Appeals Nos
2138 and 2196 of 1966
Appeals by special leave from the Award dated June 27 1966 of the Sixth Industrial Tribunal West Bengal in Case No VIII 251 of 1965
N A Palkhivala Jatinder Mahajan OC Mathur and Ravinder Narain for the appellant in CA No 2138 of 1966 and the respondent in CA No 2196 of 1966
A SR Chari RK Maheshwari and BP Maheshwari for the respondents in CA No 2138 of 1966 and the appellants in CA No 2196 of 1966
HK Sowani K RaJendra Chaudhuri and KR Chaudhuri for intervener No 1
N A Palkhivala and DN Mukherjee for intervener No 2
MK Ramamurthi Shyamala Pappu and Vineet Kumar for intervener No 3
R J Kolah and OC Mathur for intervener No 4
N A Palkhivala and OC Mathur for Intervener No 5
A N Parekh and Subhag Mal Jain for intervener No 6
The Judgment of the Court was delivered by Shelat J
By a reference dated September 17 1965 the Government of West Bengal referred to the Sixth Industrial Tribunal the following question for adjudication Whether computation of bonus in respect of the accounting year ending 31st March 1965 payable to the employees is in accordance with the payment of Bonus Ordinance  If not what should be the quantum of bonus for the employees  754 The dispute between the appellant company and its employees arose in the following manner
The company s accounting yearis from 1st April to 31st March of the following year and its books of account are maintained on the mercantile system of accounting
The company computed the amount of bonus payable to its employees under the Payment of Bonus Ordinance which was promulgated on May 29 1965 and furnished on July 5 1965 copies of its this computation to the three respondent Unions representing its employees
The available surplus and allocable surplus according to this computation were Rs 4996 lacs and Rs 2998 lacs respectively
On this basis the company declared the bonus at 1328 per cent of the total wages paid to the employees
According to this computation the gross profits came to Rs 27061234 
Out of this the company deducted the following amounts allowed under the Ordinance namely Rs 2864000 as depreciation admissible under the Income Tax Act 1961 Rs 900000 as development rebate
Rs 13633000 as direct taxes
Rs 150000 as dividend on preference shares Rs 2337000 as interest at 85 pc on paid up capital Rs 1780358 as interest at 6 pc on reserves
Thus the available surplus came to Rs 4996876  sixty per cent of which namely Rs 2998125 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 1838605 and provision for doubtful debts Rs 50000 
They also challenged deduction of interest on the reserves on the ground that the capital reserve of Rs 5700151 was artificially arrived at by a mere revaluation of the company s fixed assets as on April 1 1956
They also disputed the figures of depreciation development rebate and direct taxes deducted by the company while working out the available surplus
Parliament in the meantime passed the which by sec
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 September 27 1965 company paid subject to the result of the reference bonus at the rate of 1328 percent of the wages including dearness allowance to its employees
In its award the Tribunal allowed Rs 2348226 instead of Rs 2882261 claimed by the company as depreciation
Simiearly it allowed only Rs 7 lacs instead of Rs 887371 claimed 755 by the company as development rebate
As regards Rs 1838 lacs claimed under the head of gratuity the Tribunal held 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 lacs and odd as also Rs 131 lacs and Rs 87000 and odd actually paid during the year to employees who retired during that year and added back the balance of Rs 6 lacs to the gross profits
Except for these amounts the TribUnal accepted the rest of the company s computation
In the result the Tribunal found the available surplus and the allocable surplus to be 54 lakhs and odd and Rs 3242 lacs respectively and directed payment of bonus at 1455 per cent of the total wages
Both the Unions and the company obtained special leave and filed appeals challenging the correctness of the Award
In the profit and loss account for the year 1964 65 the Company had shown Rs 17 chores and odd as gross receipts and out of that amount had deducted diverse amounts as expenditure including the sum of Rs 2348226 by way of depreciation
In its computation filed before the Tribunal the Company however claimed depreciation at Rs 2882 lacs worked out by its auditors in accordance with the provisions of the Income Tax Act 1961
The Unions disputed this amount on the ground 1  that there was no evidence that the amount of depreciation came to Rs 2882 lacs and 2 that since the profit and loss account mentioned Rs 2348 lacs 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 2348 lacs 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 2882 lacs
The Tribunal as we shall presently show was in error in confusing depreciation claimed by it as a deduction under sec
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 sec
205 1  of the  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 sec
Sub sec
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 asset by a specified period in respect of each such asset
The depreciation deducted in the expenditure column in the PL account therefore was the depreciation worked out under sec
205  2  of the Companies Act
Under sec
2  18  of the Bonus Act gross profits mean gross profits calculated under sec
In the case of companies other than a banking company gross profits under Sec 4 are to be computed in the manner laid 756 down in the 2nd Schedule
That Schedule requires adding back to the net profit shown in the P  L account 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 sec
205 2  of the 
Section 6 of the Bonus Act provides that having arrived at the gross profits under sec
4 read with the 2nd Schedule the Company is entitled to deduct therefrom depreciation admissible under sec
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 and the one to be worked out 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 lacs and odd were shown as depreciation in the P  L Account while in the computation exhibit 6 the company claimed Rs 2864 lacs as depreciation
There was therefore no question of the company having made any mistake in calculating depreciation in the P  L Account or its trying to amend that mistake as erroneously thought by the Tribunal
The only mistake the company claimed it had made was that the true figure of depreciation deductible under sec
6a of the Bonus Act was Rs 2882 lacs and not Rs 2864 lacs
The Company produced a certificate of its auditors exhibit U 2 dated December 20 1965 wherein the auditors certified that on the records produced before them the true figure of depreciation would be the revised figure of Rs 2882 lacs and not Rs 2864 lacs
But the controversy between the parties was not confined to the difference between these two figures
There were three figures for depreciation before the Tribunal Rs 23 lacs and odd shown in the P  L Account Rs 2864 lacs shown in the computation and Rs 2882 lacs 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 2864 lacs and latex on revising that figure to Rs 2882 lacs 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 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 757 So far as books and records mentioned in the first part of Ext
U 2 are concerned the books and record 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 record mentioned in the second part of the certificate are concerned they are different records
The informations and explanations given to the auditors were given verbally after consulting our books of accounts
These books and records not having been produced or disclosed there was obviously no opportunity to the Unions to verify either of the two figures viz Rs 2864 lacs or Rs 2882 lacs
It is true that Verma said that the calculations shown to the auditors could be produced but he qualified the offer by saying 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 2882 lacs certified by the auditors
Under sec
23 of the Act the presumption of accuracy is allowed only to the balance sheet and the P  L Account of companies
No such presumption is provided for by the Act to auditors  certificates
Speaking of rehabilitation amount deductible as a prior charge under the Full Bench formula while working out the available surplus this Court in Khandesh Spg
ana Wvg
Mills Co Ltd vs Rashtriya Girni Kamgar Sangh1 observed at page 847 as follows The importance of this question the procedure to be followed for ascertaining facts in the context of fixing the amount required for rehabilitation cannot be over estimated
The item of rehabilitation is generally a major item that enters
into the calculations for the purpose of ascertaining the surplus and therefore the amount of bonus
So there would be a tendency on the part of the employer to inflate this figure and the 1  847
C 169 2 758 employees to deflate it
The accounts of a company are prepared by the management
The balance sheet and the profit and loss account 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 vs Dyes  Chemical Workers  Union1
These observations made with regard to balance sheets and P  L accounts would equally apply to statements made in the auditors  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 auditors 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 proof of the correctness of the figure of depreciation claimed by the employer either by examining the auditors who calculated and certified it or by some other proper proof
Depreciation in some cases would be of a large amount affecting materially the available surplus
Fairness 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 sec
205 of the  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
1   909
759 An error of the same type seems to have been committed by the Tribunal in the matter of development rebate
It allowed Rs 7 lacs as development rebate
instead of Rs 887 lacs
claimed by the Company
Under sec
33 of the Income Tax Act an assessee is allowed by way of development rebate a certain percentage of the cost of machinery or plant depending on the date of its installation
Section 343 of that Act provides however that the said allowance shall not be given unless an amount equal to 75 per cent of the development rebate to be allowed is debited to the P  L account of the relevant previous year and credited to a reserve account to be utilised by the assessee in the 8 years next following for the purposes of the undertaking
Accordingly the Company appropriated Rs 7 lacs to the development rebate reserve as it was bound to do if it wanted to claim development rebate
The Company took the round figure Rs 9 lacs instead of Rs 887 lacs for development rebate and credited Rs 7 lacs being 75 per cent thereof to the development rebate reserve
Under the Second Schedule to the Bonus Act read with sec
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 lacs
Under sec
6b of the Bonus Act the Company is entitled however to deduct out of the gross profits arrived at under sec
4 the whole of the development rebate admissible under the Income Tax Act ie the amount 75 per cent of which comes to Rs 7 lacs
The error which the Tribunal fell into was in mixing up the development rebate reserve to which the Company had to appropriate Rs 7 lacs in P  L account and the development rebate of Rs 887 lacs allowable to it under sec
6 of the Act
Mr Chari for the Unions fairly conceded that he could not challenge this position
There was therfore no justification for the Tribunal to allow Rs 7 lacs only instead of Rs 887 lacs as development rebate
The next question relates to a sum of Rs 1838 lacs being the estimated liability under two gratuity schemes framed by the Company which was deducted from the gross receipts in the P  L account
In 1960 the Company introduced a gratuity scheme for its employees other than its officers
Under that scheme gratuity was payable on the termination of an employees 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 lacs
Rs 10 lacs and Rs 5 lacs respectively from out of the profits 760 debiting these amounts in the profits and loss account
In all Rs 40 lacs 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 introduced a similar gratuity scheme for its officers
According to the Company the estimated liability under this scheme was worked out at Rs 20 lacs
But instead of providing the whole for it provided only Rs 1131 lacs
It also provided Rs 7 lacs under the scheme for its non officers against the liability for service put in by them in that year
Out of Rs 1838 lacs so provided the Company paid as gratuity Rs 131585 and Rs 87295to officers and other employees who retired during 1964 65 debiting as aforesaid these amounts not as an outgoing or expenditure but against the said amounts of Rs 11 lacs and Rs 7 lacs
The Company claimed that it was entitled to
deduct the balance of Rs 16 lacs from the gross receipts in the P  L account while working out its net profit
The Unions contended that the Company could deduct from the gross receipts only Rs 131 lacs and Rs 87000 and 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 1838 lacs 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 lacs eg in 1959 60 and 1961 62 it would allow only Rs 5 lacs for each of the two schemes
Thus it allowed Rs 10 lacs as dubitable in the P  L account in addition to the said Rs 131 lacs and Rs 87000 and disallowing the balance of Rs 6 lacs 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 lacs and allowed wrongly that amount to be deducted and 2 even if such estimated liability was debitable the appropriation amounted to a reserve and under the Bonus Act such a reserve had to be 761 added back while working out the gross profits under the 2nd Schedule to the Act
Two questions therefore arise 1 whether it is legitimate in 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 2if 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 permissible only in case of amounts actually expended or paid
Just as receipts though not actual receipts but accrued due or 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 development sold certain plots received a part of the price but entered the whole of the price receivable as it maintained its books of accounts on mercantile method
It also debited a certain sum being the estimated expenditure for the developments it undertook to carry out within six months from the execution of the sale deeds although no part of such expenditure was actually incurred during that year
It was held that having regard to the accepted commercial practice and trading principles and there being no prohibition against it in the Income Tax Act deduction of such estimated liability even though it did not come under any specific provisions of sec
102 of the Income Tax Act 1922 was permissible see Calcutta Company Ltd vs CJT1 Such a deduction of an accrued liability though not actually paid is not confined to the Income Tax Act only but is also perrnissible under the Wealth Tax Act 1957
In Commissioner of Wealth Tax vs Standard Vacuum Oil Co Ltd 2 demands in respect of payment of tax under sec
18A of the Income Tax Act 1922 were made against the assessee company for 1956 57
The final installment of Rs 47 lacs 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 sec
18A and a notice of demand is sent
The amount mentioned in the notice begins to be owed  till a new figure is 1 19601 SCR 185
2  762 substituted by the assessee under sec
18A2 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 sec
18A1 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 contingent liability
The decision no doubt turned on the meaning of debt  as defined by sec
2m of the Wealth Tax Act the
Court there holding that the statutory liability to pay the amount mentioned in the order commenced when the demand notice was served and therefore the liability did exist in present
In Kesoram Industries and Cotton Mills Ltd vs CWT1 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 present though payable in future and was in respect of an ascertainable sum of money
In Standard Mills Co Ltd vs Commissioner of Income Tax2 the decision turned on the question whether an estimated liability under gratuity schemes framed under Industrial awards amounted t0 debts and could be deducted while computing the net wealth
On reliance having been placed on Southern Railway of Peru Ltd vs Owena a decision to which we shall presently come the Court observed  at page 773 that decision had no relevance to the question before it as the House of Lords in that decision was concerned in determining the deductibility of the present value of a liability which may arise in future in the computation of taxable income for the relevant year under the Income Tax laws The Court held in view of the terms of sec
2m of the Wealth Tax Act that as the liability to pay gratuity was not in presents but would arise in future on the termination of service ie on retirement death or termination the estimated liability under the schemes would not be a debt and therefore could not be deducted while computing the net wealth
These observations show that the Court was of the view that though such a liability is a contingent liability and therefore not a debt  under sec
2m of the Wealth Tax Act it would be deductible under the Income Tax Act while 1  2  3  763 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 he 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 CN Beatti s Elements the Law of Income and Capital Gains Taxation 8th ed 54
In Southern Railway of Peru Ltd vs Owen1 the House of Lords was concerned with the problem similar to
the one before us and therefore the observations made there would be of assistance
An English Company operating a railway in Peru was under the laws of that country 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 affluence 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 of every year of service
The Company claimed to be entitled to charge against each years 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 feature at the close of the year and setting  aside the aggregate of what was required insofar as the year had contributed to the aggregate
The House of Lords rejected the deductions on the ground that in calculating the deduction 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 the benefit of the employees  services during the year provided the present value of the future payments could be fairly estimated
The contention on behalf of the Crown was very nearly the same as the one before us
Counsel conceded that a trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but 1  764 also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated
But it was argued that proposition would not apply to that case as the company was not in any year under a definite obligation to pay its employees lump sums on the termination of their employment as in each case the right to a lump sum was contingent on certain conditions being fulfilled and  so the prospective liability remained contingent until the service was actually ended
The lump sum could not be regarded as earned or payable in respect of a particular year 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 vs Clark1 at p 455 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 pp
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 as expenses of the year of payment and ignore any question of making provision for the maturing obligation during the years of service that precede it  
It has one considerable advantage no element of estimate or valuation appears in the profit assessment and nothing 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 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 incident of retirement payments must be variable from year to year and 1  765 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 allowances 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 appellant claims the right to do is to charge against each year s receipts the cost of making provision for the retirement payments that will ultimately be thrown upon it by virtue of the fact that it has had the benefit of its employees  services during that year
As a corollary it will not make any charge to cover the actual payments made in the year in respect of retirement benefits
Only by such a method it is said can it bring against the receipts of the year the true cost of the services that it has used to earn those receipts
Generally speaking this must I think be true
For whereas it is possible that any one of its many employees may forfeit his benefits and so never require a payment the substantial facts of the situation are that when the company has paid every salary and wage that is due for current remuneration of the year it has not by any means wholly discharged itself of the pecuniary burden which fails 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 against 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 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 dubitable against the gross receipts
Schedule VI  lays down the requirements of profit and loss account and el 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 liabili 766 ties contingencies or commitments
But the contention was that though Schedule VI to the may permit a provision for contingent liabilities the Income tax Act 1961 does not for under sec
36v the only deduction from profits and gains permissible is of a sum paid by an assessee as an employer by way of his contribution towards an  approved gratuity fund created by him for the exclusive benefits of his employees under an irrevocable trust This argument is plainly incorrect because sec
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 direction 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 employed in the business
Provisions are usually shown in the balance sheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor s interest See Spicer and Peglar s Book keeping and Accounts 15th ed
p 42
An amount set aside 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 which defines provision and reserve
Under sec
23 of the Bonus Act there is a presumption of the genuineness 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 lacs which it took into account while making it P  L account was the 767 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 Peru1 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 provisions on the footing of estimated liabilities to be paid in future cannot be taken into account
But under the Income tax Act also the previous year is a unit and it is only the profits and gains during that year which are taxable
If under the Income tax Act an estimated 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 lacs out of the estimated Rs 16 lacs impliedly accepted the principle canvassed by the company
It however allowed only Rs 10 lacs because it thought it to be excessive as in some prior years the Company had deducted Rs 5 lacs
But this was not done on the ground that the estimate of Rs 16 Iacs 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 lacs to be deducted while arriving at the net profits in the P  L account
Turning now to the appeal filed by the employees two question besides those already disposed of were raised one dealing with interest on capital reserve and the other relating to the amount of direct taxes to be deducted from the gross profits
As regards the first question Verma s evidence was that the Company had revalued its fixed assets in 1956and credited the difference of Rs 57 lacs between its cost and the value fixed on such revaluation to the capital reserve
The Tribunal accepted the valuation as bona fide and allowed interest on the said reserve at 6 per cent in accordance with sec
6d and el 1 iii of the 3rd Schedule
Mr Chari s contention was that the revaluation 1  768 by the director in 1956 was fictitious that the difference of Rs 57 lacs was a mere book adjustment and did not add to the wealth of the Company and though that amount was transferred to the capital reserve it was not as if any additional amount became available for the Company s business and therefore no interest was permissible on such an artificial amount
At first 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 red claiming interest on the excess by carrying such excess to capital reserve and to reduce thus labor 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 labor 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 sec
211 of the 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
VI to the also provides that where sums have been written off on a reduction of capital or a revaluation of assets the balance sheet subsequent to such reduction or revaluation must show the reduced or the increased figures as the case may be
Apart from the provisions of the  it is a recognised principle of accountancy to transfer the increased value of assets on revaluation to a capital reserve account
Such an increased figure is an unrrealised accretion in the value of a fixed asset
see Pickles Accountancy 2nd Edn
103 and 935
So that the fact 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 72 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 separate the value of each asset held by the assessee determine the net value of the asset of the business as a whole having regard to the balance sheet of such business as on the valuation date
In Kesoram Industries vs Commissioner of Wealth Tax1 the assessee sought 1  769 to argue exactly what Mr Chari contended namely that the revaluation of the assets made by him did not represent the true value of the assets
That contention was rejected and this Court held that the Wealth Tax Officer was entitled to rely on such revaluation and proceed to assess on the basis of the net wealth shown as a result of such revaluation
We do not therefore see any justification for the apprehension felt by Mr Chaff for by trying to reduce the gross profits the Company would land itself into being assessed on a higher net wealth
The Tribunal was in our view right in accepting the figure of Rs 57 lacs and deducting interest thereon from the gross profits
There remains now the question regarding computation of direct taxes
Section 6c of the Act provides 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 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 claim a deduction from the gross profits of Rs 145 lacs as direct taxes
It had made provision however for Rs 130 lacs for direct taxes in the P  L account
In its computation it had made a provision for Rs 136 Iacs
At the stage of the evidence and arguments it contended however that the proper amount would be Rs 145 lacs
It claimed that direct taxes are to be worked out under sec
6c on the gross profits worked out under sec
4 less the prior charges allowable under sec 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 lacs
as direct taxes to be deducted under section 6 c
This conclusion has been seriously disputed by the Unions
Mr Chari s argument was that the Act lays down its own statutory formula for working out available surplus and allocable surplus that the deduction from gross profits allowable are those permissible under the Act namely depreciation admissible in accordance with the provisions  of sec
321 of the Income tax Act the development rebate and subject to the provisions of sec
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 770 words is liable to pay  and in respect of his income gains and profits during that year and argued that inasmuch as cl
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 cl
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 for direct taxes and then deduct from the gross profits calculated under section 4 the prior charges permissible under section 6
The provision for direct taxes made in the P  L account would be computed after deducting from the gross receipts such deductions allowances reliefs rebates credits etc
as are permissible under the Income tax Act which would include the bonus amount payable during the year for without such deduction the P  L account cannot reflect the true net profit of the employer
The Company s contention on the other hand was that the employer is entitled to compute his tax liability without deducting first the amount of bonus he would be liable to pay from out of the amount computed under section 4 and section 6
Mr Palkhiwala submitted from the different provisions of the Act that the concept of actual tax liability under the Income tax Act is foreign to the Bonus Act inasmuch as the Bonus Act is concerned with gross profits calculated in accordance with section 4 and Sch
II and that section 7 to which section 6c 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 Sch
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 controversy thus is one of principle rather than on the amount deducted by the Tribunal by way of direct taxes
771 Before we attempt to resolve this controversy it will be worth our while to recount the principle consistently follow before the passing of this Act not with a view to interpret section 6c 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 6c
At first sight it would appear that the language of el
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 6c and section 7
Calculating the avail
able surplus under the Full Bench Formula used to work out nationally the amount of bonus which they thought would be awarded and deducted that amount from the gross profits on the remaining balance of which income tax payable by the employer would be determined
The result of this procedure was that the amount of tax so worked out was proportionately less
Deprecating this procedure Gajendragadkar J as he then was observed in Associated Cement Companies Ltd vs The Workmen1 as follows Logically it is only after all the prior charges have been determined and deducted from the gross profits that available surplus can be ascertained and it is only after the available surplus is ascertained that the question of awarding bonus can be considered
Some tribunals seem to work out nationally the amount of bonus which they think can be awarded and placed that amount higher up in the process of making calculations before the income tax payable is determined 
We wish the make it clear that this procedure should not be followed In Crompton Parkinson Works Private Ltd vs Its Workmen2 disapproval of the said procedure was once again voiced Das CJ 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 bound to lead to chaos and industrial unrest
 In Workmen of India Explosives Ltd vs Indian Explosives 1 2 1959 Supp
2SCR 936
772 Ltd1 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 6239 lacs 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 nationally payable on the profits determined under the Full Bench Formula and that if the argument on behalf of the labour were to be accepted the Tribunal would in effect not be applying the formula
Similar observations are to be found in several other decisions but 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 6c and section 7 and replaced the concept of actual tax liability
To answer this question we must examine the scheme of the Act and Sch
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 as are each entitled as contributories to the profits to a share therein the deductions 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 clamored 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 actual tax liability by first working out the taxable income of the employer under the Income Tax Act and other Acts  The answer of course must be found from the provisions of the Act and not from what used to be done before its enactment
Sections 4 5 6 and 7 together with the Schedules deal with computation of gross profits and available surplus out of which 67 in cases falling under el
a of sec
24 and 60 in cases falling under cl
b of that sub section would be the allocable surplus
Under Sch
II which applies to establishments which are not banking companies the starting point is the net profit 1 773 shown by the employer in his P  L account
The reason for doing so seems to be that the Tribunal is not expected ordinarily to reopen the P  L account verify the accounts from which it is worked out or find
out for itself the true net
profit
Parliament was award that Tribunals which 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 
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 Sch
II requires these amounts to be added back
Similarly the amounts set out in Items 3  4 in Sch
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 out in cls
a b c and d
Clause a allows the deduction of depreciation admissible under section 32  1  of the Income Tax Act or a similar provision under other Acts charging direct taxes but not depreciation unabsorbed in any earlier previous 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 322 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 321 as
also the depreciation unabsorbed during the earlier years
The whole of Such depreciation however has to be added back under item 2bof Sch
II while computing the gross profits
Notwithstanding such adding back of depreciation allowable under both sub secs
1  2 of section 32 of the Income Tax Act the depreciation deductible under s6a of the Act is the one allowed under section 321 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 entitled to deduct such bonus from his taxable profits and gains as expenditure incurred wholly for the business
Under Sch
II Item 3a bonus even though paid during the accounting year has to be 774 added back if it is deducted in the P  L account
The net profit in the P  L account would thus not be the same as the available surplus worked out under the Act The same is the position of losses and expenditure relating to a foreign business which though allowable under  the Income Tax Act have to be added back to the net profit shown in the P  L account
As already stated deductions permissible under Sch
11 are those items in which it can be said that labour could have made no contribution in earning them So far as development rebate is concerned section 6b allows the whole of such rebate allowable under the Income Fax Act and therefore there would be no difficulty in working out the development rebate under this head and the Income Tax Act
Coming now to cl
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 cl 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 and as stated above and apply the said rates and estimate the amount of direct tax and deduct them from the remain gross profits Bonus being payable within eight months after the close of the accounting year in caseswhere 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 bonus has to be paid Therefore the Tribunal would not have before it the taxable income assessed by the Income Tax and other such officers
If the Unions  contention were to be right there would be two or more parallel authorities working under 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 brooke delay without causing 775 hardship to labour would seem to militate against the possibility of such prolonged enquiries
The key to the words in section 6c 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 cl
These words are used whether the tax liability is to be calculated on actual taxable income or on the notional amount worked out under sections 4 and 6 and Sch
II because the direct taxes payable by the employer are to be calculated at the rates applicable during that year as provided by section 7
That both such amounts cannot be the same is clear because section 7 in express terms prohibits taking into account unabsorbed losses and arrears of depreciation allowable under section 322 the exemption allowed under section 84 and the deduction allowed under section 1011 of the Income Tax Act
Similarly where an assessee is a religious or charitable institution and its income either wholly or partially as the case may be is exempt under the Income Tax Act such an employer to whom section 32 of the Act does not apply is treated as a company in which the public are substantially interested and its income is to be assessed accordingly by the Tribunal and compute its liability for direct taxes
Clause c of section 7 does away for the 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 6c
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 Tax Act and other such Acts during the accounting year in question
That is the reason why section 6c has the words is liable for and the words income gains and profits
These words do
not however mean that the Tribunal while computing direct 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 776 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 deal 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  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 6c being subject to section 7 the computation has to be done without taking into account the items specified in section 7a and in the manner prescribed by the remaining clauses of that section
This interpretation is commendable because 1  it is consistent with the words is liable to pay in section 6c 2 it is in harmony with the provisions of sections 4 and 6 and Sch
11 and 3 it is consistent with the intention of Parliament apparent from the scheme of computation of available surplus in the Act
The Act recognises the principle laid down in the Full Bench Formula that both labour and capital are entitled to a share in the profits
That is why 40 po of the available surplus is left to the capital and interest is allowed to the employer on paid up and working capitals while working out the gross profits
Parliament besides was or at any rate is presumed to have been aware that depreciation allowed under the Income Tax Act would not be sufficient for rehabilitation purposes
It did away with rehabilitation as a prior charge partly became there were complaints that it was being ill used but partly also because it knew that the rebate in 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 6c
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 questions is therefore allowed and to that extent the award is set aside
As regards the question of depreciation 777 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 rebate and  of the provision for gratuity in the light of this judgment the Tribunal will adjust it award and arrive at the quantum of bonus payable to the workmen
Appeal by workmen is dismissed
There will be no order as to costs
RKPS Appeal by Company allowed in part
Appeal by Workmen dismissed


Summary:
In a dispute between the appellant and its workmen relating to the computation of bonus under the  the Company contended that the available surplus came to Rs 4996 lakhs sixty pet cent of which namely Rs 2998 lakhs was the allocable surplus
The employees disputed the computation claiming that the Company had wrongly reduced the gross profits and the available surplus and contended inter alia that certain amounts deducted on account of provisions for gratuity and for doubtful debts should be added back they challenged a deduction of interest on reserves on the ground that the capital reserve was artificially arrived at by a mere revaluation of the company s fixed assets as on April 1 1956 and also disputed the figures of depreciation development rebate and direct taxes deducted by the company while working out the available surplus
The Unions disputed the amount of Rs 2882 lakhs worked out by the Company s auditors as depreciation in accordance with the Income tax Act 1961 on the ground 1 that there was no evidence that the amount of depreciation came to Rs 2882 lakhs and 2 that since the profit and loss account mentioned Rs 2348 lakhs as depreciation the Company could only claim that amount
In its award the Tribunal allowed Rs 2348 lakhs instead of Its
2882 lakhs claimed by the company as depreciation
Similarly it allowed only Rs 7 lakhs instead of Rs 88 lakhs claimed by the company as development rebate
The Tribunal held that the amount of Rs 1838 lakhs claimed under the head of gratuity 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 about Rs 10 lakhs as also Rs 131 lakhs and Rs 87000 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 the company s computation
Both the Unions and the Company obtained special leave and fled appeals challenging the correctness of the Tribunal s award
In their appeal it was also contended by the Unions that the Tribunal had wrongly allowed a deduction of Rs 145 lakhs as direct taxes under sec
6c all that the employer could deduct was direct taxes which he is liable to pay for the accounting year in respect of his income profits and gains during that year ie the employer is entitled to deduct only his actual tax liability
Such liability
therefore has 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 compute the taxes at rates provided by them for that particular accounting year
751 HELDThe appellantcompany contentions on the questions of development rebate and the provisions for gratuity must be upheld the amount of depreciation must be ascertained afresh by the Tribunal after giving the parties opportunity to lead such evidence as they desired
The  workmen s appeal must be dismissed
1 The depreciation deducted in the expenditure column in the Profit and Loss Account was the depreciation worked out under section 2052 of the Companies Act but under section 6 of the Bonus Act the Company is entitled to deduct from its gross profits depreciation admissible under Section 321 of the
Income tax Act ie such percentage on the  written down value as may in the case of each of the classes of assets be prescribed
It was for this reason that Rs 2348 lakhs were shown as depreciation in the Profit and Loss Account by the Company while in the computation for bonus the company claimed Rs 2882 lakhs as
depreciation
755 H 756 B Since the Company claimed the deduction of depreciation the burden of proof that the amount claimed was in accordance with the Income tax Act was on the Company and that burden the company must discharge once its figures were challenged
It was not sufficient for it to produce its auditors  certificates
The question as to the correct amount of depreciation must therefore go back to the Tribunal for a further decision
The Tribunal must give an 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
757 D Khandesh Spg
 Wvg
Mills Co Ltd vs The Rashtnya Girni Kamgar Sangh   847 Petlad Turkey Red Dye Works Ltd vs Dyes  Chemical Workers  Union   909 referred to
2 Under section 6b of the Bonus Act the Company is entitled to deduct out of the gross profits arrived at under section 4 the whole of the development rebate admissible under the Income tax Act ie the amount 75 per cent of which comes to Rs 7 lakhs in the present case
The Tribunal was in error in mixing up the development rebate reserve to which the Company had to appropriate Rs 7 lakhs in the Profit and Loss Account and the development rebate of Rs 887 lakhs allowable to it under section 6
of the Act
There was therefore no justification for the Tribunal to allow  Rs 7 lakhs only instead of Rs 887 lakhs as development rebate
759D F 3 An estimated liability under gratuity schemes as in the present case 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 Profit and Loss Account
This is in accordance with accepted principles of commercial practice and is also the position under the Income tax Act
There is no rule or direction in the Bonus Act which prohibits such a practice
766 C 767 D The Tribunal in allowing Rs 10 lakhs out of the estimated liability of Rs 16 lakhs impliedly accepted the same principle but allowed only Rs 10 lakhs because it thought the estimate to be excessive
This was not done on the ground that the estimate of Rs 16 lakhs was not warranted on any valuation
In the absence of any challenge as to the correctness of the valuation and in the absence of any challenge that such iiability 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 Profit and Loss Account
767 E 752 Calcutta Company Ltd vs
CIT   Commissioner Wealth Tax vs Standard Vacuum Oil Co Ltd  Kesoram Industries and Cotton Mills Ltd
CWT   Standard Mills Co Ltd vs Commissioner of Income Tax   Southern Railway of Peru Ltd vs Owen  and San Insurance Office vs Clark   referred to
4 There was no justification for the contention that revaluation of company s assets in 1956 was fictitious and that the difference of Rs 57 lakhs was a mere hook adjustment and did not add to the wealth of the company so that no deduction by way of interest was permissible on such an artificial amount
767 H In the present case the revaluation was made as early as 1956 and did not appear to have been objected to at any time 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 sec
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
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 revaluation must show the reduced or the increased figures as the case may be
Apart from the provisions of the Companies Act it is a recognised principle of accountancy to transfer the increased value of assets on revaluation to a capital reserve account
Such an increased figure is an unrealised accretion in the value of a fixed asset
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
768 C G The Tribunal was therefore right in accepting the figure of Rs 57 lakhs and deducting interest thereon from the gross profits
5 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 bonus has to be paid
Therefore the Tribunal would not have before it the taxable income assessed by the Income tax and other such officers
If the Union s contention were to he right there would be two or more parallel authorities working under the Bonus Act and the Income tax Act and other such Acts who would have to assess taxable income and the tax payable them before all of whom the employer would have to prove his taxable income
In each bonus dispute the Tribunal not equipped with the detailed knowledge of all such Acts would have to undertake an enquiry into various deductions rebates reliefs etc
claimable by the employer under those Acts
The fact that payment of bonus cannot broke delay without causing hardship to labour would seem to militate against the possibility of such prolonged enquiries
774 E 775 A An examination of the provisions of the Bonus Act shows 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 753 after deducting the amount of taxes so worked out arrive at the available surplus
Section 6c being subject to section 7 the computation has to be done without taking into account the items specified in section 7a and in the manner prescribed by the remaining clauses of that section
This interpretation is commendable because 1 it is consistent with the words is liable to pay in section 6c 2 it is in harmony with the provisions of sections 4 and 6 and Sch
H and 3 it is consistent with the intention of Parliament apparent from the scheme of computation of available surplus in the Act
Furthermore 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 it would have made an express provision to that effect either in the Act or in the Schedules
776 B D F G Associated Cement Companies Ltd vs The Workmen at 974 Crompton Parkinson Works Private Ltd vs Its Workmen 1959 Supp
2 SCR 936 and Workmen o India Explosives Ltd India Explosives Ltd 1966 2 LLI 313 referred to