Their Workmen 1 that if managing agents deliberately divert profits to the selling, agents with a view to deprive labour of their bonus and pay commission to the selling. In considering such a plea the tribunal must resist the temptation of dissecting the balance-sheet too minutely or of attempting to reconstruct it in any manner. It is only glaring cases, where the impugned item may be plently and obviously extraneous that a plea for its exclusion should be entertained. Where the employer makes profits in the course of carrying on his trade or business, it would be unreasonable to inquire whether each one of the, items of the said profit is related to the contribution made by labour.
In such matters, the tribunal must take an overall, practical and commonsense view.
In, working out the formula the other important fact which should not be ignored is, that the formula proceed's to deal with the labour's claim for bonus on the basis that the relevant year for which bonus is claimed is a self- sufficient unit and the appropriate accounts have, to. Also vide  L. In Model Mills etc. The concession made by the income-tax authorities in making a refund of the excess profits tax already paid by the employer is intended to aid a concern on account of past losses and so it has nothing to do with the formula.
The same principle governs cases where owing to a loss incurred in the previous year or years the employer is entitled to claim allowance for adjustment under s. In Bennett Coleman and co. Their Workmen 2 the Labour Appellate Tribunal rejected the contention raised by labour that since under s. The Labour Appellate Tribunal pointed out that the fact that the employer was not required to pay tax during the bonus year was the result of the adjustment of the previous year's unabsorbed depreciation and losses against current year's profit, and that had no relevance in determining the available surplus from the trading profits of the bonus year.
The same view has been taken in several other decisions to which the Labour Appellate Tribunal has referred. In our opinion, once it is realised that in working out the formula the bonus year is taken as a unit self-sufficient by itself, the decisions of the Labour Appellate Tribunal in regard 1 I J. Having ascertained the amount of gross profits, the first item of deduction relates to depreciation. The propriety of this deduction was not questioned before the Labour Appellate Tribunal which evolved the formula; but the content of the item of depreciation became a matter of controversy subsequent to After , s.
In other words, depreciation allowed under the Income-tax Act now consists of what may be called the statutory normal depreciation calculated under r. The allowance of these depreciations is an exception to the general rule that the income has to be taxed without reference to the diminution in the value of the capital. Under the amended provision of s. This conflict of decisions led to confusion; and so a Full Bench of the Labour Appellate Tribunal was constituted to decide this and other points in the case of the U.
Electric Supply Co.
The Works of A. Workman: Volume 2
Electricity Supply Undertakings v. Their Workmen 1. The Full Bench held that " the depreciation which should be deducted from the gross profits in working the formula is annual depreciation allowable under the provisions of the Income-tax Act including the multiple shift depreciation; it also held that the initial depreciation and additional depreciation which were also allowed under the Income-tax Act are abnormal additions to the income-tax depreciation designed to meet particular contingencies and for a limited period;.
Apparently some doubt arose as to what exactly was allowed to be deducted under this Full Bench decision; and two of the members of the Full Bench took occasion to clarify the position in Surat Electricity Co. Surat Electricity Co. This decision shows that what the Full Bench intended to treat as depreciation for the purpose of the formula was a notional amount of normal depreciation; in order to avoid any future doubt or confusion, the judgment in the case has set out the manner in which this notional normal depreciation has to be worked out. Since this decision was pronounced it is the notional normal depreciation that is deducted from the gross profits in working the formula.
It seems to us that the view taken by the Full Bench is wholly consistent with the basic idea of social justice on which the original formula is founded. The relevant provisions of the Income-tax Act allowing further depreciation are based on considerations which have no relevance to the original formula; indeed, as the Full Bench has pointed out, if the said two items of depreciations are allowed to be deducted from the gross profits it would in a majority of cases defeat the object of the formula itself. We would accordingly hold that the depreciation which has to be deducted from the gross profits should be the notional normal depreciation as explained in the case of Surat Electric Co.
The balance obtained after deducting depreciation from the gross profits is then taken as the amount on which calculations have to be made about the income-tax payable for the bonus year. This item gives rise to a controversy between the parties. It is urged for the employers that in determining the amount payable by way of income-tax on this balance the tribunal should not take into consideration allowances which are made under the relevant provisions of the Income-tax Act.
There is no doubt that in taxing the employer for the bonus year the Income-tax Act would 1 II L. In support of this argument it is further urged that though the employer may obtain credit for the two further depreciations for some years, later on the said allowances will not be made and his liability' to pay tax would be correspondingly increased.
It is but fair, so the argument runs, that the employer should be allowed to create a fund of income-tax reserve from which he would be able to bear his tax liability in future as and when it is bound to increase. On the other hand it is contended on behalf of workmen that while determining the amount of tax payable for the bonus year the tribunal cannot ignore the concession given to the employer by the Income-tax Act by making the allowance of two further depreciations. What the employer claims is not the amount of tax payable during the bonus year but much more in addition in order to build up a reserve and this notion of building up a tax reserve for meeting future, though certain, increased tax liability is foreign to the basic idea of the formula.
For making calculations under the formula the bonus year is taken as a unit and all items specified in the formula should be worked out on that basis. That is why the refund of the excess profits tax received in the bonus year is excluded from consideration and the right of the employer to adjust his previous year's losses and depreciation against the trading profits of the bonus year is likewise ignored. So too the fact that the employer may have to pay increased taxes in future years must be treated as irrelevant.
That in brief is the case for workmen. In our opinion, having regard to the basis of the formula and the manner in which the other items of the formula are required to be worked out, it would not be reasonable to allow the employer to claim under the item of income-tax an additional amount is respect of the two further depreciations which are expressly allowed to him under s.
It is clear that the amount determined under this item would not represent the actual tax which the income-tax department will recover from the employer.
In that sense it would always be a notional amount ; but in calculating even this notional amount it would be unfair and unjust to ignore the concessions allowed to the employer by s. The creation of a fund of income-tax reserve may conceivably lead to unnecessary complications. Besides, if on principle the further depreciations allowed by the Income-tax Act are treated as inadmissible under the formula and so are excluded from consideration, it would be substantially inconsistent with the object of such exclusion to allow the employer to claim tax in respect of the said amounts of the two depreciations.
It is clear that even if the amount of income-tax is determined after taking into account the concession given to the employer by s. This method of calculating income tax is thus fair to both the parties and it has besides the merit of being consistent with the basic character of the formula.
It would be relevant in this connection to remember that, though in most of the industries workmen continue to be employed from year to year, nationally and on principle, the claim for bonus for a particular year is made on behalf of workmen employed during the said year; and in that sense, the relevant calculations have to be made with the bonus year as a unit. That is why considerations of future tax liability of the employer are foreign to the calculation under the formula. We would, therefore, bold that in calculating the amount of tax payable for the bonus year the tribunals should not take into account the concessions given by the Income-tax Act to the employers under the two more depreciations allowed under s.
Electric Co. We would only like to add that in that case this Court had occasion to say what exactly the normal depreciation meant; but it is clear that the normal depreciation mentioned in the judgment was not intended to mean anything other than the notional normal depreciation as explained by the Labour Appellate Tribunal in the case of the Surat Electric Co. The amount income-tax thus determined has then to be deduct as a prior charge. The next step in the working of the formula related to the deduction of an appropriate amount in respect of the return on paid-up capital as well as working capital.
Subsequent decisions show that the tribunals do not regard the said rates as inflexible and they have suitably modified them in the light of the relevant circumstances in each case. We think that this is a correct approach and that it is necessary to fix the rates of interest on the two items of paid-up capital and working capital according to the circumstances of each case.
In Workmen of Assam Co. Assam Co. On the other hand, in Ruston and ornsby India Ltd.
The Rashtriya Mill Mazdoor Sangh 2 the Labour Appellate Tribunal has observed that " as we have said before, there is no fixed rule as to the rates of such return on capital and each case must depend on its individual acts. In Tea and Coffee Workers Union v.
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Brooke Bond India Private Ltd. In dealing with this aspect of the matter it is relevant to point out that no distinction has been made y tribunals between reserves used as working capital and depreciation fund similarly used. In the Mill Owners Association, Bombay v. The Rashtriya Mill Mazdoor Sangh 2 page when labour objected to the depreciation fund earning any return even if it was utilised in or about the business of the year, the labour Appellate Tribunal overruled the objection and observed that " no essential difference could be made between the depreciation fund and any other 1 1 L.
It is thus clear that what is material is not the origin of the fund.
It is the fact that the fund in the hands of the concern has been used as working capital that justifies the claim for art adequate return on it. We think it is commonsense that if the concern utilises liquid funds available in its hands for the purpose of meeting its working expenses rather than borrow the necessary amounts it is entitled to claim some reasonable return on the funds thus used.
It is of course necessary that the employer must show that the amount under the depreciation fund was in fact available and that it has actually been used as working capital during the relevant year. What return should be allowed on such funds must inevitably be a question of fact to be decided by the tribunal in its discretion in each case in the light of the relevant circumstances. It would thus be noticed that in working out these two items under the formula there is no fixed or rigid rule about the rate of interest which can be claimed and awarded.
Jerome J. Workman Jr.
It is also clear that if any fund is used by the employer for the purpose of expanding his business he is not entitled to claim any return on such fund under those items. In the case of the U. Electricity Supply Undertakings 1 the Full Bench of the Labour Appellate Tribunal held that " considering all the factors presented to them they did not think that a case had been made out for giving a special prior charge in the shape of return on the reserves utilised for expansion ".
When the amounts awardable to the employer under these two items are determined they have to be treated as prior charges in the calculation of available surplus under the formula. The original formula referred to replacement, rehabilitation and modernisation of the plant and machinery. Soon after the formula was evolved a dispute arose as to whether the industry was entitled to claim rehabilitation for its buildings as well and it was held that " a claim for rehabilitation for buildings had to 1 II L.
That takes us to the item of rehabilitation and it is this item which poses a very difficult problem. We have already noticed that the object of providing depreciation of wasting assets in commercial accounting is to recoup the original capital invested in the purchase of such assets; but the amount of depreciation which is allowed under the formula can hardly cover the probable cost of replacement. That is why the formula has recognised the industry's claim for rehabilitation in addition to the admissible depreciation. Since the Second World War prices of industrial plant and machinery have registered a continuous upward rise and its inevitable consequence has been a proportionate rise in the claim for rehabilitation.
In considering the claim for rehabilitation it is first necessary to divide the blocks into plant and machinery on the one hand and other assets like buildings, roads, railway-sidings, etc.
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