1. The petitioners are a co-operative bank. The 1st respondents are a trade union of co-operative bank employees. The union made a demand for payment of 20% bonus to the petitioners' employees for the year 1976-77. A reference was made and was heard by the Industrial Tribunal. It is this award that is impugned here.
2. The union alleged that the bank had make a substantial profit and should be required to pay bonus at the rate of 20%. The bank contended that on the basis of its profits for the relevant year the bonus payable worked out at not more than 6 1/2% but it was willing to pay at the rate of 8.33%. Both parties filed statements of bonus calculations based on the balance-sheet and profit and loss account of the bank for the relevant year.
3. The union disputed three deduction claimed by the bank. These were on account of : (a) liability of income-tax, (b) contribution to the reserve fund and (c) return at the rate of 8.5% on the capital invested.
4. The bank claimed a deduction of Rs. 25674/- on account of liability to income-tax. It was contended by the bank that it carried on the non-banking activities of the sale of canteen coupons to Air-India staff, the sale of leave concessional air tickets, Life Insurance Corporation business, and the collection of bills of the Bombay suburban Electric Supply Company. Upon these activities it earned commission and was liable to income-tax. The tribunal held that under S. 6 of the Banking Regulations Act, 1948, by which the bank was admittedly governed, banking companies were permitted to engage in such activities, Under S. 80P of the Income-Tax Act a co-operative society on the business of banking was entitled to a deduction of the whole of the amount of its profits and gains of business. Therefore, the entire income earned by the bank was liable to deduction under the provisions of the Income Tax Act. In other words, the bank was exempted from paying any income-tax and could claim no deduction on that account.
5. Mr. Damania, learned counsel for the union, fairly offered to agree to a deduction of whatever amount was proved to have been actually paid by the bank by way of income-tax for the relevant year. The matter was adjourned to enable the bank to produce such proof. No assessment order or other satisfactory proof of payment has been forthcoming.
6. Mr. Cama, learned counsel for the bank, laboured long and hard and cited authorities to urge out that in calculating the available surplus under the Payment of Bonus Act the tribunal was concerned not with actual payments made but with the liability to pay direct tax. There is no dispute on this score. The activities carried on by the bank are permissible under the Banking Regulation Act. Under S. 80P of the Income Tax Act a banking company is not liable to income-tax upon its profits and gains of business. The bank is, therefore, not liable to pay income-tax and cannot claim a deduction therefor.
7. On account of contribution to the Reserve Fund the bank claimed a deduction of 25% of its net profits. Bye-law 64(a) of the bank's bye-laws required it to contribute only 10% of its net profits. This is what the bank had in fact done. What was contended on behalf of the bank was that the auditor of the co-operative department had objected to the contribution of only 10% the bank had thereafter amended it bye-laws and was subsequently making a contribution of 25%. It was, therefore, liable to deduct at the rate of 25% even for the relevant year the contribution had been only 10% that this was permissible under the bank's bye-laws and that the auditor's objection could make no difference.
8. Mr. Cama urged that the bye-law as it then stood was contrary to the law and that the bank's liability was to contribute 25% for the relevant year. The bye-law entitled the bank to contribute only 10%. Such contribution has in fact been made. The bye-law was amended later. There was, accordingly, no liability to make a contribution of more than 10% for the relevant year and no deduction in excess of 10% is permissible.
9. The bank claimed that it was entitled to deduct 8.5% of the capital invested by it in its establishment. The bank based its claim on Item 4 of Schedule III to the Act. The union on the other hand contended that the bank was entitled to such deduction at the rate of only 7.5% and based its claim upon Item 2 of the Schedule III.
10. S. 2(8) of the Act defines a banking company as including any co-operative bank. Item 2 of Schedule III applied to an employer which is a banking company. Item 4 applied to an employer which is a co-operative society. As such, the bank is entitled to a deduction only of 7.5% of the capital invested and the tribunal was right in so holding.