1. The petitioner is a company incorporated originally under the French law and is a company within the meaning of the Companies Act, 1956. It operates a textile mill at Pondicherry. Its accounts are made in accordance with the calendar year, which is the accounting year for purposes of the Payment of Bonus Act, 1965. As required under the Companies Act, it has accredited auditors who audited its accounts for the year 1967. According to the profit and loss account and the balance-sheet as at 31st December, 1967 the available surplus and the allocable surplus for purposes of the Payment of Bonus Act, 1965 as-disclosed in the audited statement of account were Rs. 4,68,502 and Rs. 2,82,101, respectively. The 2nd respondent, which is the union representing the workers in the petitioner-company, demanded a 15 per cent bonus for the year 1967. The company, however, having regard to the allocable surplus as disclosed in the audited statement of account, expressed its willingness to pay the minimum bonus of 4 per cent though the actual percentage of bonus in accordance with the profit and loss account would be far below the minimum percentage fixed under the Act. The workers, however, gave a strike notice. Thereafter, the Government of Pondicherry, in exercise of their powers under Section 10 of the Industrial Disputes Act, 1947, referred the dispute, as conciliation failed between the management and the workers, to the Industrial Tribunal at Pondicherry. The 1st respondent, Industrial Tribunal, directed that a sum of Rs. 42,085, being gratuity paid to the employees who retired during the year, and Rs. 4,43,000, being interest paid to the United Commercial Bank Limited on the medium term loan admittedly obtained by the petitioner-company be added back to the net profit shown in the profit and loss account and bonus be paid to the employees for the accounting year 1967 at 5.48 per cent on the basis of an allocable surplus arrived at by the Tribunal. The Tribunal held that the gratuity paid should be treated as capital expenditure and interpreted the quondam award of the Textile Arbitration Committee in relation to the payment of such gratuity as such. Under the award of the Textile Arbitration Committee, the company was to pay gratuity to its employees as and when it became payable on retirement. The company, instead of providing a fund no sooner the award of the Textile Arbitration Committee was rendered, had spread the said liability over years as its payment was contingent upon the retirement of employees year after year. The 1st respondent again was of the view that interest on the medium term loan was not normal revenue expenditure. Though the 1st respondent noticed that for purposes of the levy of direct taxes interest paid on medium term loan was deducted as was done by the company, yet it directed the adding back of this amount to arrive at the allocable surplus under the Payment of Bonus Act. It is as against these two items which were directed to be added back by the Industrial Tribunal that the present writ petition has been filed.
2. The contention of Mr. Uttam Reddi appearing for the petitioner is that the profit and loss account prepared by the auditors of the company being a document prescribed under the Act and prepared by responsible auditors cannot be lightly brushed aside and ought to have been acted upon by the Tribunal. It is claimed that gratuity has been paid in accordance with the award of the Textile Arbitration Committee and is revenue expenditure in the same way as pensions. It is said that interest on borrowings is an item of expenditure deductible from the gross profits as a usual working charge irrespective of the use to which the borrowed funds are put. In accordance with the understanding of the expression 'capital expenditure' under the Income-tax Act which is equally applicable while interpreting the provisions of the Payment of Bonus Act, it is said that the refusal to deduct interest from gross profits, though it has been allowed as such under the Income-tax Act, is perverse. The stand of the labour, however, is that the Textile Arbitration Committee's award is plain and unambiguous and that the amount payable to the employees at the time of retirement as and by way of gratuity which was notionally created for the first time by the Textile Arbitration Committee is an item of expenditure which ought to have been actually evaluated soon after the award of the Textile Arbitration Committee and a fund created therefore from which the operations during the successive years ought to have been made. Though the labour did not object to the practice of the company deducting such gratuity paid year after year after the award of the Committee, yet the employees are not stopped from questioning such a deduction in the year 1967 as by then the Payment of Bonus Act has intervened and the workers have the right to claim such percentage of bonus to which they are entitled under the provisions of law then prevailing. Mr. Dolia would not agree that the amount of gratuity payable could be spread over years and the provisions of the award of the Textile Arbitration Committee be thus satisfied. On the question of interest, he is emphatic that until the machinery purchased by reason of raising the medium term loan are commissioned such interest ought to be treated as capital expenditure and in that behalf particulars having been furnished by the company, on a direction made by Palaniswamy, J., earlier, the actual date of commissioning of the plant after the borrowing has to be ascertained before an attack can be made against the adding back of such interest as was done by the Tribunal. Though Mr. Dolia in principle would agree that interest paid on borrowings will not amount to capital expenditure, he would qualify his argument by saying that it is deductible only after the machinery or plant for the purchase of which borrowing was made was commissioned and it is only thereafter such interest would become a revenue expenditure. In the supplemental affidavit filed by the company particulars as to when the loans were taken and how they were utilised are given arid on the basis of such information it is said that as the loans were taken for modernisation of the plant in a running concern, no question of commissioning of a new plant would arise and, therefore, the last contention of the union is unsustainable.
3. The contention of Mr. Uttam Reddi is that the adding back of the sum of Rs. 42,085 being gratuity paid to the employees during the year on the incident of their retirement from service and the sum of Rs. 4,43,000 being interest paid is not proper.
4. Regarding gratuity these amounts were computed whenever an employee retired and this practice was not objected to earlier. The present objection for the deduction of such payments is obviously motivated so as to get a higher percentage of bonus for the year. There was no direction in the award to compute at one tune the benefit of gratuity created in the award of Textile Arbitration Committee for the period commencing from 1936 and ending with 1955 in money and as such the company has the option to spread the liability over years and reckon it annually as and when it is paid to the employees on their retirement. Even though a mercantile system of accounting was adopted, the creation of a consolidated one-time fund towards a contingent liability such as gratuity, when the award did not say so, is a step which is against all normal systems of accounting. It is stated that if by such an allocation of a large sum in one particular year' following the year of award is made and in consequence loss has to be shown in the profit and loss statement, such a loss cannot even be carried forward or allowed to be carried forward. As a matter of fact, the income-tax authorities accepted the annual deductions made in the above context as proper and the Industrial Tribunal ought to have followed suit. Mr. Dolia contending contra would say that liability to pay gratuity is not contingent liability and as the benefit granted to the employees under the award was computable in terms of money and as the period, rate and basis was known, it ought to have been quantified at the earliest possible time and cannot be spread so as to truncate the ascertainable amount into annual payments depending upon the number of employees retiring yearly. Reference was made by Mr. Dolia to the following decisions which I shall consider immediately. In Metal Box Co. of India v. Their Workmen : (1969)ILLJ785SC , the Supreme Court expressed the view at p. 193 that:
Even if the liability is a contingent liability, provided its discounted present value is ascertainable, it could be taken into account.........if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into account contingent rights, if capable of valuation, similarly,, can be taken into account as trading receipts where it is necessary to do so in order to ascertain the true profits.
This observation is not of universal application. It is only in a case where profits could not be ascertained without deducting the liabilities and if the liabilities are capable of immediate and certain ascertainment then they ought to be debited to the profits. I do not think that the item in question in the instant case is so capable of evaluation and in any event it cannot be said that without deducting the gratuity in a lump sum the profits cannot be ascertained. On the other hand, it would be reasonable for a public company so truncate such gratuity payable to the employees on their retirement and spread it over years so that the shareholders may be benefited and the profits might increase. Central Weaving and Manufacturing Company, Bombay v. Mill Mazdoor Sabha, Bombay 1969 XI L.L.J 65, was a case where the company was maintaining accounts in a mercantile system. The Supreme Court expatiating the principle of mercantile system held that in such a system of accounting amounts would be credited and debited as they accrued due and not when they were actually received or expended. That this is the main indicia of mercantile system cannot be denied. But, in the instant case whether the totality of the gratuity amount should have been debited soon after the finding of the Textile Arbitration Committee is a moot question. It has no bearing on the system of accounting because it cannot be predicted that it was an amount which accrued as payable even in the next year of the arbitration award. In all the above cases the facts were borne in mind before directions were given by the Supreme Court as above. The Textile Arbitration Committee, while providing a gratuity benefit for the workers, since there was no provident fund, during the years 1936 to 1955, said:
Taking all these circumstances into account, we feel that if we substantially push back the scheme of contributory provident fund to 1936 and work out the amount of gratuity on that basis, it will be fair 10 both the management and the labour. We therefore, direct that a contribution of one anna per rupee, i.e., 1/16th of the total emoluments which every worker to clerk has received from the beginning of 1936 to the end of 1955 shall be made by the management to constitute the gratuity or the compensation payable to him for the period 1936 to 1955, both years inclusive.
In the instant case the award is silent as to the fund from which the benefit of gratuity has to be paid. The benefit undoubtedly accrued to the workers under the award. But, that does not mean that a consolidated fund has to be created soon after the date of the award after an acrobatic actuarial calculation for the purpose. No one is sure as to how many employees are going to retire in any particular year. In public companies it is not unusual to expect some of the experienced craftsmen being kept on in service beyond their period of service. Some employees may cease their relationship with the company. As the Tribunal said, the management was only directed to make the contribution for past years and the method of implementation was left to them. No doubt, in a mercantile system of accounting, a liability which accrues is taken as payable. The liability to pay the entire amount obviously did not arise in the year following the award. There was no direction to that effect either in the award. The liability to pay is closely linked with the number of employees retiring in any accounting year. The Supreme Court, while interpreting the law governing ;i similar situation but under tin-, Wealth-tax Act, 1957, said in Standard Mills Co. Ltd., Bombay v. Commissioner of Wealth-tax, Bombay : 63ITR470(SC) as follows:
The liability to pay gratuity to employees on determination of employment is a mere contingent liability which arises only when the employment of the employee is determined by death, incapacity, retirement or resignation. The liability does not exist in praesenti but is contingent and hence cannot be a 'debt owed' within the meaning of Section 2(m) of the Wealth-tax Act.
I respectfully adopt the ratio as above and add that, in the circumstances of this case, the entire gratuity fund though related to an anterior period cannot be said to have accrued or is a debt owing, which situation alone can compel the company adopting the mercantile system to provide for it then and there. The Tribunal concedes that gratuity was to be paid by the company as and when it became payable. To create an actuarial fund notionally so as to operate on it when gratuity is payable in terms of the award is something which is not found in the award and for the violation of which the company cannot be penalised. I am unable to accept the view that gratuity directed to be paid is nothing but contribution of the management to the provident fund. This scheme of gratuity was created under the award as a substitute for provident fund which was not in vogue during 1936 to 1955, This financial benefit granted to the labour was linked with the provident fund for the purpose of fixing the time when such gratuity has to be paid. Undoubtedly, provident fund has to be paid only when the employee retires So also this fictional gratuity invented by the Textile Arbitration Committee created a bare privilege and made it payable along with the provident fund of the employee. This is the view of the Supreme Court in Standard Mills Co., Ltd., Bombay v. Commissioner of Wealth-tax, Bombay [ : 63ITR470(SC) ]. They characterised it as a contingent liability. It follows that a more reasonable and real method of payment would be to pay the Same and discharge the liability on the date of retirement of the concerned worker. This is the proper time when it has to be reckoned fur all purposes including the one to land the allocable surplus under the Payment of Bonus Act. The Industrial Tribunal was wrong in adding back the sum of Rs. 42,085 to the net profits so as to determine the percentage of bonus payable to the labour.
5. The next contention of Mr. Reddi is that interest paid towards the borrowing admittedly availed of by the company to modernise the machinery in a running public limited company is revenue expenditure. Mr. Dolia does not support the decision of the Tribunal as rendered by it. The Tribunal said that interest paid for medium term loan incurred in the year should be considered as capital expenditure. He compares interest with brokerage, taxes on purchases, etc., and holds that the sum of Rs 4,43,000 should be added back. Again, the Tribunal disallowed interest because it was excessive and it was not necessary for the mills to borrow. This is completely outside the field of review of an Industrial Tribunal. It is for the public limited company to decide with the consent of its shareholders to raise a loan for its expansion or modernisation and it is not for Courts to question the policy arising out of the indoor management of the company. But, Mr. Dolia would say that until it is known as to when the machinery bought from loans raised were commissioned to work, the interest paid has to be considered as capital expenditure. In the instant case the company asserts that at no time work was stopped because the mill was a running concern. Monies were borrowed from time to time for expansion including modernisation and as and when they were installed they were used. A supplemental affidavit pursuant to directions of Palaniswamy, J., who heard the matter first, was filed by the company. The company says:
2(a). In the award made by the 1st respondent on the, 4th April, 1970, a sum of Rs. 4,43,037 being the interest paid to the United Commercial Bank during the year was directed to be added back to the net profits shown in the Profit and Loss Account for the accounting year 1967 for arriving at the allocable surplus for payment of bonus to the employees under the Payment of Bonus Act, 1965. The interest related to the loans taken by the company during the years 1959 to 1966. The first loan of Rs. 36 lakhs taken in 1959 was for the purposes of modernisation of the plant and machinery of the company's mills and conversion of machinery to electric drive. The loan was drawn in instalments as and when required for purposes of modernisation. The total amount so spent on modernisation amounted to Rs. 41.77 lakhs which was met from the loan of Rs. 35 lakhs and the company's own resources. Rs. 22.50 lakhs had been repaid towards the loan before the beginning of the year 1967 now relevant.
(b) The second loan was taken to finance the cost of installation of 250 automatic looms in replacement of 289 plain looms and the installation of some weaving preparatory machinery. The loan was drawn in instalments between November, 1964 to June, 1965. Rs. 4 lakhs had been repaid towards the loan before the beginning of the year 1967 now relevant.
(c) The third loan was taken in June, 1966, to finance additions to machinery in the spinning department. The additions were effected between 1965 to 1967, the initial expenditure having been met out of the company's own resources.
These allegations show that the loans were utilised for purposes connected with the mills. The principle stated in Butliboi's Advanced Accounting that 'as each business is started with a view to earn income in a specific direction, it is but necessary that all expenditure incurred up to the stage at which the business may be said to be sufficiently equipped to earn should be capitalised' is inapplicable, because this is not a case where the business is started, as it was a business which was running and income had begun to be earned long before. The auditor who has heavy responsibilities under the Companies Act, has certified that the borrowing was made and interest has been paid as claimed in the year. Interest is accepted to be the legal recompense on loan of money to be taken from the borrower by the creditor. It is always regarded as incidental to the debt and is a payment stipulated to be made for the use of the money. Such being the accredited characteristic of interest, the conclusion of the Tribunal that such interest admittedly paid by the company as borrower is capital expenditure is unreasonable and poses an apparent error in the record. In Calico Dyeing and Printing Works v. Commissioner of Income-tax [ : 34ITR265(Bom) , Chagla, C.J., explains what is the nature of interest on borrows, Judge says that 'in oh, to claim deduction borrowed capital all that is have the assesses must have brave capital for the purpose of the carried on by the assessee in the of account and the capital has been used by him in the year of account. If the capital has been borrowed and so used then it is immaterial whether the user of the capital actually yielded profit or not...Nor can a distinction be made for the purpose of the clause between capital borrowed for the acquisition of a capital asset and for the acquisition of a revenue asset, in both cases an assessee is entitled to claim interest paid provided the borrowing is for the purpose of the business irrespective of what may be the result of using the capital which he has borrowed.' By adopting this principle it is clear that in the admitted state of facts, the mid-term loan was borrowed for the business of the company and, therefore, interest paid thereon is a deductible item from the profit and loss account and the auditor rightly deducted the same and the revenue having admitted such a deduction it is equally admissible even under the Payment of Bonus Act.
6. In the view held by me that both the added back items ought not to have been so added and as the Tribunal's award poses apparent errors of law, the same is set aside and the rule nisi is made absolute. In the peculiar circumstances of the case, there will be no order as to costs.