1. This reference raises a question of some importance as to whether bonus paid by an assessee to its workmen out of the profits of the previous year after the relevant valuation date is debt owed by the assessee so as to be deductible in computing the net wealth of the assessee. The question is not free from difficulty and it is with some hesitation that we have arrived at a decision against the assessee. The assessee which is a public limited company submitted a return showing a net wealth of Rs. 89,39,671 for the assessment year 1959-60, the relevant valuation date being 31st March, 1959. There was no provision for the accounting year 1st April, 1958, to 31st March, 1959, but in the return submitted by it the assessee claimed a deduction of Rs. 5,33,000 on account of liability for bonus for the said accounting year on the ground that it was a debt owed by the assessee on the relevant valuation date, namely, 31st March, 1959. This claim for deduction was negative by the Wealth-tax Officer and hence the assessee preferred an appeal to the Appellate Assistant Commissioner. Before the Appellate Assistant Commissioner, the claim for deduction was revised, since, in the meantime, the amount of bonus payable to the workmen was settled and Rs. 2,62,279 and Rs. 1,82,007 were paid to the workmen of Baroda unit and Sayaji Mills No. 2, respectively, as bonus for the calendar year 1958 and Rs. 19,433 were paid to the workmen of Kathwada factory as bonus for the accounting year 1st April, 1958, to 31st March, 1959. These payments aggregating to Rs. 4,63,719 formed the subject-matter of the revised claim for deduction made by the assessee before the Appellate Assistant Commissioner. The argument of the assessee was that, though these payments were made subsequent to the relevant valuation date, they were in respect of liability for bonus which had arisen prior to the relevant valuation date in the case of Baroda unit and Sayaji Mills No. 2, and on the relevant valuation date in the case of Kathwada factory and they were, therefore, deductible as debts owed by the assessee on the relevant valuation date. This argument found favour with the Appellate Assistant Commissioner and he directed the Wealth-tax Officer to allow the deduction of Rs. 4,63,719 subject to verification of the figures, in computing the net wealth of the assessee. The revenue appealed against this decision of the Appellate Assistant Commissioner but the Tribunal also took the same view following the decision of the Calcutta High Court in Textile Machinery Corporation Ltd. v. Commissioner of Wealth-tax, which had been given in the meantime. The revenue thereupon applied for a reference and, on the application of the revenue, the Tribunal referred the following question of law for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the bonus amount of Rs. 4,63,720 which is paid by the assessee to its employees after the valuation date is deductible as debt due in computing the net wealth of the assessee under the Wealth-tax Act, 1957 ?'
2. Obviously, having regard to the definition of 'net wealth' in section 2(m) of the Wealth-tax Act, 1957, the amount of Rs. 4,63,719 (Rs. 4,63,720 being a mistake for Rs. 4,63,719 in the question) would be deductible in computing the net wealth of the assessee only if it could be shown that it was a 'debt owed' by the assessee on the relevant valuation date where the claim for bonus is made by the workmen and it is settled amicably or by industrial adjudication subsequent to the relevant valuation date.
3. Now what is the true meaning and import of the expression 'debt owed' in section 2(m) is no longer a matter of doubt or debate. It is settled by the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax. There the question was whether income-tax payable in respect of the profits of the previous year was a 'debt owed' by the assessee on the relevant valuation date so as to be deductible in computing the net wealth of the assessee. The determination of this question rested on the true interpretation of the expression 'debt owed' in section 2(m) and the Supreme Court was, therefore, called upon to consider what that expression means. The Supreme Court, after referring to various decisions, English as well as Indian, pointed out that all these decisions agree -
'..... that the meaning of the expression 'debt' may take colour from the provisions of the concerned Act : it may have different shades of meaning. But the following definition is unanimously accepted :
'A debt is a sum of money which is now payable or will become payable in future by reason by reason of a present obligation : debitum in praesenti, solvendum in futuro.' The said decisions also accept the legal position that a liability depending upon a contingency is not a debt in praesenti or in futuro till the contingency happened. But if there is a debt the fact that the amount is to be ascertained does not make it any the less a debt if the liability is certain and what remains is only the qualification of the amount. In short, a debt owed within the meaning of section 2(m) of the Wealth-tax Act can be defined as a liability to pay in praesenti or in futuro an ascertainable sum of money.'
4. The Supreme Court then proceeded to consider when does the liability to pay income-tax become a 'debt' within the meaning of that expression. On a proper interpretation of the relevant provisions of the Income-tax Act and particularly section 3, in the light of judicial pronouncements by the highest courts in India, the Supreme Court came to the conclusion :
'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 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.'
5. It will thus be seen that a debt is a sum of money which is not payable or will be payable in future by reason of present obligation. It postulates an existing liability - a liability which has accrued as distinguished from a liability which is contingent - to pay a sum of money in present or in future. The sum of money may be ascertained or it may be ascertainable in future 'in the light of factors existing at the date when the nature of the liability is to be determined'. The mere fact that the sum of money is yet to be ascertained does not make it any the less a 'debt'. This much is clear from the decision of the Supreme Court in Kesoram Industries case. But there is also one other requirement which is implicit in it though not articulated in so many words and that is that the liability must be to pay a liquidated amount. A 'debt' in the legal sense of the word, as pointed out by B. K. Mukherjee J., in Jabed Sheikh v. Taher Mallick, a case referred to by the Supreme Court with approval in Kesoram Industries case, 'means a liquidated money obligation'. Lord Justice Lindley in his decision in Webb v. Stenton clearly indicated that a debt is a liquidated sum of money which is now payable or will become payable in future and this was quoted with approval by Sir Lawrence Jenkins in the Full Bench case in Banchharam Majumdar v. Adyanath Bahattachrjee, which was a case accepted by the Supreme Court in Kesoram Industries case, as laying down the correct meaning of the word 'debt'. To quote again the words of B. K. Mukherjee J. in Jabed Sheikh v. Taher Mallick, 'there cannot be a debt in law unless there is a liquidated money claim'. This, of course, does not mean that the amount of the claim must be an ascertained amount. It may be ascertainable in future as was the case in O'Driscoll v. Manchester Insurance Committee, or Kesoram Industries case. But it must be a liquidated amount which is certain and definite though not yet ascertained. The process of ascertainment in such a case would be nothing but a process of discovering or finding out what is that certain and definite sum. What was uncertain and indefinite does not become certain and definite by this process, but what happens is that that which was always certain and definite nut not ascertained is now ascertained. This is an essential characteristic of a debt, namely, that it should be for a liquidated amount, whether ascertained or ascertainable and that is why B. K. Mukherjee J. held in Jabed Sheikh v. Taher Mallick that in a suit for mesne profits for wrongful possession of land, though law declares that a person in unlawful possession of land is liable to pay mesne profits to the original owner, such liability does not become a debt until a final decree for a specified sum is passed in the suit as a result of investigation. So also in a case of tort or breach of contract, there is undoubtedly liability on the wrongdoer to pay damages to the aggrieved party but that liability being for unliquidated damages, it would not ripen into a 'debt' until judgment. It was in fact so held in Jones v. Thompson, where the court observed that the claim for damages does not become a 'debt' till the judgment is actually delivered. Shah J. also pointed out in his minority judgment in Kesoram Industries case - and on this point there was no contrary opinion expressed by the majority - that the expression 'debt' does not include 'liability to pay damages'. The reason is that until judgment is given, it cannot be said even in a case where liability to pay damages is found by the court or admitted by the wrongdoer, what would be the damages payable by the wrongdoer. The amount of damages would be uncertain; it would be made certain only when judgment is pronounced. Then only it would become a 'debt owed' by the wrongdoer.
6. Having examined the true meaning and connotation of the expression 'debt owed', we may now proceed to consider what is the real nature of the liability for bonus. When does it become a 'debt owed' within the meaning of that expression Now, before we examine this question on principle, we may refer to the decision of the Supreme Court in commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Pvt. Ltd., for it was contended on behalf of the revenue that this decision clearly lays down that liability for bonus arises only when a claim for bonus is made by the workmen and it is settled amicably or by industrial adjudication and, therefore, it becomes a 'debt owed' by the assessee only when this contingency is fulfilled. The argument of the revenue was that since in the present case there was nothing to show that a claim for bonus was made by the workmen of the assessee on or before the relevant valuation date and in any event the records showed that the claim for bonus was made by the workmen of the assessee on or before the relevant valuation date and in any event the records showed that the claim for bonus was settled amicably or by industrial adjudication subsequent to the relevant valuation date the liability for bonus was not a 'debt owed' by the assessee on the relevant valuation date so as to be deductible in computing the net wealth of the assessee. Now, there can be no doubt that if this interpretation of the decision of the Supreme Court in Swadeshi Cotton and Flour Mills case is correct, it would be unnecessary for us to examine the question on principle and we would have to proceed on the basis that liability for bonus becomes a 'debt owed' by the assessee only when a claim for bonus is made by the workmen and it is settled amicably or by industrial adjudication. But a little scrutiny will reveal that this reading of the decision of the Supreme Court is not correct. The question which arose for determination before the Supreme Court was whether a certain amount paid by the assessee as bonus to its workmen for the calendar year 1947 in terms of an award made on 13th January, 1948, was an allowable deduction in the calendar year 1947 or in the calendar year 1949. The claim of the assessee for deduction was based on section 10(2)(x) read with section 10(5) of the Indian Income-tax Act, 1922. Section 10(2)(x) provided that any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission shall be deductible in computing the profits arising to the assessee from business. The word 'paid' in section 10(2)(x) was defined by section 10(5) to mean 'actually paid or incurred according to the method of accounting, upon the basis of which the profits or gains are computed under this section......' The assessee followed the mercantile system of accounting and, therefore, the question arose whether the amount of bonus could be said to have been 'incurred' according to the mercantile method of accounting in the calendar year 1947. When did the liability for the amount of bonus arise according to the mercantile system of accounting Now, the mercantile system of accounting 'brings into credit what is due, immediately it becomes legally due and before it is actually received, and it brings into debit expenditure for which a legal liability has been incurred before it is actually disbursed'. But it is obvious that before any credit or debit entry can be made in the accounts according to the mercantile system of accounting, the amount of the credit or debit entry must be an ascertained amount. If the amount of what is due is not ascertained, it cannot legitimately be brought into credit even though it may be legally due and similarly, if the amount of a legal liability is not ascertained, it cannot be brought into debit even though the legal liability may have been incurred. The mercantile system of accounting can never be stretched to include credit entries and debit entries where the amounts legally due in the one case and the amounts for which legal liability is incurred in the other case are not ascertained. The Supreme Court was, therefore, called upon to consider as to when the liability so that is could be regarded as a liability debitable according to the mercantile system of accounting. The Supreme Court examined the nature of bonus and after referring to several of its earlier decisions observed that it was clear from those decisions that :
(a) workmen are entitled to make a claim to profit bonus if certain conditions are satisfied;
(b) the workmen have 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.
7. The Supreme Court then proceeded to hold on the basis of these observations that '...... it is only when the claim to 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'. It will be seen from these observations that the Supreme Court was not concerned with the wider question as to when liability for bonus arises or when it can be said to become a 'debt owed' by the assessee. The Supreme Court was concerned only with the limited question, namely, when is liability for bonus incurred according to the mercantile system of accounting and since the mercantile system of accounting requires that the amount of the liability should be ascertained before it can be entered in the accounts, the only point which the Supreme Court was required to consider was as to when liability for bonus becomes an ascertained liability. That obviously it becomes only when a claim for bonus is made by workmen and such claim is settled amicably or by industrial adjudication. This decision of the Supreme Court cannot, therefore, be regarded as an authority binding on us for the purpose of a wholly different question, namely, as to when liability for bonus arises even though unascertained and when does it become a 'debt owing' by the assessee. We must, therefore, proceed to examine this question on principle.
8. What is the true nature of the liability for payment of bonus Of course, after the enactment of the Payment of Bonus Act, 1965, it is a statutory liability and there can be no question that it would be a 'debt owed' by the assessee on the date on which it arises under the provisions of the Payment of Bonus Act, 1965. But we are concerned with the period prior to the enactment of the Payment of Bonus Act, 1965, and therefore, in order to understand the true nature of the liability for payment of bonus, it is necessary to refer briefly to a history of the development of industrial law in regard to payment of bonus. We find that a very succinct and accurate synopsis of development of industrial law relating to bonus is given by Shah J. in Jalan Trading Co. v. Mill Mazdoor Sabha, where the constitutional validity of the Payment of Bonus Act, 1965, came to be challenged. 'Bonus', according to this synopsis, was in the early stages of development of industrial law regarded purely as a voluntary payment made by employers to workmen to keep them contented. It was felt that workmen have a just claim against the employers to receive bonus but the claim was not 'customary, legal or equitable'. However, in the dispute for payment of bonus for the year 1948-49, 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 the workmen. This formula for computing bonus as a payment of surplus profit received the broad approval of the Labour Appellate Tribunal in appeals against the award relating to the year 1949. According to this 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 : (1) provision for depreciation; (2) reserve for rehabilitation; (3) return of six per cent. on the paid up capital; and (4) return on the working capital at a lower rate than the return on paid up capital and, from the balance called 'available surplus', the workmen were to be awarded a reasonable share by way of bonus for the year. The full Bench Formula came up for consideration before the Supreme Court in several cases. The Supreme Court did not commit itself to acceptance of the formula in its entirely but ruled that bonus is not a gratuitous payment made by the employer to the workmen, nor a deferred wage and, where the wages fall short of the living standard and the industry makes profit, part of which is due to the contribution of labour, a claim for bonus may legitimately be made by the workmen. It was for the first time in Associated Cement Companies Ltd. v. Its Workmen, that the Supreme Court examined the Full Bench Formula in all its aspects and accepted it as laying down a valid principle for adjudicating claim for bonus. Since that decision, several cases came up before the Supreme Court where the basic formula was accepted with some elaboration. The result was that, for the purpose of industrial adjudication, claim for bonus acquired the character of legal right. This was pointed out by the Supreme Court in clear and no uncertain terms in Workmen v. Hercules Insurance Co., where Gajendragadkar J., delivering the judgment of the court, said :
'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.'
9. Shah J. also made observations to the same effect in Jalan Trading Co. v. Mill Mazdoor Sabha.
'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 bonus formula, of right to share in the surplus profits, and enforceable through the machinery of the Industrial Disputes Act.'
10. It will, therefore, be seen that according to industrial law as laid down by the Supreme Court in these decided cases, if it can be shown that, on an application of the Full Bench Formula, an employer has sufficient available surplus in his hands, the workmen would have a right to claim bonus and there would correspondingly be a liability on the employer to pay bonus. Where workmen make a claim for bonus and the claim is disputed by the employer, an industrial dispute would arise and when that industrial dispute is referred for adjudication, the industrial court would determine the industrial dispute on the application of the principle that if it is found that there is available surplus in the hands of the employer calculating on the basis of the Full Bench Formula, the workmen must be held entitled to receive bonus and a part of the available surplus must be awarded to them by way of bonus. The right of the workmen to claim bonus and the liability of the employer to pay bonus are the right and the liability recognisable only in industrial adjudication and they would have no meaning and existence so far as civil courts are concerned. It may, therefore, be a matter for consideration whether a liability to pay bonus which is not recognised by the civil courts but is recognisable only in industrial adjudication can be said to be a 'debt owed' within the meaning of that expression as used in section 2(m). But we do not propose to decide this question since we are of the view that even otherwise the liability to pay bonus does not become a 'debt owed' by the employer until a claim is made by the workmen and it is settled by mutual agreement or industrial adjudication.
11. Now, bonus which workmen are entitled to claim and the employer is liable to pay is not a liquidated sum of money which is merely ascertained by mutual agreement or industrial adjudication. Where a claim for bonus is made by the workmen and it is resisted by the employer, the first question which industrial adjudication would have to consider would be whether there is available surplus in the hands that the workmen would be entitled to receive bonus. There are several factors which would have to be considered by industrial adjudication in determining how the prior charges should be computed and what should be taken to be the amount of available surplus. Then industrial adjudication would have to decide what part of available surplus should be awarded to the workmen by way of bonus and in determining this question, industrial adjudication would have to be guided by considerations of what is fair and just. It is only when industrial adjudication determines that there is available surplus and decides what part of available surplus should be made over to the workmen as bonus that liability to pay bonus would ripen into a debt. Till the claim of the workmen for bonus is settled by mutual agreement or industrial adjudication, it cannot be said whether the employer is liable to pay any bonus payable by him to the workmen. The amount of bonus would be uncertain and indefinite : it would become certain and definite only when the claim of the workmen is settled by mutual agreement or industrial adjudication. The liability to pay bonus is akin to a liability for unliquidated damages. There is undoubtedly a liability in both cases, in one case recognised by civil courts and, in the other, by industrial courts, but just as liability in the former case does not become a 'debt' until damages are awarded either by mutual agreement or judgment of civil court so also liability in the latter case does not become a 'debt' until the claim of bonus is settled by mutual agreement or industrial adjudication. It is not sufficient to constitute a debt to say that there is a liability to pay bonus. Every liability for payment does not necessarily constitute a debt. It is only where there is an existing liability for payment of a liquidated amount, whether ascertained or ascertainable, that it becomes a debt. The liability to pay bonus is not a liability for a liquidated amount until the amount of the bonus is settled by mutual agreement or industrial adjudication. It is only then that it settled by mutual agreement or industrial adjudication. It is only then that is becomes a 'debt' owed by the employer.
12. We find that the Calcutta High Court has taken a different view in Textile Machinery Corporation v. Commissioner of Wealth-tax, but with the greatest respect to the learned judges who decided that case, we cannot agree with their view and we must express our dissent from it. The learned judges held that, having regard to the industrial law as laid down by the Supreme court, the workmen have a right to claim and the employer is liable to pay bonus when it is shown that there is available surplus in his hands and there we agree with them, but the next step taken by the learned judges is, in our opinion, erroneous. The learned judges concluded that because there is a liability on the employer to pay bonus under the industrial law, it is a 'debt owed' by the employer. But this conclusion is based on an assumption that every liability to pay necessarily constitutes a debt. That assumption is, as we have already pointed out above, plainly incorrect. Every liability to pay does not necessarily constitute a debt. We have to examine the nature of the liability in order to see whether it is for a liquidated amount or for an unliquidated amount. If it is the former, it is a debt but not so, if it is the latter. That aspect does not appear to have been examined by the learned judges presumably because it was not urged before them. We have no doubt that if this aspect had been placed before the learned judges, they would have come to a different conclusion as we are doing.
13. Now, in the present case, it is apparent from the record that the claim of the workmen was settled and the amount of bonus determined subsequent to the relevant valuation date. This factual position was indeed not disputed on behalf of the assessee. It that be so, it must follow as a necessary consequence that liability for payment of bonus did not become a 'debt owed' by the assessee until after the relevant valuation date and it was accordingly not deductible in computing the net wealth of the assessee.
14. We, therefore, answer the question referred to us in the negative. The assessee will pay the costs of the reference to the Commissioner.
15. Question answered in the negative.