TMI Blog1968 (8) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... unt. It is recognised in trading circles and we find no rule or direcion in the Bonus Act which prohibits such a practice. 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 ascertain the amount afresh after giving the parties opportunity to lead such evidence as they desire and taking that amount and the amounts of development - C.A. 2138 OF 1966 - - - Dated:- 20-8-1968 - Judge(s) : J. M. SHELAT., C. A. VAIDIALINGAM JUDGMENT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct taxes deducted by the company while working out the available surplus. Parliament in the meantime passed the Payment of Bonus Act, 1965, which by section 40 repealed the Ordinance but which saved all things done and action taken under the Ordinance as having been done or taken under the Act. On 27th September, 1965 the company paid, subject to the result of the reference, bonus at the rate of 13.28 per cent. of the wages including dearness allowance to its employees. In its award the Tribunal allowed Rs. 23,48,226 instead of Rs. 28,82,261 claimed by the company as depreciation. Similarly it allowed only Rs. 7 lakhs instead of Rs. 8,87,371 claimed by the company as development rebate. As regards Rs. 18.38 lakhs claimed under the head of gratuity, the Tribunal held that that amount was not a reserve but a provision and, therefore, was not liable to be added back. But it held that the company could deduct only Rs. 10 lakhs and odd as also Rs. 1.31 lakhs and Rs. 87,000 and odd actually paid during the year to employees who retired during that year and added back the balance of Rs. 6 lakhs to the gross profits. Except for these amounts, the Tribunal accepted the rest of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits under section 4 are to be computed in the manner laid down in the 2nd Schedule. That Schedule requires adding back to the net profit shown in the P. L. account the amount of depreciation deducted in that account while computing gross profits. Obviously, the depreciation so to, be added back is the one worked out by the company under section 205(2) of the Companies Act. Section 6 of the Bonus Act provides that, having arrived at the gross profits under section 4 read with the 2nd Schedule, the company is entitled to deduct therefrom depreciation admissible under section 32(1) of the Income-tax Act, that is, such percentage on the written down value as may, in the case of each of the classes of assets, be prescribed. The fact that the company, while preparing its P. L. account and its computation (exhibit 6) produced before the Tribunal, had kept the distinction between depreciation worked out under the Companies Act and the one to be worked under the Income-tax Act for the purposes of the Bonus Act is clear from the evidence of its witness, Verma. It was for this reason that Rs. 23 lakhs and odd were shown as depreciation in the P. L. account while in the computation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the two figures, viz., Rs. 28.64 lakhs or Rs. 28.82 lakhs. It is true that Verma said that the calculation shown to the auditors could be produced but he qualified the offer by saying that that would be done if the Tribunal required. Since the company claimed the deduction of depreciation, it stands to reason that the burden of proof that the depreciation claimed by it was the correct amount in accordance with the Income-tax Act was on the company and that burden the company must discharge once its figures were challenged. But it was contended that once the company produced its auditors' certificate that should be sufficient and must be accepted and that the Tribunal should not insist either on the auditors proving their certificate or on the company proving depreciation on each and every item of depreciable asset. Such an enquiry before the Tribunal, it was argued, would be a harassing and prolonged enquiry, not contemplated in industrial adjudication and, therefore, the Tribunal ought to have accepted as correct Rs. 28.82 lakhs certified by the auditors. Under section 23 of the Act the presumption of accuracy is allowed only to the balance sheet and the P. L. account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, requires that an opportunity must be given to the employees to verify such figures by cross-examination of the employer or his witnesses who have calculated depreciation amount. Notwithstanding the unions challenge to the figure of depreciation claimed by the company, the only thing that the company did was to examine Verma, who admittedly had nothing to do with its calculation, and to produce through him the said certificate. In our view, that was neither proper nor sufficient. The proper course for the Tribunal in such a case was to insist upon the company adducing legal evidence in support of its claim instead of taking the figure of depreciation from the P. L. account which was not worked out in accordance with the Income-tax Act but under section 205 of the Companies Act, and saying that the company had failed to prove that it was a mistaken figure. In our view, the question as to the correct amount of depreciation must go back to the Tribunal for a fresh decision. The Tribunal should give opportunity to the company to prove its claim for depreciation by reasonable proof and to the unions to test such evidence by cross-examination or otherwise. An error of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gratuity was payable on the termination of an employee's service either due to retirement, death or termination of service, the amount of gratuity payable being dependent on his wages at that time and the number of years of service put in by him. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. Thus in 1959-60, 1960-61 and 1961-62 the company allocated towards this liability Rs. 5 lakhs, Rs. 10 lakhs and 5 lakhs respectively from out of the profits, debiting these amounts in the profit and loss account. In all Rs. 40 lakhs have so far been provided in the aforesaid manner against the said liability. The practice followed by the company is that every year the company works out the additional liability incurred by it on the employees putting in every additional year of service. Whenever an employee retires, the amount of gratuity payable to him is debited against the amount provided for as aforesaid. The amount so paid is not debited in the P. L. account as an outgoing or expenditure but against the estimated liability provided as aforesaid. In 1964-65, the company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such a scheme of gratuity to estimate the liability on an actuarial valuation and deduct such estimated liability in the P. L. account while working out its net profits ; and (2) if it is, whether such appropriation amounts to a reserve or a provision. If it is a reserve, obviously the amount has to be added back while computing the gross profits. But in that event the company would be entitled to interest thereon at 6 per cent. per annum under Item 1(iii) of the Third Schedule to the Act. In the case of an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissble only in case of amounts actually expended or paid just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business. A company carrying on business of buying land and selling it after develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the liability did exist in praesenti. In Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax, also a case under the Wealth-tax Act, the appellant company showed in its P. L. account two amounts : (1) the amount of dividend proposed to be distributed for that year, and (2) another sum as a provision for tax liability under the Income-tax Act, 1922. The question was whether these two sums were debts and could be deducted while computing the company's net wealth. It was held that the dividend amount was not a debt, as on the valuation date nothing more than a recommendation by the directors had taken place. But, as regards the estimated tax liability, it was held that it was a debt inasmuch as the liability to pay the tax was in praesenti though payable in futuro and was in respect of an ascertainable sum of money. In Standard Mills Co. Ltd. v. Commissioner of Income-tax, the decision turned on the question whether an estimated liability under gratuity schemes framed under industrial awards amounted to debts and could be deducted while computing the net wealth. On reliance having been placed on Southern Railway of Peru Ltd. v. Owen, a decision to which we shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntry, liable to pay its employees compensation on the termination of their services either by dismissal or on termination of service by notice or on such termination by death or efflux of contractual time. The compensation so paid was an amount equivalent to one month's salary at the rate in force at the date of determination for every year of service. The company claimed to be entitled to charge against each year's receipts the cost of making provision for the retirement payments which would ultimately be thrown on it, calculating the sum required to be paid to each employee if he retired without forfeiture at the close of the year and setting aside the aggregate of what was required in so far as the year had contributed to the aggregate. The House of Lords rejected the deductions on the ground that in calculating the deductions the company had ignored the factor of discount. But their Lordships recognised the principle that the company was entitled to charge against each year's receipts the cost of making provision for the retirement payments which would ultimately be payable as the company had had the benefit of the employee's services during that year provided the present value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is charged to profits except the actual cash outgoing. But, when this has been conceded, I think that there is the very serious disadvantage to be set against the cash basis that it affords a comparatively inefficient method of arriving at the true profits of any one year. The retirement benefit is not, obviously, paid to obtain the services given in the year of retirement. The incidents of retirement payments must be variable from year to year, and they may inordinately depress the profits of one year just as they may inordinately inflate the profits of another. It is true that the company carries on business from one year to another, but it is not charged on the average of its annual profits. Tax rates and allowance themselves vary and, apart from that, to charge tax on a profit unduly accelerated or unduly deferred is, in my opinion, no more respectable an achievement than to admit that the annual accounts of business do in some cases require the introduction of estimates or valuations if a true statement of profit is to be secured. Another method is that which the appellant is seeking to establish with regard to its assessments for the four years 1947-1950 ...... What the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r an irrevocable trust. This argument is plainly incorrect because section 36 deals with expenditure deductible from out of the taxable income already assessed and not with deductions which are to be made while making the P. L. account. In our view, an estimated liability under gratuity schemes such as the ones before us, even if it amounts to a contingent liability and is not a, debt under the Wealth-tax Act, if properly ascertainable and its present value is fairly discounted is deductible from the gross receipts while preparing the P. L. account. It is recognised in trading circles and we find no rule or direcion in the Bonus Act which prohibits such a practice. The next question is whether the amount so provided is a provision or a reserve. The distinction between a provision and a reserve is in commercial accountancy fairly well known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the P. L. account and the balance-sheet. On the other hand, reserves are appropriations of profits,the assets by which they are represented being retained to form part of the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated liability ascertainable with substantial accuracy can be taken into account for arriving at the true profits and gains, there is no reason why the same cannot be done under the Bonus Act unless there is any provision therein forbidding such a practice recognised by commercial accountancy. No such provision was shown to exist in the Bonus Act. The Tribunal in allowing Rs. 10 lakhs out of the estimated Rs. 16 lakhs impliedly accepted the principle canvassed by the company. It, however, allowed only Rs. 10 lakhs because it thought it to be excessive as in some prior years the company had deducted Rs. 5 lakhs. But this was not done on the ground that the estimate of Rs. 16 lakhs was not warranted on any valuation. In our view, in the absence of any challenge as to the correctness of the valuation and in the absence of any challenge that such liability cannot be estimated on any fair standard, the Tribunal ought to have allowed the whole of Rs. 16 lakhs to be deducted while arriving at the net profits in the P. L. account. Turning now to the appeal filed by the employees two questions, besides those already disposed of, were raised : one dealing with interest on capital res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... increased figure is an unrealised accretion in the value of a fixed asset : (see Pickles Accountancy, 2nd edn., pp. 193, 935). So that the fact that such an increased figure does not actually bring in any additional amount to the company does not make the capital reserve any the less a reserve. Nor is it possible to postulate that if such a claim is allowed to be deducted, the management would go on artificially inflating the value of the fixed assets with a view to claim interest. In the first place, if such an inflation is made mala fide the Tribunal can always reject it. In the second place, it is hardly profitable for a company to resort to such a practice, for, under the Wealth-tax Act the company would be liable to an increased assessment. Section 7(2) of that Act provides that where an assessee is carrying on a business for which accounts are maintained regularly, the Wealth-tax, Officer may instead of determining separately the value of each asset held by the assessee determine the net value of the assets of the business as a whole having regard to the balance-sheet of such business as on the valuation date. In Kesoram Industries v. Commissioner of Wealth-tax, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 32(1) of the Income-tax Act, the development rebate and, subject to the provisions of section 7 of the Act, the amount of direct taxes which the employer " is liable to pay " for the accounting year in respect of " his income, profits and gains during that year ". Mr. Chari laid stress on the words " is liable to pay " and in " respect of his income, gains and profits during that year " and argued that inasmuch as clause (c) incorporates the language of the Income-tax Act, it contemplates that the employer is entitled to deduct his actual tax liability. Such liability, therefore, is to be worked out in accordance with the provisions of the Income-tax Act and other relevant Acts by first arriving at the actual taxable income, gains and profits under those Acts and then computing the taxes at rates provided by them for that particular accounting year. He argued that, since clause (c) is subject to the provisions of section 7, the only departure permissible under the Act is that which is provided in section 7. His contention thus was that the Tribunal must start its calculations from the net profit shown in the P. L. account which would have made provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, not with a view to interpret section 6(c), but to ascertain whether Parliament has made a departure from that principle and laid down a new procedure on which direct taxes are to be computed. Mr. Chari's contention was that the Bonus Act is drafted on a clean slate giving a go-bye to the earlier principle of working out bonus, and, therefore, we must proceed on the footing of the language used in section 6(c). At first sight it would appear that the language of clause (c) lends support to his contention. But acceptance of that contention would mean incorporating into the Bonus Act the elaborate and complicated provisions of not only the Income-tax Act but other Acts levying direct taxes and throwing a considerable burden on Tribunals, least equipped with working out the provisions of those Acts entailing inevitably prolonged enquiries. Therefore, we must proceed cautiously in examining the scheme of the Act before we conclude on the interpretation to be given to section 6(c) and section 7. It appears that some Industrial Tribunal, while calculating the available surplus under the Full Bench Formula, used to work out notionally the amount of bonus which they thought would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we need not add them here. The question is whether the concept of notional tax liability which was adopted so long was laid aside by Parliament when it enacted section 6(c) and section 7 and replaced the concept of actual tax liability. To answer this question we must examine the scheme of the Act and Schedule II. Broadly speaking, it can be safely said that Parliament has retained the main outlines of the Full Bench Formula in the Act. It maintained, for instance, the accounting year as the unit, the principle that the employer, and where it happens to be a company, the company and its shareholders and labour are each entitled as contributories to the profits to a share therein, the deduction of certain prior charges, the concept of gross profits, etc., which were the features of the formula. The principal change it introduced was the statutory formula of minimum and maximum bonus and the corollary flowing therefrom of " set on " and " set off " and the doing away of rehabilitation as a prior charge against which labour had clamoured long. But do these changes envisage the doing away of the concept of notional tax liability which the Tribunals used to work out and substituting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous year by reason of there being no profits or gains chargeable for that year or of such profits or gains being less than the allowance allowable under section 32(2) of the Income-tax Act. The result is that while making his P. L. account the employer would deduct both the depreciation allowable under section 32(1) as also the depreciation unabsorbed during the earlier years. The whole of such depreciation, however, has to be added back under item 2(b) of Schedule II while computing the gross profits. Notwithstanding such adding back of depreciation allowable under both sub-sections (1) and (2) of section 32 of the Income-tax Act, the depreciation deductible under section 6(a) of the Act is the one allowed under section 32(1), that is, the depreciation relating to the accounting year only, and not the depreciation unabsorbed in any earlier accounting year. Similar is the position regarding bonus paid during the accounting year but which relates to the earlier accounting years. Even in the case of an employer keeping his accounts on mercantile basis, he would not get a deduction of bonus though payable but not actually paid during the accounting year. He would, however, be entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der this Act and the Income-tax Act and other such Acts who would have to assess taxable income and the tax payable thereon, before all of whom the employer would have to prove his taxable income. Prima facie, it would seem that the Bonus Act could not intend an enquiry into the actual taxable income worked out under all the elaborate provisions relating to deductions, allowances, reliefs, rebates, etc., provided by the Income-tax Act and other such Acts. This is particularly so as in each bonus dispute the Tribunal not equipped with the detailed knowledge of all such Acts would have to undertake an enquiry into the various deductions, rebates, reliefs, etc., claimable by the employer under those Acts. The fact that payment of bonus cannot brook delay without causing hardship to labour would seem to militate against the possibility of such prolonged enquiries. The key to the words in section 6(c), namely, " is liable to pay " emphasised on behalf of the unions and some of the interveners lies in the opening words " subject to the provisions of section 7 " in clause (c). These words are used, whether the tax liability is to be calculated on actual taxable income or on the notiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t taxes as a prior charge has to assess the actual taxable income and the taxes thereon. How can the Tribunal arrive at the amount of bonus to be paid to labour without first estimating the amount of taxes and deducting it from the gross profits and thus ascertaining the available surplus ? If it were to reverse the process and first deduct bonus and ascertain the tax amount, it would have to do so on a somewhat ad hoc figure thus bringing about the same result deprecated by this court in decisions referred to above. This and the other difficulties already pointed out must lead to the result that the Tribunal must estimate the amount of direct taxes on the balance of gross profits as worked out under sections 4 and 6, but without deducting the bonus, then work out the quantum of taxes thereon at rates applicable during that year to the income, gains and profits of the employer and after deducting the amount of taxes so worked out arrive at the available surplus. Section 6(c) being subject to section 7 the computation has to be done without taking into account the items specified in section 7(a) and in the manner prescribed by the remaining clauses of that section. This interpretati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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