(1.) THE petitioner in this is a company incorporated under the Indian Companies Act, and carries on the business of engineering and/or manufacturing and sale of engineering products. The petitioner maintains its accounts in what is known as the 'mercantile system' of accounting; that is to say, an expense is debited as soon as the petitioner has become liable to such expenditure whether the amount thereof has actually been paid or not, and similarly the price of goods sold or any other amount due to the petitioner is credited as soon as the sale is effected or the amount becomes due, whether the price or amount has actually been realised or not In respect of the financial year ending 31st December, 1956 the petitioner (hereinafter referred to as the 'company') made a payment of bonus to its workmen equivalent to one month's wages and dearness allowance amounting to Rs. 45,000/ -. According to the petitioner, it had no available surplus, but this payment was made out of goodwill towards the workmen and in order to secure their goodwill in return. This payment was made in March 1956. The workmen, however, were not satisfied and raised a dispute which was referred for adjudication to the 5th Industrial Tribunal (being the first respondent hereto ). The issue that was referred was as follows:-
"whether the workmen are entitled to any extra bonus in addition to the amount already paid for the year 1956 payable in 1957? If so, what should be the quantum of such bonus?"
(2.) BEFORE the Tribunal, the company filed its audited profit and loss account and balance-sheet for the year ending 31st December, 1956 and various other calculations based upon them to show that there was no available surplus in accordance with the Full Bench formula, but that there was actually a deficit. On or about 7th May, 1959 the Tribunal made an award by which he has held that the company had an available surplus of Rs. 84,000/- and after crediting Rs. 45,000/- already paid, the Tribunal directed the company to pay to its workmen a further 15 days' wages as bonus which, I am told, amounts to approximately another sum of Rs. 11,000/ -. This award is challenged by the company on four grounds which I shall now proceed to examine.
(3.) THE first item of dispute relates to 'bad Debts'. As I have already mentioned, the accounts of the company are kept in the mercantile system. The balance-sheet (Ext. C to the petition) shows that the share-capital of the company is Rs. 10,00,000/- of which the subscribed capital is Rs. 4,80,000/ -. We find that in 1955 the fixed asset was Rs. 21,31,648/- and in 1956 it was rs. 22,34,340/ -. The stock in 1956 was valued at Rs. 18,73,182/- on the heading of 'sundry debtors'. Against 'loans and advances' there was shown a sum of Rs. 6,21,814/15/- from which has been deducted a sum of Rs. 31,767/2/-as 'provisions for Bad Debts'. Coming to the profit and loss account, we find that for the year 1956 a sum of Rs. 17267/2/- has been shown as 'bad Debt reserve'. In other words, this amount has been shown as the 'bad Debt Reserve' for the year in question. In this award, the Tribunal states that the Union claims to add back the Bad Debt Reserve amounting to Rs. 17,000/- and the management resists the claim. The Tribunal has held that it was not a reserve which could be taken into revenue expenditure against the workmen and so it should be disallowed. In other words, it should not be considered in the calculation of the available surplus which it is necessary to calculate under the Full Bench formula, for arriving at the figure of bonus payable to the workmen. The legal position is that in calculating the available surplus, the heading, 'bed Debt' must be deducted. In G. F. Mills v. Employees of G. F. Mills (1) A. I. R. (1958) S. C. 382 at 387 it has been laid down that if the debts were irrecoverable, they would, to that extent reduce the gross profits and therefore such a deduction is permissible. If the debts are fortunately recoverable they would be credited when they would be so recovered. The Tribunal has accepted the position that for determining the gross profits, the amount of irrecoverable debts must be deducted. What is argued on behalf of the respondents is that a deduction is permissible for an irrecoverable debt when it is, in fact irrecoverable, and not in anticipation. What is pointer out is that in this case the amount of Rs. 17,000/-- and odd, that is sought to be deducted, is not deducted as 'bad Debt' but as a 'bad Debt Reserve'. It is explained that a 'bad Debt Reserve' is merely the notional sum which is set apart in anticipation that this amount would not be recovered. It is said that this item can not be treated as a revenue item. It is argued that there is a difference between writing off a 'bad Debt' which is actually a 'bad Debt' and making provision for doubtful debts. Reference has been made to a treaties on Advanced Accounting by Batliboi (page 66) where it is stated as follows :-
"even after all bad debts have been written off, there might be a number of other overdue accounts the recovery of which may be more or less doubtful. The provision for loss on account of such doubtful debts must be made by debiting Profits and Loss Account and crediting Reserve for Doubtful Debts Account with an estimated amount of such loss or with a certain percentage of the total debtors. The credited balance of Reserve for Doubtful Debts Account is shown in the Balance-sheet by way of deduction from the item Sundry Debtors. ";