any of the Acts levying direct taxes on sums spent on development of an industry is also not to be taken into account while computing the tax liability. It was, however, argued that the provisions of section 7 lay down the only departure from the Income-tax Act and that except for that departure the Tribunal must assess the actual taxable income and arrive at the tax liability thereon at rates prevailing during the accounting year in question. In our view this submission is not correct. What section 7 really means is that the Tribunal has to compute the direct taxes at the rates at which the income, gains and profits of the employer are taxed under the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew that the rebate in the Income-tax Act on bonus paid would go to the employer with which he could recoup the depreciation which would be larger than the one allowed under section 32 of the Income-tax Act. In our view it was for that reason that it did not lay down that bonus is to be deducted before computing the amount on which direct taxes are to be calculated under section 6(c). 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 asce ..... 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