# • METAL BOX CO. OF INDIA LTD v. THEIR WORKMEN

- **Citation:** [1969] 1 S.C.R. 750
- **Court:** Supreme Court of India
- **Decided:** 1968-08-20
- **Case number:** Civil Appeals Nos. 2138 and 2196 of 1966
- **Bench:** J. M. SHELAT At<D C. A. YAlDlALlNGAM
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/metal-box-co-of-india-ltd-v-their-workmen-4516
- **Pages:** 28

## Headnote

Bonus Act, 1965 ss. 4, 6, 7--Scope
of-..Con1puta1io11
of bonus--
Principles for deduction from
/;l'O~S profit~; on
uccuunt of deprecia1k>n,
deve/op111cn1 rebate, and estinwtt.'d liability .for
grotuity-1'reat~nt OJ
interest on capira/ reserve attributable to revaluation of assets-Principks
for deter1nining allowance for direct tcxes that employer ''i.r liable to pay".
In a dispute between the appellant and it.; \!.'Ork.men relating to the
computation of bonll~ under 1hc Payment df Bonus Act, 1965. the Company contended that the available surplus came to R•. 49.96 lakhs, mty
per cent
of which, namely, Rs. 29.98 laklt• was the alloeablc surplus.
The employees di.•putcd 1he computation claiming that the Company !tad
\\.Tongly reduced the gross profil~ and the available surplus and contended,
inter a/ia, that certain amounts deducted on
accounl
oi provic;ions for
gratuity and for doubtful debt' should be added hack: they challenged
a dcc!.uction of interest on reserves on the ground that the capital reserve
wa.~ artificially arrived at by a mere revaluation of the company's fixed
assets as on April I, i 956; and also dispuled the figures of depreciation,
development rebalc and direct taxes deducted by the company
while
\vorking out the available surplus.
The Unions disputed the amount of Rs.
28.82 lakhs worked out by
the Company's auditors
a.~ depreciation in accordance with the lncometax Act, 1961 on the ground (I) that there was no evidence
that
the
amount of depreciation came 10 Rs. 28.82 lakhs; and (2) that since the
profit and Joss account mentioned R~. 23.48 lakhs as depreciation,
the
Company could only claim that ;1mount.
In it• award the Tribunal alloW<d Rs. 23.48 laklt• instead of Rs. 28.82
lak.hs claimed by the company as depreciation.
Similarly it allowed only
Rs. 7 lakhs inslead of Rs. 8.8 lakhs claimed by the company as development rebate.
The Tribunal held that the amount of Rs. 18.33 lakhs
claimed under the hcJd of grc1tuitv wa'i not a reserYe but a provision and
therefdrc. was not liable to be added hack, but it held 1hat the company
could deduct only ahout Rs. 10 Jakhs as
also
Rs.
l.31
lakhs
and
Rs. 87.000/- actually paid durin~ the year to employees who retired
during that year and added back 1he balance of Rs. 6 lakh• to the gross
profits.
Except for these amount~. the Trihunal accepted_ the rest of the
company's comput.1tion.
Both the Unions and the Company ohtaioed
,pccial le.we and filed appeals challenging the correctness of the Tr;btinal's ay.·ard.
In their appeal it was al<>o contended by the Union~ that
tho Trihunal had wrongly allowed a dcduc1jon of Rs. 145 lakhs as direct
t<tXCS under sec. 6( c); all that the empJoyer could deduct was direct
taxes which he "is liable to pay" for the accounting year in respect of
''his income, profits and ~ains during that year", i.r •• the employ«
~
entitled to deduct only his aclual tax liability.
Such liability. therefore,
has to he wdrkcd out in accordanee wi!h the provision~ of the Income>-tax
Act and other relevant Act<> by first arriving at the actual taxable income,
oaill.'I and profit• under tho<e Acts and then compute the u..,. at ral"'i,
provided by them for that particular accounting year.
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METAL BOX CO. V. WORKMEN
75(
HELD : The appellant company contentions on the questions of
development rebate and the pro,isions for gratuity must be upheld; the
amount of depreciation must be ascertained afresh by the Tribunal after
giving the parties opportunity to lead such evidence as they desired. The
workmen's appeal must be dismissed.
(I) The depreciation deducted in the expenditure
column in the
Profit and Loss Account was the depreciation wdrked out under s. 205(2)
of the Companies Act, but under. section 6 of the Bon~ Act, the _Company is entitled to deduct from its gross profits depreciation adm1ss1bJe
under Section 32(1) of the Income-tax Act, i.e., such percentage on the
written down value as may, in the case

## Text

_Characters 0–39,865 of 81,596. This is a partial read: ask again with offset=39865 for what follows._

•
METAL BOX CO. OF INDIA LTD.
v.
THEIR WORKMEN
August 20, 1968
[J. M. SHELAT At<D C. A. YAlDlALlNGAM, JJ.j
Bonus Act, 1965 ss. 4, 6, 7--Scope
of-..Con1puta1io11
of bonus--
Principles for deduction from
/;l'O~S profit~; on
uccuunt of deprecia1k>n,
deve/op111cn1 rebate, and estinwtt.'d liability .for
grotuity-1'reat~nt OJ
interest on capira/ reserve attributable to revaluation of assets-Principks
for deter1nining allowance for direct tcxes that employer ''i.r liable to pay".
In a dispute between the appellant and it.; \!.'Ork.men relating to the
computation of bonll~ under 1hc Payment df Bonus Act, 1965. the Company contended that the available surplus came to R•. 49.96 lakhs, mty
per cent
of which, namely, Rs. 29.98 laklt• was the alloeablc surplus.
The employees di.•putcd 1he computation claiming that the Company !tad
\\.Tongly reduced the gross profil~ and the available surplus and contended,
inter a/ia, that certain amounts deducted on
accounl
oi provic;ions for
gratuity and for doubtful debt' should be added hack: they challenged
a dcc!.uction of interest on reserves on the ground that the capital reserve
wa.~ artificially arrived at by a mere revaluation of the company's fixed
assets as on April I, i 956; and also dispuled the figures of depreciation,
development rebalc and direct taxes deducted by the company
while
\vorking out the available surplus.
The Unions disputed the amount of Rs.
28.82 lakhs worked out by
the Company's auditors
a.~ depreciation in accordance with the lncometax Act, 1961 on the ground (I) that there was no evidence
that
the
amount of depreciation came 10 Rs. 28.82 lakhs; and (2) that since the
profit and Joss account mentioned R~. 23.48 lakhs as depreciation,
the
Company could only claim that ;1mount.
In it• award the Tribunal alloW<d Rs. 23.48 laklt• instead of Rs. 28.82
lak.hs claimed by the company as depreciation.
Similarly it allowed only
Rs. 7 lakhs inslead of Rs. 8.8 lakhs claimed by the company as development rebate.
The Tribunal held that the amount of Rs. 18.33 lakhs
claimed under the hcJd of grc1tuitv wa'i not a reserYe but a provision and
therefdrc. was not liable to be added hack, but it held 1hat the company
could deduct only ahout Rs. 10 Jakhs as
also
Rs.
l.31
lakhs
and
Rs. 87.000/- actually paid durin~ the year to employees who retired
during that year and added back 1he balance of Rs. 6 lakh• to the gross
profits.
Except for these amount~. the Trihunal accepted_ the rest of the
company's comput.1tion.
Both the Unions and the Company ohtaioed
,pccial le.we and filed appeals challenging the correctness of the Tr;btinal's ay.·ard.
In their appeal it was al<>o contended by the Union~ that
tho Trihunal had wrongly allowed a dcduc1jon of Rs. 145 lakhs as direct
t<tXCS under sec. 6( c); all that the empJoyer could deduct was direct
taxes which he "is liable to pay" for the accounting year in respect of
''his income, profits and ~ains during that year", i.r •• the employ«
~
entitled to deduct only his aclual tax liability.
Such liability. therefore,
has to he wdrkcd out in accordanee wi!h the provision~ of the Income>-tax
Act and other relevant Act<> by first arriving at the actual taxable income,
oaill.'I and profit• under tho<e Acts and then compute the u..,. at ral"'i,
provided by them for that particular accounting year.
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METAL BOX CO. V. WORKMEN
75(
HELD : The appellant company contentions on the questions of
development rebate and the pro,isions for gratuity must be upheld; the
amount of depreciation must be ascertained afresh by the Tribunal after
giving the parties opportunity to lead such evidence as they desired. The
workmen's appeal must be dismissed.
(I) The depreciation deducted in the expenditure
column in the
Profit and Loss Account was the depreciation wdrked out under s. 205(2)
of the Companies Act, but under. section 6 of the Bon~ Act, the _Company is entitled to deduct from its gross profits depreciation adm1ss1bJe
under Section 32(1) of the Income-tax Act, i.e., such percentage on the
written down value as may, in the case of each of the classes of assets,
be prescribed.
It was 1for this. reason that Rs. 23.48 lakhs were shown
as depreciation in the Profit and Loss Account by the Company while in
the computation for bonus the company claimed Rs.
28.82 lakhs
as
depreciation. [755 H-756 BJ
Since the Company claimed the deduction of depreciation, the burden
of proof that the amount claimed was in accordance with the Income-Otx
Act was on the Company and that burden the company must discharge
once its figures were challenged. It was not sufficient for it to produce
its auditors' certificates. The question as to the co:rlrect amount of depreciation must the·refore go back to the Tribunal for a further decision. The
Tribunal must give an 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. [757 D]
Khandesh Spg. & Wvg. Mills Co. Ltd. v. The Rashtriya Girnl Kamgar
Sangh, [1960J 2 S.C.R. 841, 847, Petlad Turkey Red Dye Works Ltd. v.
Dyes & Che1nicc;·l Workers' Union [1960] 2 S.C.R. 906, 909, referred to.
(2) Under s. 6(b) of the Bonus Act the Company is entitled to deduct
out of the gross profits arrived at under s. 4 the whole of the development rebate admissible under the Tncome~tax Act, i.e., the amount, 75
per cent of which comes to Rs. 7 lakhs in the present case.
The Tribunal
was in error in mixing up the development rebate reserve to which the
Company had to appropriate Rs. 7 lakhs in the Profit and Loss Account
and the development rebate of Rs. 8.87 lakhs allowable to it under s. 6
of the Act.
There was the.refcire no justification for the Tribunal to allow
Rs. 7 bkhs only instead of Rs. 8.87 lakhs as development rebate. [759DFJ
(3) An estimated liability under gratuity schemes as in the present
case, even if it amounts to a contingent liability and is not a debt under
the Wealth Tax Act, if propef-ly ascertainable and its present value is fairly
di~ounted, is deductible from the gross receipts while. preparing the Profit
and Loss Account.
This is in accordance with accepted
principles
of
commercial practice and is also the position
under the Income-tax Act.
There is no rule or direction in the Bonus Act which prohibits such a
practice. [766 C; 767 DJ
The Tribunal in allowing Rs. 10 lakhs out of the estimated liability
of Rs. 16 lakhs impliedly accepted the same principle but allowed only
Rs. 10 lakhs because it thought the estimate to be excessive.
This was
not done on the ground that the estimate of Rs. 16 Jakhs was not warranted on any valuation.
In the absence of any challenge as to the
correctn-e:ss of the valuation and in the absenee of any challenge that such
liability cannot be estimated on any fair standard. the Tribunal ought t0>
o have allowed the whole of Rs. 16 lakhs to be deducted while arriving
at the net profits in the Profit and Loss Account. f767 El
752
SUPREME COURT REPORTS
(1969] I SC.R.
(.:a/curta Coinpany Lrd. V. c:.1.r., 11960] 1 S.C.R. 185~ <:0111111is.sioner
nf Wealth T1tt v. Starulard Vacuum Oil Co. Lui.
11966] 2 S.C.R. 317;
Kesoram Industries and Co1to11 Mills Ltd. v. C.W:r., [1966] 2 S.C.R. 688:
A
Standard Mills Co. I.id. v. C:on11nissio11t;'r of lnco1nc Tax, 119671 l S.(;.R.
768; So11th('rn Roi/;1·ay Of Peru Lr,/. \', Owen, rt957J A.(:. 334 and Sun
Insurance Office v. c·1urk. 119121 A.t:. 443; referred to.
(4) There
iw·a~ no justification fOr the contention that revaluation of
the company\ as.sets in J 956 wa~ fic1i1ious and that the
difference ol
Rs. 57 Jakh'> y.·as a 1nere honk atlju~trnent :1nd did not :1<ld to the \vealth
of the conlpany so that no deduction hy \ray of interest \\'ii" pcm1issi~c
on such an arliticial :1moun1. 1767 If]
In the prc()enr case the revaluation \•la!> n1ade .is ca riv a'io J 956 and did
nnl appear ro ha,-c been objected to at any time either ·bv the Co111pany\
auditor~ or by any one ~lsc concerned \i.tith the (:ompany'S management. It
c;tonot. therefore, he lcg1tin1atcly said that it was done for any ohliquc purpo\e, much h:ss with a vie\\· to defeat the labour's claim 10 bonu'i. It is true
rhat c;uch revaluation docs not bring in any tangible additional amount into
the company's coffer!'> v.-·hich it can use 'for its business. Rul' under sec. 2l l
of the .~panic~ Act. c'·cry bJlance.,hcct of a comp.iny must givl.' a tnie
~nd f~rr VJC\~' of the slate of affairs of the company as at the end of the
hnanc1al year.
Sch. \"l to the Companies Act ;1ho provide" that v.il.ere
-sums have hcen \.1:rittcn off on a reduction of capital or a re-valuation ol
;1sscts, the balance sheet, subsequent to such reduction or revaluation rnust
show the reduced or the increased figures as the case may he. Apart fron1
The provisionc; of the c:ompanie~ Act, it is ;t rccogni\cd principh: of accountancy to tran~fcr the increased value of as-sets on revaluation to a capital
n .. "'ierve accolmt.
Such <In increa..,cd fi!!ure is an unrcaliscJ ;1ccretion in the
value of a fixed as.;;ct.
The fact tha·t such an incre:tscd figure docs not
·actually hrinj?. in any additional amount to the con1pan\' docs not make
rhc capital re'iervc any 1hc less a reserve. [768 (',,..GJ
·rhe Tribunal \\'as therefore right in accepting the figur:! of Rs
57
Ltkhs and deducting interest thereon from the gross profitc;.
(5) Bonus being payable within eight months after the close of the
accounting year in cases where there is no dispute pending before an
authority under s. 22 of the Act as provided by s. 19, it i> hardly poosible,
t.."Xcept in
rar~ cases. rhat assessment under the Tncome-tax Act and
-0ther such Acts would he completed by the time bonus has to be paid.
'fhcrcforc, the Tribunal "'·ould not have before it the taxahle income
a\scssed by the Income-tax and other such officers.
If the Union's ~
rention were to he right, there would he two or more parallel authofttJcs
\.\.-'Orking under 1hc Bonus Act and the Income-tax Act and other such Acts
"·ho \.\.-:ould have to at.Sess taxable incomo and the tax payablo thereon,
hefore all of whom the emplover would have to prove his taxable income.
Jn each bonus dispute, the Tribunal. not equipped
with
the
detailed
kno"·ledge of all such Acts, \\'ould have to undertake an enquiry into
variou~ dcductiono;;, rehates, reliefs. l'tc. claimable hy the employer ~nder
those Acts.
The fact that payment of bonus cannot brooke delay v.-·1.t~~ut
causine hardship to Jabour \vould seem t(} n1ili1atc against the pos._..,1b1l11y
of such prolonged enquiries. [774 E-775 A)
An examination of the provi.;;ions of the Bonu~ Act sho...,-s that tflc:
·rribunal mu\t e.;;limatc the arnount of direct t;1xC"i. on thi..•. hala.nce of
!.!l'oc;.s profits as \\-'orked ottt under ss. 4 and 6. but without daluctt~ the
honus. 1h-.:n \\-'Ork out the quantum of t;1xcs thereon al ratL"S applicable •
-during that year to !he income. gain" and
profits of the employer and
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METAL BOX co. v. WORKMEN (Shelat, J.)
753
after deducting the amount of taxes so worked out arrive at the available
surplus. Section 6( c) being subject to s. 7 the computation has to be done,
without taking into account the irems specified in s. 7 (a) and in the
manner prescribed by the remaining clauses pf that ooction. This interpretation is commendable because; (l) it is consistent with the words
"iS'liable to pay" ins. 6(c), (2) it is in harmony with the provisions of
ss. 4 and 6 and Sch. II, and ( 3) it is consistent with the intention of
Parliament apparent from the scheme of computation of available surplus
in the Act.
Furthermore, i'f 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,
it would have made an express provision to that effect either in the Act
or in the Schedules. [776 B-D; F-GJ
Associated Cement Companies Ltd. v. The Workmen, [1959] S.C.R. 925
at 974; Crompton Parkinson (Works) Private Ltd. v.
Its Workmen
[1959] Supp. 2 S.C.R.
936; and
Workmen of India Explosives Ltd. v.
India Explosives Ltd., (1966] 2 L.L.J. 313, referred to,
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 2138
and 2196 of 1966 .
Appeals by special leave from the Award dated June 27, 1966
of the Sixth Industrial Tribunal, West Bengal in Case No. VIII-251
of 1965.
N. A. Palkhiva/a, Jatinder Mahajan, 0. C. Mathur and Ravinder Narain, for the appellant (in C.A. No. 2138 of 1966) and
the respondent (in C.A. No. 2196 of 1966).
A. S. R. Chari, R. K. Maheshwari and B. P. Maheshwari, for
the respondents (in C.A. No. 2138 of 1966.) and the appellants (in
C.A. No. 2196 of 1966).
,
H. K. Sowani, K. Rajendra Chaudhuri and K. R. Chaudhuri, for
intervener No. 1.
N. A. Palkhiva/a and D. N. Mukherjee, for intervener No. 2.
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M. K. Ramamurthi, Shyama/a Pappu and Vineet Kumar for
intervener, No. 3.
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R. J. Ko/ah and 0. C. Mathur, for intervener No. 4.
N. A. Palkhivala and 0. C. Mathur, for Intervener No. 5 .
A. N. Parekh and Subhag Mal Jain, for intervener No. 6.
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The Judgment of the Court was delivered by
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Shela!, J. By a reference dated September 17, 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 ?"
•
7 54
SCl'REME COURT REPORTS
[1969] I S.C.R.
The dispute between the appellant company and its employee-'
arose in the following manner.
The company's accounting year
is from !st April to 3Isl March of the following year and iL' book_,
-0f 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 wa' promulgated on May 29, 1965 and furnished on July 5, 1965 copie'
of its computation to the three respondent Unions representing its
employees.
The available surplus and allocable surplus, according to this computation, were Rs. 49.96 lacs and Rs. 29.98 lacs
respectively.
On
this
basis
the
company
declared
the
bonus at 13.28 per cent of the total wages paid to the employee.;.
According to this computation, the gross profits came to
Rs. 2,70,61,234;-.
Out of this
the company deducted
the
fo!1owing amounts allowed under the Ordinance, namely :
R,. 28,64,000/- a' depreciation admi,sible under
the Income Tax Act, 196 I;
Rs. 9,00,000/- as development rebate.
Rs. I ,36.33,000/- as direct taxes.
Rs. 1,50,000/- a' dividend on preference share;;
R,. 23,37,000/- as interest at 8.5 p.c. on paid up
capital;
Rs. I 7.80,358/- as interest at 6 p.c. on reserves.
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 profil' and
the
available
surplus and that the follownig amounts should be added back, viz ..
provi,ion for gratuity Rs. 18,38,605/- and provision for doubtful·
debts Rs. 50,000/-.
They also challenged deduction of intere;t
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 April 1, 1956. They also disputed the figures of depreciation, development rebate and direct
taxes deducted by the company while working out the availabk
surplus.
Parliament in the meantime passed the Payment of Bonus Act,
I 965 which by sec. 40 repealed the Ordinance hut which saved
all things done and action taken under the Ordinance as having
been done or taken under the Act.
On September 27, I 965 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
tH its employees.
In its award the Tribunal allowed Rs. 23,48,226/- instead of
Rs. 28,82,261 /- claimed by the. company as depreciation.
~imi- •
larly it allowed only Rs. 7 lacs mstead of Rs. 8,87.371/- clatmed
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METAL BOX co. v. WORKMEN (She/at, J.)
755
by the company as development reba~. As r~ards Rs. 18.38
lacs claimed under the head of gratmty, the Tnbunal held that
that amount was not a reserve but a provision and, therefore, was
not liable to be added back. But it held that the company could
deduct only Rs. 10 lacs and odd as also Rs. 1.31
lacs and
Rs. 87,000/- and odd actually paid during the year to employees
who retired during that year and added back the balance of Rs. 6
lacs to the gross profits. Except for 'these amounts, the Tribunal
accepted the rest of the company's computation.
In the result
the Tribunal found the available surplus and the allocable surplus
to be 54. lakhs and odd and Rs. 32.42 lacs respectively and directed payment of bonus at 14.55 per cent of the total wages. Both the
Unions and the company obtained special leave and filed appeals
challenging the correctness of the Award.
In the profit and loss account for the year 1964-65, the Company .had shown Rs. 17 crores and odd as gross receipts and out
of that amount had deducted diverse amounts as expenditure
including the sum of Rs. 23,48,226/- by way of depreciation. In
its computation filed before the Tribunal, the Company, however,
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claimed depreciation at Rs. 28.82 lacs worked out by its auditors
in accordance with the provisions of the Income Tax Act, 1961.
The Unions disputed this amount on the ground (I) that there
was no evidence that the amount of depreciation came to Rs. 28.82
lacs and (2) that since the profit and loss account mentioned
Rs. 23.48 lacs as depreciation, the company could claim that
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amount only. The Tribunal accepted the Unions' contention stating that there was nothing to show that the company through
mistake .had shown Rs. 23.48 lacs as depreciation in the profit and
loss account and that subsequently on finding out the mistake it
had revised in its computation depreciation at Rs. 28.82 lacs.
The Tribunal, as we shall presently show, was in error.in confusing
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depreciation claimed by it as a deduction under sec. 6 of the Act
and in thinking that the company had made or claimed to have
made a mistake and was tryint; to correct such mistake.
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Under sec. 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 sub-sec. (2).
Sub-sec. (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 asset 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 sec. 205 ( 2) of the Companies Act.
Under sec. 2 (18)
of the Bonus Act, gross profits mean gross profits calculated under
sec. 4.
In the case of companies other than a banking company,
g~s profits under Sec. 4 are to be computed in the manner laid
•
756
SUPREME COURT RllPORTS
(1969) I S.C.R.
down in the 2nd Schedule.
That Schedule requires adding back·
to the net profit shown in the P & L account of depreciation
deducted in that account while computing gross 'profit1. Obviously, the depreciation so to be added back is the one worked ou!
by the company under sec. 205(2) of the Companies Act. Section
6 of the Bonus Act provides that having arrived at the gross
profits under sec. 4 read with the 2nd Schedule, the Company is
entitled to deduct therefrom depreciation admissible under sec.
32 ( I ) of the Income Tax Act, that is, such percentage on th.:
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 (Ex. 6) produced before the Tribunal, had
l.:cpt the distinction between depreciation worked out under the
Companies Act and the one to be worked out under the Incomer
tax Act for lhe purposes of the Bonus Act is clear from the evidence of its witness, Verma.
It was for this reason that Rs. 23
lacs and odd were shown as depreciation in the P & L Account
while in the computation (Ex. 6) the company claimed Rs. 28.64
lacs 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 sec. 6(a) of the Bonus Act was Rs. 28.82 lacs
and not Rs. 28.64 lacs.
The Company produced a certificate of
its auditors (Ex. U 2) dated December 20, 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
lacs and not Rs. 28.64 lacs.
But the controversy between the
parties was not confined to the difference between
these
two
figures.
There were three figures for depreciation bewre the
Tribunal, Rs. 23 lacs and odd shown in the P & L Account.
Rs. 28.64 lacs shown in the computation and Rs. 28.82 lacs 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 lacs and, later on.
revising that figure to Rs. 28.82 lacs on certain further rocords
aR<l information produced before them.
The evidence of Verma
shows clearly that the Unions disputed the Company's calculations of depreciation.
When questioned by them, Verma could
only say that the calculations were done not by him but by the
Secretarial Department and, therefore, was not in a position W
answer questions in that regard.
No witness from the Secretarial
Department was produced.
As regards their books and record'
produced before the auditors, his only answer was :
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METAL BOX co. v. WORKMEN (She/at, J.)
75 7•
"So far as books and records mentioned in .the first
part of Ext. U 2 are concerned, the books and record
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 record 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, vziz., Rs. 28.64 lacs or Rs. 28.82 lacs.
It is
true that Verma said that the calculations 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 thfft burden the company must discharge once its figures were challenged. But it was
contended that once the company produced its auditors' certificate
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 Tribunal, 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 lacs certified by the
auditors.
Under sec. 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 Spg. and
Wvg. Mills Co. Ltd. v. Rashtriya Girni Kamgar Sangh(') observed at page 847 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 qf the employer to inflate this figure and the
• (l) [1960] 2 S.C.R. 841, 847.
l.1Sup. C. I.169-2
• 758
SUPRDIE COURT REPORTS
(1969] I S.C.R.
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 Pet/ad Turkey Red Dye Works
Ltd. v. Dyes & Chemical Workers' Union(1).
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 admilled by labour, not by the auditors 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 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 acco:dance
with the Income Tax Act but under sec. 205 of the Companies
Act, and sayinl! 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 hack 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.
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(1) [1960] 2 S.C.R. 906, 909.
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METAL BOX co. v. WORKMEN (Shelat, !.)
759
An error of the same type seems to have been committed by
the Tribunal in the matter of development rebate.
It allowed
Rs. 7 lacs as development rebate instead of Rs. 8.87 lacs claimed
by the Company.
Under sec. 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 shal! 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 previous
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 lacs 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 lacs instead of Rs. 8.87 lacs for development rebate and
credited Rs. 7 lacs, being 75 per cent thereof to the development
rebate reserve.
Under the Second Schedule to the Bonus Act,
read with sec. 4 thereof the Company is required while computing its gross profit to add the development rebate and as footnote
1 ill that Schedule shows "to the extent charged to profi~ and loss
account", that is, Rs. 7 lacs.
Under sec. 6(b) of the Bonus Act,
the Company is entitled, however, to deduct out of the gross
profits arrived at uruler sec. 4, the whole of the devdopment rebate
admissible under the Income Tax Act, i.e., the amount, 75 per
cent of which comes to Rs. 7 lacs.
The error which the Tribunal
fell into was in mixing up the development rebate reserve to which
the Company had to appropriate Rs. 7 lacs in P & L account and
the development rebate of Rs, 8.87 lacs allowable to it under sec.
6 of the Act.
Mr. Chari for the Unions fairly conceded that he
could not challenge this position.
There was, therfore, no justification for the Tribunal to allow Rs. 7 lacs only instead of
Rs. 8.87 lacs as development rebate.
The next question relates to a sum of Rs. 18.38 lacs, 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
19til-62 the Company allocated towards this liability Rs. S lacs.
Rs. 10 lacs and Rs. 5 lacs respectively from out of the profits,
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760
SUPRE11E COURT REPORTS
[1969] I S.C.R.
debiting these amounts in the profits and loss account. In all Rs.
40 lacs have so far been provided in the aforesaid manner aga-insc
the said liability.
The practice followed by the Company is that
every year the Company works out the additional liability incurred by it o.n 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
, .. ,
aforesaid.
The amount so
paid is not debited in the P & L
account as an outgoing or expenditure but again~! the estimated
liability provided as aforesaid.
In 1964-65 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 lacs.
But instead of providing the whole for it,
it provided only Rs. 11.31 !acs.
It also provided Rs. 7 lacs under
the scheme for its non-officers against the liability for service put
in by them in that year.
Out of Rs. 18.38 lacs so provided, the
Company paid as gratuity Rs. 1,31,585/- and
Rs.
87,295/ to
officers and other employees who retired during 1964-65, debiting
as aforesaid, these amounts not as an outgoing or expenditure but
against the said amounts of Rs. 11 lacs and Rs. 7 lacs.
The
Company claimed that it was entitled to deduct !he baiance of
Rs. 16 lacs from the gross receipts in the P & L accour.t while
working out its net profit.
The Unions contended that the
Company could deduct from the gross receipts only Rs. 1.31 lacs
and Rs. 87.000/- and odd actually paid during the year.
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 lacs was
deductible in arriving at its net 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
lacs e.g., in 1959-60 and 1961-62, it would allow only Rs. 5 lacs
for each of the two schemes.
Thus it allowed Rs. l 0 lacs a~
debitable in the P & L account in addition to the said Rs. 1.31
lacs and Rs. 87,000/- and disallowing the balance of Rs. 6 lacs
added back that amount in !he net profits shown in the P & L
account.
The contention of Mr. Chari was two fold:
(I)
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
anv 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 lacs
and allowed wrongly that amount to be deducted; and (2) even
if such estimated liability was debitable, the appropriation amowited to a reserve and under the Bonus Act such a reserve had to be
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METAL BOX co. v. WORKMEN (She/at, !.)
761
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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 net 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 deducrion 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 or
brought in for income tax assessment, so also liabilities accnued
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, recei ved 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 t11e Income
Tax Act, deduction of such estimated liability even though it did
not come under any specific provisions of sec.
10(2) of the
Income Tax Act, 1922 was permissible; (see Calcutta Company
Ltd. v. C.l.T. (')
Such a deduction of an accrued liability
tliough not actuaJly paid is not confined to the Income Tax Act
only but is also permissible under the Wealth Tax Act 1957. In
Commissioner of Wealth Tax v. Standard Vacuum Oil Co. Ltd.(2)
demands in respect of paym€int of tax under sec. 18A of the
Income Tax Act, 1922 were made against the 'assessee company
for 1956-57.
The final instalment of Rs. 47 lacs 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 net wealth of the Company.
This Court held that a debt is "owed' when an order is passed
under sec. 18A and a notice of demand is sent.
The ·amount
merotioned in the notice begins to be 'owed' till a new figure is
(1)
[1960] 1 S.C.R. 185.
(2)
[1966] 2 S.C.R. 317.
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SUPREME COURT REPORTS
fl 969] I S.C.R.
substituted by the assessee under sec. 18A(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 sec. l 8A ( I ) and were debts on the valuation dates and,
therefore, deductible for the purpose of arriving at the Company's
net 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 sec. 2(n1) of the
Wealth Tax Act, the Court there holding that the statutory liability to pay the amount mentioned in the order commen~cd when
the demand notice was served and, therefore, the liability did exist
in presenti.
In Kesoram Industries and Collon Mills Ltd. v.
C.W.T.(') also a case under the Wealth Tax Act, the appeitant
company showed in its P & L account two amounts :
( l) the
amount of dividend proposed to be distributed for that ye::r and
( 2) 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
net 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 presell/i though payable ill futuro and was
in respect of an ascertainable sum of money.
In Standarci Mills
Co. Ltd. '" Commissioner of Income Tax(') 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 net wealth.
On reliance
having been placed on Southern Railway of Peru Ltd. v. Owen ( 8 )
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 1he 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, i;n view of the terms of sec. 2(m) of the Wealth Tax Act.
that as the liability to pay gratuity Wds not ill presell/i but wquld
arise in future on the termination of service i.e. on retirement,
death or tern1ination; the estimated liability under the schemes
would not be a debt and·, therefore, could not be <.leduct:!d while
computing the net 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 sec. 2(m) of the Wealth
Tax Act, it would be deductible under the Income Tax Act while
•
(I) [19661 2 S.C.R. 688.
(2) [1%7] I S.C.R. 768.
(3) [1957) A.C. 334.
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METAL BOX co. v.