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Textile Machinery Corporation Ltd. v. Commissioner Of Wealth-Tax, Calcutta.

Calcutta High Court
May 17, 1967
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Structured Summary of the Opinion (Banerjee, J.) — Reference under section 27(1) of the Wealth-tax Act, 1957

Factual and Procedural Background

The assessee is a public limited company engaged in the manufacture of textile machinery. The reference concerns wealth-tax assessments for the assessment years 1957-58, 1958-59 and 1959-60, with valuation dates 31 December 1956, 31 December 1957 and 31 December 1958 respectively. The company maintained accounts on the mercantile basis.

There was a long-running industrial dispute between the company and its employees concerning payment of bonus. An Industrial Tribunal awarded Rs. 5,65,000 in 1955, implemented in 1956. For subsequent years (1956–58) disputes were pending before Industrial Tribunals and no awards had been made as late as 1961. The assessee nonetheless made provisions in its accounts for likely bonuses (Rs. 6,00,000 in 1956; Rs. 12,00,000 in 1957; Rs. 16,93,000 in 1958) and made advances to employees against anticipated bonuses (Rs. 1,76,414; Rs. 5,93,824; Rs. 11,75,468 on the respective valuation dates). These items were shown in the balance-sheets under “Sundry provisions” (liabilities) and “Loans and advances” (assets), respectively.

The assessee also made provisions for income-tax liability for pending assessments (Rs. 31,00,000; Rs. 60,15,000; Rs. 99,65,743 on the respective valuation dates) and showed loans and advances (including amounts outstanding over three months) with specific provisions for anticipated short recoveries. A sales-tax demand under appeal was disclosed in a footnote; for the valuation date 31 December 1957 a sales tax liability of Rs. 3,13,000 was indicated, with Rs. 2,16,475 determined for 1954 but the demand notice being served a few days after the valuation date.

The Wealth-tax Officer rejected the assessee's claims for deductions of (i) provisions for bonus, (ii) provisions for income-tax, (iii) provisions for bad and doubtful debts and (iv) sales-tax liability (except partly allowing certain tax-related sums under section 18A of the Indian Income-tax Act). The assessee's appeals to the Appellate Assistant Commissioner failed. In three second appeals to the Appellate Tribunal, the Tribunal rejected the claims for bonus and tax provisions (treating contingent liabilities as non-deductible until they became debts), allowed the deduction for determined sales tax demand where it existed on the valuation date, rejected the bad and doubtful debts claim (unchallenged further), and disposed of the advances-to-employees point by treating advances as recoverable personal debts of employees. The assessee obtained a reference to this Court under section 27(1) of the Wealth-tax Act on specific questions of law arising from the Tribunal's orders.

Legal Issues Presented

  1. Whether, for the purpose of determining the net wealth of the assessee on the respective valuation dates, deduction was permissible in respect of certain provisions shown in the accounts, specifically:
    • (a) Provisions for bonus for each of the three years (as clarified by counsel: Rs. 6,00,000; Rs. 6,00,000; Rs. 4,93,000 respectively);
    • (b) Provisions for taxation (Rs. 30,96,541; Rs. 49,65,191; Rs. 72,07,771 respectively);
    • (c) Bad and doubtful debts (Rs. 1,33,406; Rs. 1,32,512; Rs. 1,14,866 respectively);
    • (d) Liability for sales tax for the assessment year 1958-59 (Rs. 2,16,475).
  2. Whether, if the claim under (a) (provision for bonus) was denied in full, the amounts advanced to employees against bonus pending final settlement were deductible.
  3. Whether only part, and not the whole, of the depreciation allowed in the income-tax assessments (but not taken into account in the balance-sheets) was a permissible adjustment for valuation purposes.

Arguments of the Parties

Assessee's Arguments

  • The net value of the assets of the business as a whole (section 7(2)(a) was invoked in argument) must take into account incidental liabilities such as bonus, income-tax and sales tax; these should reduce net wealth.
  • Section 7(2)(a) (valuation section) and section 2(m) (definition of net wealth) operate on different footings; alternatively the net value should be determined under section 7(2)(a) and net wealth computed by applying section 2(m).
  • By analogy with income-tax principles, commercial/accounting principles should govern valuation: real and unavoidable liabilities ought to be taken into account.
  • Specifically: advances to workmen against likely bonus should be deductible; provisions for bad and doubtful debts represent true diminution in asset value and should be allowed; written down value of fixed assets (income-tax WDV including additional depreciation) should be substituted where balance-sheet depreciation is inadequate.
  • Counsel also argued the character of bonus had evolved into a legal liability/right so that a provision for bonus was a debt (not merely contingent) and thus deductible under section 2(m).

Revenue's Arguments

  • Claims for deductions of provisions for bonus, income-tax and sales-tax had not ripened into debts as of the valuation dates and therefore were not deductible under section 2(m) (only debts owed by the assessee are deductible).
  • Because valuation of the business as a whole was made under section 7(2) of the Wealth-tax Act, the assessee could not seek revaluation of individual items; adjustments envisaged by section 7(2) do not include the item-by-item changes claimed by the assessee.
  • Reliance was placed upon authority (Swadeshi Cotton & Flour Mills) for the proposition that under mercantile accounting a liability for bonus arises only when the claim is settled amicably or by industrial adjudication.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax [1966] 59 I.T.R 767 S.C. Explains that section 7(2) is a valuation provision not directed to determination of net wealth; contains analysis of what constitutes a "debt" (present obligation to pay ascertainable sum; income-tax liability is a present liability though payable after quantification). The Court relied on Kesoram to: (a) accept that section 7(2) is not for determining net wealth and to reframe the questions appropriately, and (b) hold that provisions for income-tax were deductible (answering question 1(b) in favour of the assessee).
Ismailia Grain Merchants Association Ltd. v. Commissioner of Income-tax Authority for the proposition that a question may be reframed by the Court so as to address the real controversy even if framed under a wrong section, provided the Tribunal dealt with the aspect. The Court relied on this view to justify reframing the questions before it so as to address deductions as debts under section 2(m) even though the Tribunal had posed the question under section 7(2)(a).
Kusumben D. Mahadevia v. Commissioner of Income-tax [1960] 39 I.T.R 540 S.C. Cautionary principle: if an aspect was not touched upon by the Tribunal, the Court should not reframe a question to include that new aspect. The Court cited the case as a caution but held that here the aspect of deductibility as debts had been considered by revenue authorities; therefore reframing was permissible.
Jalan Trading Company Pvt. Ltd. v. Mill Mazdoor Sabha Summarises the historical development of bonus law in India and recognition of claim for bonus as a legal right in certain circumstances. The Court used Jalan Trading as an authoritative summary of the evolution of bonus claims and to contextualise the nature of bonus liability.
Muir Mills Co. Ltd. v. Suti Mills Mazdoor-Union One of the Supreme Court cases discussing the "Full Bench Formula" and the circumstances under which bonus claims may be allowed. Referenced as part of the jurisprudential history showing how bonus claims were treated and to explain the Full Bench Formula.
Baroda Borough Municipality v. Its Workmen Part of the line of cases considering bonus claims and the Full Bench Formula. Cited as part of the factual/legal evolution of bonus jurisprudence relied upon in the Court's exposition.
Sree Meenakshi Mills, Ltd. v. Workmen [1958] S.C.R 878 Supreme Court consideration of bonus claims and related principles. Used in summarising the Supreme Court's approach to the Full Bench Formula and bonus rights.
State of Mysore v. Workers of Gold Mines [1959] S.C.R 895 Another Supreme Court authority bearing on bonus claims and their adjudication. Referenced in explaining the judicial development of bonus law.
Associated Cement Companies Ltd. v. Its Workmen Elaborated the notional accounting / Full Bench Formula: gross profits → deductions such as depreciation and tax → notional surplus → share to labour as bonus; treats bonus as claim to a portion of surplus. The Court relied on the detailed exposition in Associated Cement to characterise the Full Bench Formula and to explain when and how a bonus claim becomes enforceable and quantifiable.
Ahmedabad Miscellaneous Industrial Workers' Union v. Ahmedabad Electricity Co. Ltd. Reiterated aspects of the Full Bench Formula and Supreme Court's approach to bonus claims. Cited to show repeated Supreme Court acceptance (with reservations) of the core principles concerning bonus rights.
Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Pvt. Ltd. Held (Sikri J.) that under mercantile accounting a liability for profit bonus arises, for accounting purposes, only when the claim is settled amicably or by industrial adjudication. The revenue relied on Swadeshi to argue that provisions for bonus here were contingent; the Court examined and distinguished Swadeshi's facts and reasoning and ultimately rejected the revenue's contention insofar as it would deny deductibility of the provisions in this case.
Workmen of the Hercules Insurance Co. Ltd. v. Hercules Insurance Co. Ltd. States that bonus under the Industrial Disputes Act is not part of wages but the right to claim bonus has attained status of a legal right in appropriate cases (subject to the Full Bench Formula). Cited by the assessee and relied on by the Court to support the proposition that bonus claims can be legal rights enforceable through industrial adjudication and thus may amount to liabilities of the employer.
Indian Tea Association v. Workmen [1962] Supp. 1 S.C.R 557 One of the authorities considered in the line of cases discussing profit bonus entitlement and conditions for allowance. Used in the Court's review of Swadeshi and the general principles as to when a bonus liability arises under the mercantile system.
Keshav Mills Ltd. v. Commissioner of Income-tax Explanation of the mercantile system of accounting (credit what is due even if not received; debit what is legally incurred even if not disbursed). Quoted in the discussion of the mercantile system as applied in Swadeshi and in assessing when liabilities (including bonus) arise for accounting purposes.
Calcutta Co. Ltd. v. Commissioner of Income-tax Approval of the mercantile system explanation and its application in income-tax contexts. Referenced to support the exposition of mercantile accounting principles relevant to the timing of liability recognition.

Court's Reasoning and Analysis

The Court proceeded in a structured manner:

  1. The Court first observed that the Tribunal had framed questions under section 7(2)(a) (a valuation provision) although the real controversy involved whether certain provisions represented debts deductible in computing net wealth under section 2(m). The Court accepted the correctness of the Tribunal's own statement that section 7(2) is concerned with valuation of assets and not with deducting liabilities, and therefore reframed the referred questions so as to address deductibility when determining net wealth under section 2(m).
  2. On bad and doubtful debts (question 1(c)), counsel for the assessee conceded that some items were contested/subject to litigation and did not press this point; the Court therefore did not answer in the assessee's favour on that head.
  3. On provisions for income-tax (question 1(b)), the Court accepted the Kesoram decision's analysis that income-tax liability may be a present liability capable of being treated as a debt for wealth-tax purposes; the revenue did not press to resist this point in view of Kesoram. The Court answered question 1(b) in the affirmative (in favour of the assessee), i.e., provisions for income-tax were allowable deductions in computing net wealth where they amounted to debts.
  4. On sales tax (question 1(d)), the Court examined the statutory language of the Bengal Finance (Sales Tax) Act, 1941 (section 4) and concluded that provisions for such taxation stood on the same footing as income-tax provisions; therefore the sales-tax liability (where it had been determined and demanded on the valuation date) was deductible. The Court answered question 1(d) in the affirmative for the assessee.
  5. On the most contentious issue — provisions for bonus (question 1(a)) — the Court undertook a detailed review of the historical and judicial development of bonus law in India, drawing on a sequence of Supreme Court authorities and the Full Bench Formula. The Court noted the evolution from voluntary employer payments to judicially recognised claims under the Full Bench Formula, and ultimately to statutory obligation (Payment of Bonus Act, 1965), and reviewed authorities (including Associated Cement and other Supreme Court decisions) which treated bonus as a claim to a share of surplus.
  6. The revenue relied on Swadeshi Cotton & Flour Mills to argue that under the mercantile system a liability for bonus arises only when settled amicably or by industrial adjudication. The Court examined Swadeshi closely and distinguished it on its facts and context, noting Swadeshi addressed the timing of liability for accounting purposes in a different factual setting. The Court also relied on Kesoram's definition of a "debt" and other authorities which treated bonus claims as legal rights in appropriate circumstances.
  7. The Court concluded that a liability to pay bonus can be a debt and not merely a contingent liability, and that in the instant case there was no real dispute that the assessee had admitted liability up to the amounts provided (and had in fact made advances). That factual position reinforced the legal conclusion that the provisions for bonus were debts owed by the assessee on the valuation dates and therefore deductible in computing net wealth under section 2(m). The Court therefore answered question 1(a) in the affirmative in favour of the assessee.
  8. Given the answer to 1(a), the Court held that question 2 (whether advances to employees against bonus pending final settlement were deductible) need not be separately decided; it indicated that if the whole provision was allowable then parts paid out (advances) were likewise allowable.
  9. On question 3 (depreciation issue), the assessee's counsel conceded he was satisfied with the depreciation allowance made, so the Court answered question 3 in the negative (no further allowance needed).

Holding and Implications

Core Rulings:

  • Question 1(a) (Provisions for bonus): Answered in the affirmative — provisions for bonus, to the extent they constituted liabilities/debts on the valuation dates (as here), were deductible in determining net wealth (in favour of the assessee).
  • Question 1(b) (Provisions for income-tax): Answered in the affirmative — provisions for income-tax that amounted to present liabilities/debts were deductible (in favour of the assessee).
  • Question 1(d) (Sales-tax liability for 1958-59): Answered in the affirmative — where the sales-tax demand had been determined and was outstanding on the valuation date, it was a deductible debt (in favour of the assessee).
  • Question 1(c) (Bad and doubtful debts): Not pressed / answered in the negative for purposes of this reference (the assessee did not press this point).
  • Question 2 (advances to employees against bonus): Not necessary to answer separately; the Court indicated that if the whole provision is allowable then the part already advanced would also be allowable.
  • Question 3 (depreciation issue): Answered in the negative — no further adjustment required (not pressed by the assessee).

Direct Consequences:

  • The Court allowed the assessee the deductions in respect of the specified provisions for bonus, income-tax and sales-tax as outlined above for the respective valuation dates, and the assessee was entitled to costs.
  • The Court reframed the questions to address deductibility under section 2(m) (net wealth) rather than under section 7(2)(a) (valuation), and proceeded on the basis that where provisions represent present obligations/debts on the valuation date they may be deducted in computing net wealth.

The opinion sets out the Court's reasoning and relies on a body of earlier Supreme Court decisions to reach its conclusions. The opinion does not expressly state whether it intends to create a new binding precedent beyond its answers to the referred questions; the holding is confined to the issues raised and the facts of this reference.

Disposition

The Court answered Questions 1(a), 1(b) and 1(d) in the affirmative (in favour of the assessee), Questions 1(c) and 3 were not pressed and are answered in the negative, Question 2 was unnecessary to decide but would be answered in the affirmative if needed. The assessee was awarded costs.

Show all summary ...

Banerjee, J.:— This is a reference under section 27(1) of the Wealth-tax Act, 1957, made in circumstances hereinafter stated.

2. The assessee is a public limited company, doing business in manufacture of textile machinery.

3. The assessment years in question are 1957-58, 1958-59 and 1959-60, the material valuation dates being December 31, 1956, December 31, 1957, and December 31, 1958. There is no dispute that the accounts of the business, carried on by the assessee, are regularly maintained on mercantile basis.

4. As is now-the common feature with most of the manufacturing concerns, the employees of the assessee-company were carrying on an industrial dispute with the assessee, concerning payment of bonus. This dispute is not of recent origin. In the year 1955, the employees made a claim for bonus and carried the matter before an Industrial Tribunal, which made an award of Rs. 5,65,000 in favour of the employees. This award was implemented in the year 1956. For similar claims concerning the years 1956, 1957 and 1958, there were disputes pending before Industrial Tribunals but as late as the year 1961, the Tribunals did not make any award. Be that as it may, the assessee seems to have learnt a lesson from the award made in respect of the claim for bonus for the year 1955 and made provision for Rs. 6,00,000 in the year 1956, Rs. 12,00,000 in the year 1957 and Rs. 16,93,000 in the year 1958, for bonuses likely to become payable to the workmen in the respective years. Not only was such provision made, but the assessee made advances to the workmen during the year 1956, 1957 and 1958 against bonuses, that might become payable to them in future, the amounts advanced being Rs. 1,76,414 as on December 31, 1956, Rs. 5,93,824 as on December 31, 1957 and Rs. 11,75,468 as on December 31, 1958. The amounts, which the assessee had provided for bonuses, were included in the accounts under the head “Sundry provisions”, in the section for current liabilities, and were shown in the balance-sheets. The amounts, which were advanced out of the bonus fund, were included under the item “loans and advances” in the balance-sheets.

5. Further the assessee made provisions for income-tax liability, in respect of assessments which were not completed up to the respective valuation dates. The provision for taxation amounted to Rs. 31,00,000 as on December 31, 1956, Rs. 60,15,000 as on December 31, 1957, and Rs. 99,65,743 as on December 31, 1958.

6. Also, the assessee showed, amongst its assets, loans and advances amounting to Rs. 70,37,932, Rs. 76,50,605 and Rs. 1,06,77,932, as on December 31, 1956, December 31, 1957, and December 31, 1958, respectively; these amounts included the sums of Rs. 24,44,998, Rs. 27,50,969 and Rs. 45,17,133, being the amounts of debt outstanding for more than three months and were separately shown in schedule G of the respective balance-sheets. The assessee-company anticipated short recoveries in respect of some of these debts and against such short recoveries made specific provisions, amounting in all to Rs. 1,38,406, Rs. 1,32,512 and Rs. 1,14,866. respectively, for the three assessment years.

7. Lastly, although the assessee had not made any provision in respect of its liability for sales tax, in the balance-sheets, as on respective valuation dates, the amounts of outstanding sales tax demand under appeal were shown in a foot-note. On December 31, 1957, which was the valuation date for the assessment year 1958-59, such liability for sales tax for the years 1953 and 1954 was said to be Rs. 3,13,000. Out of this sales tax for the year 1954 was determined at Rs. 2,16,475 but the demand notice in respect thereof was issued on January 3, 1958, and was served on the assessee after two or three days, that is to say, a few days after the end of the relevant valuation date.

8. The book value of the assessee's fixed assets were Rs. 1,56,17,729 as on December 31, 1956, Rs. 2,08,38,494 as on December 31, 1957, and Rs. 2,18,41,602 as on December 31, 1958. These figures are not in dispute and details thereof are to be found from the balance-sheets. The written down value of these assets for the purpose of section 10(2)(vi) of the Income-tax Act, as per income-tax records of the assessee, were Rs. 1,26,95,835, Rs. 1,76,26,976 and Rs. 1,87,52,878, respectively. The written down value of the assets as per income-tax records of the assessee took into account not only the normal depreciation allowance allowed under section 10(2(vi) but also additional depreciation allowance under section 10(2)(via).

9. The deductions claimed by the assessee, in all the three assessment years, were four-fold, firstly, on account of bonus payable to the employees, secondly, for income-tax payable in respect of profits earned before the valuation dates, thirdly, for bad and doubtful debts in respect of which provisions had been made in the accounts and, fourthly, for sales-tax liability for the assessment year 1958-59, which liability had not been provided for in the books.

10. The assessee further claimed that in determining the net value of the assets of its business, buildings and machinery should be taken at their written down value, as per income-tax records, instead of the value of those assets as shown in the balance-sheet.

11. The Wealth-tax Officer rejected all these claims of the assessee-company, except the claim in respect of the tax liabilities for the three years which he partly allowed. In respect of the claim for deduction for income-tax liabilities, he allowed Rs. 3,459, Rs. 10,49,809 and Rs. 27,57,972, on account of liabilities under section 18A of the Indian Income-tax Act demanded before the respective valuation dates.

12. Aggrieved by the order of the Wealth-tax Officer, the assessee-company preferred appeals before the Appellate Assistant Commissioner. Those appeals failed and the orders of the Wealth-tax Officer were affirmed.

13. Thereupon, the assessee filed three second appeals in respect of the three years before the Appellate Tribunal. The contentions which were raised by the assessee before the Appellate Tribunal were:

(i) that the determination of the net value of the assets of the business as a whole was made under section 7(2)(a) of the Wealth-tax Act, having regard to the balance-sheets of the business as on the respective valuation dates but the net value of the business as a whole could not be arrived at without taking into account the incidental liabilities like the liability for bonus, income-tax and sales tax;

(ii) that section 7(2)(a) of the Wealth-tax Act proceeded on a footing different from section 2(m); under section 7(2)(a) what was determined was the net value of the assets of the business as a whole, while section 2(m) referred to the net wealth of the assessee;

(iii) alternatively, the net value of the assets of the business should first be determined under section 7(2)(a) and, thereafter, the net wealth should be worked out under section 2(m) by adding the value of the other assets and deducting the debts;

(iv) drawing on the analogy of the Income-tax Act, it was contended that, just as for the purpose of income-tax profits are to be determined according to commercial principles by giving deductions which may not have been provided in the Act, so the net value of the assets should also be determined by taking into account the liabilities which were real and unavoidable.

(v) Without prejudice to the aforesaid contentions, it was argued : (1) that in so far as the provision for bonus was concerned, the advances made by the assessee to its employees against bonus, to be ultimately awarded by the Tribunal, should in any event be deducted in determining the net value of the assets of the assessee, (2) that the bad and doubtful debts were the amounts, which the assessee, by prudent estimate, did not expect to recover and to that extent the balance-sheet value of these assets did not represent their true value, (3) that the proper valuation of fixed assets could only be arrived at by making allowance for the wear and tear of the assets and since the assessee had not made adequate allowance for the depreciation of the assets, adjustment should have been made by substitution of the written down value of these assets as per income-tax records of the assessee, in place of the value shown in the balance-sheet on the respective valuation dates.

14. The arguments advanced on behalf of the assessee were sought to be repelled, by the revenue, with the contention that the claim for deduction of provisions for bonus, income-tax and sales tax liabilities had not ripened into debts and therefore could not be deducted from the net assets of the assessee under section 2(m) of the Wealth-tax Act. With regard to the claim for deduction under the head of bad and doubtful debts and the substitution of the written down value of fixed assets in place of the value shown in the balance-sheets, it was contended that, since the valuation of the assets of the business as a whole had been done under section 7(2) of the Wealth-tax Act, the assessee was not entitled to choose an individual item and ask for its revaluation; the adjustment contemplated by section 7(2) of the Wealth-tax Act did not include adjustment in the manner suggested by the assessee. The Tribunal rejected the claim of the assessee in respect of the provisions for bonus with the following observation:

“It is…… clear that what section 7(2) determines is the net value of the assets of the business as a whole without saying anything about the liabilities whether accrued or contingent. After determining the net value of the assets of the business the Wealth-tax Officer has again to refer to section 2(m) to determine the net wealth of the company, by giving deduction where necessary from the net value of the assets, for debts owed by the assessee. There is no provision for deduction of mere liabilities if they are contingent. Only liabilities which have ripened into debts can be deducted from the net value of the assets in order to arrive at the net value of the assets. In this view of the matter it is not possible to agree with the learned counsel that the provisions for bonus are deductible from the net wealth of the company.”

15. The Tribunal negatived the claim of the assessee concerning the provision for payment of income-tax with the following observation:

“Here again the same considerations will apply as in the case of the provision for bonus. The tax liabilities do not become debts till the tax is determined, quantified, and demanded and, therefore, no deduction is permissible on account of provisions for taxes which are not yet determined and which are in respect of assessments which were pending on the valuation dates.”

16. The Tribunal rejected the claim under the head of sales tax liability for the year 1958-59, with the following observation:

“The company had not made provisions for that liability in its balance-sheet and it was mentioned in the foot-note as a contingent liability. The company had challenged the demand made by the sales tax authorities before the appellate court and the company's contention was accepted five months after the date of valuation…..

17. We have to take the position as it existed on the valuation date and there is no getting away from the fact that on the date of valuation there was a demand outstanding against the company amounting to Rs. 2,37,362. This amount having been determined, quantified and demanded was a full fledged debt within the meaning of section 2(m) and was clearly deductible from the net wealth of the assessee. For the assessment year 1958-59 we find that the demand for the tax was made after the valuation date and in view of that fact the liability had not become a debt on the valuation date and the amount was not deductible from the net wealth of the assessee company.”

18. The Tribunal also rejected the claim for bad and doubtful debts but we are not concerned with the reasons given therefor any more, because the order of the Tribunal was not challenged in that respect.

19. The alternative contention by the assessee for deduction, at least, of sums advanced to the workmen against bonus from the bonus fund was disposed of by the Tribunal by later order, under section 35 of the Wealth-tax Act, in the following language:

“The amounts advanced to employees are pure advances and although they may be adjusted in future against bonus that may be due to the employees as a result of the award of the Industrial Tribunal, so long as the award has not been given the amounts advanced are on the personal credit of the employees with the security of the salaries for which they are entitled from month to month. The position in law, on the valuation date, is that the employees are liable to pay the advances back to the company and the debt owed by the employees would be enforceable in a court of law.”

20. Aggrieved by the order of the Tribunal, the assessee obtained a reference to this court, under section 27(1) of the Wealth-tax Act, on the following questions of law:

“(1) Whether, on the facts and in the circumstances of the case, in determining the net value of the assets of the assessee company's business as a whole under section 7(2)(a) of the Wealth-tax Act, adjustments by way of deductions of the following amounts, as on the respective valuation dates, were permissible:

Rs. (a) Provision for bonus for each of the three years 6,00.000 12,00,000 & 16,93,000 (b) Provision for taxation 30,96,541 49,65,191 & 72,07,771 (c) Bad and doubtful debts amounting to 1,33,406 1,32,512 & 1,14,866 (d) Liability to sales tax for the assessment years 1958-59 and 1959-60 2,16,475

(2) If the answer to part (a) of question No. 1 is in the negative, whether the amounts advanced to the employees against bonus pending final settlement were deductible by way of adjustment under section 7(2)(a) of the Act?

(3) Whether, on the facts and in the circumstances of the case, only a part and not the whole of the depreciation allowed in the income-tax assessments of the company but not taken into account in its balance sheets was a permissible deduction by way of adjustment under section 7(2)(a) of the Act?”

21. Now the question as framed does not appear to have been correctly done. It requires both clarification and correction. Question 1(a), concerning the provision in respect of the claim for bonus, was so framed as gave an indication that for the assessment year 1957-58 the claim was Rs. 6,00,000, for the year 1958-59 the claim was Rs. 12,00,000, and for the year 1959-60 the claim was Rs. 16,93,000. Mr. A.K Sen, learned counsel for the assessee, made it clear that for the year 1957-58 the claim of the assessee in respect of provision for bonus was limited to Rs. 6,00,000 only, for the year 1958-59 to Rs. 6,00,000 only and (not Rs. 12,00,000) and for the year 1959-60 to 4,93,000 (and not Rs. 16,93,000). We propose to read question No. 1(a) with the clarification as made by Mr. Sen. Then again, under question No. 1(d) liability for sales tax was admittedly limited to the year 1958-59 and not to 1959-60 Mr. Sen made it clear that, although the provision for liability of sales tax concerned the assessment year 1958-59, apart of the last quarter of that year may have travelled beyond that year and that was the reason why the Tribunal tagged on the year 1959-60 to the year 1958-59. We, therefore, read question No. 1(d) with the clarification that the provision for liability of sales tax principally concerned the year 1958-59. This is so far as clarifications which are necessary to be made to the questions. But Mr. Gouri Mitter, learned consel for the revenue, very pertinently pointed out that section 7(2)(a) of the Wealth-tax Act was merely a valuation section and did not concern itself with deductions of debts and liabilities, which could only be considered under section 2(m) of the Wealth-tax Act. In this submission Mr. Mitter is right. In the case of Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax [1966] 59 I.T.R 767 S.C. Shah J., in his dissenting judgment, referred to this aspect of the matter and observed (page 793):

“The argument raised by counsel for the assessee is that substantially section 7(2) is a definition section, which extends, for the purposes of the Act, the definition of the ‘net wealth’ of the assessees carrying on business. There is no warrant for this argument in the language used in section 7(2). Counsel was unable to suggest any rational explanation why, if what he contends was the intention, Parliament should have adopted this somewhat roundabout way of incorporating a definition of net wealth in a section dealing with valuation of assets.

22. In my judgment, neither clause (a) nor clause (b) of section 7(2) is directed towards the determination of the net wealth, and it would be impossible to hold that the legislature intended that the net wealth for the purpose of the charge to tax under section 3 should be the net value of the assets as determined under sub-section (2) of section 7”.

23. Thus the position is that by quoting a wrong section of the Wealth-tax Act the questions of law referred to this court have become such that they should be answered in the negative.

24. Mr. Sen, for the assessee, however, contended that the points of dispute between the revenue and the assessee, in the instant case, were whether provisions made for bonuses, taxes, including income-tax and sales tax, and bad debts should be deducted in computing the net wealth of the assessee. Those disputes were of such a nature that they certainly raised a question of law. Now, the Tribunal was not oblivious of the fact that section 7(2) was not concerned with deduction of liabilities. This is what the Tribunal expressly said in their judgment:

“In the first place, the section is confined to the net value of the assets of the business. It does not refer to the liabilities presumably because in section 2(m) only debts owed by the assessee are deductible from the net value of the assets. It is also significant that section 7(2) refers to the net value of the assets of the business as a whole and not to the net value of the business as a whole. It is, therefore, clear that what section 7(2) determines is the net value of the assets of the business as a whole without saying anything about the liabilities whether accrued or contingent. After determining the net value of the assets of the business, the Wealth-tax Officer has again to refer to section 2(m) to determine the net wealth of the company, by giving deduction where necessary from the net value of the assets, for debts owed by the assessee.”

25. Thus, the Tribunal correctly stated the law but in framing the questions fell into the same error which they themselves had pointed out. Mr. Sen, for the assessee, prayed that in these circumstances we should reframe the question in such a manner so that the real controversy between the assessee and the taxing department may be included in the question. In our opinion, there is wisdom in the prayer made by him. Where an assessee is entitled to certain deductions under a taxing statute, if he claims those deductions under a wrong section of the statute, that should not be overemphasised. If, in negativing a claim of the assessee otherwise allowable, a Tribunal quotes a wrong section, in the question referred to this court, and seeks an answer whether the claim of the assessee is allowable under that wrong section, it is open for this court to say that the assessee is entitled to claim for deduction not under the erroneous section quoted by the Tribunal but under some other section. This was the view which was expressed by Chagla C.J in Ismailia Grain Merchants Association Ltd. v. Commissioner of Income-tax and we respectfully agree with his Lordship. The only caution administered by the Supreme Court against that view is to be found in Kusumben D. Mahadevia v. Commissioner of Income-tax [1960] 39 I.T.R 540 S.C.. What their Lordships said in that case was that, if an aspect of a question was not touched by the Tribunal, the question should not be so reframed as to include that aspect in the question itself. In the instant case,-the aspect whether deductions claimed by the assessee were allowable as debts owed by the assessee, when computing its net wealth, was agitated and considered throughout by the revenue authorities beginning from the Wealth-tax Officer to the Appellate Tribunal. If the assessee is really entitled to such deductions then the fact that the claim for deduction was being made under an inappropriate section should not be over-emphasised and we should reframe the question in such a manner that the real controversy between the assessee and the taxing department may be properly dealt with by us in our advisory jurisdiction. In the view that we take we reframe question No. 1 in the following manner:

“Whether, in the facts and circumstances of the case, in determining the net wealth of the assessee, deduction of the following amounts as on the respective valuation dates, were permissible:

(a) Provision for bonus for each of the three years Rs. 6,00,000 6,00,000 4,93,000 (b) Provision for taxation 30,96,541 49,65,191 72,07,771 (c) Bad and doubtful debts amounting to 1,33,406 1,32,512 1,14,866 (d) Liability for sales tax for the assessment year-1958-59 2,16,475

We reframe questions Nos. 2 and 3 by omitting therefrom the words “section 7(2)(a) of.”

26. Mr. A.K Sen, learned counsel for the assessee, in his fairness, conceded that the amounts claimed under the heading “bad and doubtful debts” may not have become irritrievably bad because some of them were the subject-matter of litigation. He, therefore, did not press for an answer to question No. 1(c). We, therefore, do not answer that question in favour of the, assessee.

27. So far as the provisions made for income-tax were concerned, Mr. Sen submitted that the decision of the Supreme Court in Kesoram Industries & Cotton Mills Ltd. v. Commissioner of Wealth-tax covered the point and in accordance with that decision the question must be answered in the affirmative and in favour of the assessee. Mr. G. Mitter, learned counsel for the revenue, submitted that in view of that decision he was unable to contend that the provisions made by the assessee in respect of income-tax was not allowable as deduction. We, therefore, answer question No. 1(b) in the affirmative and in favour of the assessee.

28. The liability for sales tax does not stand on a different footing and this amply appears from section 4 of the Bengal Finance (Sales Tax) Act, 1941, which is couched in the following language:

“With effect from such date as the State Government may by notification in the Official Gazette, appoint, being not earlier than 30 days after the date of the said notification every dealer whose gross turnover during the year immediately preceding the commencement of this Act exceed taxable quantum shall be liable to pay tax under this Act on all sales effected after the date so notified………”

29. If provision made for taxation under the Indian Income-tax Act and the Bengal Finance (Sales Tax) Act stand on the same footing, the answer to question No. 1(d) must also be in the affirmative and in favour of the assessee. This is˜not disputed by Mr. Mitter on behalf of the revenue. We answer the question accordingly.

30. We are thus left with question 1(a) only, out of question No. 1. Mr. Sen, learned counsel for the assessee, contended that bonus, which started as a boon from the employer to the employee, has now developed and acquired the character of a right on the part of the employees and a corresponding liability on the part of the employer. In order to understand this argument, it is necessary for us to consider the development of the Industrial law relating to bonus in this country. The Supreme Court summarised this development in Jalan Trading Company Private Ltd v. Mill Mazdoor Sabha for bonus, it is well-known, was made by industrial employees, for the first time in India, in the towns of Bombay and Ahmedabad, after the commencement of the first world war, when as a result of inflationary trends there arose considerable disparity between living wages and contractual remuneration in the textile industry. The employers began paying to the workmen an increase in wages, initially called “war bonus” and later on “special allowance”. A committee appointed by the Government of Bombay, in 1922, to consider, inter alia, the nature and basis of this bonus payment, reported that the workmen had a just claim against the employers to receive bonus, but the claim was not customary, legal or equitable. During the second world war, the employers in the textile industry granted cash bonus equivalent to a fraction of actual wages, but even this was a voluntary payment made with a view to keep labour contented. Thus, in its process of evolution, the propriety of the payment of bonus to workmen was recognised as just and proper but not as customary, legal or equitable. In other words, it was recognised that there was a good deal of justice behind the claim but the employers were not made liable for such payment in any manner. Thus ends the first phase of evolution of the claim for payment of bonus. Labour in this country is not well-paid and is consequently hungry. Labour persisted on with its claim for bonus and more bonus and collective bargaining on payment of bonus became a feature in employer and employee relationship. In the dispute for payment of bonus for the years 1948 and 1949, in the textile industry in Bombay, the industrial court expressed the view that since labour as well as capital employed in an industry contribute to the profits of the industry, both are entitled to claim a legitimate return out of the profits and evolved a formula for charging certain prior liabilities on the gross profits of the accounting year, and awarding a percentage of the balance as bonus to workmen. In adjudicating upon the claim for bonus, an industrial court excluded. establishments which had suffered losses in the year under consideration from liability to pay bonus. In several appeals against the award, the Labour Appellate Tribunal particularly approved of the method for computing bonus as a fraction of surplus profit. According to the formula, which came to be known as the “Full Bench Formula”, surplus available for distribution had to be determined by debiting the following prior charges against gross profits,

(a) provision for depreciation,

(b) reserve for rehabilitation,

(c) return of 6% on the paid up capital,

(d) and return on the working capital at a lower rate than the return. on the paid up capital;

and from the balance called “available surplus” the workmen were to be given a reasonable share by way of bonus for the year.

31. The “Full Bench Formula” came up for consideration before the Supreme Court in many cases, for example, Muir Mills Co. Ltd. v. Suti Mills Mazdoor-Union, Baroda Borough Municipality v. Its Workmen Sree Meenakshi Mills, Ltd. v. Workmen [1958] S.C.R 878, and State Of Mysore v. Workers Of Gold Mines [1959] S.C.R 895 The Supreme Court did not commit itself to acceptance of the formula in its entirety but ruled that bonus was not a credit payment made by the employer to the workmen, nor a deferred wage and, where the wages fell short of the living standard and the industry made profit, part of which was due to the contribution of labour a claim for bonus might legitimately be made by the workmen. The Supreme Court did not examine the propriety nor the order of priorities as between the several charges and their relative importance, nor did it examine the desirability of making any variations, change or addition in the “Full Bench Formula”. These problems were for the first time elaborately considered by the Supreme Court in Associated Cement Companies Ltd. v. Its Workmen in which Gajendragadkar J. (later Gajendragadkar C.J) observed:

“The notional accounting for this purpose starts with the figure of the gross profits which are arrived at after payment of wages and dearness allowance to the employees and other relevant items of expenditure. Then a deduction for depreciation is made, and on the notional balance thus derived a provision for taxes payable is allowed. Then follow the provisions for reserves for rehabilitation, return on paid up capital and return on reserves employed as working capital. That gives the amount of surplus if any. Whenever the working of this formula leaves an amount of available surplus, labour was held entitled to claim a reasonable share in this amount by way of bonus for the current year. This formula is based on considerations of social justice and is intended to satisfy the legitimate claims of both capital and labour in respect of the profits made by the industry in a particular year. It takes the particular year as a unit and makes all its notional calculations on the basis of the gross profits usually taken from the profit and loss account;…………”

(Underlined for emphasis).)

32. Since that decision, numerous cases came up before, the Supreme Court in which the basic formula was accepted with some elaboration. Attempts were made before the Supreme Court to secure a revision of the Full Bench Formula but such attempts generally failed. In Associated Cement Company's case, the Supreme Court observed:

“The plea for revision of the formula raises an issue which affects all industries; but before any change is made in it all industries and their workmen would have to be heard and their pleas carefully considered. It is obvious that while dealing with the present group of appeals it would be difficult, unreasonable and inexpedient to attempt such a task.”

33. This was the view which was repeated by the Supreme Court in Ahmedabad Miscellaneous Industrial Workers' Union v. Ahmedabad Electricity Co. Ltd. us ended the second phase of the evolution of the claim for bonus. The third phase has started with the passing of the Payment of Bonus Act, 1965, which has cast upon the employers a statutory obligation to pay bonus.

34. It may be broadly stated that bonus, which was originally a voluntary payment out of profits to workmen to keep them contented, acquired the character, under the Full Bench Formula, of a right to share in the surplus profits and enforceable through the machinery of the Industrial Disputes Act. Under the Payment of Bonus Act, 1965, liability to pay bonus has become a statutory obligation imposed upon employers covered by the Act, (vide the observation of the Supreme Court in Jalan Trading Co. v. Mill Mazdoor Sabha

35. That the payment of bonus has become a liability on the employer was not seriously disputed before us. What was disputed was the point of time when this becomes a liability.

36. It was contended on behalf of the revenue, relying on the case of Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Private Ltd. that it was only when a claim to profit bonus was settled amicably or by industrial adjudication that a liability was incurred by the employer, who followed the mercantile system of accounting, to pay bonus. It was contended that, in the instant case, the employees' claim for bonus had not been amicably settled nor covered by an award of an industrial tribunal and had not therefore ripened into a liability and as such did not amount to a debt owed by the employer-assessee, It was said that the provision made by the assessee for payment of bonus was a provision made against a contingent liability and a contingent liability, which depended upon the happening of various collateral events, did not amount to a debt owed by the assessee within the meaning of section 2(m) of the Wealth-tax Act.

37. Mr. A.K Sen, learned counsel for the assessee, sought to repel this contention with the following argument. He submitted that the idea that a liability did not ripen into a debt until it was quantified, was not a correct idea. In support of this contention, he relied upon the following observation by the Supreme Court in the case of Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax at page 784:

“To summarize: A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in praesenti or in futuro: debitum in praesenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened. A liability to pay income-tax is a present liability though it becomes payable after it is quantified in accordance with ascertainable data. There is a perfected debt at any rate on the last day of the accounting year and not a contingent liability. The rate is always easily ascertainable. If the Finance Act is passed, it is the rate fixed by that Act; if the Finance Act has not yet been passed, it is the rate proposed in the Finance Bill pending before Parliament or the rate in force in the preceding year, whichever is more favourable to the assessee. All the ingredients of a ‘debt’ are present. It is a present liability of an ascertainable amount.”

38. The aforesaid observations were no doubt made in the context of liability for payment of income-tax debt. Mr. Sen argued that the liability to pay bonus to workmen arose as soon as the industry made a profit. How much bonus to pay was also ascertainable, at the material time, under the Full Bench Formula as explained by the Supreme Court. Therefore, the liability was not. a contingent liability and the quantification of the liability was a matter of calculation in accordance with a formula. In the hands of the workmen the claim for bonus was a right, correspondingly for the assessee it was a liability ascertainable either by settlement or by application of the Full Bench Formula, might be through the medium of industrial adjudication. The claim, he submitted, was very much an enforceable claim, which could be enforced through the medium of industrial adjudication. He, therefore, submitted that there was no difference between a provision made for payment of income-tax and a provision made for payment of bonus. He rounded up this branch of his submission by recitation of the following extract from the judgment of the Supreme Court in Workmen of the Hercules Insurance Co. Ltd. v. Hercules Insurance Co. Ltd.

“Bonus under the Industrial Disputes Act is not a part of wages, but the right to claim bonus which has been universally recognised by industrial adjudication in cases of employment falling under the said Act has now attained the status of a legal right. Bonus can be claimed as a matter of right provided of course by the application of the Full Bench Formula it is shown that for the relevant year the employer has sufficient available surplus in hand.”

(Underlined for emphasis).

39. He next tried to cross the hurdle created by the judgment of the Supreme Court in Swadeshi Cotton & Flour Mills Ltd. in the following manner. He submitted that the decision was clearly distinguishable and the point which the Supreme Court had to consider in that case was a point different from what we have to consider in the instant case. This takes us to the consideration of the facts of the case of Swadeshi Cotton & Flour Mills Private Ltd. In that case, the assessee had paid a sum of Rs. 1,33,325-9-3 by way of profit bonus to the employees for the calendar year 1947, in terms of an award made on January 13, 1949, under the Industrial Disputes Act. It debited the amount in its profit and loss account for the year 1948, but in fact paid it to the employees in the year 1949, the relevant assessment year being 1950-51. The question that arose for consideration was whether, in the facts and in the circumstances of the case, the assessee was entitled to claim a deduction of bonus relating to the calendar year 1947, in the assessment year 1950-51. Sikri J., who delivered the judgment of the court, observed that the answer to the question must depend on the proper interpretation of section 10(2)(x), read with section 10(5) of the Act. His Lordship then examined the sections and observed:

“Asthe assessee's profits and gains have been computed according to the mercantile system, the question… comes to this :……

‘In what year did the liability of this sum of Rs. 1,08,325 arise according to the mercantile system?’

The mercantile system of accounting was explained in the judgment of this court in Keshav Mills Ltd. v. Commissioner of Income-tax thus:

‘That system brings into credit what is due, immediately it becomes legally due and before it is actually received, and it brings into debit expenditure the amount for which the legal liability has been incurred before it is actually disbursed:’

These observations were quoted with approval in Calcutta Co. Ltd. v. Commissioner of Income-tax.

On the facts of this case, then when did the legal liability arise in respect of the bonus? This depends on the facts of the case and the nature of the bonus awarded in this case. This court has examined the nature of profit bonus—it is common ground that the bonus with which we are concerned was a profit bonus—in various cases.”

40. Then, his Lordship examined the cases of Muir Mills Co. Ltd., Associated Cement Co., and Indian Tea Association v. Workmen [1962] Supp. 1 S.C.R 557 and observed:

“It follows from the above decisions of this court that:

(a) workmen are entitled to make a claim to profit bonus if certain conditions are satisfied.

(b) the workmen are to make a claim from year to year.

(c) this claim has either to be settled amicably or by industrial adjudication; and

(d) if there is a loss or if no claim is made, no bonus will be permissible. In our opinion, it is only when the claim of profit bonus, if made, is settled amicably or by industrial adjudication that a liability is incurred by the employer, who follows the mercantile system of accounting, within section 10(2)(x) read with section 10(5) of the Act.”

41. Mr. Sen submitted that the aforesaid decision was an authority for the proposition that, for an employer who followed the mercantile system of accounting, the liability for bonus for accountancy purposes should be deemed to arise when bonus was either amicably paid or settled by industrial adjudication. The case, according to him, was no authority for the proposition that the liability for payment of bonus would not at all arise until the claim for bonus was either amicably settled or settled by an award of an industrial tribunal. He submitted, in the next place, that since the time when the decision in Swadeshi Cotton & Flour Mills Private Ltd. was pronounced by the Supreme Court in 1964, ideas of social justice in this country have made considerable progress and it has now been recognised by the Supreme Court that a claim for bonus is based on a right in the workmen and all employers are liable to pay the same as soon as they make profit. The quantification of such claim, either amicably or through industrial adjudication, by application of the Full Bench Formula, may come later but that will not make the liability any the less a liability. It was therefore the bounden duty of every employer to provide for the liability, as a debt owed by the capital to the labour, and it should be deemed as such for the purpose of computation of the net wealth of the assessee.

42. The point raised by Mr. Sen is a point of very great interest and importance. We live in a welfare State where we have certain responsibilities. One such responsibility is that employers should not only pay wages and allowances to workmen, but must share with them a portion of their profit. This is not a moral responsibility. It may have started that way but in course of time this moral responsibility has ripened into a legal liability and has recently been converted into a statutory obligation. If that is so, this liability is at par with any other liability, may be contractual liability as in Calcutta Company Ltd. v. Commissioner of Income-tax or statutory obligation as in Kesoram Industries & Cotton Mills Ltd. We agree that the argument of Mr. Sen that the context in which the Supreme Court observed that the liability to pay bonus did not become a liability until it was amicably settled or covered by an award of the industrial tribunal was made in a different context and their Lordships had not to consider the case in the context that we are now doing. In our opinion, the liability to pay a bonus is a debt and not a contingent liability and, therefore, is liable to be taken into consideration in the computation of the net wealth under section 2(m) of the Wealth-tax Act.

43. There is another aspect of the matter. Here, it does not appear that there was any dispute between the assessee and the workmen over the payment of bonus up to the extent provided for by the assessee. The workmen were possibly asking for more and that is why industrial adjudication was going on. But up to a total sum of Rs. 16,93,000 spread over the years of assessment, the assessee admitted liability and was making payment of considerable sums towards bonus. This is an indication that up to that amount the payment of bonus was not disputed. If that was so, and we have every reason to think that it was so, then this is an additional reason why the liability should be treated as debt owed by the assessee to the workmen.

44. In the view that we take, we answer question No. 1(a) in the affirmative in favour of the assessee.

45. In view of our answer to question No. 1(a) in the affirmative, question No. 2 does not call for an answer because if the whole was an allowable debt, then part of it, which was paid out to the employees against bonus pending full settlement, must also be allowable. We, therefore, answer question No. 2 in the following manner. It is not necessary to answer the question in view of our answer given to question No. 1(a) and if the entirety of the provision made towards payment of bonus was allowable as deduction then a part of it was equally allowable as such.

46. We need not trouble ourselves with an answer to question No. 3, because Mr. Sen in his fairness conceded that conscientiously he was satisfied with the depreciation allowance as allowed in the instant case and would not aspire to get more for the years in question. We, therefore, answer question No. 3 in the negative.

47. In the result, our answer to questions Nos. 1(a), 1(b), 1(d) are in the affirmative. Question No. 1(c) and question No. 3 were not pressed and are, therefore, answered in the negative. It is not necessary for us to answer question No. 2 and were it necessary for us so to do, we would have answered the question in the affirmative.

48. The assessee is entitled to costs.