MITTER, J. - (1.) THE only point of dispute between the parties to this appeal by special leave from an order of an Industrial Tribunal relates to the quantum of direct taxes deductible under S. 6 of the Payment of Bonus Act, 1965.
(2.) THE appellant is a public limited company owning and running various industrial units situate at different places in India. THEse are engaged in the manufacture of different kinds of articles such as cotton textiles, artificial silk fabrics, sugar, industrial alcohol, vanaspati, chemicals, fertiliser, polyvinyl chloride and rayon tyrecord etc. Two of these units i.e. THE Delhi Cloth Mills and the Swatantra Bharat Mills are cotton textile mills each registered as a factory under the Factories Act. THE award under appeal relates to these two mills alone. THE appellant prepares and publishes one consolidated balance sheet and profit and loss account of the company showing the final results of the working of all the units for its shareholders. It had however for many years past, prepared and maintained separate balance sheets and profit and loss accounts for some of its units individually and some grouped together. Although separate balance sheets and profit and loss accounts were prepared for each of these two mills (hereinafter referred to as D. C. M. and S. B. M. for abbreviation) their workmen have always been paid bonus calculated on the basis of pooled profits of the two units treating them as one unit. This is borne out by the award of the Tribunal in paragraph 29. The reference herein was made by notification dated 4/03/1966 under Ss. 10 (1) (d) and 12 (5) of the Industrial Disputes Act for adjudication of several specified matters of which the first two read as follows: "1. Whether in calculating the bonus table for the accounting year ending 30-6-1965 the allocation separately made by the Delhi Cloth and General Mills Co. Ltd. towards the Capital and Reserves of the Delhi Cloth Mills and Swatantra Bharat Mills, the two units of the Company is fair and reasonable? If not, what directions are necessary in this regard? 2. Whether the workmen of these Mills are entitled to bonus at a rate higher than 6 per cent. of the wages for the accounting year ending 30-6-1965? If so what directions are necessary in this regard?" After prolonged proceedings before the Tribunal a settlement was arrived at between the Management and the Labour Unions which were parties to the reference and agreed directions given in accordance therewith in regard to issue No. 1 were as follows: "1. Balance-sheets of D. C. M. and S. B. M. will be taken together for calculation of available surplus in accordance with the formula laid down in the Payment of Bonus Act, 1965. 2. Interest has been charged in the profit and loss account of D. C. M. and S. B. M. units of the head-office current account. Hence, no return will be claimed thereon. 3. Interest has not been charged on the fixed capital expenditure accounts and the gratuity reserves appearing in the balance sheets of the D. C. M. and S. B.M. therefore, return on such amounts will be claimed. The following method will be followed in making a claim for return on the following amounts: (a) The fixed capital expenditure account in the D. C. M. and S. B. M. as represented by the written down value of the fixed assets appearing in the balance-sheet of these two units will be treated as paid up share capital of the company allocated to and invested in these two units and return at the rate of 8 1/2 Per Cent or as provided in the Payment of Bonus Act, 1965 from time to time will be charged thereon as provided under the Payment of Bonus Act, 1965. b) The gratuity reserves of these two units will be treated as reserves and return at the rate of 8 Per Cent will be charged thereon as provided under the Payment of Bonus Act, 1965.
(3.) THE method and basis of casting balance-sheets will not be unilaterally altered or changed. The above method of charging return on paid up share capital and reserve of the above two units will be followed in future also." 4. Thereafter the parties filed a large number of documents waiving formal proof thereof. Those filed on behalf of the Management were Exs. M to M-352 while three other opposite parties filed some documents each. On the basis of the documents before the Tribunal the Management and the workers made their respective calculations which were summed up in a chart, a copy whereof was handed over to us by learned counsel for the appellants. The same reads as follows:- CHART. JUDGEMENT_695_2_1971Html1.htm The above brings out the wide divergence between the parties as to the figure of direct taxes. According to the appellant direct taxes which have to be deducted for computation of allocable surplus for payment of bonus are: Rupees 52-24 lakhs by way of Income-tax and Rupees 5-48 lakhs by way of surtax making a total of Rupees 57-72 lakhs, while according to the calculation of the workers direct taxes should be no more than Rupees 10-09 lakhs on the basis of Ex. M-15, one of the documents produced by the Management itself. If the computation of the management is accepted, then the allocable surplus in terms of Section 2 (4) of the Bonus Act is Rupees 22.40 lakhs and the rate of bonus to each employee is 7.31 per cent. while according to the computation of the workers the allocable surplus is Rupees 50-99 lakhs and the rate of bonus should be 16.64 Per Cent . 5. In order to appreciate the viewpoints of the two parties, it is necessary to refer to some provisions of the Act. It is unnecessary to state that before the enactment of the Payment of Bonus Act of 1965 bonus used to be awarded by Industrial Tribunals whenever there was a dispute between the management and workers, by applying the Labour Appellate Tribunal Full Bench formula formulated as far back as 1950 and approved of and explained in several decisions of this Court. The Act of 1965 was passed for creating a statutory liability "for payment of bonus to persons employed in certain establishments and for matters connected therewith". Subject to certain exceptions it was made applicable to every factory or other establishment in which twenty or more persons were employed on any day during an accounting year. The accounting year in the present case is 1/07/1964 to 30/06/1965. Under Section 8 every employee is entitled to be paid by the employer in an accounting year, bonus in accordance with the provisions of the Act. The amount of bonus is to be specified percentages of the allocable surplus of the establishment which is defined in Section 2 sub-section (4) of the Act. Establishments may be of two kinds. They are either establishments in private sector or establishments in public sector. Although 'establishment' by itself has not been defined in the Act separately, Section 3 gives a clue to the meaning thereof. The said section runs as follows: "Where an establishment consists of different departments or undertakings or has branches, whether situated in the same place or in different places, all such departments or undertakings or branches shall be treated as parts of the same establishment for the purpose of computation of bonus under this Act: Provided that where for any accounting year a separate balance-sheet and profit and loss account are prepared and maintained in respect of any such department or undertaking or branch, then, such department or undertaking or branch shall be treated as a separate establishment for the purpose of computation of bonus under this Act for that year, unless such department or undertaking or branch was, immediately before the commencement of that accounting year treated as part of the establishment for the purpose of computation of bonus." Gross profits of each establishment have to be computed in terms of Section 4 which in its turn refer to two Schedules the first to be applicable to a banking company and the other to any other case. After the ascertainment of gross profits Section 5 lays down the method of computation of available surplus. Before the amendment introduced by Act 8 of 1969 the available surplus in respect of any accounting year was to be the gross profits for the year after deducting therefrom the sums referred to in Section 6. Section 6 provided for the deduction of certain amounts from the gross profits as prior charges. These are namely, (a) any amount by way of depreciation admissible in accordance with the provisions of sub-section (1) of Section 32 of the Income-tax Act or in accordance with the provisions of the agricultural Income-tax law, as the case may be (the provision is irrelevant for our purpose); (b) any amount by way of development rebate or development allowance which the employer is entitled to deduct from his income under the Income-tax Act; (c) subject to the provisions of Section 7 any direct tax which the employer is liable to pay for the accounting year in respect of his income, profits and gains during that year; and (d) such further sums as are specified in respect of the employer in the Third Schedule. Before the amendment of the Act in 1969 Section 7 read as follows:- "For the purpose of Clause (c) of Section 6, any direct tax payable by the employer for any accounting year shall, subject to the following provisions, be calculated at the rates applicable to the income of the employer for that year, namely :- "(a) in calculating such tax no account shall be taken of- (i) any loss incurred by the employer in respect of any previous accounting year and carried forward under any law for the time being in force relating to direct taxes; (ii) any arrears of depreciation which the employer is entitled to add to the amount of the allowance for depreciation for any following accounting year or years under sub-section (2) of Section 32 of the Income-tax Act; (iii) any exemption conferred on the employer under Section 84 of the Income-tax Act or of any deduction to which he is entitled under sub-section (1) of Section 101 of the Act, as in force immediately before the commencement of the Finance Act, 1965; (b) where the employer is a religious or a charitable institution to which the provisions of Section 32 do not apply and the whole or any part of its income is exempt from tax under the Income-tax Act, then, with respect to the income so exempted, such institution shall be treated as if it were a company in which the public are substantially interested within the meaning of that Act; (c) where the employer is an individual or a Hindu undivided family, the tax payable by such employer under the Income-tax Act shall be calculated on the basis that the income derived by him from the establishment is his only income; (d) Where the income from any employer includes any profits and gains derived from the export of any goods or merchandise out of India and any rebate on such income is allowed under any law for the time being in force relating to direct taxes, then, no account shall be taken of such rebate; (e) no account shall be taken of any rebate (other than development rebate or development allowance) or credit or relief or deduction (not hereinbefore mentioned in this section) in the payment of any direct tax allowed under any law for the time being in force relating to direct taxes or under the relevant annual Finance Act, for the development of any industry." 6. Section 3 is the key to the Act in that it fixes the res or the property which is to provide the allocable surplus for the distribution of bonus in terms of the Act. This must be an establishment and a question directly arises when there are a number of establishments in common ownership as to how the allocable surplus is to be found out. If Section 3 had no proviso to it, all departments, undertakings or branches, be they complete factories or not, for turning out commercial products under common ownership could be treated as one establishment for the purpose of computation of bonus. A company which is a legal entity owning and running factories of diverse characters whether situate at the same place or located at different places would in such eventuality, form one establishment for the purpose of the Act. The proviso to the section however shows that the legislature intended that each of these factories is to be treated as a separate establishment for the purpose of computation of bonus if a separate balance-sheet and profit and loss account were prepared in respect thereof unless such a factory was, immediately before the commencement of the accounting year, treated as a part and parcel of the company i.e. the establishment. In other words, if different units or branches or departments had been treated separately for the purpose of computation of bonus and separate balance-sheet and profit and loss accounts had been prepared in respect thereof, they were not to lose their separate identity as establishments because of the main provision of Section 3. Once it is ascertained that a branch, department or a factory is an establishment by itself under the Act, Sections 4 to 7 are to have effect in respect of that establishment by themselves without the impact or connection with other branches, departments or factories even if they subserve a common cause. Gross profits of such an establishment like the two mills before us would have to be calculated in terms of the Second Schedule to the Act by taking the net profit as per profit and loss account and adding thereto the various amounts therein mentioned and deducting the amounts like capital receipts, profits of and receipts relating to business outside India etc. The gross profits to be computed for the purpose of bonus would not be the same as to be computed under the Indian Companies Act or the Income-tax Act. Under Section 5 of the Act the available surplus in respect of the two units would be the gross profits computed under Section 4 as reduced by the prior charges mentioned in sub-clauses (a) to (d) of Section 6. All these amounts i.e. gross profits, available surplus and sums deductible from gross profits would be notional amounts in that they would not be the amounts which would be computed under the Companies Act for submission to the shareholders or for assessment under the Income-tax Act to the taxing authorities. Section 7, Clause (a) of the Act further illustrates the point that the direct taxes which are to be deducted as prior charges are not to be the same as would be assessed by the Income-tax authorities under the Income-tax Act. That the calculation of direct taxes would be on a notional basis is also emphasised by clauses (b), (c), (d) and (e) of Section 7. ;