Case: Metal Box Company of India Ltd Vs. Their Workmen

and the deduction allowed under Section 101 (1) 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 6 (c). Also, the rebate allowed under any of the Acts levying direct taxes on sums spent on development of an industry is also not to be taken into account while computing the tax liability. It was, however, argued that the provisions of Section 7 lay down the only departure from the Income Tax Act and that except for that departure the Tribunal must assess the actual taxable income and arrive at the tax liability thereon at rates prevailing during the accounting year in question. In our view this submission is not correct.What Section 7 really means is that the Tribunal has to compute the direct taxes at the rates at which the income, gains and profits of the employer are taxed under the Income Tax Act and other such Acts during the accounting year in question. That is the reason why Section 6 (c) 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 available surplus?If it were to reverse the process and first deduct bonus and ascertain the tax amount, it would have to do so on a somewhat ad hoc figure thus bringing about the same result deprecated by this Court in decisions referred to above.This and the other difficulties already pointed out must lead to the result that the Tribunal must estimate the amount of direct taxes on the balance of gross profits as worked out under Sections 4 and 6, but without deducting the bonus, then work out the quantum of taxes thereon at rates applicable during that year to the income, gains and profits of the employer and after deducting the amount of taxes so worked out arrive at the available surplus. Section 6 (c) being subject to Section 7 the computation has to be done without taking into account the items specified in Section 7 (a) and in the manner prescribed by the remaining clause of that section. This interpretation is commendable because: (1) it is consistent with the words is liable to pay in S. 6 (c) (2) it is in harmony with the provisions of Sections 4 and 6 and Schedule II, 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 per cent 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 because 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 6 (c). If Parliament intended to make a departure from the rule laid down by courts and tribunals that the bonus amount should be calculated after provision for tax was made and not before, we would have expected an express provision to that effect either in the Act or in the Schedules. In our view the contention urged by the Company that the tax liability is to be worked out by first working out the gross profits and deducting therefrom the prior charges under Section 6 but not the bonus payable to the employees is right. 28. 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 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 its award and arrive at the quantum of bonus payable to the workmen.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]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. and L. account. It is recognised in trading circles and we find no rule or direction in the Bonus Act which prohibits such a practiceWe do not, therefore, see any justification for the apprehension felt by Mr. Chari, 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 profitsIn our view it was for that reason that it did not lay down that bonus is to be deducted before computing the amount on which direct taxes are to be calculated under Section 6 (c). If Parliament intended to make a departure from the rule laid down by courts and tribunals that the bonus amount should be calculated after provision for tax was made and not before, we would have expected an express provision to that effect either in the Act or in the Schedules. In our view the contention urged by the Company that the tax liability is to be worked out by first working out the gross profits and deducting therefrom the prior charges under Section 6 but not the bonus payable to the employees is right28. 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 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 its award and arrive at the quantum of bonus payable to the workmen.