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

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 = appeal accepted, 0 = rejected): 1

Explanation:
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.