The Associated Cement Companies Ltd., Dwarka Cement Works Vs. Its Workmen & ANR [1959] Insc 65 (5 May 1959)
GAJENDRAGADKAR, P.B.
DAS, SUDHI RANJAN (CJ) BHAGWATI, NATWARLAL H.
DAS, S.K.
WANCHOO, K.N.
CITATION: 1959 AIR 967 1959 SCR Supl. (2) 925
CITATOR INFO :
R 1959 SC1081 (12) F 1959 SC1089 (9) R 1959 SC1114 (6,8,9) F 1959 SC1276 (5,8) F 1959 SC1317 (3) F 1960 SC 12 (23) R 1960 SC 571 (5,6) R 1960 SC 826 (10) R 1960 SC1003 (5) F 1960 SC1025 (8) F 1960 SC1346 (5) F 1961 SC 867 (2,4,7,9) R 1961 SC 941 (2,7,9) RF 1961 SC 977 (7,9) RF 1961 SC1165 (2,5,6) R 1961 SC1191 (3) RF 1961 SC1200 (13) R 1962 SC1221 (4) R 1962 SC1255 (1,5,7) R 1963 SC 474 (4) R 1963 SC1007 (6,12,13) RF 1963 SC1710 (5) R 1964 SC1766 (13) RF 1967 SC 691 (7,11,22) R 1967 SC1222 (5) R 1967 SC1450 (5) R 1968 SC 538 (2,10,12,25,32) R 1968 SC 963 (2,3,11,12,25,26,28,29,30,31) RF 1969 SC 530 (8) RF 1969 SC 612 (23) RF 1969 SC 976 (13) R 1971 SC2521 (8,16,18) RF 1971 SC2567 (1) RF 1972 SC 70 (15,21) R 1972 SC 330 (7,18) RF 1972 SC1954 (15,23) RF 1973 SC 353 (22)
ACT:
Industrial Dispute-Bonus-Available surplus-Determination of Full Bench formula Basis Applicability-Revision if required Prior Charges-Mode of calculation-Gross Profits, ascertainment of-Rehabilitation charges, how determinedGratuity fund, whether can be claimed as Prior chargeDistribution of surplus--Overtime Payment, if can be taken into consideration in awarding bonus.
HEADNOTE:
For the year 1953-54, the employers paid bonus to the workmen equal to three months' wages, but the workmen demanded bonus equivalent to seven months and six months basic wages with dearness allowance. The employers contended that after making deductions for the prior charges from the gross profits in accordance with the formula evolved by the Full Bench of the Labour Appellate Tribunal in Mill Owners Association, Bombay v. The -Rashtriya Mill Mazdoor Sangh, (1950) L.L.J. 1247, there was no available surplus left and consequently the 926 workmen could claim no bonus. The workmen countered that the formula required revision as the employers were becoming increasingly more rehabilitation conscious and their appetite for the provision for rehabilitation was fast growing with the result that in most cases, after allowing for rehabilitation, there was no surplus left for the payment of bonus and the main object of the formula was thus frustrated. The workmen further contended that the whole of the rehabilitation expenses should not be provided for out of trading profits and that the claim for rehabilitation should be fixed at a reasonable amount and the industry should be required to find the balance from other sources:
Held, that though there may be some force in the plea made for the revision of the Full Bench formula, the problem raised by the said plea is of such a character that it can be appropriately considered only by a high-powered commission and not by this Court while hearing the present group of appeals. Besides the Full Bench formula had on the whole worked fairly satisfactorily in a large number of industries all over the country, and the claim for bonus should be decided by Tribunals on the basis of this formula without attempting to revise it. The formula was elastic enough to meet reasonably the claims of the industry and labour for fair play and justice. If the content of each item specified in the formula was determined objectively in the light of all relevant and material facts, the Tribunals would generally find it possible to make reasonable adjustments between the rival claims and provide for a fair distribution of the available surplus.
Muir Mills Co. Ltd. v. Suti Mills Mazdoor Union, Kanpur, [1955] 1 S.C.R. 991, Baroda Borough Municipality v. Its Workmen, [1957] S.C.R. 33, Sree Meenakshi Mills Ltd. v. Their Workmen, [1958] S.C.R. 878 and The State of Mysore v. The Workers of Kolar Gold Mines, [1959] S.C.R. 895, referred to.
The formula was based on two considerations: first, that labour was entitled to claim a share in the trading profits of the industry, because it had partially contributed to the same; and second, that labour was entitled to claim that the gap between its actual wage and the living wage should, within reasonable limits, be filled up. In dealing with the claims for bonus, the two-fold basis of the formula must always be kept in mind. Further, it was not necessary that the workmen must actually manufacture or produce the goods before they become entitled to claim any bonus.
Burma Shell Oil Storage & Distributing Co. of India Ltd. v. Their Workmen, (1953) 2 L.L.J. 246, applied.
The working of the formula begins with the figure of gross profits, taken from the profit and loss account, which are arrived at after payment of wages and dearness allowance to employees 927 and other items of admissible expenditure. It would be open to the Tribunal to examine the accounts and to disallow deliberate and mala fide debit entries made to reduce the amount of gross profits. It would likewise be open to the parties to claim the exclusion of items, credit or debit, on the ground that they were patently and obviously extraneous and entirely unrelated to the trading profits of the year.
But the Tribunal must resist the temptation of dissecting the balance-sheet too minutely or attempting to reconstruct it.
J.f. K. Cottton Manufacturers Ltd., Kanpur v. Their Workmen, (1954) L.A.C. 716, applied.
The formula deals with the claims for bonus on the basis that the relevant year is a self-sufficient unit and the appropriate accounts have to be made on the notional basis in respect of the said year. Hence, the refund of excess profits and the adjustment of the previous year's depreciation and losses cannot be made against the bonus year's profits.
Model Mills etc. Textile Mills, Nagpur v. The Rashtriya Mills Mazdoor Sangh (1955) 1 L.L.J. 534; Bennett Coleman and Co. Ltd. v. Their Workmen, (1955) 2 L.L.J. 60, referred to.
After ascertaining the amount of gross profits, the first item of deduction therefrom relates to depreciation. The depreciation which has to be deducted from the gross profits should be the notional normal depreciation as explained in the case of Surat Electricity Co. Ltd., (1957) 2 L.L.J. 648, and should not include the initial and additional depreciation allowable under the Income-tax Act.
U.P. Electric Supply Co. Ltd. v. Their Workmen, (1955) 2 L.L.J. 431; Surat Electricity Co's. Staff Union v. Surat Electricity Co. Ltd., (1957) 2 L.L.J. 648, referred to.
The second item of deduction is on account of income-tax.
On the balance obtained after deducting the depreciation from the gross profits the tribunal has to calculate the amount of income-tax payable for the bonus year. In making this calculation it would not be reasonable to allow the employer to claim under the item of income-tax an additional amount in respect of the two further depreciations which are expressly authorised under s. 10(2)(vi) of the Income-tax Act. Therefore the two concessions thus given by the Income-tax Act should not be taken into account in determining the amount of income-tax under the formula.
Sree Meenakshi Mills Ltd. v. Their Workmen, [1958] S.C.R.
878, explained and followed.
The third item of deduction under the formula relates to the return on paid up capital as well as working capital. The formula provides generally for the payment of interest at 6% 118 928 per annum on the paid up capital and at 2% on working capital. These rates are not inflexible and will vary according to the circumstances of each case.
Workmen of Assam Co. Ltd. v. Assaam Co. Ltd., [1959] S.C.R. 327 ; Rustom and Hoynsby (India) Ltd. v. Their Workmen (1955):I L.L.J. 73, Mill Owners Association, Bombay v. The Rashtriya Mill Mazdoor Sangh, (1952) 1 L.L.J. 518, Tea and Coffee Workers Union v. Brooke Bond (India) (Private) Ltd., (1956) 1 L.L.J. 645, U. P. Elcctric Supply Co. Ltd. v. Their Workmen, (1955) 2 L.L.J. 4I3, referred to.
The fourth item of deduction is on account of rehabilitation which includes replacement and modernisation but not expansion. Rehabilitation has to be calculated for the plant and machinery as well as the buildings. The whole of the rehabilitation charges have to come out of the trading profits as this guarantees the continuance of the industry to the benefit both of the employer and labour. The Tribunal has to estimate the probable cost of replacement of plant and machinery at the time when such replacement would become due. In determining such cost, the Tribunal has to project the price level into the future, determined not only in the light of the prices prevailing during the bonus year, but also of subsequent price levels. The decision on the question of the probable cost of rehabilitation is always reached by adopting a suitable multiplier. This multiplier is based on the ratio between the cost price of the plant and machinery and the probable price which may have to be paid for its rehabilitation, replacement or modernization.
As there has been a continuous rise in the price of industrial plant and machinery, the older the plant which needs rehabilitation, the higher is the multiplier. If the employer has deliberately or mala fide refrained from rehabilitating his old machinery with a view to claim a higher multiplier, his conduct may be taken into account in determining the multiplier and the amount of rehabilitation payable to him. Once a proper multiplier is adopted, the probable cost of rehabilitation can be easily determined by multiplying the original cost by the multiplier. At this stage the divisor steps in. The total amount required for rehabilitation has to be divided by a suitable divisor in order to ascertain the annual requirement of the employer in that behalf year by year.
Before awarding an appropriate amount in respect of rehabilitation for the bonus year, deductions have to be made, first on account of the break-down value of the plant and machinery which is usually calculated at the rate Of 5% Of the cost price, secondly the depreciation and general liquid resources available to the employer other than those earmarked for specific purposes, thirdly all the rehabilitation amounts which may have been allowed to the employers in the previous years, but had remained unused in the meanwhile.
929 It is only after all the prior charges have thus been determined and deducted from the gross profits that the available surplus can be ascertained for payment of bonus. The procedure adopted by some Tribunals of nationally working out the amount of bonus and then giving it priority in the calculations before the determination of the income-tax payable inevitably lessens the amount of tax proportionately, and should be deprecated. Rehabilitation cannot be given priority before the income-tax payable is ascertained and deducted from the gross profits.
No addition should be made to the list of prior charges recognised by the formula even with respect to the employers claim for deductions on account of gratuity fund created for the benefit of the workmen. But the Tribunal ought to, when the available surplus is determined, take into account such a claim and reasonable amount of allowance should be definitely borne in mind in finally fixing the amount of bonus.
M/s. Metro Motors v. Their Workmen, (1952) 2 L.L.J. 205, referred to.
When the available surplus has been ascertained, three parties are entitled to claim shares therein : labour's claim for bonus, the industry's claim for the purpose of expansion and other needs and the share-holders' claim for additional return on the capital invested by them. The ratio of distribution would obviously depend on several factors: such as the gap between the actual wages and the living wages, the setting a part of a gratuity fund by the employer and the amount thereof, the extent of the available surplus, the dividends actually paid by the employer and those paid by comparable concerns, the probabilities of expansion, the general financial condition of the employer and his necessity to meet urgent liabilities.
It would be wrong on principle to take overtime payment into account in calculating the bonus payable to each workman.
Once the total amount payable as bonus is determined on the principles as indicated, the question of overtime payment being taken into account can no longer be a dispute between the employer and his workmen but one between the workmen inter se.
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 459 and 460 of 1957.
Appeals by special leave from the judgment and order dated the 30th November, 1956, of the Industrial Tribunal, Bombay, in Reference 1. T. Nos. 10 and 13 of 1956.
R.H. Kolah, Dadachanji and S. N. Andley, for the appellant.
930 C.L. Dudhia and I. N. Shroff, for the respondents in C. A. No. 459 of 1957.
A.S. R. Chari and 1. N. Shroff, for the respondents in C. A. No. 460 of 1957.
1959. May 5. The Judgment of the Court was delivered by GAJENDRAGADKAR J.-These two appeals arise out of a demand for bonus made against the appellants by their workmen for the year 1953-54. The Associated Cement Companies Ltd., Bombay, the Cement Marketing Company of India Ltd., Bombay and the Concrete Association of India, Bombay, were faced with a demand of their workmen employed in their offices at Bombay for bonus equivalent to seven months' basic wages with dearness allowance. The industrial dispute arising out of this demand was referred by the Government of Bombay for adjudication before the Industrial Tribunal, Bombay, under s. 10 of the Industrial Disputes Act and it was numbered I. T. No. 10 of 1956. The Associated Cement Companies Ltd., Dwarka Cement Works, Dwarka, was similarly faced with a demand of its workmen for bonus equivalent to 50% of total earnings or six months' total earnings. This dispute was referred to the same tribunal and was numbered 1. T. No. 13 of 1956. By consent of parties both the references were heard together and evidence was recorded and documents tendered in the first reference. By its award delivered on November 30, 1956, the tribunal directed the companies to pay their workmen drawing a basic pay or wages up to Rs. 500 per month bonus equivalent to 1/3 of their basic wages or pay (less bonus already paid for the year 1953-54) subject to the conditions specified in the award. It is against this award that the respective companies have preferred the two appeals by special leave. In this judgment the said companies will hereafter be described as the appellant and their workmen as respondents.
The A. C. C. is the principal company concerned in the dispute. The Cement Marketing Company of 931 India Ltd., (hereafter -called the C. M. I.) has been separately registered under the Indian Companies Act as a Joint Stock Company; but it is a hundred per cent.
subsidiary of the A. C. C. The C. M. I. are the Sales Managers of the A. C. C. while the Concrete Association of India (hereafter called the C. A. I.) is merely a department of the C. M. 1. As a result of the agreement which came into operation from' August 1, 1953, all financial transactions of the C. M. 1. in relation to sales now find a place in the accounts of the A. C. C. Similarly all of its fixed assets have been taken over and appear in the balance-sheets of the A. C. C. All the three concerns have a common staff in Bombay. The A. C. C. had already paid to its employees bonus equivalent to three months' basic wages for the year 1953-54 and so had the C. M. I. to its workmen. It appears that the C. M. I., including the C. A. I., undertakes to pay to its employees the same amount of bonus as has been paid or awarded to the employees of the A. C. C.
There is no dispute that the A. C. C. is the biggest amongst the companies in India which manufacture cement. It owns 15 cement factories at different places in India and 2 in Pakistan. Out of the total quantity of cement dispatched by all the cement factories in India in 1953-54 the A. C. C. despatched 55.46 %. The A. C. C. came into existence in 1936 as a result of the merger of four important groups of companies engaged in the manufacture of cement. These were F. E. Dinshaw, Tatas, Killick Nixon and Khatau, groups. It appears that 11 companies in all merged with the A. C. C.
Before the tribunal the case for the respondents was that the appellant held a position of monopoly in the cement industry and was easily in a position to pay the bonus claimed by them. Their allegation was that the appellant had inflated the capital invested by the merging companies while taking them over in 1936; it had set up new factories out of the profits earned by it without raising fresh capital and thereby had used profits for the purpose of expansion. In the year 195354 the appellant had capitalised the full amount 932 standing to the credit of the premium-on-shares account and had transferred a part of the reserves for taxation to the capital account thus increasing the aggregate capital. The emoluments of the workers were inadequate and so they were entitled to the bonus claimed by them in order to fill up the gap between the actual wage paid to them and the living wage due to them. The respondents also contended that the claim made by the appellant for rehabilitation and replacement in the dispute for the year 195152 included not only the amount required for rehabilitation and replacement but also expansion; and so, according to them, the appellant was not entitled to any amount for rehabilitation purposes in the year in dispute. They also alleged that the appellant was not entitled to claim. interest at more than 4% on paid-up capital and 2 % on working capital. Thus the respondents urged that if all the relevant facts are taken into account it would be found that the claim for bonus made by them in the two respective references was just and proper. In support of their case the respondents filed several statements which, they claimed, had been prepared in accordance with the Full Bench formula, and they also crossexamined Mr. Tongaonkar who gave evidence on behalf of the appellant.
This claim was resisted by the appellant. It was urged on its behalf that the points raised by the respondents in the present references bad been heard and finally decided in the previous adjudication (Ref. I. T. No. 115 of 1953) which dealt with their claim for bonus for the preceding year; and it was alleged that the respondents were barred from raising the same questions over again in the present adjudication.
The cement machinery, though heavy, is subject to rigours of extremely tough and heavy duties and the machinery has to run ceaselessly day and night throughout the year. The appellant contended that, having regard to the special features of the cement industry, the machinery had to be kept on the highest standards of maintenance and needed frequent replacement and rehabilitation. A cement factory is a very expensive industrial proposition. The appellant denied that 933 it was in a monopolistic position and pleaded that its object was to deliver cement as cheaply as possible to the consumers. The respondents' allegation that there was " puffing up of block capital at the time of the merger in 1936 " was denied by the appellant and it was not admitted that ever since its inception it had steadily made huge profits. The appellant also denied the allegation of the respondents that the profits, coming out of the business had been used in expanding its factories. It had used all available resources including premium on issue of shares and depreciation fund for replacement, rehabilitation and modernisation. It was not true that the appellant had built huge reserves and that the wages paid by the appellant to its employees were inadequate; on the contrary they compared very favourably with those in other comparable industries.
The appellant denied the statement of the respondents that no plant reinstatement reserve over and above the depreciation allowance was necessary in the current year and it urged that the calculations made by the respondents alleged to be in terms of the Labour Appellate Tribunal formula were inaccurate. In its turn the appellant claimed more than 6% interest on paid-up capital and more than 4% interest on working capital. The appellant also emphasised that it had already paid to the respondents bonus for three months though the strict working out of the formula would show that there was no available surplus for the relevant year and so the respondents would not be entitled to any bonus at all.
In support of its case the appellant examined Mr. G. R. Tongaonkar, its controller of planning and development, and produced a statement (Ex. C-2) showing the original cost of the blocks to be replaced and the approximate replacement cost. It also produced amongst other documents a statement (Ex. C-10) showing the cost of the assets of the merging companies on July 31, 1936, as taken over by the appellant and the statement (Ex. C-29) showing the capital expenditure from 1936-37 to 1953-54 on expansion, modernisation, rehabilitation, replacement, sundry capital jobs, etc.
In addition a statement was filed by the appellant (Ex. C23) showing that the calculations made under the Full Bench formula would show a substantial deficit and that would support its case that there was no available surplus for the relevant year from which any bonus could be claimed by the respondents.
Ex. C-2 is a statement prepared by Mr. Tongaonkar showing the original cost of the block to be replaced and the approximate replacement cost. This statement has been prepared on the basis that the approximate cost to the merging companies of their assets as on 31-7-1936 was 5.73 crores. It is admitted that this statement has lumped together all the properties of the appellant including plant and machinery, as well as buildings, roads, bridges and railway-sidings and has classified them into four categories. The statement contains 9 columns. The first column gives the year or years of purchase of machinery.
This could classifies the four categories of the blocks according to their respective years of purchase. The first category consists of blocks purchased up to 1939, the second purchased between 1940-44, the third purchased between 194547 and the last purchased between 1949-54. Column 2 gives the original cost of the said categories as on 31-7-1954.
Column 3 gives particulars of such portions of the blocks as have been discarded, scrapped or sold. In this column the years in which the blocks were discarded, scrapped or sold are indicated and their original cost is me 935 figures mentioned in col. 5 for 1939 and 1940-44 blocks have been arrived at by reducing the corresponding figures given in col. 4 by 20%. Column 6 gives the approximate present life of the machinery and plant mentioned in col. 4; col. 7 sets out the breakdown value of the machinery referred to in col. 4, whilst col. 8 gives the approximate cost of rehabilitation of machinery as shown in col. 5 less breakdown value as shown in col. 7. The last column works out the annual requirements of the appellant in respect of the rehabilatation of the four categories of blocks. The figures in this column are arrived at by dividing the amounts mentioned in col. 8 by the respective divisors mentioned in col. 6. The total annual requirement of the appellant in respect of rehabilitation is shown as of the order of Rs. 3,29,61,752.
Ex. C-23 is a statement prepared by Mr. Tongaonkar to show the deficiency in profits in relation to payment of additional bonus claimed by the respondents for the accounting year 1953-54. This statement has been prepared alternatively on the basis of statutory depreciation allowable by income-tax authorities and also on the basis of straight computation at ordinary rates. The first method results in a deficit of Its. 107.20 lakhs, while the second in a deficit of 97.86 lakhs. In working out the provision for rehabilitation, this statement first takes the replacement cost of block up to 1939 as per Ex. C-2 to be Rs. 1601.19 lakhs. From this amount the available reserves as on 1-8-1953 which are of tile order of Rs. 311 lakhs are deducted, leaving a balance of Rs. 1290.19 lakhs. Then the replacement costs of the three remaining categories of blocks are taken into account and all the said amounts are divided by the appropriate divisors mentioned in col. 6 of Ex. C-2. The result is the sum of Rs. 284.48 lakhs, and that is claimed by the appellant as the provision for rehabilitation under the formula.
In his evidence Mr. Tongaonkar has given reasons in support of the respective multipliers and divisors adopted by him in making his calculations in Ex. C-2. 119 119 936 He has also given several details on all the relevant and material points in support of the appellant's case.
Naturally the respondents have cross-examined him at length.
One of the questions in controversy between the parties in the present appeals centres round the appreciation of Mr. Tongaonkar's evidence and the value to be attached to the statements prepared by him.
On the contentions raised by the parties before it the tribunal framed ten issues for determination and it has made its findings on them in the light of the evidence adduced before it. It has held that the appellant had not inflated the capital invested by the merging companies while taking them over in 1936. It has allowed 6% interest on the entire paid-up capital of Rs. 1267.59 lakhs, and 4% interest on the working capital. In regard to the claim for depreciation the tribunal has held that it was normal depreciation calculated according to the straight line method which should be allowed. On the question of income-tax, the tribunal has allowed the same at 83.4 pies in a rupee as claimed by the appellant on its net profits. It has, however, rejected the appellant's case that the income from investments in shares and securities received by it should be excluded for the purpose of bonus; while it has allowed the sum of Rs. 10 lakhs provided by the appellant as annual contribution to the reserve for gratuity, as also the expenditure on the cost of dismantling buildings, prospecting expenses, etc. It did not accept the respondents' case that the bonus paid by the appellant to its officers should be reduced or wholly disallowed for the purpose of calculations under the formula; and, on the question as to whether overtime payment should be included in the payment of bonus, it has upheld the respondents' contention and allowed the inclusion of the said payment.
Having disposed of these minor issues, the tribunal examined at length the claim made by the appellant in regard to the provision for rehabilitation, replacement and modernisation.
Indeed this was the most controversial and the most important issue raised 937 before it. The tribunal examined the evidence of Mr. Tongaonkar as well as Ex. C-2 and other documents produced by him, and came to the conclusion that " Ex. C-2 presents an incorrect and exaggerated picture of the A.C.C.'s requirements of rehabilitation and replacement" and so it cannot be relied upon. According to the tribunal the multiplier 4.28 adopted by Mr. Tongaonkar was itself an inflationary figure; and it thought that " the consequence of applying it not to the original price but to its increased price paid by the A.C.C. would be to obtain an inflationary result. It appears that the tribunal wag inclined to hold that 2.7 was a fair multiplier representing the price increase over the pre-war base. The tribunal was also not satisfied with Mr. Tongaonkar's evidence in regard to the life of plant and machinery ; and so it held that the period of life given in col. 6 of Ex. C-2 cannot be accepted as correct. While dealing with the question about the rise in prices, the tribunal has held that it was usual to take the average level of prices prevailing in a period of about five years in preference to the prices prevailing in a particular year as was done by Mr. Tongaonkar. The tribunal subjected Mr. Tongaonkar's evidence on the question of replacement, rehabilitation and modernisation to a close examination and held that the method adopted by Mr. Tongaonkar in distinguishing between modernisation and expansion was of a purely subjective estimate " which does not bear the scrutiny of an objective test ". On the whole the tribunal was not prepared to accept Mr. Tongaonkar's evidence at its face value and it was not prepared to treat Ex. C-2 and consequently Ex. C-23 as reliable. It is relevant to point out at this stage that the tribunal has not made any finding about the life of the machinery nor has it recorded any conclusion as to a proper divisor. In fact it has completely left out of consideration Exs. C-2 and C23 while determining the amount which should be allowed for the appellant's claim for rehabilitation for the relevant year.
The tribunal then examined the principle underlying the Full Bench formula and held that, it was not 938 intended to be worked out as a rigid mathematical formula.
" We must make it ", says the tribunal, " as flexible as possible so as to do justice to everybody concerned in the earning of profits". The general question, which it has considered in this connection, is how far and to what extent profits of a concern should contribute to the satisfaction of the claims of industry for replacement; rehabilitation and modernisation. It was impressed by the argument that, where the requirements under these items are so huge as to be out of tune with the profits, it would be open to an industrial adjudicator to allow only a reasonable provision to be made out of the profits for the said items and leave the industry concerned to tap other resources to make up the balance. In support of this conclusion it has referred to the observations made by F.R.M. de Paula in his "Principles of Auditing", the report of the Taxation Enquiry Commission and of the working party for the Cotton Textile Industry.
It has also relied on a part of the speech delivered by Mr. J. R.D. Tata in addressing the annual general meeting of the shareholders of the Tata Iron and Steel Company in August 1950.
In this connection the tribunal has expressed its apprehension that if all the money required for a continuous process of modernisation and expansion is to come out of the profits made by the concern, labour will rarely see a day when they will enjoy bonus granted to them out of profits;
though it has hastened to add that it was far from its mind that a progressive concern like the A.C.C. should not keep pace with time and modernise its machinery; but it only wished that it should give a fair deal to the workers in the distribution of the profits. Having hold that, if the claims for rehabilitation turn out to be huge and out of tune with the profits made by the industry, it would be open to the tribunal to grant the claim of the industry in that behalf only to the extent that it deems to be reasonable and fair, it proceeded to consider how far and to what extent the appellant's claim should be allowed in the present proceedings.
It is necessary to mention that in dealing with this 939 question the tribunal was considerably influenced by the past conduct of the appellant. It thought that for rehabilitation the appellant had claimed no more than Rs.
192 or 193 lakhs in the previous adjudication proceedings where the dispute for bonus had reference to the year 1951
52. If the claim then made by the appellant was no more than Rs. 192 or 193 lakhs, the present claim for Rs. 284 lakhs, the tribunal thought,' was obviously inflated and unreal. Similarly the tribunal emphasised the fact that the programme earlier submitted by the appellant to the Tariff Commission was in turn more modest than the claim made in the said adjudication proceedings. It appears that in the said programme the appellant had made out a case for the estimated expenditure of Rs. 18.36 crores to be spread over a period of ten years from 1-8-1952 to 31-7-1962 and that works out approximately at the figure of Rs. 184 lakhs per year. It was on these facts that the tribunal held that " if the A.C.C. estimated its annual requirements of rehabilitation, replacement and modernisation at Rs. 192 lakhs per year during the period of ten years commencing from 1-8-1952, 1 do not think that it should be allowed to depart from it now". In substance, according to the tribunal, the present claim for rehabilitation was very much inflated, it had no relation to realities, and so the appellant should not be allowed to make such a claim. That is why it did not think it necessary to record any finding as to the proper divisor, and to determine, in the light of Mr. Tongaonkar's evidence, what approximately would be a fair or reasonable amount for rehabilitation under the formula.
It is thus clear that in making its final calculations the tribunal has assumed that the claim made by the appellant for rehabilitation, replacement and modernisation must be taken to be no more than Rs. 192 or 193 lakhs, and on that assumption it has considered to what extent the claim should be allowed. Ultimately the tribunal came to the conclusion that in the circumstances of the case it would be fair to allow the appellant about Rs. 165 to 170 lakhs as annual provision for the said items. In support of this conclusion 940 the tribunal has relied on the fact that for the two years 1952-53 and 1953-54 the appellant had spent about Rs. 339.76 lakhs for the purpose of rehabilitation, replacement land modernisation and that works at the average of Rs. 170 lakhs per year. The tribunal has then taken into account the fact that the appellant had a plant reinstatement reserve of Rs. 235 lakhs and a general reserve of Rs. 76 lakhs in the beginning of the year 1953-54. If these amounts which would be available for rehabilitation are spread over the ten year period of the tentative programme planned by the appellant, the annual figure would come to Rs. 31 lakhs; and this amount would have to be deducted from Rs. 165 lakhs which the tribunal was inclined to grant in respect of the relevant item. That is how the tribunal has made the appropriate calculations under the formula, and has shown that, even after the payment of one month's additional bonus as directed by it, the appellant would still be left with a surplus of Rs. 23.48 lakhs. That in brief is the nature and effect of the findings made by the tribunal.
Before dealing with the merits of the points raised in these appeals it would be convenient to refer to the genesis and the terms of the formula which has been evolved by the Full Bench of the Labour Appellate Tribunal in the case of The Mill Owners Association, Bombay v. The Rashtriya Mill Mazdoor Sangh, Bombay (1) in 1950. It appears that from 1940 A. D. onwards the claims for bonus made by the employees against their employers in different industries were dealt with on an ad-hoe basis from case to case.
Sometimes the employers voluntarily paid bonus to their workmen; and where disputes arose they were decided by the tribunals in the light of the circumstances of each case without relying on any broad consideration of policy or without attempting to lay down any general principles. In 1948 a bonus dispute arose between the Mill Owners Association, Bombay and its employees, and it was referred for adjudication to the Industrial Court. In considering this dispute the Industrial Court went (1)(1950) L.L.J. 1247.
941 elaborately into the matter, laid down certain principles and awarded to the workmen bonus equivalent in amount to 3/8 of the total basic earnings of each workman subject to certain conditions.
In the subsequent year a similar dispute arose between the same parties; and it was again referred to the Industrial Court for adjudication. The Court made its award on July 7, 1950, directing 55 mills of the Association to pay to their workmen, whether permanent or temporary, 1/6 of the basic earnings of each of them as bonus. This award was challenged by the Association before the Labour Appellate Tribunal. It was urged on behalf of the Association that the wage structure in the textile industry had been settled by standardisation and so bonus must be regarded as a gratuitous payment; and it was argued that at any rate grant of bonus cannot be made for the purpose of making up the deficiency between the actual and living wages. These contentions were rejected by the Labour Appellate Tribunal and the question about the grant of bonus was considered on general principles on the basis of which a formula,, often described as the First Full Bench Formula, was ultimately evolved. "As both capital and labour contribute to the earnings of the industrial concern ", observed the appellate tribunal, " it is fair that labour should derive some benefit if there is a surplus after meeting prior or necessary charges ". The appellate tribunal was also of the view that where the goal of living wages had been attained, bonus, like profit sharing, would represent more as the cash incentive to better efficiency and production; but where the industry had not the capacity to pay a living wage bonus must be looked upon as the temporary satisfaction wholly or in part of the needs of the employee. In other words, according to this decision, the award of bonus is based on a two-fold consideration. It is made in recognition of the fact that labour has made some contribution to the profit earned by the industry, and so it is entitled to claim a share in it; and it is also intended to help labour to bridge or narrow down the gap, as far as may be reasonably possible, between the living wage to which labour is entitled and the actual wage received by it.
942 Dealing with the problem from this point of view the appellate tribunal conceded that investment necessarily implies the legitimate expectation of the investor to secure recurring returns on the money invested by him in the industrial undertaking, and so it held that it was essential that the plant and machinery should be kept continuously in good working order for the purpose of ensuring that return.
Such maintenance of the plant and machinery would necessarily be to the advantage of labour because the better the machinery the larger the earnings and the brighter the chance of securing a good bonus. On this consideration it was held that the amount of money that would be necessary for rehabilitation, replacement and modernisation of the machinery would be a prior charge on the gross profits of the year. Since the depreciation allowed by the income-tax authorities is only a percentage on the written-down value the depreciation fund set apart on that basis would not be sufficient for the purposes of rehabilitation and an extra amount would have to be annually set apart nationally under the heading of 'reserves' to make up the deficit. This position was apparently not disputed by the employees.
The claim made by the industry that a fair return on the paid-up capital must be secured and that ordinarily it should be paid at the rate of 6% per annum was also not disputed. The employees, however, challenged the claim of the industry that reserves employed as working capital should carry any interest; but their objection was overruled and it was held that working capital also would be entitled to interest though at a much lower rate than that on the paid-up capital. Then the question of taxes was considered and it was agreed that a provision had to be made for taxes which would be payable on the amount determined after deducting depreciation from the gross profits less any bonus which may be awarded. In the result the appellate tribunal laid down the manner and method in which the available surplus should be determined. The notional accounting for this purpose starts with the figure of the gross profits which are 943 arrived at after payment of wages and dearness allowance, to the employees and other relevant items of expenditure. Then a deduction for depreciation is made, and on the notional balance thus derived a provision for taxes payable is allowed. Then follow the provisions for reserves for rehabilitation, return on paid-up capital and return on reserves employed as working capital. That gives the amount of surplus if' any. Whenever the working of this formula leaves an amount of available surplus, labour was held entitled to claim a reasonable share in this amount by way of bonus for the current year. This formula is based on considerations of social justice and is intended to satisfy the legitimate claims of both capital and labour in respect of the profits made by the industry in a particular year.
It takes the particular year' as a unit and makes all its notional calculations on the basis of the gross profits usually taken from the profit and loss account; in this particular case the available surplus determined by the application of the formula was found to be 2.61 crores; and out of this surplus 0.30 crores were awarded as bonus to clerks and other staff and 1.86 crores was awarded as bonus to the employees leaving a net notional balance of 0.45 crores.
This Court had occasion to consider the said formula in Muir Mills Co. Ltd. v. Suti Mills Mazdoor Union, Kanpur (1). The judgment in that case indicates that without committing itself to the acceptance of the formula in its entirety, this Court in general accepted as sound the view that since labour and capital both contribute to the earnings of the industrial concern, it is fair that labour should derive some benefit if there is a surplus after meeting the four prior or necessary charges specified in the formula. It is relevant to add that in dealing with the concept of bonus this Court ruled that bonus is neither a gratuitous payment made by the employer to his workmen nor can it be regarded as a deferred wage. According to this decision, where wages fall short of the living (1) [1955] S.C.R. 991 120 944 standard and the industry makes profit part of which is due to the contribution of labour, a claim for bonus can be legitimately made. However, neither the propriety nor the order of priority as between the four prior charges and their relative importance nor their content was examined by this Court in that case; and though the formula has subsequently been generally accepted by this Court in several reported decisions (Baroda Borough Municipality v. Its Workmen (1), Sree Meenakshi Mills, Ltd. v. Their Workmen (2) and The State of Mysore v. The Workers of Kolar Gold Mines (3) ) the question about the adequacy, propriety, or validity of its provisions has not been examined nor has the general problem as to whether the formula needs any variation, change or addition been argued and considered.
It is for the first time since 1950 that, in the present appeals, we are called upon to examine the formula carefully and express our decision on the merits of its specific provisions. As we have already indicated, in dealing with the present dispute the tribunal has held that, in working out the formula, it could relax its provisions even though the proposed relaxation may mean a material variation of the formula itself. On behalf of the appellant Mr. Kolah has taken strong exception to this approach. He has argued that, in the last eight years and more, on the whole the formula has worked fairly well in the interest of both capital and labour, and so the tribunal was not justified in departing from it in the present case. This argument undoubtedly raises a question of considerable importance.
Before examining this argument, however, it is necessary to consider one preliminary point: Was the tribunal justified in holding that the appellant could not be allowed to add to its previous claim for rehabilitation ? The decision of the tribunal on this point seems to indicate that the tribunal thought that the appellant was estopped from making any such claim; and the correctness of this conclusion is challenged by the appellant.
(1)[1957] S.C.R. 33, 39.
(2) [1958] S.C.R. 878, 884.
(3) [1959] S.C.R. 895.
945 It is true that, in the report submitted by the appellant before the Tariff Commission in April 1953, it had set out the details of its ten year programme which included, besides replacement, rehabilitation, modernisation and expansion, mechanisation of quarries as well as construction and improvement of houses for its labour staff. The report of the Tariff Commission (p. 30) shows that the cost of the programme was' estimated at Rs. 18.36 crores, excluding the cost of a new plant at Sindri, or about Rs. 184 lakhs per annum. Subsequently in January 1954, when Mr. Tongaonkar gave evidence in the previous adjudication proceedings, he produced a statement (Ex. U-8) according to which the appellant's annual requirements for rehabilitation would be of the order of Rs. 192 or 193 lakhs, whereas in the present proceedings the said claim is made at Rs. 284 lakhs. A bare statement of these facts prima facie suggests that the appellant's present claim for rehabilitation has been growing from stage to stage, and in its present form it is very much inflated; and that is what the tribunal has also assumed. In our opinion this assumption is not wholly correct. Mr. Tongaonkar's evidence shows that in the report of the jobs submitted to the Tariff Commission the appellant had not included all relevant items of rehabilitation, replacement and modernisation. The report merely gave a list of the jobs which the appellant had proposed to undertake during the ten year period ending July 31, 1962.
It was in no sense an exhaustive statement about the appellant's requirements in regard to the rehabilitation of all its blocks. In fact, having regard to the nature and scope of the enquiry before the Tariff Commission, the report made by the appellant had to be restricted to the urgent jobs which it wanted to undertake during the execution of its ten year programme; and so it would not be reasonable to hold that the figure of annual rehabilitation expenses which can be deduced from the said report has any relation to the claim for rehabilitation made by the appellant in terms of the working of the formula.
Then again the appellant's claim for rehabilitation 946 in the earlier proceedings has also been satisfactorily explained by Mr. Tongaonkar. The respondents have placed considerable reliance on the statement filed by Mr. Tongaonkar in the said proceedings (Ex. U-8). This document has been produced by the respondents in support of their contention that it purports to make a claim for Rs. 192 lakhs per year 'for rehabilitation. That no doubt is true ; but in terms the document purports to show the estimated expenditure required during the ten year period there specified; and as Mr. Tongaonkar has stated, it does not include a full statement of the claim in regard to the rehabilitation of all the blocks belonging to the appellant.
In considering the respondents' argument on this point, it is necessary to bear in mind that in the earlier proceedings the appellant had filed a separate statement showing the amount to which it was entitled by way of rehabilitation under the formula; this statement was Ex. C-3 and it has been produced in the present case and exhibited as U-5. It appears that in the earlier proceedings the tribunal did not attach any importance to the said document and virtually ignored it because, like the present tribunal, it held that " it does not appear to be necessary to plan further ahead than ten years and it is desirable to base calculations of rehabilitation on realities "(1). Even so the Labour Appellate Tribunal found that the appellant's contention that its workmen were not entitled to any additional bonus was not well-founded even if its claim for rehabilitation was confined to Rs. 192 or Rs. 193 lakhs. Besides, Mr. Tongaonkar has stated on oath that Ex. U-8 was not among the documents originally submitted by the appellant to the tribunal in 1954. it was in fact prepared and submitted at a later stage at the instance of the tribunal itself. It is, therefore, clear that Ex. U-8 was not intended to, and did not supply, the basis of the appellant's claim in the earlier proceedings in accordance with the formula.
A study of the items contained in Ex. U-8 also supports the same conclusion. Mr. Tongaonkar has (1) (1955) 1 L.L.J. 588,592.
947 stated that the total amount of the estimated expenditure shown in this document included only a small portion of the expenditure required for rehabilitation of the post1944 block. It is true that Mr. Tongaonkar's statement that in the said total amount nearly Rs. 50 lakhs represent the amount for replacement or rehabilitation of post-1944 block is inaccurate. The Chaibasa Cement Factory and the Sevalia Cement Factory for the rehabilitation of which Rs. 64.98 and 85.15 lakhs have been claimed in Ex. U-8 are undoubtedly parts of the post 1944 block and the amounts claimed for them are very much more than Rs. 50 lakhs. It is nevertheless clear that 'the items in Ex. U-8 do not include a claim for rehabilitation for all the blocks of the appellant, and it is not surprising either, because a claim for the rehabilitation of all the blocks had been separately made by the appellant in the earlier proceedings under Ex. C-3. Thus there can be no doubt that neither the report submitted by the appellant before the Tariff Commission nor the estimate given by Ex. U-8 was prepared under the formula; and so any disparity in the amounts claimed in the two earlier documents cannot be seriously pressed into service against the appellant when it seeks to make a claim for rehabilitation strictly in accordance with the formula.
We must, therefore, hold that the tribunal was in error in coming to the conclusion that by reason of its previous conduct the appellant could not be allowed to place its claim for rehabilitation at a figure higher than Rs. 192 lakhs in the relevant year. In this connection it would be pertinent to remember that in dealing with the employer's claim for rehabilitation the tribunal is called upon to assess respective values of the relevant factors on hypothetical and empirical considerations, and so it may generally not be useful or wise to take recourse to strict legalistic principles like estoppel in deciding this question and indeed all material questions in industrial adjudications.
Does the formula need to be revised, and should it be revised and reconstructed ? That is the question 948 which we must now consider. It appears that some tribunals have taken the view that the rigid working of the formula may defeat its object of recognising the social justice of labour's claim for bonus and so they have made suitable adjustments in its operation. It is this approach which has raised the larger issue of principle in the group of appeals which have been placed for disposal before the Constitution Bench. So we must examine this question in its broad aspects and if we decide not to change the formula we must state what, in our opinion is the content of the different items mentioned in the formula and how they should be calculated and mutually adjusted.
Let us first set out the case as it has been made for changing the formula. It is 'urged that though the formula purports to recognise the principle of social justice on which labour's claim for bonus is based, it does not accord to the said claim the high priority it deserves. Social justice has been given a place of pride in the preamble to the Constitution and it has been enshrined in the Directive Principles under Arts. 38 and 43. Since 1950, ideas about social and economic justice have made an appreciable progress and they require the readjustment of priorities prescribed by the formula in favour of the claim for bonus.
It is also contended that experience in industrial adjudication during the last eight years and more shows that employers are becoming increasingly more rehabilitation conscious and their appetite for the provision of rehabilitation is fast growing from year to year. In the present case, for instance, though the appellant occupies a dominant position in its line of trade and though it makes large profits, it has made such a tall claim for rehabilitation that if the said claim is allowed the working of the formula leaves no available surplus from which bonus can be granted to labour. The appellant has no doubt paid bonus for three months and it is unlikely that the appellant would depart from its practice of paying the said bonus even in future; but that does not affect the 949 position that in the light of the appellant's claim for rehabilitation the working of the formula would not justify the grant of any bonus to labour. This shows that the notional claim for rehabilitation which an employer can make under the formula tends to be completely divorced from the reality or actuality of the need of rehabilitation; and that needs to be corrected.
Besides, it is said, that the theory that the trading profits of the industry must provide for the whole of the rehabilitation expenses is not universal accepted by enlightened and progressive businessmen and economists. In this connection reliance is placed on the observations of F. R. M. de Paula in his " Principles of Auditing " that " the object of depreciation is the replacement of original investment capital and that an increase in replacement cost is an important matter and means that additional capital is required in order to maintain the original earning capacity ". It is also pointed out that the Institute of Chartered Accountants in England and Wales, in its recommendations made in 1949 under the heading " Rising price levels in relation to accounts " has pointed out that " the gap between historical and replacement costs might be too big to be bridged by a provision made for replacement spread over a period of years either by way of supplementing the depreciation charges or by setting up in lieu of depreciation a provision for renewals based on estimated replacement costs ". It is therefore suggested that in revising the formula the claims for rehabilitation should be fixed at a reasonable amount and industry should be required to find the balance from other sources and if necessary from its share in the available surplus.
In this connection it is pointed out that when the Labour Appellate Tribunal evolved the formula it was dealing directly with the needs of the textile industry and there was no dispute that the plant and machinery of the textile industry had become old and obsolescent and needed immediate replacement, rehabilitation and modernisation. It is doubtful whether, in giving priority to the claim for rehabilitation in the 950 context of the needs of the textile industry with which the appellate tribunal was concerned, it really intended that rehabilitation should be claimed 'by every industry on theoretical considerations whether or not the said claim was justified by its actual or practical need for rehabilitation.
In substance the argument is that the Full Bench of the Labour Appellate Tribunal evolved its formula in order that labour may get a reasonable share in the available surplus and may thereby receive assistance in filling up the gap between its actual wage and the living wage which it looks forward to receive in due course; and if it is found that, in working out the items which are treated as prior charges, in a majority of cases the formula leaves no available surplus, then its main object is frustrated and that is the justification for revising it and readjusting its priorities.
In support of this view reliance has also been placed on the recommendations of the Committee on 'Profit-sharing'. This Committee had been appointed in 1948 to advise the Government of India " on the principles to be followed for the determination of (a) fair wages to labour, (b) fair return to capital employed in the industry, (e) reasonable reserves for the maintenance and expansion of the undertaking, and (d) labour's share of the surplus profits, calculated on a sliding scale normally varying with production, after provision has been made for (b) and (c) above ". The Committee viewed its problem from three important angles, viz., " profit-sharing as an incentive to production, profit-sharing as a method of securing industrial peace, and profit-sharing as a step in the participation of labour in management ". The Committee recognised that putting back profits into the industry is one of the most useful forms of capital investment and this should be encouraged and it recommended that a figure of 20% for reserves should be generally aimed at, though it considered that, as a first charge, 10% of the net profits should be compulsorily set aside for reserves, leaving it to the good sense of the management to allocate the balance or more out of their own share of surplus profits. In regard 951 to the labour's share in the surplus profits, the Committee stated that, having due regard to the conditions prevailing in the industry selected for an experiment in profit sharing, it had come to the conclusion that labour's share should be 50% of the surplus profits of the undertakings.
It is a matter of common knowledge that so far Government have not thought it desirable, expedient or possible to legislate in this matter in the light of the recommendations made by this Committee; but it is suggested that these recommendations afford a rational basis for reconstructing the formula.
It may be conceded that there is some force in some of the arguments urged in support of the plea that the formula should be revised and its priorities should be readjusted and redefined; but, on the other hand, we cannot ignore the fact that on the whole the formula has worked satisfactorily in a large number of industries all over the country.
Except for a few cases, particularly in Bombay, where some of the tribunals have taken the view that, in its rigid form, the formula has become unworkable from the point of view of labour, in a majority of cases industrial disputes arising between employers and their workmen in regard to bonus have been settled by tribunals on the basis of this formula; and it would not be unreasonable or inaccurate to say that by and large labour's claim for bonus has been fairly and satisfactorily dealt with. The main source of contest in the working of the formula centres round the industry's claim for rehabilitation; but, as we shall presently point out, if this claim is carefully scrutinised and examined in the light of evidence which the employer has to produce in support of his claim, even the settlement of this item would, as it is intended to, invest the tribunal with sufficient discretion to make the working of the formula elastic enough to meet its two-fold object of doing justice both to industry and labour.
It is true that in the working of the formula employers sometimes make an attempt to add items to the list of prior claims. In The State of Mysore v. The 121 952 workers of Kolar Gold Mines (1), it was urged before this Court by the industry that it was a wasting industry and as such it needed special consideration. The contention was that for the prosperity and longevity of the industry a special provision for the prospecting of new ore has to be made and that should be added as an additional item in the list of prior charges. This argument was, however, rejected and it was held that the special features of the industry would be taken into account in determining the amount which could be reasonably claimed under rehabilitation. This decision shows the reluctance of this court to vary or add to the formula which oil the whole has so far worked fairly satisfactorily.
The theory that the whole of the rehabilitation charges need not come out of the trading profits of the industry does not appear to be generally accepted. As has been observed by Paula himself: " In the past the accepted principle has been that the main object of providing for the depreciation of wasting assets is to recoup the original capital invested in the purchase of such assets. As part of the capital of the concern has been invested in the purchase of these assets, therefore, when their working life comes to an end, the earning capacity of these assets ceases. Thus they will become valueless for the purposes of the business, and the original capital sunk in their acquisition, less any scrap value, will have been lost. Hence, in order to keep the original capital of a business intact, if any part thereof is invested in the purchase of' wasting assets, revenue must be held back by means of depreciation charges to profit and loss account, in order to replace the capital that is being lost by reason of the fact that it is represented by assets that are being consumed or exhausted in the course of trading or seeking to earn income It is also stated by the same author that " in all cases where One of the direct causes of earning revenue is gradually to consume fixed assets of wasting nature, the depreciation of such assets should be provided for out of revenue " (3). It is true (1) [1959] S C.R. 895.
(2) F.R.M. de Paula's Principles of Auditing', 1957, P. 136.
(3) Ibid, p. 138.
953 that the author recognises that " owing to the very considerable increase in the price level since the termination of the 1939-45 war, industry is finding its original money capital insufficient for its needs. Thus the cost of replacement of fixed assets has greatly increased and in addition, further working capital is required to finance a given volume of production. Many economists, industrialists, and accountants contend that provision should be made, in arriving at profits, for this increased capital requirement ". Having noticed this view the author adds that " at the time of writing this matter is still being debated and final decisions have not yet been reached ", and he concludes that " until a final solution of this complex problem is reached it would be inadvisable for the auditor to act on any principle other than that recommended by the Institute "(1); and that principle appears to be that depreciation should be provided for out of revenue.
Besides, it must be borne in mind that, in adjusting the claims of industry and labour to share in the profits on a notional basis, it would be difficult to repel the claim of the industry that a provision should be made for the rehabilitation of its plant and machinery from the trading profits. On principle the guaranteed continuance of the industry is as much for the benefit of the employer as for that of labour; and so reasonable provision made in that behalf must be regarded as justified.
The recommendations made by the Committee on Profit-sharing' cannot be of much assistance because they raise questions of policy and principle which Legislature can more appropriately consider.