http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8  

PETITIONER: WORKMEN OF WILLIAM JACKS & CO.  LTD.,  MADRAS

       Vs.

RESPONDENT: MANAGEMENT OF WILLIAM JACKS & CO.  LTD., MADRAS

DATE OF JUDGMENT28/04/1971

BENCH: BHARGAVA, VISHISHTHA BENCH: BHARGAVA, VISHISHTHA SHELAT, J.M. DUA, I.D.

CITATION:  1971 AIR 1821            1971 SCR  540  1972 SCC  (3) 140

ACT: The  Payment  of  Bonus  Act (21 of  1965),  s.  23,  Second Schedule,  item  2(c) and Third Schedule,  item  (1)-Advance made by head office to branch office-Interest paid by branch office--If deductible expenditure in calculating profit  and loss  of branch office-Provision for  gratuity  etc.--Diffe- rence   between   provision   and   reserve-Provision   when deductible--Deductible income tax calculated without  taking into  account  bonus payable--if correct--Payment  of  Bonus (Amendment) Act (8 of 1969)-Effect of.

HEADNOTE: The  appellants workmen of the respondent claimed  that  for the  two years 1964 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 surplus 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 claims. 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 amounts 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8  

head-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. [545D] (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 541 of  it is not so, the court is not! bound to hold that.  the method adopted ’in preparing the accounts is correct  simply because the auditors raised no objection. [544H-545C] Therefore, in the calculation of gross profits for  purposes 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 loss. (2)  The  provision  for gratuity, and  other  contingencies such as furlough salary, passage, service and commission. in the present case, was made in respect   of   existing    and 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.  Such 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. [547D] 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 workmen under the Act, was correctly done  in accordance with the decision of this Court  in  the Metal  Box  Company case.: In that case,  the  question  was determined  on the interpretation of ss. 6(c) and 7  of  the Act,  and  the  amendments  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]

JUDGMENT: CIVIL APPELLATE Jurisdiction   : Civil Appeal No, 1700 of 1968. Appeal by special leave from ’the Award dated March 9,  1968 of  the Industrial Tribunal, Madras in  Industrial  Dispute No. II of 1957. M.   K. Ramamurthi, I. Ramamurthy, Vineet Kumar and Shyamala Pappu, for the appellants. M. C. Chagla and D. N. Gupta for the respondent. The Judgment of the Court was delivered by Bhargava,  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 calendar years 1964 and 1965,  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8  

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 542 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, William 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 all 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 related.  The Company  is  carrying business  as engineers, manufacturers,  representatives  and general merchants.  The business of the Company includes the buying of locally manufactured machinery and other  products and   selling  them  to  both  private  and  public   sector industries.  The income of the Company is derived  primarily from the sale 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 Branch,  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  enumerated by  us  as they may have bearing 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 surplus in accordance with the provisions  of the Act and its schedules showing that  there was  no available 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 appeal 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  that  there should be an add back of an estimated sum of Rs. 40,000 / which was received as direct commission paid by the manufac- turers to the London Office for the benefit of the Branch at Madras,  in  calculating the gross profits on the  basis  of which available surplus is to be worked out.  On this point, the Tribunal in its award did not give any specific finding, though, after mentioning this argument raised before it, the Tribunal  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  that  the  direct commission received by this Company relating to this 543 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 and 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 any add back.  There  is  no cross-examination on this point on behalf of the  appellant, nor has any evidence been led by the appellant to show  that

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8  

the  statement  of  this  witness  is  incorrect.   In   the circumstances, this claim has to be rejected. The  second item claimed 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 second Schedule to the Act,  and  the further  debit of the handling charges amounted  to  double deduction.   This  argument  proceeds  on  the  basis   that handling  charges,  which are included 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  evidence on  this point is again that of M. W. 1, Mani.   He  clearly stated  that, in the accounts.no sum is shown  for  handling charges as an expenditure as such.  The  handling  charges are only mentioned in the.invoices received from the London Office for goods sent to India.  These refer to the amount of  handling  charges  incurred  by  the  London  Commercial Departments  and an these amounts are recoverable from  the customers  in  India along with the sale price. He  added that  the  administrative (overhead) expenses  of  the  Head 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 accou nt under item 6(e) of the Second Schedule.  The actual expenses incurred b y various Commercial 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 part of the sale price.  There is no  separate entry of handling charges as an expenditure in the accounts of  the Company.  Consequently, there can &rise 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  544 in Calcutta, as we have indicated above, is a sort of common office  supervising the business of the Company at  all  the three   places   in  Calcutta,  Bombay  and   Madras.    The expenditure of this Regional Office is of the same nature as the  administrative  (overhead) expenses of the  Company  in London.  These sums which have been shown as expenses in the accounts in the Madras Branch are amounts allocable to  that Branch.  This has been again proved by the same witness,  M. W.  1, 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 fails. 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 at  Madras  during these  years.   It  was urged that,  having  regard  to  the proviso  to  item 1(iii) of the Third Schedule to  the  Act, this interest should be disallowed.  It, however appears  to us  that  the question of this interest should  be  examined from  a different aspect and that is whether  this  interest can  be  held to  be ’a legitimate item  of  expenditure  in calculating  the profit and loss of the ’Company at  Madras.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8  

It is clear that these amounts have been paid by the  Branch at  Madras to Head Office in London and  represent  interest which  the London 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.  Such a  payment  of  interest could be justified only on the basis that the London  Office was the creditor and the Madras Branch the debtor in respect of  the advances on which the interest has been  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  different Offices  of  the  same Company.  The  interest  paid  merely amounts to money transferred by the Madras Branch o the Head 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.  Learned   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 balance-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 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 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 of it, it is not  so, the  Court is not bound to hold that the method  adopted  in preparing  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 an  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 amount 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 Company  to its  Head  Office, is not be treated as  a  liability.   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 as a  prior charge  when calculating the surplus for purposes of  bonus. In the case of an Indian Company, this object is achieved by giving a return of 8-5 per cent on the equity share  capital and  6  per  cent on reserves.  In the  case  of  a  foreign Company,  the  same  object is served  by  working  out  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8  

difference  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  Office  are not deductible as  liabilities,  because that  amount is also treated as a part of the investment  by the Company on which the Cornpany should be given the return of  8.5  per cent.  It does not, therefore, partake  of  the nature  of  a loan on which interest can be charged  by  the Head  Office  from  the Branch  Office.   The  principle  of calculation laid down in item 1 of the Third Schedule, thus, recognises the position that the Head Office and the  Branch Office  do  not function as creditor and  debtor  when  only interest  could be legitimately charged by the  Head  Office from 35-1 S.C. India/71 546 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/- 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/- in 1965 shown as expenses incurred  in  the Jax  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  claim  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 gratuity, 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.  In some cases, of course,  where the  exact  liability was not ascertainable,  provision  has 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(1) held:               "The  distinction  between a provision  and  a               reserve  is in commercial  accountancy  fairly               well-known.     Provisions    made     against               anticipated   losses  and  contingencies   are               charges against profits and, therefore, to  be               taken  into account against gross receipts  in               the  Profit and Loss account and the  balance-               sheet.   On  the  other  hand,  reserves   are               appropriations of profits, the assets by which               they  are represented being retained  to  form               part of the capital employed in the  business.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8  

             Provisions are usually               (1) [1969] 1 S. C. R. 750.               547               shown   in   the  balance-sheet  by   way   of               deductions from the assets 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 Bookkeeping 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 at 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  an  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-tax.  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 calculated after taking into account the bonus  is fully met by the decision of this Court in the case of Metal Box  Co. of India(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) Act  8  of  1969, and urged that this  amendment  should  be treated as the parliamentary exposition of the law which was interpreted  by this Court in the case of Metal Box  Co.  of India(1).   In  that case, the question  was  determined  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 unmended  and in section 7, the only amendment is  that  the principles  laid down in that section are to be applied  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. 548 necessary,  because amendment was made in section 5  of  the Act  by  making certain additions which referred  to  direct tax, including income-tax.  That amendment in section 5  has no  bearing at all 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.  Consequently,  there  is  no

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 8  

reason  for  us to differ from the view  expressed  by  this Court in Metal Box case(1).  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  accordingly. We  leave  this  calculation to  the  Tribunal.   With  this partial amendment in the award, the appeal is dismissed.  In the  circumstances  of  this case, we make no  order  as  to costs. V.P.S.                         Appeal dismissed. (1) [1969] 1 S.C.R. 750. 549