G. Gopinath, B.A., B.L.
1. This dispute relates to the bonus for the year ending 31-3-1970 referred on a joint application by the management and the workmen of Simco Meters Ltd., Tiruchi to the Government.
2. According to the workmen represented by the Simco Meters Workers' Union (Union No. 1) and the Simco Meters Thozhilalar Munnetra Sangam (Union No. 2) the workmen are entitled to a bonus of 20% of their gross emoluments on the basis of the computation of available surplus for the relevant year, filed by Union No. 1 and marked as Ex. W. 1. The contention of the management is that as per the calculation contained in their worksheet marked as Ex. M. 11 the workmen are not entitled to claim more than the minimum bonus of 4% as there is no available surplus.
3. The controversy centres round the deductions made by the management under the heads 'depreciation' and 'development rebate' from the gross profits as prior charges under Section 6(a) and (b) of the Payment of Bonus Act, 1965. Clause (a) of Section 6 allows the deduction of depreciation admissible under Section 32(1) of the Income-tax Act, or in accordance with the provisions of the Agricultural Income-tax law, as the case may be. Here we are concerned only with the depreciation under Section 32(1) of the Income-tax Act. According to the management, a sum of Rs. 4,09,184 is deductable under this head vide Ex. M.I 1. In its claim statement, Union No. 1 does not admit the validity or the correctness of this amount. It puts the company to proof of its claim. It is, however, significant to note that in its worksheet Union No. 1 has shown this amount as an admissible depreciation, vide Ex. W. 1. So too, in the worksheet filed by Union No. II, this amount has been deducted as depreciation. But since the workmen have not admitted the correctness of this amount, it is for the employer to prove the claim. That has been done by the management by examining M.W. 1, a partner of Suri & Co., the auditors of Simco Meters Ltd. He is in charge of the auditing of the accounts of the company. He has stated that as per the working made by him, the depreciation allowed for the year ending 31-3-1970 under Section 32(1) of the Income-tax Act is Rs. 4,08,397. Ex. M.I is the certificate of the chartered accountants about the depreciation allowable for the year ended 31-3-1970. Ex. M. 2 is the breakup figures. Both these have been prepared by M.W. 1. He has not been cross-examined by the workmen on this point. Though there is a slight difference between the evidence of M.W. 1 and the sum deducted as depreciation in Ex, M. 11, that will not affect the net result in arriving at the available surplus. I may also note that the learned advocate for the workmen did not challenge the correctness of the figure shown under depreciation.
4. The arguments of the learned Counsel for the workmen were directed more against the correctness of the deduction under the head 'development rebate' and it was maintained by him that the sum deducted by the management in its worksheet was inadmissible. The amount deducted by way of development rebate is a sum of Rs. 10,33,700, Ex. M. 11. So far as development rebate is concerned, Clause (o) to Section 6 allows the whole of such rebate allowable under the Income-tax Act. Sections 33 and 34 of the Income-tax Act deal with development rebate. Ex. M-6 is the statement of accounts of the company for the year ended 31-3-1970. In the balance-sheet, a sum of Rs. 10,33,700 has been provided as development rebate reserve (vide page 20 of M. 6). This amount represented development rebate reserves for 3 years, that is a sum of Rs. 3 lakhs transferred to development rebate reserve for the year ended 31-3-1967 (Ex. M. 3), a sum of Rs. 90,000 transferred to development rebate reserve for the year ended 31-3-1969 (Ex. M. 5) and a sum of Rs. 6,43,700 transferred to development rebate reserve for the year ended 31-3-1970. This is less than the amount allowable under Sections 33 and 34 of the Income-tax Act. This is proved by M.W. 1 who has also certified that the development rebate which the management has provided in the accounts is less than the amount allowable under the provisions of the Income-tax Act, for the year ended 31-3-1970. The contentions of the learned Counsel for the workmen are that the management is entitled to development rebate only for the year in question, as, under the Payment of Bonus Act, each year is taken as a unit and further that the rebate can only be claimed only if it is debited in the profit and loss account. The first contention is clearly not correct, for under Section 33 of the Income-tax Act, development rebate is to be actually allowed in any of the 8 years following the acquisition or installation of an asset or machinery, depending on the availability of taxable profits in each of these 8 years. To express it differently, under Section 33 of the Income-tax Act, the company can claim development rebate upto a period of 8 years, from the date of the installation of the machinery. From the records mad; available by the management to the auditors, M. W. 1 says that the machinery was installed in 1963-64. In the reports of the company for the first 2 years, the directors have stated the plant and machinery were under erection. Therefore, the company is entitled to claim development rebate for a period of 8 years from 1963-64. The correctness of the figures cannot, and is not, seriously disputed since they have been taken from the audited accounts. Actually, in the income tax return for the year ended 31-3-1970, the company claimed a development rebate of Rs. 12 lakhs, Since the company has got sufficient profits for the year in question, it is only this year that the Income-tax department will allow the development rebate, because the company must have sufficient profits to absorb -the development rebate. It is seen from the evidence of M.W. 1 that the company has claimed development rebate for the years prior to 1970, with the reservation that it will be entitled to claim the 1 full amount only when the company made sufficient profits. The development rebate was not allowed in the prior years by the Income-tax Officer, as the company had not made income-tax profits, even including the two years in which the company did make book profits. Hence, the contention that the sum to be deducted for development rebate under Section 6(b) should only relate to the account for the bonus year is not tenable.
5. The other contention that before claiming deductions under development rebate, the amount should be debited in the profit and loss account and not merely entered as an appropriation in the profit and loss appropriation account is also not correct. Hence the amount claimed as development rebate has been transferred to development rebate reserve in the profit and loss appropriation account in the concerned years and it is not included in the profit and loss account; that is to say above the line. In other words, there is no charge for development rebate reserve in the profit and loss account, as such. It is only made in the profit and loss appropriation account, which according to M.W. 1 is only a continuation of the profit and loss account. The entries made in the profit and loss appropriation account are the appropriations made by the directors from the profits made during the year. Whether such appropriations made below the line would satisfy the requirements of Section 34(3) of the Income-tax Act is now set at rest by the executive instructions contained in Circular No. 4-P (LXXVI-61) of 1966 dated 21st July, 1966 found printed at page 503 of the Income-tax law by K, Chathurvedi, B.L., and S. M. Pithisaria, B. Com., LL.B. The relevant portion thereof is as follows:
While some companies have been creating the development rebate reserve by debiting the amount thereof in the 'above line' section of the profit and loss account in which the profits of relevant year are arrived at, others have been making the debit in the 'below the-line' section of the profit and loss account, often referred to as the profit and loss appropriation account, which inter alia contains credits for the profits, if any, brought forward from the earlier years or amounts transferred from various reserve accounts of the company. The provisions in Part II of Schedule VI to the Companies Act, 1956 in regard to the requirement as to the profit and loss account do not make a distinction between the 'above the line' and 'below the line' sections of the profit and loss account. The debit for development rebate reserve in the 'below the line' section of profit and loss account is, therefore, to be regarded adequate compliance with the condition in Section 34(3)(a) of the Income-tax Act that the debit should be made to the profit and loss account of the relevant previous year.
That the circular issued by the Central Board of Revenue is binding on all officers and persons employed in the execution of the Income-tax Act, under Section 5(8) of the 1922 Act, and Section 119 of the 1961 Act, is recognized in the decision reported in Navnit Lal C. Javeri v. K.K. Sen, A.A.O. of Income-tax : 56ITR198(SC) . Thus the claim for development rebate cannot certainly be negatived, merely because it has been debited below the line, i.e., in the profit and loss appropriation account.
6. In view of the above, and as the worksheet of the management as per Ex. M. 11 has not been impugned before me on any other ground, 1 have to hold that there is no available surplus but only a deficiency and that the workmen are not entitled to anything more than 4% for the year in question as bonus. The claim by the workmen is, therefore, rejected and an award is passed accordingly.