# INDIAN OXYGEN LIMITED v. THEIR WORKMJ):N

- **Citation:** [1972] 2 S.C.R. 816
- **Court:** Supreme Court of India
- **Decided:** 1971-12-09
- **Bench:** C. A. Vaidialingam, K. K. Mathew
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/indian-oxygen-limited-v-their-workmj-n-5551
- **Pages:** 22

## Headnote

P~ymen( of Bonus Act, 1964 s. &-Bonus paid in respect of accounting year not to be deducted from gross profit for computing direct 1k7Xes--
!J1vidend declared during accounting year-Whether to be deducted from
teserves "'ihown at co:nmencen1ent of accounting year-Doubtful debts'
whether rightly treated as part of reserves-Bonus paid in respect of year
preceding the accounting year to be deducted from gross profits-Set on,
direc·tions as to.
For its accounting year 1964-65 the Indian Oxygen Ltd. was liable
to pay bonus under t.he Payment of Bonus Act 1965.
The accounts of
the company for the said year were passed on February 12. 1966.
The
company calculated bonus at the rate of 17.58% of the total annual
wages dr salary plus Dearne: s Allowance and declared the said amount
payable by notice dated March 23,_ 1966.
The workmen demanded a
higher rab> of bonus.
The resulting industrial dispute was referred to
the National Industrial Tribunal.
The Tribunal fixed the rate of bonus
at 20%.
Against the decision of the Tribunal appeals were filed in this
Court.
The questions that fell for consideration wem: (i) whether the
tribunal was right in calculating the direct taxes after deducting the
amount of bonus payable for the accounting year 1964-65 from the gross
profits; (ii) whether the Tribunal was justified in deducting the amount
earmarked for distribution of dividends from the rese\'ves shown in the
balance sheet at· Ifie commencement of the_ accounting year even thoug)I
the dividend had not been declared at the commencement of the accounting year: (iii) whether the Tribunal was justified in treating the amount
shown against doubtful debts as part of the reserves; (iv) whether the
Tribunal while calculating direct taxes was justified in not taking into
account the bonus paid for the year 1963-64; (v) whether tl-r. directbm
given by the Tribunal regarding set on were justified.
HELD : (i) In Metal Box Co. this Court laid down that an employer
is entitled to compute his tax liability without deducting first the amount
of bonus, he would be liable 1o pay, from and out of the amount computed under ss. 4 and 6 of the Act. After the above decision Parliament
enacted the Payment of Bonus (Amendment) Act 1969.
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 the gross-profits
and deducting therefrom the prior charges under s. 6 but not the bonus
payable to the employ.,es.
Nevertheless Parliament did not make anv
c'bange in the Act enacting that a different method is to be adopted for
computing the cfir_ect taxes. If Parliament intended to make a departure
from. the principles laid down by this Court in Metal Box Co. that bonus
amount should be calculated after a provision for tax was made and
not ~dore a provision to that effect would have been incorporated by
the Amendment Act.
'Tmit not having been done, the law as laid down
by this Court in Metal Box Co. and reaffirmed by two later decisions
namely William Jacks & Co. Ud. and Delhi Cloth and General Mills Co.
still holds the field.
It follows that the view of the National Tribunal
that bonus must be deducted from the gross-profits before income-tBx is
calculated, was not c<irrect. [826 F-G; 829 C-F]
A
B
c
D
E
F
G
H
A
B
c
D
E
F
G
H
INDIAN OXYGEN LTD. v. WORKMEN (Vaidialingam, I.)
817
Further the view of the Tribunal that the tax concessions by way of
rebate that an employer will get under the Indian Ineome-tax Act 011
the bonus found to be payable has also to be taken info consideration in
dividing tne •urplus between the workmen and the company, was also
erroneous in view of the fact that the Act which is a self contained Code
has prescribed the manner in which available surplus and the allocable
surplus are to be calculated. [829 G]
Metal Box Co. of ltfdia Ltd. v. Workmen, [1969] 1 S.CR. 750, Workmen of William Jacks & Co. Ltd. v. Management of William Jack9 & Co.
[1971] 1 L.L.J. 503 and D

## Text

_Characters 0–39,727 of 56,666. This is a partial read: ask again with offset=39727 for what follows._

816
INDIAN OXYGEN LIMITED
v.
THEIR WORKMJ):N
December 9, 1971
[C. A. VAIDIALINGAM AND K. K. MATHEW, JJ.]
P~ymen( of Bonus Act, 1964 s. &-Bonus paid in respect of accounting year not to be deducted from gross profit for computing direct 1k7Xes--
!J1vidend declared during accounting year-Whether to be deducted from
teserves "'ihown at co:nmencen1ent of accounting year-Doubtful debts'
whether rightly treated as part of reserves-Bonus paid in respect of year
preceding the accounting year to be deducted from gross profits-Set on,
direc·tions as to.
For its accounting year 1964-65 the Indian Oxygen Ltd. was liable
to pay bonus under t.he Payment of Bonus Act 1965.
The accounts of
the company for the said year were passed on February 12. 1966.
The
company calculated bonus at the rate of 17.58% of the total annual
wages dr salary plus Dearne: s Allowance and declared the said amount
payable by notice dated March 23,_ 1966.
The workmen demanded a
higher rab> of bonus.
The resulting industrial dispute was referred to
the National Industrial Tribunal.
The Tribunal fixed the rate of bonus
at 20%.
Against the decision of the Tribunal appeals were filed in this
Court.
The questions that fell for consideration wem: (i) whether the
tribunal was right in calculating the direct taxes after deducting the
amount of bonus payable for the accounting year 1964-65 from the gross
profits; (ii) whether the Tribunal was justified in deducting the amount
earmarked for distribution of dividends from the rese\'ves shown in the
balance sheet at· Ifie commencement of the_ accounting year even thoug)I
the dividend had not been declared at the commencement of the accounting year: (iii) whether the Tribunal was justified in treating the amount
shown against doubtful debts as part of the reserves; (iv) whether the
Tribunal while calculating direct taxes was justified in not taking into
account the bonus paid for the year 1963-64; (v) whether tl-r. directbm
given by the Tribunal regarding set on were justified.
HELD : (i) In Metal Box Co. this Court laid down that an employer
is entitled to compute his tax liability without deducting first the amount
of bonus, he would be liable 1o pay, from and out of the amount computed under ss. 4 and 6 of the Act. After the above decision Parliament
enacted the Payment of Bonus (Amendment) Act 1969.
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 the gross-profits
and deducting therefrom the prior charges under s. 6 but not the bonus
payable to the employ.,es.
Nevertheless Parliament did not make anv
c'bange in the Act enacting that a different method is to be adopted for
computing the cfir_ect taxes. If Parliament intended to make a departure
from. the principles laid down by this Court in Metal Box Co. that bonus
amount should be calculated after a provision for tax was made and
not ~dore a provision to that effect would have been incorporated by
the Amendment Act.
'Tmit not having been done, the law as laid down
by this Court in Metal Box Co. and reaffirmed by two later decisions
namely William Jacks & Co. Ud. and Delhi Cloth and General Mills Co.
still holds the field.
It follows that the view of the National Tribunal
that bonus must be deducted from the gross-profits before income-tBx is
calculated, was not c<irrect. [826 F-G; 829 C-F]
A
B
c
D
E
F
G
H
A
B
c
D
E
F
G
H
INDIAN OXYGEN LTD. v. WORKMEN (Vaidialingam, I.)
817
Further the view of the Tribunal that the tax concessions by way of
rebate that an employer will get under the Indian Ineome-tax Act 011
the bonus found to be payable has also to be taken info consideration in
dividing tne •urplus between the workmen and the company, was also
erroneous in view of the fact that the Act which is a self contained Code
has prescribed the manner in which available surplus and the allocable
surplus are to be calculated. [829 G]
Metal Box Co. of ltfdia Ltd. v. Workmen, [1969] 1 S.CR. 750, Workmen of William Jacks & Co. Ltd. v. Management of William Jack9 & Co.
[1971] 1 L.L.J. 503 and Delhi Cloth & General Mills Co. Ltd. v. Work·
men [1971] 2 S.C.C. 695, applied.
(ii) The ~elevant accounting year in the present case was October l,
1964 to September 30, 1965.
In its balance sheet as on September 30,
1964 the appellant had shown a sum of Rs. 2,35,07,686 reserves. Similarly in its balance sheet as on September 30, 1965 apart from showing
its reserves on that date, it. had also shown a sum of Rs. 2,35,07,686 as
reserves at the commencement of the accounting year. On December 5,
1964 a notice wac< issued regarding holding of the Annual Genocal Meeting on February 12, 1965.
The dividend was paid on March 9, 1965.
From the notice calling for the General Meeting the Directors' Report
and balance sheet as on September 30, 1964 it was clear that a sum of
Rs. 43,68,000 out of the General Reserve of Rs. 2,35,07,686 had been
set apart and was to be appropriated for payment of dividend for the
previous year. 1963-64.
In the circumstances the Tribunal correctly
applied the provisions of s. 6(d) of the Act read with item 1 cl. (iii)
together with the material part of the Explanation to the Third Schedule
of the Act when it deducted the sum »armarked to be paid as 3ividend,
i.e., Rs. 43,68,000 from the General Revenue at the beginning of the
accounting year, i.e., Rs. 2,35,07,686 for the purpose of determining the
return on Resmes. The fact that the dividend had not been declared
at the. commencement of the accounting year was not material.
In no
case will a company be able to declare a dividend for the year ending
September 30, 1964 on the morning of October I, 1964. Once the
Directors have, on the basis of auditor's repott and other materials decided
to declare a particular amount as dividend and have set apart the required
amount from the Genelral Reserve, it must relate back to the date of 'tho
commencement of the accounting year. [830 G-H; 832 C-F; 833 A-Cl
(iii) The Tribunal was justified in :.holding that the appellant was not
in order in deducting Rs .. ·55,127 under the head 'doubtful debts' an item
of expenditure. It was perfectly justified in adding back the amount in
computing the gross profits.
The creation of such an amount is really
a reserve and not a provision as contended by the appellant. The appellant ito,lf in its breach up had distinguished bad debts !tom doubtfu!'ctebts.
[S34 F-835 BJ
Textile Machinery Corpn. Lta. v. Workmen, [1960] 1 .L.L.J. 34,
applied.
(iv) Tt£ Tribunal was justified in holding that in calculating direct
taxes the bonus for the accounting year 1963-64 though paid during
the accounting year 1964-65 should not be taken into account.
As the
.bonus year must be taken as a unit, bonus paid for the previous accounting year from and out of the profits of the said previous year does not
come into the picture. [836 El
( v)
On a p~oper computation even the bonus already paid by the
company at 17.58% was on the big side. It follows that the direction of
818
SUPREME COURT REPORTS
(1972] 2 S.C.R.
the National Tribunal regarding set on based as it· was on the rate 20%
bonus fixed by the Tribunal. could not be accepted. [836 F-G]
C1vrL APPELLATE JURISDICTION:
Civil Appeals Nos. 415,
813 and 1302 of 1967.
Appeals by special leave from the award dated January 20,
l 967 of the National Industrial Tribunal, Calcutta in Reference
No. NIT-I of 1966.
G. B. Pai and D. N. Mukherjee, for the appellant (in C.A.
No. 415 of 1967) and respondent No. I (in C.As. Nos. 813 and
1302 of 1967.
A
B
Janardan Sharma and Indira Jaisingh, for respondent No. I
c
(in C.A. J'.!o. 415 of 1967), the appellants (in C.A. No. 813 of
1967) and respondent No. 2 (in C.A. No. 1302 of 1967).
K. R. Chaudhuri,
for respondent No. 3 (in C.A. 415 al
1967).
C. L. Dudhia, C. G. Nadkarni, K. L. Hathi and P. C. Kapur,
for respondent No. 4 (in C.As. Nos. 415 and 813 of 1967) and
the appellants (in C.A. No. 1302 of 1967).
Janardan Sharma, for the intervener,
The Judgment of the Court was delivered by
Vaidialingam, I.
All these appe~ls, by special leave,
are
directed against the Award dated January 20,
1967 of the
National Industrial Calcutta in Reference No. NIT-I of
1966.
Civil Appeal No. 415 of 1967 is by the Company regarding the
disallowance of certain items by the 'f.ribunal for arriving at the
available and allocable surplus for calculating bonus to be paid
for the accounting year 1964-65.
Civil Appeals Nos. 813 and 1302 of 1967 are by the two
UniQllS representing the workmen, against that part of the Award
rejecting the claim of the Unions for adding back certain items
for the purposes of calculating the rate of bonus to be paid by the
appellant Company.
As mentioned earlier, the year of account is 1964-65, which
is October I, 1964 and ending September 30, 1965. The appellant Company was incorporated under the
Indian Companies
Act, in 1935 and was made into a public company in 1958. It
is a venture of the British Oxygen Company incorporated in
England and the English Company still holds a little over 66 %
~;f the shares of the Indian Company.
The main products of the
Company are production of industrial gases like oxygen, dissolved
acetylene, nitrogen and hydrogen
and
also electrodes and
D
E
F
G
ll
A
B
c
D
E
F
G
H
INDIAN OXYGEN LTD. v. WORKMEN (Vaidialingam, J.)
819
welding equipment and medical equipment.
The Company has
been paying bonus to its workmen from 1948; and since then it
has been paying bonus by agreements with 1he union. The bonus,
so paid, has been more or less at five months basic wages, subject
to a minimum and maximum as per the agreement. For the year
in question, 1964-65, there was no agreement, as the Payment of
Bonus Act, 1965 (hereinafter to be referred as the Act) came
into force. Tuer is no controversy that this is the first accounting
year, in respect of which the bonus is to be paid under the Act.
The accounts of the Company were passed at the Annual
General Meeting held on February
12, 1966. The Company
calculated bonus at the rate of 17.58% of the total annual wages
or salary plus Dearness Allowance and declared the said amount
payable by notice dated March 23, 1966. The Company originally worked out the allocable surplus under the Act for the said
year at Rs. 30,3~,958. As the sum of Rs. 1,72,69,770 was the
total salary <1nd wages including Dearness Allowance
payable
for the said year, the allocable surplus worked out at 17.58%
of the said total wage bill and hence bonus was declared at that
rate.
The Unions protested against the rate of bonus declared by the
Company and demanded a substantial increase in the quantum of
bonus. The claim by the Indian Oxygen & Acetylene Employees'
Federation was for payment of bonus equal to eight months'
basic wages subject to a minimum of Rs. 400 /-. Another union,
National Federation of Indian Oxygen Workmen, Jamshedpur,
claimed bonus at the maximum rate of 20% provided under the
Act.
A third union, also the Bombay Labour Union, claimed
bonus at the maximum rate of 20 % . A fourth union, Indian
Oxygen Employees Union of Rajawadi, Bombay, demanded
bonus at 25 % of the total earnings or at six mOillths' basic wages,
whichever was higher.
As attempts at settlement failed, a strike _.notice was given by
some of the Unions. Originally, there was a reference of the
dispute by the Government of West Bengal' to a Tribunal. Later
on, this order of reference by the State Government was .cancelled
and t~ Central Government by order dated July 7, 1966 referred
the di;pute for adjudication to the National Industrial Tribunal
at Calcutta. · The question referred was as follows :
"Whether the workmen are entitled to a higher
bonus than 17.5 per cent for the year 1964-65 as offered by the management? If so, what should be the
quantum of bonus for the said year ?"
820
SUPREME COURT REPORTS
[1972) 2 S.C.R.
Though the question referred was rega~ding the claim
for
higher bonus than 17 .5 per cent, all parties were a.greed that the
appellant Company had actually offered ~nd paid as bonus for
the said year at 17.58 per cent. It is on this basis that the dispute also was adjudicated by the National Industrial Tribunal.
Though originally, the appellant, as mentioned earlier, had
calculated the allocable surplus in the sum of Rs. 30,35,958,
during the proceedings before the Tribunal, they recomputed the
amount and filed a revised statement Ex.4, by which the allocable
surplus was worked out at only Rs. 23,30,396.
This reduced
figure was explained by the appellant Company as due to omission in the previous statement, to add back certain items in computing the gross profits and higher figure for income-tax.
All the unions very stn:nuously contested both the calculations
of the Company.
According to the unions, in the balance sheet
and profit and loss accounts of the Company various items of
expenses have been inflated. Details of such inflation were given
by them.
The unions also contested the amount of direct taxes
shown in the statement of the Company. It was the further case
of the unions that if there is a proper computation, the allocable
surplus would be very much higher than 50 lacs as against the
figure of Rs. 30,35,958 shown in the original calculation
and
miserably reduced in the subsequent calculation Ex.4.
The National Industrial Tribunal, in its Award has disallowed certain claims made by the appellant Compll:Ily. It also disallowed certain extreme claims made by the unions. Ultimately, it
fixed the available surplus in the sum of Rs. 65,29,507. On this
basis it fixed the sum of Rs. 39,17,704 as the allocable surplus
being 60% of available surplus.
As the allocable surplus so fixed
was more than 20% of the annual wage bill of Rs. 1,72,69,770,
the banus was fixed by the Tribunal at the maximum rate of 20%.
It further gave a direct·ion that a set on of Rs. 4,63,750 is to be
carried forward.
In the.:elld the Tribunal made an Award that
the workmen are entitled to a higher bonus than 17 .58 % for the
accounting year 1964-65 and fixed the quantum of
bonus
so
payable at the maximum rate of 20%, with a further direction
that there should be a set on to be carried forward of Rs. 4.63,750.
In Civil Appeal No. 415 of 1967, certain items which the
Company claimed to be added back to the net profit, shown in
the profit and loss account, for arriving at !he gross-profit, and
which have been rejected by the Tribunal are in controversy.
Further, rthere is also a controversy, in the said appeal, re11;arding
certain deductions sought to be made from the gross-profits for
the purpose of arriving at the allocable surplus and which have
A
B
c
D
E
F
G
H
A
B
c
D
E
F
G
H
INDIAN OXYGEN LTD. v. WORKMEN (Vaidialingam, I.)
821
not been allowed by the Tribunal. But the major item in controversy in the appeal of the Company is regarding the manner
in which the calculation of direct taxes have to be made under
the Act.
Though the Unions support the Award of the Tribunal, in so
far as it is against the Company, their grievance in their appeals
Nos. 813 and 1302 of 1967 relates to the Tribunal's declining
to add back certain further items in calculating the gross-profits
and permitting the Company to deduct from the gross-profits
certain items for arriving at the allocable surplus.
There are several items, which, according to the Unions,
should have been either added back to the gross-profits or should
not have been deducted from the gross-profits to arrive at the
allocable surplus. We are not referring in detail to the various
itell)s, referred to in, the two appeals of the Unions, as their counsel have represented before us that if the claim of the Company
regarding the manner in which the computation of direct taxes,
is accepted, by this Court, they are not pressing their appeals.
In order to appreciate the points in controversy we are giving
below the statement, which will show the calculations of the
Company, as well as the computation made in the Award.
"COMPUTATION OF ALLOCABLE SURPLUS FOR THE
YEAR ENDED 30-9-1965.
I. Net profit as per P & L
Account
2. Add back
(a) Bonus for 64-65
(b) Depreciation
(c) Direct taxes
(d) Development rebate
(e)
~t~er · reserves . pro..
VJS1on for doubtful
debts
3. Add back also
(a) Bpnus paid for pre~
VlOUS year
(b) Donations in excess
of incometax
i{c) Capital expenditure
{i) P•tent. fees
Appellant
Company's Cnmputstion as per the
computation
award
67,74,315
30,00,000
70,44,600
J ,04,00,000
5,00,000
2,09,44,600
25,21,347
4,569
30,00,000
70,44,600
1,04,00,000
5,00,000
67,74,315
55,127
2,09,99,727
25,21,347
4,569
~-1.726 SupCl/72
10,000
822
SUPREME COUll.T REPOll.TS
[1972} 2 S.C.R.
(ii) Plant
transfer
charges
(iii) Disa1owable rent
4. Gross profits
5. Less
(a) Depreciation
(b) Developme.nt rebate
6. Less direct taxes
(a) Income-tax at 55 %
of the balance
(b) Surtax
(c) Additional income·
tax
'I. (a) Return on paid up
capital at 8 ·5 % on
72,516
25,25,960
74,000
2~82,432
3,02,44,831
3,04,56,474
76,10,540
76,10,540
,6,11,425
82,21,965
6,11,425
82,21,9•5
1,21,12,S76,
14,67,236
2,20,22,866
54,600
1,36,34,412
83,88,454
l,04,68,219
9,39,802
2,22,34,509
54,600
1,14,62,621
1,07,71,888
Rs. 3,64,00,000
30,94,000
30,94,000
(b) Return on reserves
·at
6%
on
Rs.
2,35,07,686
14,10,461
45,04,461
11,48,381
42,42,381
Balance
8. Allocable Surplus
9. Bonus at 20% on annual
wages amounting to Rs.
1,72,69,770
10. Set on to be carried for38,83,993
23,30,396
65,29,507
39,17,704 .
34,53,954
ward
4,63,750
In the Award, the Tribunal has given its computation as well
as the .manner in which direct taxes have been calculated for the
year 1964-1965.
At this stage we may indicate that while the Company computed the direct taxes on the gross-profits, before deducting any
amount on account of bonus, the Tribunal has calculated the
taires, after deducting the amount of bonus from' the gross-profits.
A decision on this really depends upon the construction of certain
provisions of the Act, having due regard to the principles laid
down by this Court.
We have stated earlier that the claim for bonus is for the
year 1964-65, i.e., from October 1, 1964 to September 30, 1965.
There is no controversy that for this period bonus is to be calculated under the Act, which had become applicable. The Company
worked out the allocable surplus under the Act and paid a sum
of Rs. 30,35,958 as bonus for the said year. If that calculatil:m
A
B
c
D
E
F
II
A
B
c
D
E
F
G
H
INDIAN OXYGEN LTD. v. WORKMEN (Vaidialingam, I.)
823
is correct, there is no controversy that the amount represents
17.58% of the total wages earned by the eligible employees during the said accounting year. Later on, the appellant Company
in view of the provisions o.f the Finance Act, 1966 recomputed
the allocable surplus and fixed it in the,sum of Rs. 23,30,396. It
is the claim of the Company that they paid bonus at a higher
percentage than is. warranted under the Act. There is also no con1troversy that the Annual Wage Bill of the employees throughout
the country was Rs. 1,72,69,770. Though the claim of the Company was that they paid bonus at a higher percentage, its Chief Executive, Finance, M.W. 1 has given evidence to the effect that the
Company would not seek to recover the excess amount paid.
Before us also, Mr. G.B. Pai, learned counsel for the appeJlant
Company represented, that even, if on the basis of the decision of
this Court, it is found that bonus at a higher percentage has been
paid to the employees, the appellant Company will not seek to
recover any excess amount paid. That is, even if after accepting
any of the contentions o.f 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 mamier.
·
From the chart, given above, the Tribunal has computed the
allocable surplus in the sum of Rs. 65,29,507 and fixed the bonus at
the rate mentioned in the Award. The main controversy under this
head centres round the question whether the Tribunal should have
estimated the amount of direct taxes on the balance of gross-profits
as worked out under ss. 4 and 6 of the Act, but without deducting.bonus, as contended by the appellant Company or whether the
Tribunal was justified in deducting the amount ·of bonus from the
gross-profits before calculating the tax as urged on behalf of the
Unions.
The contention of the appellant Company in brief is as follows:
The Scheme of the Act clearly indicates that gross-profits are first
to be calculated and certain prior charges are to be· deducted
therefrom. One of the prior charges under s. 6 is "direct tax".
The tax is to be calculated by reference to, the profits as they emerge
at the stage when deduction of prior charges begins. After the
prior charges are deducted from the gross-profits, the balance .left
over is the available surplus. 60% of the available surplus represents the alloc.able s~rplus payable as bonus to the employees. At
the stage of calculatmg the tax, bonus does not come into the
picture as the same is ascertained after deducting the tax. Hence
the order of the Tribu.nal hol~ing that bonus, which is payable on
the profits of the year m questton, i.e .. 1964-65, should be deducted from the gross-profits for the purpose of computation of incometax under s.6(c) of the Act, is eroneous.
Tn this connection
824
SUPREME COURT REPORTS
(1972) 2 S.C.R.
Mr. G. B. Pai, learned counsel for the appellant, has referred us to
ceriain provisions of the Act and in particular to the decision of
this CQUrt in Me1al Box Co. of India Ltd. v. Their Workmen(').
According to the Unions bonus for both the years 1963-64 and
1964-65 included in the profit and loss account of the appellant
Company and added back for computation of gross-profits have
to be deducted for ascertaining the taxable income for the year
1964-65. They have made reference to the debate in Parliament
at the time of the passing the Act. In particular Mr. Dudhiya,
learned counsel for the fourth respondent, whose contentions have
been accepted by the learned counsel for other respondents, has
urged that the decision in Metal Box Co. ( ,_) has not consideroo
several relevant matters, which, if taken into account, would
clearly indicate that the intention of Parliament was that direct tax
is to be computed after deducting the bonus payable for the relevant accounting year. The counsel, therefore, urged that the
decision of this Coun in Metal Box Co. ( J) should be reconsidered.
The National Tribunal considered the question whether the
provision for bonus in question in the sum of Rs. 30,00,000 and
the bonus paid to the employees in respect of the previous accounting year, namely, Rs. 25,21,347, which have been added in the
Company's statement in computing the gross-profits under the Act
should or should not be deducted from the gross-profits before
Income-tax is computed. It is the view of the Tribunal that the
bonus for the previous accounting year 1963-64 is payable out of
the profits of the said previous year and that amount cannot be
deducted in calculating the Income-tax of the accounting year
1964-65. But it accepted the contention of the Company that in
order to ascertain the gross-profits, bonus which is ·found payable
on the profits for the year 1964-65 can be added back to the net
profit shown in the Profit and Loss Account, but rejected its contention that the tax liability is to be computed without deducting
the said amount.
The Tribunal has further held that it has to take
into account the concession by way of rebate which an employer is
entitled to get under the Income-tax Act on the amount of bonus
paid to workmen. On this basis the Tribunal held that a rough
calculation shows that the allocable surplus will exceed 20% of
the Annual Wage Bill and that the maximum statutory bonus of
20% must be subtracted from the gross-profits before the Incometax is calculated. It is now necessary to refer to the provisions of
the Act, as it stood at the material date, without the amendment
elfeeted to it in 1969.
Under section l( 4), the Act has effect
in
respect of the
accounting year commencing on any day in t}le year 1964 and in
- ···--- ···--
(!) [1969] 1 S.C.R. 750.
A
B
c
D
E
F
G
H
A
B
c
D
E
F
G
H
INDIAN OXYGEN LTD. v. WORKMEN (Vaidialingam, J.)
825
respect of every subsequent accounting year. Section 2 contains definitio.ns of various expressions. The expressions "allocable surplus"
"available surplus" "direct tax" "gross-profits" and the "lncometax Act" are defined in clauses 4, 6, 12, 18 and 19 respectively.
AB the appellant Company is not a Banking Company, its grossprofits, in respect of any accounting year, is to be calculated under
s. 4(b) in the manner specified in the Second Schedule. The
"available surplus" in respect of any accounting year, as provided
under s. 5, is the gross-profits for that year, after deducting therefrom the sums referred to in section 6. Section 6 enumerates the
various sums which are to be deducted from the gross-profits as
prior charges. We are concerned with the relevant provision in
Cl. ( c) which is as follows :
"Section 6. The following sums shall be deducted
from the gross profits as prior charges namely, :-
*
*
*
*
*
*
( c) subject to the provisions of section 7, any direct
tax. which the employer is liable to pay for the
accounting year in respect
of
his
income,
profits and gains during thirt year."
Section 7 deals with the method of calculation of direct tax
payable by an e!Ilployer "for the purpose of cl. ( c) of section 6."
Section 11 fixes the maximum amount of bonus at 20% of the
salary or wage. Section 15 deals with set on and set off of allocable surplus in the circumstances mentioned therein. Section
19 fixes the time limit for payment of bonus.
As the entire scheme of the Act, as well as the principle to
be adopted for ascertaining the direct tax, have been considered
by this Court in certain decisions, to which we will refer presently, it is not necessary for us to cover the ground over again. In
Metal Box Co. of India Ltd. v. Their Workmen( 1), one of the
questions that arose for consideration was the method of working
out the direct taxes under the Act. The Company in that case
claimed that direct taxes are to be worked out Ulllder s. 6( c) on
the gross-profits worked out under s. 4, less the prior charges
allowable under s. ·6, namely, depreciation
and development
rebate, but without deducting from such balance, the bonus payable by the Company in the particular accounting year.
The
Tribunal, in that case, had accepted tile said claim of the Company. On behalf of the workmen it was contended before this
Court that the said manner oi. calculation of direct taxes was
contrary to the scheme and provisions of the Act. According to
the workmen, the Tribunal must start its calculaltion from the net
profits shown in the Profit and Loss Account, which would have
(I) (196911 S.C.R. 750.
826
SUPREME COURT REPORTS
[1972) 2 S.C.R.
made provisions for direct taxes and then deduct from the grossprofits calculated under s . .4 the prior charges permissible under
s. 6.
The provisions for direct taxes made in the Pro1it and
Loss Account would have been computed after deducting .from
gross receipts, such deductions, allowances, reliefs and rebates
etc. as are permissible under the Income-tax Act.
It was the
further case of the workmen that the bonus amount payable during a particular year would. have been deducted from the grossreceipts, as without such deduction, the Profit and Loss Account
would not reflect the true net profit of an employer.
In dealing with the above contentions,
this Court, in the
above decision, has referred to the views expressed by this Court
on earlier occasions that the deduction by way of Income-tax is
not the actual amount payable, but what would be notionally
payable on the profits determined under the Full Bench Formula.
This Court further considered the question whether the concept
of notional tax liability adopted for a long time, has been altered
or given the go-bye by Parliament in enacting ss. 6 ( c) and 7.
After a very elaborate re.ference to the scheme of the Act and in
particular to ss. 4 to 7 read with the ~econd Schedule, this Court
ultimately accepted the contention of 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 s. 6, but not the
bonus payable to the employees.
This Court further observed
as follows :
"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."
This decision has categorically laid down that an employer is
entitled to compute his tax liability, without deducting first the
amount of bonus, he would be liable to pay, from and out of
the amount computed under ss. 4 and 6.
·
After the decision of this Court 'in Metal Box Co.( 1) Parliament enacted the Payment of Bonus (Amendment) Act, 1969,
(hereinafter to be referred as the Amendment Act). Section 2 of
the Amendment Act, added a proviso to s. 5 of the Act. Similarly
section 3 of the Amendment Act deleted in s. 7 of the Act, the
opening words "for the purpose of cl. ( c) of s. 6 any direct tax
payable by the employer" and substituted the word~ "any direct
tax payable by the employer."
(I) [1969] I S.C.R. 750.
A
B
c
D
E
F
G
H
A
B
c
D
E
F
G
ll
INDIAN OXYGEN LTD. v. WORKMEN (Vaidialingam, J.) 827
In The Workmen of William Jacks and Co. Ltd. Madras v.
Managemen/ of William Jacks and Co. Ltd., Madras( 1 ), one of
the questions that arose for consideration related to the correctness
of the method adopted by the Company therein in calculating
the amount of Income-tax, without taking into account the bonus
which would be payable to the workmen for the relevant year.
It was urged on behalf of the Union that the Income,tax should
be calculated after taking into account the bonus. · This contention again was rejected by this Court relying on its previous
decision in Metal Box Co.(2).
The principle laid down in Me1al
Box Co.(') was approved and reiterated.
That principle,
we
have already pointed out, is that the Income-tax liability is to be
worked out by first working out the gross-profits and deducting
therefrom the prior charges under s. 6, but not the bonus payable
to the employees in a relevant accounting year.
It is significant
to note that in William Jacks and Co. (1) the Union referred to
the Amendment Act and strongly urged that the principle laid
down by this Court in Metal Box Co. (2 )
regarding the method
of computing direct tax has been modified by the Legislature.
This Court, in the said decisio)l referred to the provisions of the
Amendment Act, and observed that no amendment has been
effected to s. 6, and that the amendment in s. 7 is only to the
effect that the principles laid down therein are to be applied not
only in respect of s. 6 ( c) but also to other sections of the Act. It
was further stated that the change in s. 7 became necessary biecause of certain amendments effected in s. 5 by making certain
additions, which referred to direct taxes including Income-tax. · It
was further held that the amendment in s. 5, has no bearing on the
question whether Income-tax. to be taken .into account in calculation, should be worked out after taking into account the bonus
payable under the Act or without having regard to it. Ultimately,
this Court wound up the discussion on this point as follows :
" ...... Consequently, there is no reason for us to
differ from the view expressed~ this Court in Metal.Box
Co.("). This ground of challenge also, therefore. fails."
Therefore, it will be noted that the principle laid down in Metal
}lox Co. (2)
regarding the manner of computation of direct tax
'has been reiterated and reaffirmed in William Jacks and Co.,(1)
and it has also been further pointed out that the Amendment Act
had made no change whatsoever on this aspect.
The sarne question again came up for consideration before this
~ourt in Delh~ Cloth and General Mills Co. Ltd. v. Workmen(')
(I) (1971] I L.L.J. 503.
(2) [1969].I S.C.R. 750.
(3) [1971] 2 s.c.c. 695.
$28
SUPREME COURT REPORTS
[1972] 2 S.C.R.
The workmen therein again contended that many of the observations in Metal Bo1' Co. (1) were obiter and that the said de:ision
· shou1d 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 tlfe Act, this Court rejected the contention of the Union,
and observed as follows :
"Strong reliance was placed by learned counsel for
the appellant on the decision of this Court in Metal Box
Co. v. Workmen.
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,
111amely, 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 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."
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 directly concerned."
This decision again reiterates the principle laid down in Metal
Box Co.(1).
In view of the fact that the two later decisions, William Jacks
and Co. (2) and Delhi Cloth and General Mills Co. (8) have approved and adopted the prinCiples laid down by this Court in
(I) [1969] I S.C.R. 750.
(2) [1971] I L.L.J. 503.
(3) (1971] 2 s.c.c. 695.
A
B
c
D
E
F
H
A
B
c
D
E
F
G
H
INDIAN OXYGEN LTD. v. WORKMEN (Vaidiali11tam, 1'.)
829
Metal Box Co. ( 1) that decision holds good and governs the priJ!·
ciples 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. ( 1) 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.( 2 ) 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. ( 1).
It is rather significant to note that the Amendment Act was
passed, after the decisioo of this Court in Metal 'Box Co. (1). 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 the gross-profits and 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.
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. ( 1). From what is stated above, it follOWs that
the view of the National Tribunal that bonus must be subtracted
from the gross-profits before Income-tax
is
calculated, is not
correct.
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 the
Income-tax Act 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 a self-contained Code has prescribed the manner in which available surplus and the allocable surplus are to be
calculated.
The second claim made by the Company related to deduction
of Rs. 14, 10,461 from the gross-profits as Return on reserves at
6% on Rs. 2,35,07,686. As against the amount claimed by the
Company,
the National Tribunal has allowed a sum of
(!) (1969] 1 S.C.R. 750.
(2) [1971] I L.LJ. ~3.
830
SUPREME COURT REPORTS
(1972] 2 S.C.R.
Rs. 11,48,381.
This claim of Return on reserves made by the
Company was based on s. 6, clause ( d) read with Item I Cl.
(~) together with the materi~ part of the Explanation to the
Third Schedule of the Act. Sectmn 6 enumerates the various sums
which are to be deducted from the gross-profits as prior charges.
Section 6 ( d) runs as follows :
"Section 6 : The following sums shall be deducted
from the gross-profits as prior charges, namely :
=~
*
*
•
•
•
( d) such further sums as are specified in respect
of the employer in the Third Schedule."
In the Third Schedule there are three columns.
As
the
appellant. is a. Company other than a Banking Company, the
relevant Item is Item No. 1, of Column I and clause
(iii) of
Column 3, which are as follows :
Item
Category of employer
Further sums to be deducted
No.
2
3
1. Company, other than a banking company.
• •
•
•
• •
(iii) 6 per cent of its reserves shown in its balancesheet as at the commencement of the accounting year, including ·any profits carried
fonvard from
the previous accounting
year.
,
The material part of the Explanation in the Third Schedule is
as follows :
·
"The expression "reserves" occurring in
column
(3) against Item No. 1 (iii) * * * shall not include
any amount set apart. for the purpose of :
*
•
*
•
••
(iii) payment of dividends which have been declared .......... "
We have already referred to the fact that the relevant accounting year with which we are concerned is October I,
1964 to
September 30, 1965. In its balance-sheet as on September 30,
1964, the appellant had shown a sum of Rs. 2,35,07,686. as
reserves.
Similarly, in its balance sheet as on September
30,
1965, apart from showing its reserves as on that date, it had also
shown a sum of Rs. 2,35,07,686 as reserves at the commencement of the acco1llllting year. In view of these circunistances the
claim for Return at 6% of this amount has been made by the
Company.
A
B
c
D
E
F
G
H
,
A
B
c
D
E
F
G
H
INDIAN ()XYGEN LTD. v. WORKMEN (Vaidialingam, J.)
831
The National Tribunal, on the other hand, though accepung
the figure as correct, -Oeld that from the reserves shown in the
balance-sheet a sum of Rs.