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SUPREME COURT OF INDIA
Metal Box Company of India Ltd., Appellant
Versus
Their Workmen, Respondents.
1. Steel Mazdoor Sabha, Bombay, 2. Indian Oxygen Ltd., 3. Kapra Mazdoor Ekta Union, 4. Associated Cement Co., Ltd., 5. G. E. C. Ltd., 6. Indian Sugar Mills Association, Intervenes.
Civil Appeals Nos. 2138 and 2196 of 1966, D/- 20-8-1968.
Advocates appeared
Mr. N. A. Palkhivala, Senior Advocate (Mr. Jatinder Mahajan, Advocate and M/s. O. C. Mathur and Ravinder Narain, Advocates of M/s. J. B. Dadachanji and Co., with him), for Appellant (In C. A. No. 2138 of 1966) and Respondent (In C. A. No. 2196 of 1966); Mr. A. S. Chari, Senior Advocate (M/s. R. K. Maheshwari and B. P. Maheshwari, Advocates, with him), for Respondents (In C. A. No. 2138 of 1966) and Appellants (In C. A. No. 2196 of 1966); M/s. H. K. Sowani, K. Rajendra Chaudhuri and K. R. Chaudhari, Advocates, for Intervener No.1; Mr. N. A. Palkhivala, Senior Advocate (Mr. D. N. Mukherjee, Advocate with him), for Intervener No. 2; Mr. M. K. Ramamurthi, Mrs. Shyamala Pappu and Mr. Vineet Kumar, Advocates, for Intervener No. 3; Mr. R. J. Kolah, Advocate, and Mr. O. C. Mathur, Advocate of M/s. J. B. Dadachanji and Co., for Intervener No. 4; Mr. N. A. Palkhivala, Senior Advocate (Mr. O. C. Mathur, Advocate of M/s. J. B. Dadachanji and Co., with him), for Intervener No. 5; M/s. A. N. Pareekh and Sobhag Mal Jain, Advocates, for Intervener No. 6.
Payment of Bonus Act, 1965 - Section 40, 6, 6 (a),(b) and (c) - Income-tax Act, 1961- Section 4, 6, 7, 23, 32, 32(2), 33, 34 (3), 10(2), 36 (v), 7 (2), 32 (1), 22, 84, 101(1) and 19 - Companies Act, 1956 - Section 205, 205 (1), (2) and 211 - Wealth Tax Act, 1957 - Section 2 (m) - Company - Employees - Surplus - Computation of Bonus - 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 - 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. and L. account while working out its net profits - whether such appropriation amounts to a reserve or a provision - whether the demand for such tax could be deducted while determining the net wealth of the Company - whether an estimated liability under gratuity schemes framed under Industrial awards amounted to debts and could be deducted while computing the net wealth - whether such estimated liability arising under the gratuity schemes amounts to a debt or not - whether while working out the net profits a trader can provide from his gross receipts his liability to pay a certain sum for every additional year of service - whether the amount so provided is a provision or a reserve - whether Parliament has made a departure from that principle and laid down a new procedure - whether the concept of notional tax liability which was adopted so long was laid aside by Parliament - whether the tax liability is to be calculated on actual taxable income or on the notional amount – Held, Court must examine scheme of Act and Schedule II - Broadly speaking, it can be safely said that Parliament has retained main outlines of Full Bench Formula in Act - It maintained, for instance, accounting year as unit, principle that employer, and where it happens to be a company, company and its shareholders and labour are earth entitled as contributories to profits to a share therein, deduction of certain prior charges, concept of gross profits, etc. which were features of Formula - Both such amounts cannot be same is clear because Sec. 7 in express terms prohibits taking into account unabsorbed losses and arrears of depreciation allowable under Sec. 32 (2), exemption allowed under Section 84 and deduction allowed under Section 101 (1) of Income Tax Act - Similarly, where an assessee is a religious or charitable institution and its income either wholly or partially, as case may be, is exempt under Income Tax Act, such an employer to whom Section 32 of Act does not apply is treated as a company in which public are substantially interested and its income is to be assessed accordingly by Tribunal and compute its liability for direct taxes - If Parliament intended to make a departure from rule laid down by courts and tribunals that bonus amount should be calculated after provision for tax was made and not before, Court would have expected an express provision to that effect either in Act or in Schedules - In Court view contention urged by Company that tax liability is to be worked out by first working out gross profits and deducting therefrom prior charges under Section 6 but not bonus payable to employees is right - In result, appellant Company succeeds on questions of development rebate and provision for gratuity amount - Its appeal on those questions is, therefore, allowed and to that extent the award is set aside - As regards question of depreciation amount, Tribunal will ascertain amount afresh after giving parties opportunity to lead such evidence as they desire and taking that amount and amounts of development rebate and of provision for gratuity in light of this judgment Tribunal will adjust its award and arrive at quantum of bonus payable to workmen - Appeal dismissed.
Judgment
SHELAT, 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?"
2. The dispute between the appellant company and its employees arose in the following manner. The company s accounting year is from 1st April to 31st March of the following year and its books of account are maintained on the mercantile system of accounting. The company computed the amount of bonus payable to its employees under the Payment of Bonus Ordinance which was promulgated on May 20, 1965 and furnished on July 5, 1965 copies 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 employees. According to this computation, the gross profits came to Rs. 2,70,64,234. Out of this the company deducted the following amounts allowed under the Ordinance, namely:
Rs. 28,64,000 as depreciation admissible under the Income Tax Act 1961.
Rs. 9,00,000 as development rebate;
Rs. 1,36,33,000 as direct taxes;
Rs. 1,50,000 as dividend on preference shares;
Rs. 23,37,000 as interest at 8.5 p. c. on paid-up capital;
Rs. 17,80,358 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 profits an the available surplus and that the following amounts should be added back, viz., provision for gratuity Rs. 18,38,605 and provision for doubtful debts Rs. 50,000. They also challenged deduction of interest on the reserves on the ground that the capital reserve of Rs. 57,00,151 was artificially arrived at by a mere revaluation of the company s fixed assets as on April 1, 1956. They also disputed the figures of depreciation, development rebate and direct taxes deducted by the company while working out the available surplus.
3. Parliament in the meantime passed the Payment of Bonus Act, 1965 which by Section 40 repealed the Ordinance but which saved all things done and action taken under the Ordinance as having been done or taken under the Act. On September 27, 1965 the company paid, subject to the result of the reference, bonus at the rate of 13.28 per cent of the wages including dearness allowance to its employees.
4. In its award the Tribunal allowed Rs. 23,48,226 instead of Rs. 28,82,261 claimed by the company as depreciation.Similarly it allowed only Rs 7. lacs instead of Rs. 8,87,371 claimed by the company as development rebate. As regards Rs. 18.38 lacs claimed under the head of gratuity, the Tribunal 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 lacs 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 appeal challenging the correctness of the Award.
5. 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
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