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Petitioner: METAL BOX COMPANY OF INDIA LTD. VS Respondent: THEIR WORKMEN
Court Name: Supreme Court of India Judge(s): J. M. Shelat, C. A. Vaidialingam Title: METAL BOX COMPANY OF INDIA LTD. vs THEIR WORKMEN Case No.: Civil Appeals Nos. 2138 and 2196 of 1966 Date of Judgment:1968-08-20 Reported As: 1971 PTD 687 Result: company succeed
JUDGMENT
JUDGMENT SHBLAT, J.-----By a reference dated 17th September 1965, the Government of West Bengal referred to the Sixth Industrial Tribunal the following question for adjudication :- "Whether computation of bonus in respect of the accounting year ending 31st March 1965, payable to the employees is in accordance with the Payment of Bonus Ordinance? If not, what should be the quantum of bonus for the employees?" The dispute between the appellant-company and its employees arose in the following manner. The company's accounting year is from 1st April to 31st March of the following year and its books of account are maintained on the mercantile system of accounting. The company computed the amount of bonus payable to its employees under the Payment of Bonus Ordinance which was promulgated on 29th May 1965, and furnished on ---th July 1965, copies of its computaion to the three respondent-Unions represent--ing its employees. The available surplus and allocable surplus, according to this computation, were Rs. 49.96 lakhs and Rs. 29.98 lakhs respectively. On this basis the company declared the bonus at 13.28 per cent. Of the total wages paid to the employees. According to this computation, the gross profits came to Rs. 2,70,64,234. Out of this the company deducted the following amounts allowed under the Ordinance, namely :- Rs. 28,64,000 as depreciation admissible under the Income---tax Act, 1961 ; Rs. 9,00,000 as development rebate; Rs. 1,36,33,000 as direct taxes; Rs. 1,50,000 as dividend on preference shares ; Rs. 23,37,000 as interest at 8.5 per cent. On paid-up capital ; Rs. 17,80,358 as interest at 6 per cent. On reserves.
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Thus the available surplus came to Rs. 49,96,876, sixty per cent. Of which, namely, Rs. 29,98,125 was the allocable surplus. The employees disputed the computation contending that the company had wrongly reduced the gross profits and the available surplus and that the following amounts should be added back, viz., provision for gratuity, Rs. 18,38,605, and provision for doubtful debts, Rs. 50,000. They also challenged deduction of interest on the reserves on the ground that the capital reserve of Rs. 57,00,151 was artificially arrived at by a mere revaluation of the company's fixed assets as on 1st April 1956. They also disputed the figures of depreciation, development rebate and direct taxes deducted by the company while working out the available surplus. Parliament in the meantime passed the Payment of Bonus Act, 1965, which by section 40 repealed the Ordinance but which saved all things done and action taken under the Ordinance as having been done or taken under the Act. On 27th September 1965, the company paid, subject to the result of the reference bonus at the rate of 13.28 per cent. Of the wages including dearness allowance to its employees. Under section 205(1) of the Companies Act, 1956, no dividend can be declared or paid by a company for any financial year except out of profits arrived at after providing for depreciation in accordance with subsection (2). Subsection (2) provides different methods of calculating depreciation, one of which is to calculate it by dividing 95 per cent. Of the original cost of each of the depreciable assets by a specified period in respect of each such asset. The depreciation deducted in the expenditure column in the P. & L. Account, therefore, was the depreciation worked out under section 205(2) of the Companies Act. Under section 2(18) of the Bonus Act; gross profits mean gross profits calculated under section 4. In the case of companies other than a banking company, gross profits under section 4 are to be computed in the manner laid down in the 2nd Schedule. That Schedule requires adding back to the not profit shown in the P. & L. Account the amount of depreciation deducted in that account while computing gross profits. Obviously, the deprecia--petition so to be added back is the one worked out by the company under section 205(2) of the Companies Act. Section 6 of the Bonus Act provides that, having arrived at the gross profits under section 4 read with the 2nd Schedule, the company is entitled to deduct therefrom depreciation admissible under section 32(1) of the Income-tax Act, that is, such percentage on the written down value as may, in the case of each of the classes of assets, be prescribed. The fact that the company, while' preparing its P. & L. Account and its computation (Exh. 6) produced before the Tribunal, had kept the distinction between depreciation worked out under the Companies Act and the one to be worked under the Income-tax Act for the purposes of the Bonus Act is clear from the evidence of its witness, Verma. It was for this reason that Rs. 23 lakhs and odd were shown as depreciation in the P. & L. Account while in the computation (Exh. 6) the company claimed Rs. 28.64 lakhs as depreciation. There was, therefore, no question of the company having made any mistake In calculating depreciation in the P. & L. Account or its trying to amend that mistake as erroneously thought by the Tribunal. The only mistake, the company claimed it had made, was that the true figure of depreciation deductible under section 6(a) of the Bonus Act was Rs. 28.82 lakhs and not Rs. 28.64 lakhs. The company produced a certificate of its auditors (Exh. U- 2) dated 20th December 1965, wherein the auditors certified that on the records produced before them the true figure of depreciation would be the revised figure of Rs. 28.82 lakhs and not Rs. 28.64.Lakhs. But the controversy between the parties was not confined to the difference between these two figures. There were three figures for depreciation before the Tribunal, Rs. 23 lakhs and odd shown in the P. & L. Account, Rs. 28.64 lakhs shown in the computation and Rs. 28.82 lakhs subsequently claimed by the company as the revised figure of depreciation. The last two figures were taken by the company from its auditors' certificate certifying first Rs. 28.64 lakhs and later on, revising that figure to Rs. 28.82 lakhs on certain further records and information produced before them. The evidence of Verma shows clearly that the unions disputed the company's calculations of
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deprecia--petition When questioned by them, Verma could only say that the calculations were done not by him but by the secretarial depart--ment, and, therefore, he was not in a position to answer questions in that regard. No witness from the secretarial department was produced. As regards their books and records produced before the auditors, his only answer was :- "So far as books and records mentioned in the first part of Exh. U-2 are concerned, the books and records relating to the branches were produced before the representatives of the auditors' firm there, and the other books and records were produced there before the auditors' firm. So far as the records mentioned in the second part of the certificate are concerned, they are different records. The informations and explanations given to the auditors were given verbally after consulting our books of accounts." These books and records not having been produced or disclosed, there was obviously no opportunity to the unions to verify either of the two figures, viz, Rs. 28.64 lakhs or Rs. 28.82 lakhs. It is true that Verma said that the calculation shown to the auditors could be produced but he qualified the offer by saying that that would be done if the Tribunal required. Since the company claimed the deduction of depreciation, it stands to reason that the burden of proof that the depreciation claimed by it was the correct amount in accordance with the Income- tax Act was on the company and that burden the company must discharge once its figures were challenged. But it was contended that once the company produced its auditor's certi--ficate that should be sufficient and must be accepted and that the Tribunal should not insist either on the auditors proving their certificate or on the company proving depreciation on each and every item of depreciable asset. Such an enquiry before the Tribu--nal, it was argued, would be a harassing and prolonged enquiry, not contemplated in industrial adjudication and therefore, the Tribunal ought to have accepted as correct Rs. 28.82 lakhs certified by the auditors. Under section 23 of the Act the presumption of accuracy is allowed only to the balance-sheet and the P. & L. Account of companies. No such presumption is provided for by the Act to auditors' certificates. Speaking of rehabilitation amount deductible as a prior charge under the Full Bench formula while working out the available surplus, this Court, in Khandesh Spinning & Weaving Mills Co. Ltd. v. Rashtriya Girni Kamgar Sangh ((1960) 18 F J R 114), observed at page 120 as follows :- "The importance of this question (the procedure to be followed for ascertaining facts) in the context of fixing the amount required for rehabilitation cannot be over-estimated. The item of rehabilitation is generally a major item that enters into the calculations for the purpose of ascertaining the surplus and, therefore, the amount of bonus. So, there would be a tendency on the part of the employer to inflate this figure and the employees to deflate it. The accounts of a company are prepared by the management. The balance-sheet and the profit and loss account are also prepared by the company's officers. The labour have no concern in it. When so much depends on this item, the principles of equity and justice demand that an industrial Court should insist upon a clear proof of the same and also give a real and adequate opportunity to the labour to canvass the correctness of the particulars furnished by the employer." The necessity of proper proof of the correctness of statements in the balance-sheet was repeated in Petlad Turkey Red Dye Works Ltd. v. Dyes & Chemical Workers' Union ((1960) 20 F R J 539). . These observations made with regard to balance-sheets and P. & L. Accounts would equally apply to statements made in the auditors' certificates prepared on the instructions and information supplied to them by employers. Mere production of auditors' certificate, especially when it is not admitted by labour, not by the auditor but by the employees of the company who admitted not to have been concerned with its preparation or the calculations on which it was based, would not be conclusive. We do not say that in such a case the Tribunal should insist upon proof of depreciation on each and every item of the assets. It should, however, insist on some reasonable proof of the correctness of the figure of depreciation : claimed by the employer either by examining the
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auditors who calculated and certified it or by some other proper proof. Depreciation, in some cases, would be of a large amount affecting materially the available surplus. Fairness, therefore, requires that an opportunity must be given to the employees to verify such figures by cross- examination of the employer or his witnesses who have calculated depreciation amount. Notwithstanding the unions' challenge to the figure of depreciation claimed by the company, the only thing that the company did was to examine Verma, who admittedly had nothing to do with its calculation, And to produce through him the said certificate. In our view, that was neither proper nor sufficient. The proper course for the Tribunal in such a case was to insist upon the company adducing legal evidence in support of its claim instead of taking the figure of depreciation from the P. & L. Account which was not worked out in accordance with the Income-tax Act but under section 205 of the Companies Act, and saying that the company had failed to prove that it was a mistaken figure. In our view, the question as to the correct amount of depreciation must go back to the Tribunal for a fresh decision. The Tribunal should give opportunity to the company to prove its claim for depreciation by reasonable proof and to the unions to test such evidence by cross- examination or otherwise. An error of the same type seems to have been committed by the Tribunal in the matter of development rebate. It allowed Rs. 7 lakhs as development rebate instead of Rs. 8.87 lakhs claimed by the company. Under section 33 of the Income-tax Act, an assessee is allowed by way of development rebate a certain percentage of the cost of machinery or plant depending on the date of its installation. Section 34(3) of that Act provides, however, that the said allowance shall not be given unless an amount equal to 75 per cent. Of the development rebate to be allowed is debited to the P. & L. Account of the relevant pre--vious year and credited to a reserve account to be utilised by the assessee in the 8 years next following for the purposes of the undertaking. Accordingly, the company appropriated Rs. 7 lakhs to the development rebate reserve as it was bound to do if it wanted to claim development rebate. The company took the round figure of Rs. 9 lakhs instead of Rs. 8.87 lakhs for development rebate and credited Rs. 7 lakhs, being 75 per cent. Thereof, to the development rebate reserve. Under the Second Schedule to the Bonus Act, read with section 4 thereof, the company is required while computing its gross profit to add the development rebate and as footnote 1 in that Schedule shows, "to the extent charged to profit and loss account", that is, Rs. 7 lakhs. Under section 6(b) of the Bonus Act, the company is entitled, however, to deduct out of the gross profits arrived at under section 4, the whole of the development rebate admissible under the Income-tax Act, i.e., the amount, 75 per cent. Of which come to Rs. 7 lakhs. The error which the Tribunal fell into was in mixing up the development rebate reserve to which the company had to appropriate Rs. 7 lakhs in P. & L. Account and the development rebate of Rs. 8.87 lakhs allowable to it under section 6 of the Act. Mr. Chari for the unions fairly conceded that he could not challenge this position. There was, therefore, no justification for the Tribunal to allow Rs. 7 lakhs only instead of Rs. 8.87 lakhs as development rebate. The next question relates to a sum of Rs. 18.38. Lakhs, being the estimated liability under two gratuity schemes framed by the company, which was deducted from the gross receipts in the P. & L. Account. In 1960 the company introduced a gratuity scheme for its employees other than its officers. Under that scheme gratuity was payable on the termination of an employee's service either due to retirement, death or termination of service, the amount of gratuity payable being dependent on his wages at that time and the number of years of service put in by him. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. Thus in 1959-60, 1960-61 and 1961- 61 the company allocated towards this liability Rs. 5 lakhs, Rs. 10 lakhs and 5 lakhs respectively from out of the profits, debiting these amounts in the profit and loss account. In ail Rs. 40 lakhs have so far been provided in the aforesaid manner against the said liability. The practice followed by the
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company is that every year the company works out the additional liability incurred by it on the employees putting in every additional year of service. Whenever an employee retires, the amount of gratuity payable to him is debited against the amount provided for as aforesaid. The amount so paid is not debited in the P. & L. Account as an outgoing or expenditure but against the estimated liability provided as aforesaid. In 1961-65, the company introduced a similar gratuity scheme for its officers. According to the company, the estimated liability under this scheme was worked out at Rs. 20 lakhs. But, instead of providing the whole of it, it provided only Rs. 11.31 lakhs. It also provided Rs. 7 lakhs under the scheme for its non-officers against the liability for service put in by them in that year. Out of Rs. 18.38 lakhs so provided, the company paid as gratuity Rs. 1,31,585 and Rs. 87,295 to officers and other employees who retired during 1954-fi5, debiting, as aforesaid, these amounts not as an outgoing or expenditure but against the said amounts of Rs. 11 lakhs and Rs. 7 lakhs. The company claimed that it was, entitled to deduct the balance of Rs. 16 lakhs from the gross receipts in the P. & L. Account while working out its not profit. The unions contended that the company could deduct from the gross receipts only Rs. 1.31 lakhs and Rs. 87,000 and odd actually paid during the Sear. The company, on the other hand, maintained that what it had done was legitimate and was warranted by the principles of accountancy and, therefore, the whole amount of Rs. 18.38 lakhs was deductible in arriving at its not profits. What the Tribunal did, however, was that instead of squarely facing this controversy, it held that as the company had in the former years debited Rs. 5 lakhs, e.g., in 1959-60 and 1961-62, it would allow only Rs. 5 lakhs for each of the two schemes. Thus it allowed Rs. 10 lakhs as debitable in the P. & L. Account in addition to the said Rs. 1.31 lakhs and Rs. 87,000 and disallowing the balance of Rs. 6 lakhs added back that amount in the not profits shown in the P. & L. Account. The contention of Mr. Chari was two-fold : (1) that the amount which could be debited was that which was actually paid and the company was not entitled to debit in the P. & L. Account any amount worked out by it as estimated liability. The Tribunal, therefore, was not justified in allowing the company to debit any such amount and that the Tribunal arbitrarily fixed Rs. 10 lakhs and allowed wrongly that amount to be deducted; and (2) even if such estimated liability was debitable, the appropriation amounted to a reserve and under the Bonus Act such a reserve had to be added back while working out the gross profits under the 2nd Schedule to the Act. Two questions, therefore, arise: (1) whether it is legitimate in such a scheme of gratuity to estimate the liability on an actuarial valuation and deduct such estimated liability in the P. & L. Account while working out its not profits; and (2) if it is, whether such appropriation amounts to a reserve or a provision. If it is a reserve, obviously the amount has to be added back while computing the gross profits. But in that event the company would be entitled to interest thereon at 6 per cent. Per annum under Item 1(iii) of the Third Schedule to the Act. In the case of an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. Just as receipts, though not actual receipts but accrued due are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business. A company carrying on business of buying land and selling it after development sold certain plots, received a part of the price but entered the whole of the price receivable as it maintained its books of accounts on mercantile method. It also debited a certain sum, being the estimated expenditure for the developments it undertook to carry out within six months from the execution of the sale deeds although no part of such expenditure was actually incurred during that year. It was held that, having regard to the accepted commercial practice and trading principles and there being no prohibition against it in the Income-tax Act, deduction of such estimated
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liability, even though it did not come under any specific provisions of section 10(2) of the Income- tax Act, 1922, was permissible : see Calcutta Company Ltd. v. Commissioner of income-tax (1). Such a deduction of an accrued liability though not actually paid is not confined to the Income-tax Act only but is also permissible under the Wealth Tax Act, 1957. In Commis--sioner of Wealth Tax v. Standard Vacuum Oil Company Ltd. (2), demands in respect of payment of tax under section 18-A of the Income-tax Act, 1922, were made against the assessee-company for 1956-57. The final instalment of Rs. 47 lakhs and odd for each of the two years was outstanding on the respective valuation dates. The question was whether the demand for such tax could be deducted while determining the not wealth of the company. This Court held that a debt is "owed" when an order is passed under section 18-A and a notice of demand is sent. The amount mentioned in the notice begins to be "owed" till a new figure is substituted by the assessee under section 18-A(2) of the Income -tax Act. But, till that is done, the amount is ascertained and there is a statutory liability to pay the amounts mentioned in the order under section 18-A(1) and were debts on the valuation dates, and, therefore, deductible for the purpose of arriving at the company's not wealth. The Court also held that a condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability. The decision, no doubt, turned on the meaning of "debt" as defined by section 2(m) of the Wealth Tax Act, the Court there holding that the statutory liability to pay the amount mentioned in the order commenced when the demand notice was served and, therefore, the liability did exist in praesenti. In Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth Tax ((1966) 2 SCR 688), also a case under the Wealth Tax Act, the appellant-company showed in its P. & L. Account two amounts; ((1960) 1 SCR 185) the amount of dividend proposed to be distributed for that year, and ((1966) 2 SCR 317) another sum as a provision for tax liability under the Income-tax Act, 1922. The question was whether these two sums were debts and could be deducted while computing the company's not wealth. It was held that the dividend amount was not a debt as on the valuation date nothing more than a recommendation by the directors had taken place. But, as regards the estimated tax liability, it was held that it was a debt inasmuch as the liability to pay the tax was in praesenti though payable in futuro and was in respect of an ascertainable sum of money. In Standard Mills Co. Ltd. v. Commissioner of Income-tax ((1967) 1 SCR 768), the decision turned on the question whether an estimated liability under gratuity schemes framed under industrial awards amounted to debts and could be deducted while computing the not wealth. On reliance having been placed on Southern Railway of Peru Ltd. v. Owen (1957 A C 334), a decision to which we shall presently come, the Court observed at page 773 that that decision had no relevance to the question before it as the House of Lords in that decision was concerned in determining the deductibility of the present value of a liability which may arise in future in the computation of taxable income for the relevant year under the income-tax laws. The Court held, in view of the terms of section 2(m) of the Wealth Tax Act, that as the liability to pay gratuity was not in praesenti but would arise in future on the termination of service, i.e., on retirement, death or termination, the estimated liability under the schemes would not be a debt and, therefore, could not be deducted while computing the not wealth. These observations show that the Court was of the view that though such a liability is a contingent liability and therefore not a `debt' under section 2(m) of the Wealth Tax Act, it would be deductible under the Income tax Act while computing the taxable profits In the instant case, the question is not whether such estimated liability arising under the gratuity schemes amounts to a debt or not. The question that concerns us is whether, while working out the not profits, a trader can provide from his gross receipts his liability to pay a certain sum for every additional year of service which he receives from his employees. This, in our view, he can do, if such liability is properly ascertainable and it is possible to arrive at a proper discounted present value. Even if the liability is a contingent liability, provided its discounted present value is
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ascertainable, it can be taken into account. Contingent liabilities discounted and valued as necessary can be taken into account as trading expenses…
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