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Shivrajpur Syndicate Ltd. Vs. Commissioner of Income-tax, Bombay - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 7 of 1960
Judge
Reported in[1962]46ITR1205(Bom)
ActsIncome Tax Act, 1922 - Sections 10(2)
AppellantShivrajpur Syndicate Ltd.
RespondentCommissioner of Income-tax, Bombay
Appellant AdvocateR.J. Kolah, Adv.
Respondent AdvocateG.N. Joshi, Adv.
Excerpt:
direct taxation - bonus - section 10 (2) of income tax act, 1922 - whether bonus paid to workers can be included in cost of closing stock - bonus paid out of profit of company - bonus cannot be included in cost of closing stock. - - as already stated he made adjustment on this basis in relation to the opening stock of the assessment year 1954-55 and 1955-56 but did not make such adjustment in respect of the opening stock of the assessment year 1953-54. the appeal filed by the assessee before the appellate assistant commissioner failed. that question is :whether the tribunal was justified in law in holding that the proportionate amount of bonus paid by the assessee to its employees can be taken into account in determining the cost price of the closing stock ?' 3. the tribunal itself..........method of valuing the closing stock adopted by the assessee was to value the stock at cost price. bonus paid to the employees had at no time been included by the assessee company in the cost price of the manganese ore. it is an admitted position that in all these years the cost price of the closing stock was lower than the market price. in the assessment year 1953-54 the assessee company paid rs. 1,14,810 by way of bonus to its employees relating to the previous year. similarly, it paid rs. 2,51,710 in the assessment year 1954-55 and rs. 4,44,556 in the assessment 1955-56. for the first time in the assessment year 1953-54 the income-tax officer included the proportionate amount of bonus paid by the assessee company to its employees in determining the cost price of the closing stock. he.....
Judgment:

Tambe, J.

1. This is a reference under section 66(2) of the Indian Income-tax Act (hereinafter referred to as the Act) made in pursuance of the requisition of this court. The assessee is a limited liability company and the business of the company is of raising manganese ore. We are here concerned with the assessment years 1953-54, 1954-55 and 1955-56, the relevant accounting years ending with 30th of November, 1952, 30th of November, 1953, and 30th of November, 1954. The method of valuing the closing stock adopted by the assessee was to value the stock at cost price. Bonus paid to the employees had at no time been included by the assessee company in the cost price of the manganese ore. It is an admitted position that in all these years the cost price of the closing stock was lower than the market price. In the assessment year 1953-54 the assessee company paid Rs. 1,14,810 by way of bonus to its employees relating to the previous year. Similarly, it paid Rs. 2,51,710 in the assessment year 1954-55 and Rs. 4,44,556 in the assessment 1955-56. For the first time in the assessment year 1953-54 the Income-tax Officer included the proportionate amount of bonus paid by the assessee company to its employees in determining the cost price of the closing stock. He also adjusted the price of the opening stock by taking the price of the closing stock of the preceding year in respect of the assessment years 1954-55 and 1955-56. The opening stock for the assessment year 1953-54, however, was not adjusted. The assessee company objected thereto. The principal contention raised by the assessee was that the bonus paid by it to its employees does not form part of the cost price of raising manganese ore inasmuch as bonus is paid out of the profits of the company. In the alternative the assessee contended that, in the method of accounting adopted by the assessee, bonus had never been included in the cost price and, therefore, it was not open to the income-tax authorities to vary that method of accounting. In the further alternative the assessee contended that the bonus paid in those relevant years related to the respective previous years and, therefore, at any rate, it cannot be taken into account in determining the cost price of the manganese ore raised in those years. In the last alternative the assessee contended that if at all the amount of bonus paid by the assessee company to its employees is to be taken into account then the opening stock of the assessment year 1953-54 also required to be adjusted accordingly. The contentions raised by the assessee were overruled. The Income-tax Officer took into account the proportionate amount of the bonus paid in those respective year by the assessee to its employees in determining the closing stock of those three years. As already stated he made adjustment on this basis in relation to the opening stock of the assessment year 1954-55 and 1955-56 but did not make such adjustment in respect of the opening stock of the assessment year 1953-54. The appeal filed by the assessee before the Appellate Assistant Commissioner failed. In the second appeal taken by the assessee to the Tribunal, the Tribunal held that, in the present day circumstances, bonus has long ceased to be an ex gratia payment payable only when there are profits. On the other hand, bonus paid had become part and parcel of the wages and salary as the case may be though its quantum is determined later on. The Tribunal, therefore, held that the proportionate amount of bonus can be taken into account in determining the cost price of the closing stock. The Tribunal also rejected the other alternative contentions raised by the assessee and dismissed the assessee's appeal. The assessee then applied to the Tribunal under sub-section (1) of section 66 requesting the Tribunal to draw up a statement of case and refer to this court the question of law arising out of the Tribunal's order. This application was, however, rejected by the Tribunal. The assessee then moved this court by an application under sub-section (2) of section 66 of the Act and, on the requisition of this court, the Tribunal has drawn up a statement of case and referred the following three questions of law to this court :

'(1) Whether on general principles, the Tribunal was justified in upholding the addition of a proportionate part of the bonus for the earlier years paid in the accounting year to the cost of the stock on hand for the purpose of valuation

(2) Whether such addition was in any event unjustified having regard to the petitioner's regular method of accounting

(3) In the event of the above question being answered against the petitioners, whether the Tribunal was justified in revaluing the closing stock for the assessment year 1953-54 by adding a proportionate part of the amount of bonus and in refusing to revalue the opening stock in the same manner and on the same basis ?'

2. In our opinion, the questions framed have not been happily worded to bring out the real and principal controversy between the assessee and the income-tax authorities. That question is :

'Whether the Tribunal was justified in law in holding that the proportionate amount of bonus paid by the assessee to its employees can be taken into account in determining the cost price of the closing stock ?'

3. The Tribunal itself in the opening sentence of paragraph 4 of its order has stated that this is the real question been clearly and specifically raised in this form in the statement of the case. In our opinion, therefore, it is necessary to frame the aforesaid question to brig out the real question of law arising out of the order of the Tribunal.

4. Mr. Joshi contends that it is not open to this court to raise this question at this stage because the assessee had not asked a question in this form to be raised in his application under sub-section (1) of section 66 of the Act. According to Mr. Joshi, the jurisdiction of this court is advisory to answer the question, which the assessee wants the Tribunal to raise. If the assessee does not ask that any particular question should be raised and referred to this court, it is not open to this court to raise that question. The jurisdiction of this court is limited only to answer the questions, which the assessee seeks the Tribunal to raise and refer to this court.

5. It is indeed true that the jurisdiction of this court is an advisory jurisdiction to answer the questions referred to it at the instance of the assessee. We are, however, unable to agree with Mr. Joshi that it is possible to hold that the assessee had never asked the Tribunal to raise this principal question of law arising out of the order of the Tribunal and refer it to this court. In the three applications made by the assessee to the Tribunal under sub-section (1) of the section 66, the assessee had, inter alia, asked for raising the first two questions, which have been referred to us. As already stated, the questions have not been happily worded. The first question is really in two parts, i.e., whether on general principles, the Tribunal was justified in upholding the addition of a proportionate part of the bonus to the cost of the stock on hand for the purpose of valuation as well as whether it was at any rate justified in upholding the addition of the proportionate part of the bonus in the earlier years paid in the accounting year. It is difficult to hold that, when the assessee has been agitating this principal question all through and when the Tribunal itself in its order observed that that was the real question that arose in the appeal, the assessee was, in his application under section 66(1), not asking the Tribunal to refer that question of law to this court. Mere mistakes in framing the questions or unhappy framing of questions, in our opinion, would not warrant a finding that the assessee had not asked the Tribunal to refer this question to this court. We are framing the question only with a view to clearly and specifically state the controversy between the parties and the principal question of law arising out of the order of the Tribunal. The question framed by us will be numbered as No. 1 and the other questions referred to us will be numbered as Nos. 2 to 4.

6. Now, as regards the first question, i.e., the question framed by us, we are of the opinion that it is difficult to sustain the conclusions reached by the income-tax authorities as well as the Tribunal, in view of the decision of their Lordships of the Supreme Court in various cases. The Tribunal has taken the view that in the present day circumstances, bonus has long since ceased to be an ex gratia payment payable only when there are profits. According to the Tribunal it has become part and parcel of the wages and salary, though the quantum is to be determined later on. It is difficult to understand on what basis the Tribunal has observed that 'long since bonus has ceased to be payments made out of the profits'. In Muir Mills Co. Ltd. v. Suti Mills Mazdoor Union, Kanpur their Lordships have made clear the nature of the payment of bonus and the conditions that are required to be fulfilled before a claim for bonus made by the employees can be allowed. The ratio of the decision has been well summarised in the placitum. The second placitum reads :

'There are two conditions, which have to be satisfied before a demand for bonus can be justified and they are, (1) when wages fall short of the living standard and (2) the industry makes huge profits part of which are due to the contribution which the workmen make in increasing production.............'

7. It is, therefore, clear that the claim for bonus can be made by the employees only if as a result of the joint contribution of capital and labour the industrial concern has learned huge profits. In this case their Lordships have dealt with various allowances that have to be made to the employers to ascertain the available surplus from which part of the amount could be paid to the employees as bonus. For the purpose of this case, it is not necessary for us to go into those details. It is sufficient to say that their Lordships have ruled that bonus is paid out of the profits under certain circumstances. Payment of bonus is by way of sharing of profits between labour and capital. This principle has been reiterated by their Lordships in various subsequent decisions. That being the position, with respect, the learned members of the Tribunal were in error in holding that payment of bonus had ceased to be out of profits of an industrial organisation and that it is a part and parcel of the wages or salary paid to the employees. In the order of the Tribunal reference also in made to certain agreements entered into between the employees of the assessee and the assessee regarding payment of bonus. They are annexure 'B' to the statement of the case and summary of these agreements in so far as payment of bonus goes is annexure 'A' to the case. We fail to see how from these agreements it can be inferred that the bonus paid to the employees was not out of profits. On the other hand, these documents would show that the agreement relating to payment of bonus was reached between the employer and the employees after the completion of the year, when the position as regards the available profits must have been ascertained.

8. In our opinion, therefore, the first question will have to be answered in the negative. We answer the question accordingly. In view of our answer to the first question, the remaining questions do not survive and need not be answered. In the circumstances of the case, especially in view of the fact that care was not taken in getting framed the real question that arose in this case, we make no order as to costs.

9. Questions answered accordingly.


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