Case: V.A. Nair Vs. S Indian Hume Pipe Company

CHANDRACHUD, J. ( 1 ) BY this petition under Arts. 226 and 227 of the Constitution, the petitioning unions challenge an award of the Industrial Tribunal dated January 31, 1969 in References Nos. 290 and 291 of 1965. These references were made by the Government of Maharashtra under S. 10 (1) (d) of the industrial Disputes Act, 1947, for adjudication of a claim for bonus for the year 1963-64 ending june 30, 1964. ( 2 ) REFERENCE No. 290 of 1965 relates to the claim for bonus for made on behalf of the daily-rated workmen employed by the 2nd respondent, the Indian Hume Pipe Co. Ltd. , Bombay, in their wadala factory. The workmen claimed bonus at the rate of 6 months total earnings for 1963-64, unconditionally. In Reference No. 291 of 1965, the staff working at the head office in Bombay and the monthly rated staff at the Wadala factory claimed bonus unconditionally at 30 per cent. of their total wages, inclusive of dearness allowance and whether they were in service or not after the close of the year. The 1st petitioner, construction Employees Union, represents the staff at the head office while the 2nd petitioner, engineering Staff Union, represent the staff at the Wadala factory. As common points arose in the two reference, the 1st respondent, the industrial Tribunal, disposed them of by a common judgment. ( 3 ) THE Indian Hume Pipe Company manufactures and sells cement-concrete goods like Hume pipes, Hume steel pipes and penstock pipes. It has a standing of over 40 years and it has 60 factories relevant time, spread all over India. Its profit and loss account for the year ending June 30, 1964 shows that it made a profit of Rs. 27,26,982 during that year. The company paid bonus to workmen employed in most of its branches and to the supervisory staff employed at the head office but for one reason or another bonus had remained to be paid to those whose demand is now under adjudication. The wages paid by the company were said to be much below the living wage and, therefore, the demand was made in terms of gross earnings. ( 4 ) THE statement of claim and the written statement were filed by the petitioners and the company respectively on the supposition that the Payment of Bonus Act, 1965 was applicable to the dispute. In view, however, of the majority decision of the Supreme Court in Jalan Trading co. v. Mill Mazdoor Sabha, [1966 - II L. L. J. 546]; A. I. R. 1967 S. C. 691, holding that S. 33 of the Bonus Act which made the Act applicable to certain pending disputes was invalid is infringing Art. 14 of the Constitution, the arguments in the reference centred around the applicability of the full Bench Formula evolved by the Labour Appellate Tribunal, Bombay.( 5 ) THE petitioners filed before the Tribunal their bonus calculations and explanatory Notes showing the basis on which they had deduced the available surplus. Initially this amount was calculated at Rs. 25,19,083 but later on it was changed into Rs. 33,43,662 under a fresh calculation. According to the calculations made by the company, the available surplus was Rs. 22,76,208. Mr. V. D. Abhyankar, the head accountant of the company, filed an explanatory affidavit which is particularly directed at showing what part of the reserves was utilised as working capital. ( 6 ) COMING to the conclusion that the available surplus was Rs. 22,86,954, the Tribunal awarded bonus equivalent to 40 per cent. of the annual basic wages, which works out at basic wages of 48 months. ( 7 ) DURING the course of hearing before the Tribunal, the dispute between the parties narrowed down to nine items which, according to the company, had to be debited against the gross profits but which according to the petitioners had to be added back, for the purpose of ascertaining the available surplus. Before us, the dispute is confined to the following items : rs. (i) Other items of expenditure for previous year debited in this years account. 96,091 (ii) Amount paid by way of engineers commission. 1,00,000 (iii) Foreign tour expenses. 55,528 (iv) Reduction in valuation of closing work-in progress on account of change in mode of valuation (as per Note No. 5 to Annexure E to the companys printed balance-sheet at page 18) 1,79,080 (v) The extent of reserves used as working capital the interest payable thereon. ( 8 ) WE will deal with these items in the very same order. (i) Other items of expenditure for previous year debited to this (1963-64) years account. The contention of the petitioner is that the sum of Rs. 96,091 which was charged by the company to the revenue of the year 1963-64 related to the expenses of the previous year and this amount had to be added back for ascertaining the gross profits of the year in question as each bonus year is self-sufficient unit. The company did not deny that payments amounting to Rs. 96,091 were made for bills pertaining to the expenditure of the previous year but it contended that in fact those bills were received and the amounts due thereunder were paid during the year 1964-65 and, therefore, it from the entitled to deduct the amounts so paid from the gross profits of that year. The bills, according to the company, related to items like telephone calls, electricity and water charges, lawyers fees and rates and tax levied by local authorities, for which no provision could be made in the accounts of the previous year as the amounts payable by the company in respect thereof were neither known nor ascertainable.( 9 ) THE Tribunal has rejected the contention of the petitioners on the ground that it was in disputed that the amount was in fact paid, and paid bona fide, in the year 1963-64 and that the petitioners had not chosen to cross-examine Abhyankar as to why no provision could be made for this expenditure in the accounts of the previous year. The expenditure of Rs. 96,091 was, therefore, a "legitimate revenue expenditure" for 1963-64. ( 10 ) THAT the bonus year must be treated as a self-sufficient unit for the purpose of working out the Full Bench formula is well-established. In Associated Cement Cos. v. Their Workmen, [1960- I L. L. J. 1]; A. I. R. 1959 S. C. 967, the Supreme Court observed :"in working out the formula the other important fact which should not be ignored is that the formula proceeds to deal with the labours claim for bonus on the basis that the relevant year for which bonus is claimed is a self-sufficient unit and the appropriate accounts have to be made on the notional basis in respect of the said year. It is substantially because of this basic assumption that if an employer receives during the bonus year a refund with respect to the excess profits tax paid by him in a previous year the amount of refund is not included on the credit side. In Model mills, etc. , Nagpur v. Rashtriya Mill Mazdoor Sangh, [1955 - I L. L. J. ]. 534 at p. 540 (LATI-Bom), the Labour Appellant Tribunal observed that according to the formulas, the income-tax is to be deducted as a prior charge on trading results of the year just as such as the bonus is to be ascertained upon the trading results of the year. "( 11 ) IN Indian Hume Pipe Co. Ltd. v. Their Workmen, [1959 - II L. L. J. 357]; A. I. R. 1959 S. C. 1081, the Supreme Court emphasised the same position by saying (p. 1085) :"it is also well settled that the calculations of the surplus available for distribution should be made having regard to the working of the industrial concern in the relevant accounting year without taking into consideration the credits or debits which are referable to the working of the previous years, e. g. , the refund of excess profits tax paid in the past or loss of previous years carried forward but written off in the accounting year as also any provisions that may have to be made to meet future liabilities, e. g. , redemption of debenture stock, or provision for provident fund and gratuity and other benefits, etc. , which, however necessary they may be, cannot be included in the category of prior charges. "( 12 ) IT is important to remember, while applying the ratio of these decisions that in our case the amount was in fact paid during the year 1963-64 and the payment was made bona fide in the normal course of business. The bills in satisfaction of which the amount was paid undoubtedly pertained to the working of the previous year but as stated by R. G. Kaulgi, personnel manager of the company, in paragraph 8 of his reply-affidavit before us, the payment had to await the receipt of the bills and, therefore, the payment could only be made in the year 1963-64. This is, therefore, not a case in which a payment is in fact made in a previous year but is brought in the books in the bonus year not can the present case be likened to the illustration taken by the supreme Court in the Indian Hume Pipe Co. s case where "loss of previous years (is) carried forward but written off in the accounting year". Here the expenditure was in fact incurred in the accounting year and was, therefore, included in the accounts of that year. ( 13 ) WE cannot accede to the contention advanced by counsel for the petitioners that the company ought to have made provision for the payments of these bills in the previous years accounts. The companys accountant should have been asked by the petitioners why no such provision was made. No attempt having been made to show that such a provision was not made for extraneous reasons, we must accept the position reflected in the companys profit and loss account that the amount was properly expendable in the relevant year. As observed by the supreme Court in the Associated Cement Companies case (pp. 985-986) (supra) :"the working of the formula begins with the figure of gross profits taken from the profit and loss account which are arrived at after payment of wages and dearness allowance to the employees and other items of expenditure. As a general rule the amount of gross profits thus ascertained is accepted without submitting the statement of the profit and loss account to a close scrutiny. " even where a debit item is challenged, one "must resist the temptation of dissecting the balance-sheet too minutely or of attempting to reconstruct it in any manner. It is only in glaring cases where the impugned item may be patently and obviously extraneous that a plea for its exclusion should be entertained. "( 14 ) WE are also clear that making a provision for these expenses in the previous years accounts would have been purposeless. A mere provision for payment without the payment being actually made would not have entitled the company to a deduction of the amount for the purpose of arriving at last years gross profits. Such a debit provision would have truly attracted the rule that the bonus year is self-sufficient unit. In the Indian Hume Pipe Co. s case, [1959 - II L. L. J. 557]; a. I. R. 1959 S. C. 1081, the Supreme Court says that "the calculations of the surplus available for distribution should be made having regard to the working of the industrial concern in the relevant accounting year without taking into consideration the credits or debits which are referable to the working of the previous year. . . . . . . . . . as also any provision that may have to be made to meet fature liabilities. . . . . . . . . . " (p. 1035)( 15 ) AS the amount was not included in the expenditure of the previous year, the surplus available for that year was not affected by the payment of that amount. It is only once that the amount is being deducted for calculating gross profits and it is being deducted rightly in the year of account when it was in fact expended. ( 16 ) THE petitioners claim that the sum of Rs. 96,091 should be added back for arriving at gross profits must, therefore, be rejected. (ii) Amount paid by way of engineers commission. ( 17 ) THE profit and loss account of the company for the relevant year shows that a sum of Rs. 1 lakh was paid by the company by way of "engineers commission". The question is whether this amount can be allowed as a legitimate item of expenditure or whether it has to be added back for ascertaining gross profits. ( 18 ) THE contention of the petitioners is that the amount was paid by the company without any contractual obligation, that a few engineers were arbitrarily picked and chosen by the company for its bounty and that in the absence of any well-defined scheme for distribution of such an amount, the payment was more or less in the nature of bonus paid to the officers. In support of this contention the petitioners filed a statement (Ex. U2) showing that there was no relationship between the payment made to the engineers and the turnover of the companys business or the profits made by it. ( 19 ) THE company justified the payment as legitimate by drawing upon precedents wherein a similar contention raised by the very unions against the company was rejected. The company contended that the amount was not paid ex gratia, citing that the Income-tax authorities has allowed the payment as an item of legitimate business expenditure. A practice extending over twenty years and "sanctified" by the decisions of Industrial Tribunals, it was urged, was not open to challenge. ( 20 ) THE Tribunal has allowed the deduction. It holds that (i) though the principle of res judicata was inapplicable to such matters, a "long standing practice would take the place of a contract and would be in the nature of a quasi contract in that incoming engineers would expect that they would be rewarded for a good work done by them", (ii) though the company was "reluctant for obvious reasons to disclose" on what basis the commission was paid, the discretion of the directors could not be arbitrary and that (iii) the commission bore a small proportion to the net profits of the company. ( 21 ) IT is not possible to agree that the long standing practice has in any sense matured into an obligation in the nature of a contract. The engineers might reasonably entertain the expectation that the company should reward them for their services but they have no legally enforceable claim in that behalf. ( 22 ) IT is also incorrect that "in the very nature of things" the discretion of the directors could not be arbitrary. No such assumption could be made, particularly because, as the Tribunal itself says, the company was "reluctant for obvious reasons to disclose how the decision is reached by the director. " Abhyankar, the companys head accountant, has stated in his evidence that he did not know on what basis the directors decided to pay the commission to the engineers and that the basis was not mentioned in any resolution of the board of directors. ( 23 ) THE last of the three reasons which led the Tribunal to allow the deduction is on the face of it contrary to the record. The statement Ex. U2 filed by the union discloses the following position :Year Net Profit Engineers Commission 1952-53 8,44,631 91,000 1953-54 6,46,982 1,03,000 1955-56 16,06,280 1,01,000 1957-58 20,52,293 90,0001962-63 15,38,029 60,000 1963-64 27,26,982 1,00,000 ( 24 ) THESE figures cannot, on any view, justify the Tribunals finding that "the amount of commission has some proportion to the net profits earned. " In fact, the efficacy of this finding is destroyed by what the Tribunal says in the very next sentence : "the profits for 1963-64 were the highest ever but the commission paid is not the highest but stands 5th in the order of payments made from 1952-53 to 1963-64. "( 25 ) IT is true that the engineers commission has been allowed by Income-tax authorities as legitimate revenue expenditure but that cannot conclude the question whether for bonus calculations the amount can be deducted. As pointed out by the Supreme Court time and again (see for example State of Mysore v. The Workers of Gold Mines, [1959 - II L. L. J. 479]; A. I. R. 1958 S. C. 923, it is not desirable to allow theoretical or academic considerations unrelated to facts to influence industrial adjudication. The Full Bench formula is elastic enough to meet the requirements of individual cases and amounts which are admissible under existing categories have to be determined in the light of evidence available in a given case. ( 26 ) THE decision in M/s. Lipton Ltd. v. Their Employees, [1959 - I L. L. J. 431]; A. I. R. 1959 S. C. 676, on which the companys counsel Mr. Ramaswamy relies, is not an authority for the proposition that once the Income-tax authorities allow a deduction as revenue expenditure, the deduction must be allowed for ascertaining the available surplus. Paragraph 10 of the judgment (at p. 682), on which particular stress is laid by the counsel, itself shows that there the Tribunal had erroneously added back an amount which was already added back by the company in computing its profits.( 27 ) NOR does the decision in Crompton Parkinson (Works) Private Ltd. , Bombay v. Its workmen, [1959 - II L. L. J. 382]; A. I. R. 1959 S. C. 1089, lend any support to that proposition. There the Industrial Tribunal had held that the amount of "service fee" paid by a subsidiary company to its parent company in England was excessive and beyond the requirements of commercial necessity and was allowable as an expense only as to one quarter thereof. The income-tax authorities had allowed the deduction year after year as an expenditure laid out and expended wholly and exclusively for the purpose of the business. The Industrial Tribunal was of the view that the test of "commercial necessity" applied by the Income-tax authorities under S. 10 (2) (xv) of the Income-tax Act, 1922, should be applied for determining whether the service fee could be deducted for ascertaining the available surplus. The Supreme Court rejected this view for the reasons, inter alia : (i) That there is no provision in the Industrial Disputes Act corresponding to S. 10 (2) (xv) of the Income-tax Act; (ii) In the absence of any evidence showing that the expense was shown and was incurred for reducing the available surplus, the Industrial tribunal could not substitute its own judgment as to what was or was not commercially justified in the place of the judgment exercised by the company and its directors in whom in law the management of the company is confided; (iii) The Tribunal had ignored that the service fee was treated as an allowable deduction year after year by the Income-tax authorities and the remittance was permitted by the Reserve Bank and that (iv) The payment of service fee was a common feature in India. ( 28 ) AS indicated above, the company here placed no material before the Tribunal to show in what circumstances and for what purpose the commission was paid to the engineers, nor that it was a common practice to pay "commission" to a few chosen officers. The Supreme Court had before it the evidence of a witness called V. V. Dhume that "the payment of the service fee for the services of this nature is quite a common feature in India. " The directors here have not recorded that it was necessary in their opinion to pay the commission to the engineers and companys head accountant has protested in his evidence that he knows no details. We are, therefore, not substituting our judgment for that of the directors. The directors have not judged at all. ( 29 ) IN the instant case, there is no nexus none is shown to exist between the engineers out put of work and the profits earned by the company. The company was not under a legal obligation. The company was not under a shown that it was necessary to pay the amount in the interest of the successful operation of the companys affairs. The class of persons selected to receive the payment is much too small and it does not appear that they had ever demanded any such benefit. If it appeared that the directors were satisfied that it was necessary to pay the commission in the interest of the successful operation of the companys business, we might not have subjected their satisfaction to any close scrutiny. But the company has chosen to keep all relevant facts itself so that what meets the eye is that some out of the many engineers have been picked and chosen to receive the bounty of the company. Such a gratuitous payment is difficult to bring under the Full bench formula. ( 30 ) THE fact that the commission was being paid to the engineers over a period of twelve years create mutual rights and obligations. A gratuitous payment, made even regularly or repeatedly, cannot furnish a right to the payment and, therefore, the company was not compellable to pay the commission. In B. N. Elias and Co. Ltd. Employees Union v. B. N. Elias and Company Ltd. [1960 - II L. L. J. 219]; A. I. R. 1960 S. C. 886, payment of bonus made uninterruptedly but ex gratia from 1942 to 1952, three or four times a year, was held insufficient to constitute an implied term of services. Principles governing customary or traditional bonus connected with a festival like the puja festival could not, it was held, be extended to a customary bonus unconnected with a festival.( 31 ) AT the highest, the payment made to the engineers could be likened to bonus, assuming that it was made in recognition of their contribution to the profits earned by the company and that it was intended to enable them to bridge the gap between what they earned and what was necessary for a decent living. But then even bonus paid to workers has to be added back for the purpose of arriving at gross profits of the year, on the basis of which the available surplus is determined after deduction of prior charges. Much more so would an amount paid gratuitously to the companys officers have to be added back particularly when the basis of the payment remains undisclosed. Such payments cannot be permitted to affect the workmens claim to bonus. ( 32 ) WE are, therefore, of the opinion that the amount of Rs. 1 lakh paid by way of engineers commission must be added back while calculating gross profits of the year. (iii) Foreign tour expenses. ( 33 ) A sum of Rs. 55,523 is stated to have been expended by the company for foreign tours undertaken by its officers and directors. Counsel for the petitioners, Mr. Sule, attempted to urge that the expenses were of a capital nature but finding that this contention would require a reappraisal of facts, he did dot press it. Accordingly we reject the contention. (iv) Reduction in valuation of closing work-in-progress on account of change in mode of valuation. ( 34 ) NOTE No. 5 of Annexure E to the companys balance-sheet says : "so far the closing work in progress was being valued at contract rates; this year the same is valued at contract rates less estimated profits. This change in the mode of valuation has resulted in reducing the value of closing work-in-progress by Rs. 1,79,080. " Annexure E consists of "notes forming part of the accounts. "( 35 ) TILL the end of the year 1962-63, the company used to value the incomplete work on hand and add to it the estimated profits. By this method, work-in-progress at the end of June, 1963 was valued at Rs. 13,66,871 as an item of current assets. The balance-sheet as at June 30, 1964 shows that work-in-progress was valued in 1963-64 without adding to the value of the work done, the profits which the company expected to make for that work. Such a valuation was made a at Rs. 23,61,747. Estimated profits which are not included in this valuation would come to Rs. 1,79,080. ( 36 ) THE case of the petitioners is that the amount of Rs. 1,79,080 should be added back to gross profits because the company had reduced its real profits by changing the mode of valuation. The case of the company, on the other hand, is that the old method of valuation was unscientific and was, therefore, discarding to the company, be taken into account for calculating gross profits. The Tribunal has accepted this contention. ( 37 ) LEARNED counsel for the petitioners urges that the company had valued the opening work-in-progress by the old method but had valued the closing-work-in-progress by the new method so that estimated profits were included in the opening valuation but not in the closing. The opening valuation (which is same as the valuation of closing work-in-progress for the previous year ended June 30, 1963) was thus inflated and the closing valuation was depleted allegedly in order to reduce the gross profits. True profits, according to the counsel, can be ascertained only by applying the same method of valuation to both the opening and closing work-in-progress. ( 38 ) WE are unable to accept this submission. Including estimated profits in the valuation of work-in-progress is hardly ever accurate or satisfactory because the work is still to be completed and it is not easy to foresee what lies ahead. Strikes and lockouts may upset expectations. So may a rise in the cost of raw materials and no one can vouchsafe today what the cost is going to be tomorrow. The charge, therefore, that the company has adopted an artificial method of valuation is groundless. ( 39 ) THE adoption of different systems of valuation for the opening and the closing work-in-progress for the year in question was inevitable because in whichever year the old system of valuation was discarded in favour of the new, such a difference would arise. This years opening work-in-progress is the same as last years closing work-in-progress and the latter was already valued as a current asset at the end of the last year. That valuation could not have been refixed for the purpose of ascertaining this years profits. Such a process could have been assailed as unscientific. ( 40 ) IT is important that under the Full Bench formula, the right to bonus can arise only if the employer is shown to be in possession of surplus which is actually available for distribution (See m/s. Ganesh Flour Mills v. Employees, A. I. R. 1958 S. C. 382 ). Estimated profits are profits expected to arise in future. They are not actually earned, and are not, therefore, available for distribution and cannot furnish true basis for working out the right of the labour to bonus. ( 41 ) IF in fact the sum of Rs. 1,79,080 was not available to the company, and the new mode of valuation only shows that it was not available, it cannot be said that an unscientific system of valuation was adopted to show an artificial loss. The new system only enabled the company to detect an error and to show the true position. ( 42 ) COUNSEL for the petitioners is, therefore, not right when he says that the reduction in the valuation of closing work-in-progress is comparable to cases in which a fortuitous loss has occurred to the employer. Counsel is right that if a fortuitous profit arises merely on account of a change in the system of accounting adopted by the employer that is extraneous income in which the workmen cannot participate : see Tata Oil Mills Co. Ltd. v. Its Workmen, [1959 - II L. L. J. 250]; A. I. R. 1959 S. C. 1065 at p. 1069, from which it must follow that a fortuitous loss cannot impair the workmens claim to bonus. But here the reduction in valuation is real and true, not fortuitous. It is not as if the real profits are reduced by an artificial system of accounting. ( 43 ) WE see no substance in the contention that the new mode of valuation will affect prejudicially the workmens right to bonus. When the incomplete work on hand will be completed and the company will actually earn profits for the work done, the workmen will participate in those profits. Mr. Sule expressed an apprehension that some of the workmen who were in employment in the relevant years may go out when the work is completed and, therefore, they will not be able to share the profits to which they have contributed. But this is not an uncommon happening. For example, bad debts have to be deducted in the calculation of gross profits but if any of those amounts are recovered subsequently they have to be credited. Those workers who were in employment when debits became irrecoverable and had to be written off as bad may not be in employment when any of the bad debts are subsequently recovered and credited. But that cannot affect the right of the employer to a deduction of bad debts. The basic principle of the Full Bench formula is that for distribution of bonus the employer must have in his hands an available surplus. ( 44 ) THE petitioners claim that the sum of Rs. 1,79,080 should be added back to the gross profits, therefore, fails. (v) The extent of reserves used as working capital and the interest payable thereon. ( 45 ) ACCORDING to the Full Bench formula, surplus available for distribution as bonus has to be determined by debiting against gross profits certain prior charges which include the return on reserves used as working capital. It, therefore, became necessary to ascertain to what extent reserves were utilised by the company as working capital during the relevant year.( 46 ) ANNEXURE B to the companys balance-sheet which lists the "fixed assets as at 30th June, 1964", shows that in the year 1963-64 the company made additions of the value of Rs. 33,86,308 to its fixed assets. The case of the petitioners is that in calculating reserves used as working capital, this amount must be excluded because to the extent of that amount, namely, Rs. 33,86,308, reserves were used for acquiring new fixed assets which must mean that that part of the reserves could not have been used as working capital. ( 47 ) THE case of the company is that a total sum of Rs. 1,30,87,120 (including Rs. 33,86,308)was available as reserves and was fully used as working capital during the relevant year. The company calculated its reserves thus : From the figures of paid-up share capital, reserves and depreciation as on 30-6-1963, (amounting in all to Rs. 4,06,11,088) the gross value of fixed assets as at the beginning of the year 1963-64 (Rs. 2,72,67,477) was deducted. From the balance, viz. , Rs. 1,33,43,531, a sum of Rs. 2,56,411 was deducted as representing the cost of investments made during the year. The left an amount of Rs. 1,30,87,120 which was taken to represent reserves available for being used as working capital. From out of this, a sum of Rs. 10,90,000 which was paid as dividend was said to be available for 178 days only and, therefore, interest at 4 per cent. per annum was calculated on that sum for that period only. On the rest of the amount, interest at the same rate was calculated for the whole of the year. The total interest thus calculated comes to Rs. 5,01,147 and this is the amount which the company sought to deduct from its gross profits as prior charge. ( 48 ) IF the petitioners are right in their contention, a sum of Rs. 1,35,450 (in round figures), representing interest at 4 per cent. per annum on Rs. 33,86,308 shall have to be deducted from rs. 5,01,147, so that the company will be entitled to debit Rs. 3,65,697, only against the gross profits as a prior charge. ( 49 ) THE Tribunal has held that it was not necessary for the company to utilise any part of its reserves for acquiring fixed assets because such assets could have been purchased from the additional sum set apart for depreciation during the year and from the amount received by the company by realising a part of its investments.( 50 ) THE Tribunal, it must be stated, has not recorded the finding that any part of the reserves was in fact used as working capital. It found that a sum of Rs. 1,39,63,309 was available to the company by way of reserves and that was thought sufficient to repell the contention of the petitioners that the entire available reserve was not used as working capital, that a part of it was used for buying new fixed assets. It is true that it would be unrealistic to insist on a mathematical proof regarding the actual utilisation of reserves as working capital but it is necessary to be conscious of the distinction between the mere availability of a fund and its actual user for a specific purpose. The Tribunal lost sight of that distinction. ( 51 ) THE distinction is important, for, as observed by the Supreme Court in Petlad Turkey Red dye Works Co. Ltd. v. Dyes and Chemical Workers Union, [1960 - I L. L. J. 548]; A. I. R. 1960 s. C. 1006, "while there is no reason to suspect every statement made in a balance-sheet, one cannot presume the statements made therein to be always correct. The burden is on the party who asserts a statement to be correct to prove the same by relevant and acceptable evidence. The mere statement in the balance-sheet is of no assistance to show, therefore, that any portion of the reserves was actually utilised as working capital". (para 4 ). ( 52 ) THE question whether a statement in a balance-sheet can be taken as proof of a claim that a part of the reserves was actually used as working capital was also considered by the Supreme court in Khandesh Spg. and Weaving Co. Ltd. v. The Rashtriya Girni Kamgar Sangh, [1960 - I l. L. J. 541]; A. I. R. 1960 S. C. 571, Aluminium Corporation of India Ltd. v. Their Workmen, [1963 - II L. L. J. 629], and in Bengal Kagazkal v. The Titaghar Paper Mills Co. Ltd. , [1964 - II l. L. J. 123]; (1964) 3 S. C. R. 38. It was observed by Subba Rao, J. in the first of these cases that when so much depends on the ascertainment of what portion of the reserve was utilised as working capital, the principles of equity and justice demand that an Industrial Court must insist upon a clear proof of the same. In the Aluminium Corporation case, Das Gupta, J. observed that there was a tendency on the part of some employers to show that the entire reserves available for use as working capital were in fact so used and, therefore, it was improper to rest the decision only on mere scrutiny of the balance-sheet. In the Bengal Kagazkal case it was held that "it is now well settled that a balance-sheet cannot be taken as proof of a claim of what portion of reserves has actually been used as working capital and that the utilisation of a portion of the reserves as working capital has to be proved by the employer by evidence. . . . . . . . "( 53 ) THE Tribunal was, therefore, in error in allowing interest on the entire reserves without scrutinizing whether apart from the balance-sheet there was any proof that all the available reserves were in fact used as working capital. ( 54 ) COUNSEL for the company contends that amounts set apart for development rebate and depreciation and the current years profits amounting to Rs. 27,26,982 were at the disposal of the company, from which the capital assets could have been purchased and, therefore, it cannot be held that new additions to fixed assets of the value of Rs. 33,36,308 were made by utilising a part of the reserves. This process of reasoning is impermissible. The company must prove by satisfactory evidence, if that be its case, that the entire reserve was used as working capital. The workmen having contended that the new fixed assets were acquired from a part of the reserves, the company should have led evidence to prove that the entire reserve was used as working capital, from which it would have followed that no part of it was for acquisition of fixed assets. In "the Management of the Cannanore Spinning and Weaving Mills Ltd. v. The Secretary, cannanore Spinning and Weaving Mills Workers Union, [1960 - II L. L. J. 43]; A. I. R. 1961 S. C. 1194, the Supreme Court refused to analyse the statements in the balance-sheet for finding out what portion of the reserves was used as working capital, as there was no evidence to prove the correctness of those statements. ( 55 ) IN the instant case, Abhyankar, the head accountant of the company, filed an affidavit explaining how the company had calculated its reserves and stating that the "reserves have been fully utilised as working capital for the purpose of companys business", that the reserves "were actually utilised as working capital". ( 56 ) IN his cross-examination, Abhyankar was asked to explain what he understood by "reserves used as working capital". He replied that it was difficult to answer the question and that "as there are no agreed opinions on the meaning of the expression reserves used as working capital the best thing to do is to follow the precedent laid down by the Supreme court". This answer is not easy to comprehend. The witness was being specifically cross-examined regarding the utilisation of reserves and it was no answer that it was difficult to answer. ( 57 ) ABHYANKAR has admitted in his cross-examination that "it is not possible to say that the amounts which have been shown on the assets side in the balance-sheet (p. 7) have necessarily gone out of the reserves, part may be out of reserves, part out of borrowings and part may be out of current liabilities and provisions". One of the important items on page 7 of the balance-sheet is the "gross Block" which shows an addition of over thirty lakhs during the relevant year. The witness having admitted in terms that at least a part of the Gross Block may have been acquired in the relevant year with the help of reserves, the companys case that the entire reserve was used as working capital must necessarily fail. The Tribunal has reproduced in its judgment the portion from Abhyankars evidence which we have extracted above but it has patently overlooked its implications. ( 58 ) ONE of the reason that led the Tribunal to conclude that no part of the reserves need have been used for acquiring new fixed assets is that the figure of loans had remained static. If the loans remained unpaid, thought the Tribunal, reserves were available for being used as working capital as no part thereof was utilised for paying off loans. The Tribunal has fallen into an error in saying that "the figure of loans has remained static". The balance-sheet (page 6) shows that what had remained static was the figure (Rs. 29,18,000) of debenture loans only. The figure of unsecured loans had gone down from Rs. 97,44,554 to Rs. 85,31,200 which means that outstanding loans were paid off in the relevant year to the extent of about Rs. 12 lakhs. Abhyankars evidence is inadequate to show that no part of the reserves was utilised to pay off these borrowings. ( 59 ) THE only other effective reason on which the Tribunal has based its finding that it was not necessary for the company to use its reserves for buying new fixed assets is that "current assets have risen by Rs. 40,88,000 and current liabilities have also risen by Rs. 38,87,000 approximately". "there was, therefore, no need for the company to touch the reserves", says the tribunal. This process has been deprecated by the Supreme Court in the Aluminium Corporation case for a twofold reason. Firstly, "mere statements in the balance-sheet as regards current assets and current liabilities cannot be taken as sacrosanct" and secondly, that when the task is not to ascertain the total working capital of the concern but to find out what portion of the reserves has been used as working capital, it is necessary and proper that the company must lead good evidence to substantiate its case. ( 60 ) IF anything, the balance-sheet shows that in the relevant year, the borrowings were reduced by about Rs. 12 lakhs, investments went down by about Rs. 5 lakhs and there was no increase in capital. And yet a new Gross Block was acquired at a cost of over Rs. 30 lakhs. That would rather support the claim of the petitioners, if mere figures in the balance-sheet could prove anything, that the new acquisitions were made with the help of a part of the reserves. ( 61 ) WE are, therefore, of the opinion that in calculating reserves used as working capital, the sum of Rs. 33,86,308 must be deducted. That would mean that the company is entitled to claim Rs. 3,65,697 and not Rs. 5,01,147 by way of interest. The difference of Rs. 1,35,450 represents interest on Rs. 33,86,308.

Decision:
1[ds]( 13 ) WE cannot accede to the contention advanced by counsel for the petitioners that the company ought to have made provision for the payments of these bills in the previous years accounts. The companys accountant should have been asked by the petitioners why no such provision was made. No attempt having been made to show that such a provision was not made for extraneous reasons, we must accept the position reflected in the companys profit and loss account that the amount was properly expendable in the relevant year. As observed by the supreme Court in the Associated Cement Companies case (pp.(supra) :"the working of the formula begins with the figure of gross profits taken from the profit and loss account which are arrived at after payment of wages and dearness allowance to the employees and other items of expenditure. As a general rule the amount of gross profits thus ascertained is accepted without submitting the statement of the profit and loss account to a close scrutiny. " even where a debit item is challenged, one "must resist the temptation of dissecting thetoo minutely or of attempting to reconstruct it in any manner. It is only in glaring cases where the impugned item may be patently and obviously extraneous that a plea for its exclusion should be entertained. "(21 ) IT is not possible to agree that the long standing practice has in any sense matured into an obligation in the nature of a contract. The engineers might reasonably entertain the expectation that the company should reward them for their services but they have no legally enforceable claim in that22 ) IT is also incorrect that "in the very nature of things" the discretion of the directors could not be arbitrary. No such assumption could be made, particularly because, as the Tribunal itself says, the company was "reluctant for obvious reasons to disclose how the decision is reached by the director. " Abhyankar, the companys head accountant, has stated in his evidence that he did not know on what basis the directors decided to pay the commission to the engineers and that the basis was not mentioned in any resolution of the board of24 ) THESE figures cannot, on any view, justify the Tribunals finding that "the amount of commission has some proportion to the net profits earned. " In fact, the efficacy of this finding is destroyed by what the Tribunal says in the very next sentence : "the profits forwere the highest ever but the commission paid is not the highest but stands 5th in the order of payments made from4. "(28 ) AS indicated above, the company here placed no material before the Tribunal to show in what circumstances and for what purpose the commission was paid to the engineers, nor that it was a common practice to pay "commission" to a few chosen officers. The Supreme Court had before it the evidence of a witness called V. V. Dhume that "the payment of the service fee for the services of this nature is quite a common feature in India. " The directors here have not recorded that it was necessary in their opinion to pay the commission to the engineers and companys head accountant has protested in his evidence that he knows no details. We are, therefore, not substituting our judgment for that of the directors. The directors have not judged at31 ) AT the highest, the payment made to the engineers could be likened to bonus, assuming that it was made in recognition of their contribution to the profits earned by the company and that it was intended to enable them to bridge the gap between what they earned and what was necessary for a decent living. But then even bonus paid to workers has to be added back for the purpose of arriving at gross profits of the year, on the basis of which the available surplus is determined after deduction of prior charges. Much more so would an amount paid gratuitously to the companys officers have to be added back particularly when the basis of the payment remains undisclosed. Such payments cannot be permitted to affect the workmens claim to32 ) WE are, therefore, of the opinion that the amount of Rs. 1 lakh paid by way of engineers commission must be added back while calculating gross profits of the year. (iii) Foreign tourwe reject the contention. (iv) Reduction in valuation of closingon account of change in mode of38 ) WE are unable to accept this submission. Including estimated profits in the valuation ofis hardly ever accurate or satisfactory because the work is still to be completed and it is not easy to foresee what lies ahead. Strikes and lockouts may upset expectations. So may a rise in the cost of raw materials and no one can vouchsafe today what the cost is going to be tomorrow. The charge, therefore, that the company has adopted an artificial method of valuation is42 ) COUNSEL for the petitioners is, therefore, not right when he says that the reduction in the valuation of closingis comparable to cases in which a fortuitous loss has occurred to the employer. Counsel is right that if a fortuitous profit arises merely on account of a change in the system of accounting adopted by the employer that is extraneous income in which the workmen cannot participate : see Tata Oil Mills Co. Ltd. v. Its Workmen, [1959II L. L. J. 250]; A. I. R. 1959 S. C. 1065 at p. 1069, from which it must follow that a fortuitous loss cannot impair the workmens claim to bonus. But here the reduction in valuation is real and true, not fortuitous. It is not as if the real profits are reduced by an artificial system of43 ) WE see no substance in the contention that the new mode of valuation will affect prejudicially the workmens right to bonus. When the incomplete work on hand will be completed and the company will actually earn profits for the work done, the workmen will participate in those profits. Mr. Sule expressed an apprehension that some of the workmen who were in employment in the relevant years may go out when the work is completed and, therefore, they will not be able to share the profits to which they have contributed. But this is not an uncommon happening. For example, bad debts have to be deducted in the calculation of gross profits but if any of those amounts are recovered subsequently they have to be credited. Those workers who were in employment when debits became irrecoverable and had to be written off as bad may not be in employment when any of the bad debts are subsequently recovered and credited. But that cannot affect the right of the employer to a deduction of bad debts. The basic principle of the Full Bench formula is that for distribution of bonus the employer must have in his hands an available44 ) THE petitioners claim that the sum of Rs. 1,79,080 should be added back to the gross profits, therefore, fails. (v) The extent of reserves used as working capital and the interest payable50 ) THE Tribunal, it must be stated, has not recorded the finding that any part of the reserves was in fact used as working capital. It found that a sum of Rs. 1,39,63,309 was available to the company by way of reserves and that was thought sufficient to repell the contention of the petitioners that the entire available reserve was not used as working capital, that a part of it was used for buying new fixed assets. It is true that it would be unrealistic to insist on a mathematical proof regarding the actual utilisation of reserves as working capital but it is necessary to be conscious of the distinction between the mere availability of a fund and its actual user for a specific purpose. The Tribunal lost sight of that53 ) THE Tribunal was, therefore, in error in allowing interest on the entire reserves without scrutinizing whether apart from thethere was any proof that all the available reserves were in fact used as working57 ) ABHYANKAR has admitted in histhat "it is not possible to say that the amounts which have been shown on the assets side in the(p. 7) have necessarily gone out of the reserves, part may be out of reserves, part out of borrowings and part may be out of current liabilities and provisions". One of the important items on page 7 of theis the "gross Block" which shows an addition of over thirty lakhs during the relevant year. The witness having admitted in terms that at least a part of the Gross Block may have been acquired in the relevant year with the help of reserves, the companys case that the entire reserve was used as working capital must necessarily fail. The Tribunal has reproduced in its judgment the portion from Abhyankars evidence which we have extracted above but it has patently overlooked its58 ) ONE of the reason that led the Tribunal to conclude that no part of the reserves need have been used for acquiring new fixed assets is that the figure of loans had remained static. If the loans remained unpaid, thought the Tribunal, reserves were available for being used as working capital as no part thereof was utilised for paying off loans. The Tribunal has fallen into an error in saying that "the figure of loans has remained static". The(page 6) shows that what had remained static was the figure (Rs. 29,18,000) of debenture loans only. The figure of unsecured loans had gone down from Rs. 97,44,554 to Rs. 85,31,200 which means that outstanding loans were paid off in the relevant year to the extent of about Rs. 12 lakhs. Abhyankars evidence is inadequate to show that no part of the reserves was utilised to pay off these59 ) THE only other effective reason on which the Tribunal has based its finding that it was not necessary for the company to use its reserves for buying new fixed assets is that "current assets have risen by Rs. 40,88,000 and current liabilities have also risen by Rs. 38,87,000 approximately". "there was, therefore, no need for the company to touch the reserves", says the tribunal. This process has been deprecated by the Supreme Court in the Aluminium Corporation case for a twofold reason. Firstly, "mere statements in theas regards current assets and current liabilities cannot be taken as sacrosanct" and secondly, that when the task is not to ascertain the total working capital of the concern but to find out what portion of the reserves has been used as working capital, it is necessary and proper that the company must lead good evidence to substantiate its60 ) IF anything, theshows that in the relevant year, the borrowings were reduced by about Rs. 12 lakhs, investments went down by about Rs. 5 lakhs and there was no increase in capital. And yet a new Gross Block was acquired at a cost of over Rs. 30 lakhs. That would rather support the claim of the petitioners, if mere figures in thecould prove anything, that the new acquisitions were made with the help of a part of the61 ) WE are, therefore, of the opinion that in calculating reserves used as working capital, the sum of Rs. 33,86,308 must be deducted. That would mean that the company is entitled to claim Rs. 3,65,697 and not Rs. 5,01,147 by way of interest. The difference of Rs. 1,35,450 represents interest on Rs. 33,86,308.