Case: Indian Oxygen Ltd Vs. Workmen

Mr. Banerji, W. W. 1, who was a Chartered Accountant. In chief examination he has stated that under the Act the amount claimed the appellant as doubtful debts has to be added back for ascertaining the gross-profits. He has further stated that under the Income-tax Act, Provision for doubtful debts cannot be deducted in computing the net profits. On this point, so far as we could see there is no cross-examination on behalf of the Company.The Tribunal was justified in holding that the appellant was not in order in deducting Rs. 55,127 under the head "doubtful debts" as an item of expenditure. It was perfectly justified in adding back this amount in computing the gross-profits.50. The last point in controversy related to three items shown as capital expenditure in Ex. 4. Those items are : (1) Patent fees Rs. 10,000; (2) Plant transfer charges Rs. 72,516; and (3) Disallowable rent Rs. 74,000. The above three items were claimed by the appellant as revenue expenditure and hence should not be added back for ascertaining the gross-profits.51. So far as Plant transfer charges of Rs. 72516/- is concerned, it is seen that though this was claimed as a revenue expenditure, Mr. K. B. Bose, appearing for the appellant, had conceded before the National Tribunal that this amount is an item of capital expenditure which should be added back. This concession has been recorded in the Award and it has not been, challenged before us on behalf of the appellant. Therefore, it follows that the Tribunal was justified in adding back this amount for ascertaining the gross-profits.52. Similarly, regarding Patent fees of Rs. 10,000, the appellant witness Mr. Basu, M. W. 1 has admitted in cross-examination that Patent fee is also regarded as an item of capital expenditure. If that is so, that Tribunal was justified in adding back this amount also.53. The same witness has also admitted that rent paid for godown for storing capital goods in the process offerection of a factory is not allowable that the Income-tax authorities would treat the same as part of capital expenditure for erecting a factory. Therefore, from the evidence on the side of the appellant, it is clear that this amount also is an item of capital expenditure and has to be added back in computing the gross-profits.54. Similarly, Mr. Banerji, Chartered Accountant, who gave evidence on the said of the Union, as W. W. 1, has also stated that the appellant itself originally added back in computing gross-profits the amount under Patent Fees, Disallowable Rent and Plant Transfer Charges and that it was only as a later stage that it claimed these items as revenue expenditure. Under, those circumstances, the Tribunal was justified in adding back the amount of Rs. 74,000/- under the heading Disallowable Rent.55. So far as the calculation of Surtax is concerned, the Tribunal has held that the method of calculation made by the Company in Ex. 4 is correct, but it has to be altered because the Income-tax calculated by it after deducting bonus was less. Now, that we are accepting the claim of the appellant that bonus should not be deducted for calculating direct taxes, it follows that the view of the Tribunal in this respect is not correct.56. We have already pointed out that the National Tribunal has held that direct tax has to be calculated without taking into account the bonus paid for the year 1963-64 and the bonus paid for the year 1963-64 and the bonus payable for the accounting year 1964-65. So far as the bonus payable for the accounting year 1964-65 is concerned, we have already discussed the matter and held that the view of the Tribunal is erroneous. But, in our opinion, the Tribunal was justified in holding that in calculating direct taxes, the bonus for the accounting 1963-64, though paid during the accounting year 1964-65 should not be taken into account, is correct. As the bonus paid for the previous accounting year from and out of the profits of the said previous year does not come into the picture.57. From the discussion above, it follows that except, the error committed by the National Tribunal in the matter of computation of direct taxes after excluding bonus payable for the accounting year 1964-65, in all other respects it was justified in rejecting the various claims made by the Company. Even on the basis of the rejection of the claim of the appellant that the bonus paid for the previous accounting year 1963-64 has also to be taken into account for purposes of calculation of direct taxes, there is no controversy that on a proper calculation, the bonus to which the workmen will be entitled, will be very much less than 17.58% already given by the Company. Hence it is not necessary for us to recompute the figure, as the appellant has agreed not to claim a refund or in any other manner adjust or collect the excess bonus that has been already paid.58. But it follows that the view of the Tribunal that the workmen are entitled to bonus at the maximum rate of 20% and the further direction regarding the set on to be carried forward, cannot be sustained. From the calculation given by us earlier, it will be seen that the National Tribunal had directed that a sum of Rs. 4,63,750 had to be carried forward as set on in the succeeding year. This direction has been given on its finding that the allocable surplus works out at more than 20% of the Annual Wage Bill. If that finding is correct, the direction regarding set on will be justified under S. 15 of the Act. But as we have already held that parties are agreed that on a proper computation, on the basis, indicated by us in the earlier part of the judgment, even the bonus already paid at 17.58%, will be on the high side, it follows that the direction of the National Tribunal regarding set on cannot be accepted.

Court's decision (1 = petition accepted / positive for appellant, 0 = rejected / negative): 1

Reasoning from the judgment:
1[ds]Going by a very strict interpretation of the language of the provisions relied on by Mr. G. B. Pai, his argument, no doubt, looks attractive. But from the other proceedings, to which we will refer immediately, it will be seen that the approach made by the Tribunal is correct. In the Schedule to the balance-sheet as on September 30, 1964, the appellant Company has shown a sum of Rupees 1,23,00,000 as General Reserve. It has further shown a sum of Rs. 43,68,000 as the amount transferred to appropriation account for payment of dividend subject to tax in respect of the previsious year, namely, 1962-63. It has also shown a sum of Rs. 63,00,000 as added to the General Reserve during the year ended September 30, 1964. On December 5, 1964, a notice was issued regarding holding of the Annual General Meeting on February 12, 1965. One of the items in the agenda for the said meeting was to declare dividend. It is further stated in the said notice that the dividend to be declared at the meeting will be payable on or before March 9, 1965, to those members whose names are on the Companys Register of Members as on February 12, 1965. In the Directors Report accompanying the notice, it is stated that a sum of Rs. 43,68,000 has been appropriated "for payment of dividend for the previous year" (paid during year). The reference to the "previous year ended September 30, 1964. It is also clear that the amount so appropriated for payment of dividend is to be paid "during the years" namely, 1964-65. It is also stated that this amount for payment of dividend has been transferred from the General Reserve. The notice further states that the Directors recommend payment of divident for the year ended September 30, 1964 at 12% subject to deduction of tax at the appropriate rate and that the said payment will absorb Rs. 43,68,000, out of the General Reserve.44. It will be seen that from the notice calling for the General Meeting, the Directors Report and the balance-sheet, referred to above, that a sum of Rs. 43,68,000 out of the General Reserve of Rs. 2,35,07,686 has been set apart and is to be appropriated for payment of dividend for the previous year 1963-64. In no case will a Company be able to declare a dividend for the year ending September 30, 1964 on the morning of October 1, 1964. Therefore, it is clear that from the Reserve shown at the commencement of the accounting year i.e. October 1, 1964, a sum of Rs. 43,68,000 has to be deducted as per the Explanation to the Third Schedule, as the said amount must be considered to have been set apart for payment of dividend. No doubt, Mr. Pai urged that the notice calling for a General Meeting on February 12, 1965 was issued on December 5, 1964 and that the dividend was actually declared only on a later date and in fact the dividend was paid only as late as March 9, 1965. Therefore, he pointed out that in any event it cannot be considered that the said amount has been set apart for payment of dividend which have been declared.45. It is not possible to accept this contention of Mr. Pal. Once the Directors have, on the basis of the auditors report and other materials, decided to declare a particular amount as dividend and have set apart the required amount from the General Reserve, it must relate back to the date of the commencement of the accounting year. The mere fact that dividend was actually paid only on March 9, 1965, in this view, is of no consequence. Therefore, the National Tribunal was perfectly justified in allowing interest at 6% only on the sum of Rs. 1,91,39,686. There is no controversy that 6% Return on this amount, as correctly stated in the Award, is the sum of Rs. 11,48,381.46. Another amount that has been added back by the Tribunal to the net profits shown in the Profit and Loss Account is the sum of Rupees 55,127/-. According to the appellant this amount represents doubtful debts and as such the Tribunal should not have added back the same. In this connection Mr. G. B. Pai, learned counsel for the appellant, drew our attention to S. 211 ofthe Companies Act, 1956, which provides for the from and contents of balance-sheet and Profit and Loss account. He also invited our attention to Part II and Schedule Six of the same Act regarding the requirements as to Profit and Loss Account as well as to Part III regarding the interpretation of the expressions contained in Parts I and II of the said Schedule. He has also referred us to the Auditors report for the year ending September 30, 1965 and also to certain passages in Pickles and Dunkerley on Accountancy.47. All the above matters were relied on by the learned counsel to support his contention that the doubtful debts have been properly excluded by the Company in computing the gross-profits. Here again, it is not possible to accept the contention of Mr. Pai. In the Profit and Loss Account for the year ended September 30, 1965, the appellant under the column Expenses, had given one item as Miscellaneous. Under this heading it had shown a sum of Rs. 71,71,072. Later on, under Ex. 3D, the appellant gave a break up of this amount. In particular, it is only necessary to note that it had referred to two separate items, namely, Rs. 41,099 as bad debts and the sum of Rs. 55,127 as doubtful debts. This clearly shows that the appellant Company made a clear distinction between bad debts and doubtful debts. The claim of the appellant is that this amount of Rs. 55,127, shown as doubtful debts, is really a Provision and not a Reserve.No doubt, this Court was considering the question on the basis of the Full Bench formula; but in our opinion that principal applies with equal force to the case on hand even under the Act. In fact the above decision also shows that creation of such an amount is really a reserve and not a Provision, as contended by the appellant. Even apart from the above circumstances, there is a crucial fact that the appellant itself in its break up has distinguished bad debts from doubtful debts. The Tribunal had not added back the amount shown by the appellant in the break-up sheet under the heading "bad debts." We may also refer to the evidence of Mr. Banerji, W. W. 1, who was a Chartered Accountant. In chief examination he has stated that under the Act the amount claimed the appellant as doubtful debts has to be added back for ascertaining the gross-profits. He has further stated that under the Income-tax Act, Provision for doubtful debts cannot be deducted in computing the net profits. On this point, so far as we could see there is no cross-examination on behalf of the Company.The Tribunal was justified in holding that the appellant was not in order in deducting Rs. 55,127 under the head "doubtful debts" as an item of expenditure. It was perfectly justified in adding back this amount in computing the gross-profits.gross-profits.51. So far as Plant transfer charges of Rs. 72516/- is concerned, it is seen that though this was claimed as a revenue expenditure, Mr. K. B. Bose, appearing for the appellant, had conceded before the National Tribunal that this amount is an item of capital expenditure which should be added back. This concession has been recorded in the Award and it has not been, challenged before us on behalf of the appellant. Therefore, it follows that the Tribunal was justified in adding back this amount for ascertaining the gross-profits.52. Similarly, regarding Patent fees of Rs. 10,000, the appellant witness Mr. Basu, M. W. 1 has admitted in cross-examination that Patent fee is also regarded as an item of capital expenditure. If that is so, that Tribunal was justified in adding back this amount also.53. The same witness has also admitted that rent paid for godown for storing capital goods in the process offerection of a factory is not allowable that the Income-tax authorities would treat the same as part of capital expenditure for erecting a factory. Therefore, from the evidence on the side of the appellant, it is clear that this amount also is an item of capital expenditure and has to be added back in computing the gross-profits.54. Similarly, Mr. Banerji, Chartered Accountant, who gave evidence on the said of the Union, as W. W. 1, has also stated that the appellant itself originally added back in computing gross-profits the amount under Patent Fees, Disallowable Rent and Plant Transfer Charges and that it was only as a later stage that it claimed these items as revenue expenditure. Under, those circumstances, the Tribunal was justified in adding back the amount of Rs. 74,000/- under the heading Disallowable Rent.55. So far as the calculation of Surtax is concerned, the Tribunal has held that the method of calculation made by the Company in Ex. 4 is correct, but it has to be altered because the Income-tax calculated by it after deducting bonus was less. Now, that we are accepting the claim of the appellant that bonus should not be deducted for calculating direct taxes, it follows that the view of the Tribunal in this respect is not correct.56. We have already pointed out that the National Tribunal has held that direct tax has to be calculated without taking into account the bonus paid for the year 1963-64 and the bonus paid for the year 1963-64 and the bonus payable for the accounting year 1964-65. So far as the bonus payable for the accounting year 1964-65 is concerned, we have already discussed the matter and held that the view of the Tribunal is erroneous. But, in our opinion, the Tribunal was justified in holding that in calculating direct taxes, the bonus for the accounting 1963-64, though paid during the accounting year 1964-65 should not be taken into account, is correct. As the bonus paid for the previous accounting year from and out of the profits of the said previous year does not come into the picture.57. From the discussion above, it follows that except, the error committed by the National Tribunal in the matter of computation of direct taxes after excluding bonus payable for the accounting year 1964-65, in all other respects it was justified in rejecting the various claims made by the Company. Even on the basis of the rejection of the claim of the appellant that the bonus paid for the previous accounting year 1963-64 has also to be taken into account for purposes of calculation of direct taxes, there is no controversy that on a proper calculation, the bonus to which the workmen will be entitled, will be very much less than 17.58% already given by the Company. Hence it is not necessary for us to recompute the figure, as the appellant has agreed not to claim a refund or in any other manner adjust or collect the excess bonus that has been already paid.58. But it follows that the view of the Tribunal that the workmen are entitled to bonus at the maximum rate of 20% and the further direction regarding the set on to be carried forward, cannot be sustained. From the calculation given by us earlier, it will be seen that the National Tribunal had directed that a sum of Rs. 4,63,750 had to be carried forward as set on in the succeeding year. This direction has been given on its finding that the allocable surplus works out at more than 20% of the Annual Wage Bill. If that finding is correct, the direction regarding set on will be justified under S. 15 of the Act. But as we have already held that parties are agreed that on a proper computation, on the basis, indicated by us in the earlier part of the judgment, even the bonus already paid at 17.58%, will be on the high side, it follows that the direction of the National Tribunal regarding set on cannot beis, even if after accepting any of the contentions of the appellant Company, it is found that bonus is payable at a percentage lesser than the rate, at which it has been paid, the excess amount will not be recovered from the employees, nor adjusted in any other manner.Therefore, it will be noted that the principle laid down in Metal Box Co., (1969) 1 SCR 750   = (AIR 1969 SC 612  ) regarding the manner of computation of direct tax has been reiterated and reaffirmed in William Jacks and Co., (1971) 1 Lab LJ 503 = (AIR 1969 SC 1812) and it has also been further pointed out that the Amendment Act had made no change whatsoever on this aspect.30. The same question again came up for consideration before this Court in Delhi Cloth and General Mills Co., Ltd. v. Workmen, (1971) 2 SCC 695   = (AIR 1972 SC 299  ). The workmen therein again contended that many of the observations in Metal Box Co., (1969) 1 SCR 750   = (AIR 1969 SC 612  ) were obiter and that the said decision should not be followed as a precedent for determination of the question regarding the manner in which direct taxes have to be computed. Again, after a very elaborate consideration of the scheme of the Act this Court rejected the contention of the Union, and observed asreliance was placed by learned counsel for the appellant on the decision of this Court in (1969) 1 SCR 750   = (AIR 1969 SC 612  ). Counsel for the respondents made valiant efforts to persuade us to hold that many of the observations therein were obiter and as such the case should either be distinguished or be not followed as a precedent for the determination of the question before us. While no doubt the dispute in that case was somewhat different from the one which we have to resolve and there are some distinguishing features in that case, namely, that the Court was not called upon to examine the computation of the figures of gross profits, etc., for an establishment which came within the proviso to Section 3, the observations bearing on the question of the computation of direct tax under Section 6 (c) of the Act are certainly in point. It was pointed out there at p. 775:"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 theAct 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."With respect we entirely agree with the above observation and in our view no useful purpose will be served by referring to the other observations bearing on a question with which we are not directlydecision again reiterates the principle laid down in Metal Box Co.31. In view of the fact that the two later decisions, William Jacks and Co., (1971) 1 Lab LJ 503 = (AIR 1971 SC 1821  ) and Delhi Cloth and General Mills Co. (1971) 2 695 = (AIR 1972 SC 299  ) have approved and adopted the principles laid down by this Court in Metal Box Co., (1969) 1 SCR 750   = (AIR 1969 SC 612  ) that decision holds good and governs the principles to be applied to the case on hand. We are not persuaded by the request made by Mr. Dudhiya that the decision in Metal Box Co., has to be reconsidered. In fact we have already pointed out that even the effect of the Amendment Act has been considered by this Court in William Jacks and Co., Ltd. and it has been held that the Amendment Act has made no change in the principles laid down by this Court in Metal Box Co.32. It is rather significant to note that the Amendment Act was passed, after the decision of this Court in Metal Box Co., (1969) 1 SCR 750   = (AIR 1969 SC 612  ). Parliament at that time was fully aware of the principle laid down by this Court that the tax liability has to be worked out by first working out theand deducting therefrom the prior charges under S. 6, but not the bonus payable to the employees. Nevertheless, Parliament did not make any change in the Act enacting that a different method is to be adopted for computing direct taxes. If the Parliament intended to make a departure from the principle laid down by this Court in Metal Box Co., that bonus amount should be calculated, after a provision for tax was made and not before, a provision to that effect would have been incorporated by the Amendment Act. That not having been done, the law as laid down by this court in Metal Box Co., and reaffirmed by the two later decisions, referred to above, still holds the field.33. One must in fairness state that the National Tribunal in the case before us, was for the first time applying the provisions of the Act and it did not have the benefit of the decision of this Court in Metal Box Co., (1969) 1 SCR 750   = (AIR 1969 SC 612  ).From what is stated above, it follows that the view of the National Tribunal that bonus must be subtracted form theax is calculated, is not correct.34. Before closing the discussion on this aspect, it is necessary to point out that the view of the National Tribunal that the tax concession by way of rebate that an employer will get under theAct on the bonus found to be payable has also to be taken into consideration in dividing the surplus between the workmen and the Company, is also erroneous in view of the fact that the Act, which is aCode has prescribed the manner in which available surplus and the allocable surplus are to be calculated.In our opinion, there is considerable force in the contention of Mr. Dudhiya.Going by a very strict interpretation of the language of the provisions relied on by Mr. G. B. Pai, his argument, no doubt, looks attractive. But from the other proceedings, to which we will refer immediately, it will be seen that the approach made by the Tribunal is correct. In the Schedule to theas on September 30, 1964, the appellant Company has shown a sum of Rupees 1,23,00,000 as General Reserve. It has further shown a sum of Rs. 43,68,000 as the amount transferred to appropriation account for payment of dividend subject to tax in respect of the previsious year, namely,It has also shown a sum of Rs. 63,00,000 as added to the General Reserve during the year ended September 30, 1964. On December 5, 1964, a notice was issued regarding holding of the Annual General Meeting on February 12, 1965. One of the items in the agenda for the said meeting was to declare dividend. It is further stated in the said notice that the dividend to be declared at the meeting will be payable on or before March 9, 1965, to those members whose names are on the Companys Register of Members as on February 12, 1965. In the Directors Report accompanying the notice, it is stated that a sum of Rs. 43,68,000 has been appropriated "for payment of dividend for the previous year" (paid during year). The reference to the "previous year ended September 30, 1964. It is also clear that the amount so appropriated for payment of dividend is to be paid "during the years" namely,It is also stated that this amount for payment of dividend has been transferred from the General Reserve. The notice further states that the Directors recommend payment of divident for the year ended September 30, 1964 at 12% subject to deduction of tax at the appropriate rate and that the said payment will absorb Rs. 43,68,000, out of the General Reserve.