# M. SHELAT, I. D. DUA AND v. BHARGAVA, JJ.J

- **Citation:** [1971] Supp. 1 S.C.R. 540
- **Court:** Supreme Court of India
- **Decided:** 1971-04-28
- **Bench:** J. M. Shelat, I. D. Dua, V. Bhargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-shelat-i-d-dua-and-v-bhargava-jj-j-5276
- **Pages:** 9

## Headnote

The Payment of Bonus Act (21 of 1965), s. 23, Second Schedule, item
2(c) and Third Schedule, item (1)-A.dvance made by head office to branch
office-Interest paid by branch offiu-lf deductible expenditure in calculating profit and loss of branch office-Provision for gratuity etc.-Diffe·
renee between provision and reserve-Provision when deductible-Deduc·
tible income tax calculated without taking into occoHnt bonus payable-If
correct-Payment of Bonus (Amendment) Act (8 of 1969)-Effect of.
The appellant! workmen of the respondent claimed that for the two
yean 196-4 and 1965 they were entitled to bonus at the maximum rate of
20% of their annual wages while the respondent contended that there was
no available surplm and consequently the liability to pay bonus for these
two years could not exceed the minimum of. 4% of the wages. The management, inter alia, claimed deductions: (1) with respect to interest charged
by the London office on advances made by the London office to the respondent-branch during those two years; (2) provision for gratuity and
other contingencies; and (3) income tax calculated without taking into
account the bonus which would be payable to the workmen.
The Tribunal allowed the claim_s.
In appeal to this Court,
HELD: (1) (a) The amounts claimed as interest are really payments
by the 'branch of the company to its head office.
A payment of interest
could be justified only on the basis that the head office was a creditor
and the branch office a debtor. But a company could not be a creditor
and its own debtor simultaneously. The interest paid really represented
amount! of money transferred by the respondent-branch to the head office,
and similarly, the advances made by London office to the respondent-branch
were amounts which continue to be used by the company for its own business at a different place.
[544F]
(b) This is also made manifest by the proviso to item 1 of the Third
Schedule to the Act. In the deduction of the current liabilities any amount
shown as payable by a company to its head-office whether towards any
advance made. by the bead-office or otherwise, or any interest paid by the
company to its head-office is not to be treated as a deductible liability, because, the advance made by the head office is also treated as a part of the
investment by the company. [5450]
(c) Under s. 23 of the Payment of Bonus Act, 1965, there is a presumption as to the correctness of the statements and particulars contained in
the balance-sheet and the profit and loss account of a company, if the
accounts had been properly audited by qualified auditors. The presumption, however, is confined to the accuracy of the statements and particulars
contained in the balance sheet and the profit and loss account.
If any
item in the accounts is wrongly shown aS' expenditure, when on the face
WOI.I:MEN l'. WILWW 1ACD .& CO. (B/targava, J.)
of it it is not ao, the. court is not bound to hold that th~ method adoptee
in preparing the accounta is correct simply beCause tho auditors raisc>d no
objection. [S44H-S4SCJ
.
Therefore, in the calculation of Jl'Oii pcofitl for purpoaes of bonus
the sums deducted as interest for the two years must be added back since
they were wrongly shown as deductible expenditure in calculating the profit and loa.
(2) The provision for gratuity, and other contingencies such as furlough
salary, passage, service and com.mission, in the present case, was made in
respect of existing ond known liabilities, though, in some cases the exact
amount could not be ascertained. It was not a case where it was an anticipated loss or anticipated expenditure which would arise in the future.
Suob provision is, not a reserve at all and it could not be added back under
item 2(c) of 'the Second Schedule to the Act. It was therefore rightly
shown by the respondent as a deductible expenditure in calculating profit
and loss. [5470]
Metal Box Co. v. The Workmen, [1969] 1 S.C.R. 750, followed.
(3) The calculation of the amount of income-tax

## Text

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W(}RKMEN OF WILLIAM .JACKS .& CO. LTD.,
MADRAS
11.
MANAGEMENT OF WILLIAM JACKS & CO. LID.,
MADRAS
April 28, 1971
(J. M. SHELAT, I. D. DUA AND V. BHARGAVA, JJ.J
The Payment of Bonus Act (21 of 1965), s. 23, Second Schedule, item
2(c) and Third Schedule, item (1)-A.dvance made by head office to branch
office-Interest paid by branch offiu-lf deductible expenditure in calculating profit and loss of branch office-Provision for gratuity etc.-Diffe·
renee between provision and reserve-Provision when deductible-Deduc·
tible income tax calculated without taking into occoHnt bonus payable-If
correct-Payment of Bonus (Amendment) Act (8 of 1969)-Effect of.
The appellant! workmen of the respondent claimed that for the two
yean 196-4 and 1965 they were entitled to bonus at the maximum rate of
20% of their annual wages while the respondent contended that there was
no available surplm and consequently the liability to pay bonus for these
two years could not exceed the minimum of. 4% of the wages. The management, inter alia, claimed deductions: (1) with respect to interest charged
by the London office on advances made by the London office to the respondent-branch during those two years; (2) provision for gratuity and
other contingencies; and (3) income tax calculated without taking into
account the bonus which would be payable to the workmen.
The Tribunal allowed the claim_s.
In appeal to this Court,
HELD: (1) (a) The amounts claimed as interest are really payments
by the 'branch of the company to its head office.
A payment of interest
could be justified only on the basis that the head office was a creditor
and the branch office a debtor. But a company could not be a creditor
and its own debtor simultaneously. The interest paid really represented
amount! of money transferred by the respondent-branch to the head office,
and similarly, the advances made by London office to the respondent-branch
were amounts which continue to be used by the company for its own business at a different place.
[544F]
(b) This is also made manifest by the proviso to item 1 of the Third
Schedule to the Act. In the deduction of the current liabilities any amount
shown as payable by a company to its head-office whether towards any
advance made. by the bead-office or otherwise, or any interest paid by the
company to its head-office is not to be treated as a deductible liability, because, the advance made by the head office is also treated as a part of the
investment by the company. [5450]
(c) Under s. 23 of the Payment of Bonus Act, 1965, there is a presumption as to the correctness of the statements and particulars contained in
the balance-sheet and the profit and loss account of a company, if the
accounts had been properly audited by qualified auditors. The presumption, however, is confined to the accuracy of the statements and particulars
contained in the balance sheet and the profit and loss account.
If any
item in the accounts is wrongly shown aS' expenditure, when on the face
WOI.I:MEN l'. WILWW 1ACD .& CO. (B/targava, J.)
of it it is not ao, the. court is not bound to hold that th~ method adoptee
in preparing the accounta is correct simply beCause tho auditors raisc>d no
objection. [S44H-S4SCJ
.
Therefore, in the calculation of Jl'Oii pcofitl for purpoaes of bonus
the sums deducted as interest for the two years must be added back since
they were wrongly shown as deductible expenditure in calculating the profit and loa.
(2) The provision for gratuity, and other contingencies such as furlough
salary, passage, service and com.mission, in the present case, was made in
respect of existing ond known liabilities, though, in some cases the exact
amount could not be ascertained. It was not a case where it was an anticipated loss or anticipated expenditure which would arise in the future.
Suob provision is, not a reserve at all and it could not be added back under
item 2(c) of 'the Second Schedule to the Act. It was therefore rightly
shown by the respondent as a deductible expenditure in calculating profit
and loss. [5470]
Metal Box Co. v. The Workmen, [1969] 1 S.C.R. 750, followed.
(3) The calculation of the amount of income-tax shown as expenditure,
without taking into account the bonus which would be payable to the workB
c
men under the Act, was correctly done in accordance with the decision of
D
this Court in the Metal B~x Company ctJSe. In that case, the question was
determined on the interpretation of 89, 6(c) and 7 of the Act, and the
amendmentJ made by the Payment of Bonus (Amendment) Act, 1969 do
not make any change ·in the law bearing on the question, as laid down
by this Court. [547G]
CML ~PBLLATE 1umsoicnoN : Civil Appeal No. 1700 of
1968.
E
Appeal by special leave from the Award dated March 9, 1968
of the Industrial Tribunal. Madras in Industrial Dispute No. 11 of
19~7.
M. K. Ramamurthi, I. RQJtUJmurthy,
Vineet Kumar and
Shyamola Pappu, for the appellanti.
M. C. Chagla and D. N. GupttJ for the respondent.
The Judgment of the Court was delivered by
Bbargava, J.--This appeal by special leave is directed against
an Award of the Industrial Tribunal, Madras, in a dispute relating to payment of bonus under the Payment of Bonus Act. 1965
(No. 21 of 1965) (hereinafter referred to as "the Act"). The respondent in the appeal is the employer, William Jacks & Co. Ltd .•
Madras, while the appellant is the William Jacks & Co. Employees' Union, Madras. representing the workmen employed by
the respondent. The appellant claimed that, for the two ca.lendar
years 1964 and 1965, the workmen were entitled to bonus at the
maximum rate of 20 per cent of their annual wages, while the
respondent Co. put forward the case that there was no available
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SUPREME COURT RBPORT~;
[1971] SUPP. S.C.R.
surplus and, consequently, the liability to pay bonus for these two
years could not exceed the minimum of 4 per cent of the wages.
It may be mentioned that the respondent Co. is a Bench of
Wi1liam Jacks & Co. Ltd. registered in England with its Head
Office in London. It appears that in India this Company has three
offices. One is in Calcutta which also functions at the Regional
Head Office for aU the three Branches in India. The other two
Branches are in Bombay and in Madras, the latter being the branch
to which the dispute about bonUs 'elated. The Company is carrying business as engineers, manufadurers, representatives and general merchants. The business of the Company includes the buying of locally manufactred machinery and other products and selling them to both private and public sector industries. The income of the Company is derived primarily from the sa.le of imported and indigenous goods at a profit. In addition, the Branch at
Madras earns commission credited by London Office on direct
shipments from London to customers within the areas served by
the Madras Bmnch, as well as commission on sale of indigenous
products, repairs and servicing of equipment sold and by local
purchase and sale. These features of the .business have been enu·
merated by us as they may have bea.ring on some of the questions
raised in this appeal.
During the hearing of the reference before the Tribunal, the
Company filed its balance-sheets, profits, and loss account, and calculations of available sur:plus in accordance with the provisions of
the Act and its schedules showing that there was no a.vailable surplus, so that bonus in excess of 4 per cent was not payable by it.
These. calculations were challenged on varioUs grounds before the
Tribunal, but none of them was accepted and the Award was
based on the calculations filed on behalf of the Company.
In
this appea.l before us, learned counsel appearing on behalf of the
·appellant has challenged the calculations in respect of seven
·different items, and we proceed to deal with them in the order in
which they were argued by him.
The first claim on behalf of the appellant was tha.t there
should be an add back of an estimated sum of Rs. 40.000/-,
which was received as direct commission paid by the manufacturers to the London Office for the benefit of the Bra.nch at Madras. in calculating the gross profits on the basis of which available
surplus is to be worked out. On this point, the Tribunal tn tts
award did not give any specific finding, though, after mentioning this argument raised before it, the Tribuna.l still proceeded
to accept the Company's account disregarding this objection.
The only evidence on this point is found in the statement of the
Company's witness, M. W. 1, Thiru S. S. Mani, who stated tha•t
the direct commission received by this Company relating to this
WORKMEN V. WILLIAM JACICS & CO. (Bhargava, J.)
Branch is credited in the accounts of this Branch. The amount
of commission received by the Company is included under the
head "Commission" in the Profit <~~nd Loss Account.
In 1964,
the sum of Rs. 8,80,504/- and, in 1965, the sum of Rs. 7,46,391/-
include the direct commission. According to his evidence,
therefore, the direct commission has already been taken into
:account in calculating the gross profits, and no question can
:arise of ;my add back.
There is no cross-examination on this
point on behalf of the appellent, nor has any evidence been led
.by the appellant to show that the statement of this witness is
incorrect. In the circumstances, this claim has to be rejected.
The second item cl&imed is add back in respect of handling
charges which were included by the London Head Office in the
'invoices for goods sent to Madras.
The argument was that a
·proportionate amount of administrative (overhead) expenses of
the Head Office in London allocable to the Madras Branch have
:already been deducted as expenditure in accordance with item
6(e) of the secoRd Schedule to the Act, and the further debit of
·the handling charges amounted to double deduction. This argument proceeds on the basis th&t handling charges, which are in·
eluded by the London Head Office in the various invoices, form
part of the administrative (overhead) expenses of that office.
There is no justification for such an assumption. The only evi-
,dence on this point is again that of M. W. 1, Mani. He clea-rly
stated that, in the accooots, no sum is shown for handling charges
.-as an expenditure as such. The handling charges are only men-
;tioned in the invoices received from the London Office for goods
·sent to Indi&. These refer to the amount of handling charges
•incurred by the London Commercial Departments and all these
·amounts are recoverable from the customers in India along with
the sale price. He added that the administrative (overhead) ex·
penses of the Hea<i Office do not include any portion of the
London Commercial Departments expenses. Thus, it is clear that
·these handling charges have no connection with the administrative (overhead) expenses of the Head office which are taken into
%\Ccount under item 6(e) of the Second Schedule.
The actuaJ
.expenses incurred by various C<lJilmercial Departments of the
Company in England in handling the particular goods are added
in the invoices to the cost of those goods and are realised as pad
of the sale price. There is no separate entry of handling charges
as an expenditure in the accounts of the Company. Consequently,
there can Mise no question of making any addition in respect of
these handling charges while calculating gross profit.
The third item is in respect of the Director's and General
Manager's Office expenses in Calcutta amounting to Rs. 44,768/-
.-for the year 1964 and Rs. 50,848/- for the year 1965. The Office
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r1971 1 SUPP. S.C.Il~
in Calcutta, as we have indicated above, is a sort of commoD>
office supervising the business of the Company at ~ the three
places in Calcutta, Bombay and Madras.
The expenditure of
this Regional Office is of the same nature as the administr&tive
(overhead) expenses of the Company in London.
TheSe sums
which have been shown as expenses in tb~ accounts in the Madras
Branch are amounts allocable to that .Branch. This has been
again proved by the same witness, M. W. l, Mani. There is no
cross-examination and no evidence to show that the· case put
forward by him is incorrect. In the circumstances, this objection
also fa.ils.
The fourth objection, on which greatest emphasis was laid
by learned counsel for the parties, relates to the question of interest charged by the London Office in the sum of Rs. 1,00,657/-
for 1964 and Rs. 1,65,255/- for 1965 on advances made by the
London Office to this Branch a,t Madras during_ these years. It
was urged that, having regard to the proviso to item l(iii) of thtt
Third Schedule to the Act, this interest should be disallowed.
It, however, appears to us that the question ot this interest should
be examined from a different aspect and that is whether this iaterest ca.n be held to be a legitimate item of expenditure in calculating the profit and loss of the Company at Madras. It i6
clear that these amounts have been paid by the Branch at Madr~
to Head Office in London and represem. interest which the Londo•
Office demanded from the Madras Branch on the advances made
by the former to the latter.
These payments are, thus. by a
Branch of the Company to its Head Office.
The Head Office
and the Branch Office both belong to the same Company. sue•
a payment of interest could be justified only on the basis that
the London Office was . the creditor and the Madra.s Branch tie
debtor in respect of the advances on which the interest has bee•
claimed by the London Office. On the face of it, a Company
cannot be a creditor and its own debtor simultaneously.
No
relationship of creditor and debtor can exist between two diffew
rent Offices of the same Company. The interest paid merely
amounts to money transferred by the Madras Branch to the Ht!ad
Office and, similarly, advances made by the London Office to
the Madras Branch are amounts which continue to be used by
the Company for its business at a different place.
Lea.rned counsel appearing for the Company drew our
attention to section 23 of the Act, under which there is a presumption as to the correctness of statements and particulars contained
in the bala.J.ce-sheet and profit and loss account of a Company if
they had been properly audited by qualified auditors, and urged
that, since the interest charged by the Head Office to the Branch
WORKMEN v. WILLIAM JACL<t, & CO. (Bhargava, J.)
545
office at Madras was accepted as a proper expenditure for calculation of profit and loss account by the auditors.' the Court
under section 23 must accept that it· was correctly shown as an
expenditure.
The presumption under section 23 is confined to
the accuracy of the statements and pa.rticulars contained in the
balance-sheet and the profit and loss account. n any item in
the accounts is wrongly shown as expenditure when, on the face
of it, it is not so, the Court is not bound to hold that the method
adopted in prepn.ring the accounts is correct simply because the
auditors raised no objection.
While the interest was paid on
advances not made by a creditor to a debtor, but by the Company's one office· to another, the money purported to be transferred as interest cannot be held to be a.n expenditure incurred
by the Branch paying it to the other. In fact, there are indications in the Act itself to ·support the view that such advances
made to one office by another of the same Company cannot be ·
treated as liabilities. This is made manifest by the proviso to
item 1 of the Third Schedule .. Under this item, every Company,
other than a banking company, is allowed a return on paid up
equity share capital and on reserves shown in its balance-sheet.
The proviso then· deals with the case of a foreign Company and
permits a deduction of 8.5 per cent on the aggregate of the value
of the not fixed assets and the current assets of the company in
India after deducting the amount of the current liabilities. In
deduction of the current liabilities, however. any a.mount shown
as payable by the Company to its Head Office, whether towards
any advance made by the Head Office or otherwise. or any
interest paid by the Compa.ny to its Head Office, is not be treated
as a li_ability. The reason very clearly is that the object of the
deduction under item 1 of the Third Schedule is to permit a Company a return on money invested by it for its business a6 a prior
charge when ~a.\culating the surplus for purposes of bonus. In the
case of an Indtan Company, this object is achieved by givina a return of 8·5 per cent on the equity share capital and 6 per cent on reserves. 1!1 the ca-se of~ foreign Company, the same object is served
by workmg out the <Liffcrence between the total of fixed assets and
current assets, and the current liabilities, which will represent
the actual value of the net holdings of the Company as its investment. The advances made by the Head Office to a Branch Offi
are not deductibl~ as liabilities, because that amount is also treat~~
as a part of the mvestment by the Company on which th C
pany should be given the return of &·5
e
omtherefore, partake of the natur
f
1. per cen~ I.t does not,
be charged b th H . d Offi e 0 a oan on whtch mterest can
principle of Y
e . ca .
ce from the Branch Office
The
dule th
ca.Jcul.atton latd down in item 1 of the Th'trd. S h
'
u~. rccogms
tb
. .
c e-
~ranch Office d
es
e ~sttion that the Head Office and the
tnterest could b o lot. ~unc!ion as creditor and debtor when only
35-t s.a. lndiaf7~ eg~tl.mately charged by the Head Office from
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the Branch Office. In calculation of the gross profit for purposes
of bonus. therefore. the two sums of Rs. 1,00,657/- for 1964
and Rs. 1,65,255 I- for 1965 must be added back on the basis
that they are wrongly shown as expenditure deductible in calculating profit and loss.
The fifth objection relates to a sum of Rs. 11,747/- in 1964
and Rs. 7,251 I- in 1965 shown as expenses incurred in the J ax
Board Factory on the ground that the Jax Board Factory had
ceased to function for these two years. It is, no doubt, true that
M. W. 1, Mani, admits that the Jax Board Factory had no production in those two years; but there is nothing to show that the
Factory had completely ceased to function.
The expenses are
actual expenses in the factory during those two years as certified
by the Auditors and there is no material on the basis of which it
can be held that these expenses were not incurred. This objection,
therefore, fails.
The sixth claam on behalf of the appellant is that the provision for gratuity and other contingencies should also be added
back as representing "other reserves" under item 2(c) of the
Second Schedule to the Act.
The other contingencies referred
to relate to provision made for furlough salary, passage, service
and commission. All these items are clearly in respect of liabilities which had already accrued in the years in which the provision
was made. They are not in respect of anticipated liabilities
which may arise in future. The principles on which these have
been calculated were explained by the same witness M. W. 1,
Mani. In the case of gra.tuity, for example, provision has been
made in respect of the employees on the basis of the amount of
service put in by them up to the years to which the accounts
relate. Ln some cases, of course, where the exact liability was
not ascertainable, provision hM been made on the basis of the
estimated existing liability. Such provision is quite different and
distinct from a reserve. This Court in Metal Box Co. of India
Ltd. v. Their Workmen(') held:
"The distinction between a provision and a reserve
is in commercial accountancy fa.irly well-known. Provisions made against anticipa.ted losses and contingencies
are charges against profits and, therefore, to be taken
into account against gross receipts in the Profit and Loss
account a·nd the balance·sheet. On the other hand,
reserves are appropriations of profits, the assets by which
f!tey are represented being retained to form part of the
capital employed in the business. Provisions are usually
(l) [1969] 1 S. c. R. 750.
WORKMBN v. WILLIAM lACKS, & CO. (Bhargava, J,)
shown in the balance-sheet by way of deductions from
the MSets in respect of which they are made whereas
general reserves and reserve funds are shown as part of
the proprietor's interest : (See Spicer and Peglar's Book~
keeping and Accounts, 15th ed. p. 42). An amount set
aside out of profit and other surpluses, not designed to
meet a liability contingency commitment or diminution
in value of assets known to exist a.t the date of the
balance-sheet is a reserve but an amount set aside out
of profits and other surpluses to provide for any known
liability of which the amount cannot be determined with
substantial accuracy is a provision. (See William Pickles Accountancy, Second Edn., 192, Part III, cl. 7. Sch.
VI to the Companies Act, 1956 which defines provision
and reserve.)"
The provision for gratuity, furlough salary, passage, service and
commission in the present case was all made in respect of existing and known liabilities, though, in some cases, the amount
could not be ascertained with accuracy. It was not a case where
it was a.n anticipated loss or anticipated expenditure which would
arise in future. Such provision is, therefore, not a reserve at all
and cannot be added back under item 2(c) of the Second Schedule.
The last ground for challenge of the award relates to the
deduction for income-ta•x.
In the present case, the amount of
income-tax shown as expenditure has been calculated without
taking into account the bonus which would be payable to the
workmen under the award. The point raised that it should be
ca·lculated after taking into account the bonQ.s is fully met by the
decision of this Court in the case of Metal Box Co. of lndia(
1).
That case clearly lays down that, in calculating the income-tax
deductible in working out the gross profit, the bonus which
would be payable under the Act is not to be taken into account
and the tax must be worked out ignoring that bonus at the rates
applicable in the relevant years.
Learned counsel for the appellant, however, drew out attention
to the amendment made
subsequently by Parliament in the Act by the Payment of Bonus
(Amendment) A.ct 8 of 1969, and urged that this
amendment
should be tre~ted as the parliamentary exposition of the law
which was interpreted by this Court in the case of Metal Box Co.
of India('). In that case, the question was detennined by interpretation of only sections 6(c) and 7 of the Act. The Amendment Act 8 of 1969 makes no substantial changes in either of
these· two sections. In fact, section 6 remains unamended and
in section 7, the only amendment is that the principles laid down
in that section are to be &pplied not only in respect of section
6(c), but also other sections of the Act. This change became
(1) [1969]1 S.C·R. 750.
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necessary, because amendment was made in section 5 of the
• Act by making certain additions which referred to direct tatX, including income-tax. That amendment in section 5 has no bearing at all on the question whether income-tax to be taken int~
account in cailculation should be worked out ~fter taking into account the bonus payable under the Act or without having regard
to it. Consequently. there is no r.eason for us to differ from the
view expressed by this Court in Metal Box caseO. This ground
of challenge also, therefore, fails.
As a result, we hold that the Tribunal was right in accepting
the calculations made by the Company, except in respect of the
interest paid on advances made by the Head Office to the Branch
at Madras.
The interest shown as expenditure in the accounts
has to be added back, as indicated by us above, and the available
surplus for purposes of calculation of the bonus payable as well
as 'for purposes of set on or set off must be amended a.ccordingy.
We leave this calculation to the Tribunal.
With this partial
amendment in the award, the a.ppeal is dismissed .. In the circum·
stances of this case, we make no order as to costs.
V.P.S.
Appeal dismissed.
co [tt69l 1 s.c.R. ~ . .