Wanchoo, J. - (1.) THIS Judgment is in continuation of our judgment dated 11/4/1963 [1963 II L.L.J. 358]. The two appeals by two unions of workmen of the respondents' mills relate to bonus for four years. When the appeals were heard on the previous occasion, four points were raised on behalf of the appellants, namely (1) calculation of gross profit for the year 1956-57 ; (2) calculation of incometax for all four years, (3) calculation for rehabilitation for all four years; and (4) calculation of working capital for all four years.
(2.) IN our previous Judgment we substantially accepted the contentions of the appellants on these four points and remanded the matter to the tribunal for taking farther evidence and thereafter to recalculate the available surplus and submit its findings to us. The tribunal has now done that and both parties have filed objections in accordance with our direction in the earlier judgment to these findings end the appeals have now come up for final disposal. Of the four points then in dispute, the matter of working capital is no longer in dispute, as the parties ere agreed about the finding of the tribunal in that connexion. It therefore remains to deal with the first three points only as indicated above and we shall take them one by one. Regarding (1).- The dispute in this connexion was with respect to revaluation of some of the current assets in the year 1956-57 which resulted in an increased figure of Rs. 38.8 lakhs on the debit side of the profit and loss account of that year. The contention of the appellants in that connexion was that this method of revaluation resulted in showing inflated figures in terms of money for the cost of raw materials, etc., consumed with the result that actual profit was reduced. The respondent on the other hand contended that there was a contra entry in the profit and loss account and this meant that there was no real effect on the actual profits for the year. We had however remanded the matter as it was not clear what the effect of the so-called contra entry was. It was also not clear how the revaluation affected the profits in view of the fact that raw materials, etc., were valued at a higher figure than would have been the case if the valuation had been made in the same way as in the previous years and this higher valuation had gone into consumption as the debit side of the profit and loss account for that year Indicated. Evidence was therefore led on remand to explain the position both with respect to the contra entry and also with respect to the effect on profits on account of revaluation in 1956-57. So far as the so- called contra entry is concerned, it is not now clear that It Is not a contra entry even though it appears In the profit and loss account. The profit and loss account is in two parts. The first part is concerned with the working out of profit and the revalued stock appears on the debit side of the first part of the account showing that it might have affected the profits for that year. The so-called contra entry is in the second part of the profit and loss account which deals with allocation of profit and appears on the credit side. The entry is therefore not a contra entry because It appears in another part of the profit and loss account. It therefore remains to deal with the question whether the revaluation has affected the consumption of raw material, etc., with the result that the profits for the year have been depreciated in the profit and loss account. In this connexion the explanation of the respondent was that over a course of seventeen years before 1 April 1956. It had been adopting the policy of undervaluing stock at the end of the year with the result that in most, of the seventeen years ending with 31 March 1956, there had been concealment of profits and the total of such concealment is Rs. 38.8 lakhs. In the year 1956-57, it is said that this concealed profit was brought out by the new method of accounting, but it made no difference to the profits for that year.
(3.) THAT is why in the second part of the profit and loss account it found a place on the credit side and necessary provision was also made for taxes with respect to this profit of the previous years, which was brought into the profit and loss account for this year. Reliance in this connexion is placed on the assessment orders of the Incometax Departments where this profit of Rs. 38.8 lakhs has been assessed to incometax in the various previous yeas. The reply of the appellants to this explanation is that by this method the respondent was able to depress the profit of many of the previous seventeen years and deprive the workmen of bonus. Further it is urged that by the method of revaluation the respondent has depressed the profit for this year and has tried to deprive the workmen of bonus which might be due. There is in our opinion some force in the contention of the appellants in this behalf. There is no doubt that when the system of undervaluing stock at the end of a year was adopted the profits were depressed in the previous years. Now in the year 1956-57 when the valuation system was changed, the change was brought about by showing the increased valuation on the debit side of the profit and loss account, thus increasing the valuation of raw materials, etc., consumed; the result of this may be to depress the profits for this year, as compared to what would have been the result if the valuation had continued as in the previous years. The appellants therefore pressed before the tribunal that the profit and loss account for the year 1956-57 might be made up again on the old valuation to show the real profit for that year and then the concealed profit may be brought out at the end of the year on the credit side of the profit and loss account. The respondent however was not prepared to reconstruct the balance sheet in this manner and did not help the tribunal in that behalf. The appellants therefore suggested a method of reconstructing the balance sheet on the basis that the revalution did not affect either side of the first part of profit and loss account for that year. On this basis, the appellants contended that there would be an additional profit of about Rs. 16.81 lakhs in that year and this figure has been accepted by the tribunal. The respondent however contended that this was not correct and that real profits bad not been affected at all by the revaluation effected in 1956-57. Learned counsel for the respondent however has not been able to convince us, taking only the first part of the profit and loss account for the year 1956-57, that real profits have not been affected at all by this manner of accounting. The sum of Rs. 38.8 lakhs is made up of four items, namely Now, so far as raw materials, etc., are concerned, the profit and loss account shows that there was an opening balance of Rs. 62.76 lakhs worth of raw materials and a dosing balance of Rs. 62.12 lakhs worth of raw materials, so that so far as raw materials, etc, were concerned, the revaluation did not make much difference, for the opening balance as well as the closing balance were more or less the seme and revaluation thus made both at the beginning of the year and at the end of the year cancelled out. As for paper stock, the opening balance was Rs. 32.17 lakhs including Rs. 7.1 lakhs for revaluation; the closing balance was Rs. 16.5 lakhs. If this was valued on the same basis as was prevalent in the previous years its proportionate value would be Rs. 12.5 lakhs only. So that taking paper stock alone on both debit and credit side, the profits were depressed by this method of valuation by Rs. 7.1 lakhs minus Rs. 4.0 lakhs, i.e., by Rs. 3.1 lakhs. Turning now to general stores, etc., the excess valuation was Rs. 13.5 lakhs. The profit and loss account does not show what was the opening balance and the closing balance of general stores; but we find from Sch. F of current assets in the balance sheet that the general stores, etc., as valued on 31 March were Rs. 75.7 lakhs at the old valuation. To this Rs. 13.5 lakhs have to be added on account of revaluation showing an opening stock of Rs. 89.2 lakhs. The same schedule shows that the closing balance of current assets of general stores was Rs. 92.3 lakhs at the end of the year at the new valuation. So it is clear that in the case of general stores also, revaluation would not make any difference in the same way as in the case of raw materials. Turning to power and fuel we find from the same Sch. F that coal as valued on 31 March 1956 was worth Rs. 2.26 lakhs. At the new valuation it would be worth Rs. 2.76 lakhs, on 1 April 1956. Further Sch. F shows that at the end of the year there was ooal worth Rs. 2.12 lakhs left as closing stock. So in the case of coal also it cannot be said that revaluation made any difference so far as this item is concerned, for the amount at the end of the year was practically the same as at the beginning of the year. We are therefore of opinion that the real difference on account of this change of valuation to the profit was on account of paper stock to the extent of Rs. 3.1 lakhs. We do not think that it would be right to take into account what has been provided in the second part of the balance sheet with respect to Rs. 38.8 lakhs in the shape of extra salary, wages, bonus, extra director's commission and extra managing agent's commission, for that will comeout of the profits of past years which have been brought in the second part of the profit and loss account. Therefore, looking at the first part of the profit and loss account along with Sch. F of the current assets included in the balance sheet we have come to the conclusion that the real amount by which the profit was depressed by this method of accounting was Rs. 3.1 lakhs and not Rs. 16.81 lakhs as found by the tribunal and as contended on behalf of the appellants. This is in accordance with the manner in which Sri Roy Mukherjee appearing for the appellants reconstructed the balance sheet. The only mistake that Sri Roy Mukherjee made was to take the increased valuation under general stores at its face value because the profit and loss account did not show what was the opening balance with respect to general stores and what was the closing balance. This is however apparent from Sch. F attached to the balance sheet which also gives the exact amount of the opening and closing balance of raw materials, etc., which tallies with the figures in the profit and loss account. We are therefore of opinion that taking the balance sheet Sch. F and the profit and loss account, the profit shown in the profit and loss account should be increased by Rs. 3.1 lakhs on account of the change in the method of accounting. Regarding (2).So far as incometax is concerned the contention of the appellants is that the tribunal was wrong In not taking into account the development rebate in considering the statutory depreciation and arriving at the figure of incometax to be deducted. We are of opinion that this contention must be accepted. The reason why the tribunal did not take into account the development rebate was that it thought that development rebate was not the same thing as initial depreciation which has to be taken into account in arriving at statutory depreciation. ;