M/S. Peirce Leslie & Co. Ltd.
Kozhikode Vs. Their Workmen  INSC 41 (9 March 1960)
GUPTA, K.C. DAS GAJENDRAGADKAR, P.B.
CITATION: 1960 AIR 826 1960 SCR (3) 194
CITATOR INFO :
D 1967 SC1222 (10) R 1968 SC 538 (28) R 1971
Industrial Dispute-Bonus-Full Bench
formula-Variation ofUnusual risk in business and employment of small capital-If
good grounds for variation-Rehabilitation allowance, Purpose of-Claim for bonus
by small percentage of workmen-Whether entire surplus can be taken into
During the year 1954-1955, the appellant paid
a sum equivalent to 3 months basic wages as bonus to its monthly paid clerical
staff. These employees raised an industrial dispute claiming an additional
bonus equal to 7 months basic wages. The Industrial Tribunal to which the
dispute was referred awarded additional bonus equal to 5 months basic wages.
The appellant contended that (i) since the element of risk in the business was
great and the capital employed was small the Full Bench formula had to be
materially altered and rates higher than 6% on paid up capital and 4% on
reserves employed as working capital should be allowed (ii) a higher allowance
ought to be made for rehabilitation;
and (iii) the entire surplus ought not to be
treated as available for distribution as only a small percentage of the workmen
had made the claim for bonus.
Held, that since the claim for additional
bonus was made only by a small percentage of the workmen the entire available
surplus could not be treated as available in distributing bonus to them. Not
only the 882 staff members who had raised the claim but II, 247 other workmen
as well had contributed to the emergence of the surplus. The sum still in the
hands of the company could not be treated as a matter only between the company
and these present claimants.
Indian Hume Pipe Co., v. Their Workmen,
 SUPP. 2 S.C.R. 948. L.L.I. 357, applied.
Return on invested capital had always to
provide for pure interest plus compensation for the risks of business. In a
particular industry where the risk was appreciably less than usual there would
be good cause for providing less than 6 % ; and in an industry where
extraordinary risks were run more than 6% could reasonably be provided for.
There was no unusual risk run by the appellants in their business and no case
was made out for allowing any higher return on the paid up capital or working
capital. There was no justification for compensation of the entrepreneur for the
fact that with a small amount of capital considerable profits were earned.
As fixed capital was liable to gradual
deterioration reserves had to be created out of profits for replacing any
portion of it as soon as it became too deteriorated for efficient use. It was
neces195 sary that the company's capital fund remained intact. An amount
reasonably sufficient for the notional requirement of rehabilitation during the
relevant year was deducted as a prior charge in ascertaining surplus profits
from which bonus could be paid. The basis of the prior charge was the
assumption that rehabilitation was a continuing process and needed allotment
from year to year. But in the present 'case the appellant had failed to make
out any case for rehabilitation allowance in addition to the ordinary
Associated Cement Company's case, 
S.C.R. 925, relied on.
CIVIL APPELLATE JURISDICTION: Civil Appeal
Appeal by special leave from the Award dated
September 16, 1957 of the Industrial Tribunal No. 11, Ernakulam, in Industrial
Dispute No. 34 of 1957.
G. B. Pai and Sardar Bahadur,for the
A. V. Viswanatha Sastri and M. S. K. Sastri,
for the respondents.
1960. March 9. The Judgment of the Court was
delivered by DAS GUPTA, J.-The appellant-M/s. Peirce Leslie & Co., Ltd., is
a private limited company engaged in various enterprises mainly in South.
India. It started business in this country over a century ago and though it is
registered in England almost all its activities appear to be carried on in this
country. The principal activities that require mention are the business in
cashew nuts which the Company sells after roasting raw cashew nuts purchased in
this country and in Africa, and business in coir products and several other
country produce like ginger, lemon grass oil etc. A large portion of the
products in which it trades is exported to foreign countries. Apart from these
trading activities the company is also engaged in agency business including
working as managing agents of many companies. For many years the company as a
whole had made good profits, though in some of its many lines, losses were
incurred. The company has on its pay roll a large number of employees and apart
from superior officers in its covenanted and uncovenanted staff both Indian and
European it employs in its various lines of business a large number of workmen
including clerical staff.
The 196 clerical staff alone consists of 882
monthly paid employees.
For many years the Company has voluntarily
paid bonus to all its employees out of the surplus profits. To the monthly paid
employees with whom we are concerned in the present appeal the company paid
during the year 1954-55 a sum equivalent to three months' basic wages as bonus.
Not content with this these employees through their Union put forward a claim
for additional bonus. The industrial dispute thus raised was referred by the
Government to the Industrial Tribunal sitting at Coimbatore. Before the
Tribunal the workmen claimed an additional bonus equal to seven months' basic
wages. The company's case was that the peculiar nature of its activities
specially the fact that in its agency business very little capital was employed
and the fact that in the cashew business and other produce business the element
of risk was unusually treat justify material alteration in the Full Bench
Formula for ascertainment of the available surplus in several respects. The
main alteration asked for before the Tribunal appears to have been that rates
higher than 6% of paid up capital and 4% on reserves employed as working
capital should be, allowed in working the Full Bench Formula in view of the
special risks in its business and the further fact that its agency business
requires very little capital. These claims were rejected by the Tribunal. The
Tribunal also accepted only partially the company's claims as regards
rehabilitation allowances for the year and as regards actual amounts used as
working capital. Having arrived on its calculations at the figure of pound
55,137 as the available surplus after meeting all prior and necessary charges
the Tribunal awarded bonus equal to five months' basic wages in addition to
three months' basic wages already voluntarily paid by the company.
In making this distribution the Tribunal
rejected the company's case that as this claim was raised by only a small
percentage of the workmen the entire available surplus should not be treated as
available in distributing bonus to these few workmen.
The first contention urged in appeal before
us is that the Tribunal was wrong in rejecting the company's claim for higher
return than usual on paid up capital and reserves used as working capital. The
appellants' counsel has taken us through the evidence, oral and documentary, as
regards what he' characterized as the heavy " fluctuations " in the
price of raw cashew nuts which the company had to purchase and the price in the
foreign market of the finished goods. That there is some amount of risk is
undoubtedly true. We are not convinced however that the company's business
whether in cashew nuts or in any other line is attended with such unusual risk
as would justify the provision of more than the usual rate of return. Return on
invested capital has always to provide for pure interest plus compensation for
the risks of the business. Prevailing interest in the money market yielded by
giltedged security is ordinarily taken to be a fair index of what should be
considered reasonable as pure interest. For many years now this figure has
varied from 3 to 4 per cent. If no risks were involved, this percentage should
have been considered a fair return on invested capital. It is because most
businesses contain an element of risk some more some less because of
fluctuations, on the one hand in the prices of raw material and on the other
hand in the effective demand for the finished goods-apart from cyclical booms
and depressions that an additional return of 2 to 3% is generally considered
necessary to compensate for the risks.
It is in view of this that a return of 6% is
ordinarily considered to be a fair return on the capital invested in the shape
of paid up capital. In a particular industry where the risk is appreciably less
than usual there will be good cause for providing less than 6%. And similarly,
in an industry where extraordinary risks are run more than 6% should reasonably
be provided for.
If therefore there was reason to think that
the appellant company's contention that its business was attended with unusual
risks was correct there would have been good reason to allow a higher rate than
6% on the paid up capital and also a higher rate than 4% on the reserves used
as working capital. We are not however satisfied that any such unusual risk is
198 run. There is no more speculation in buying raw nuts and roasting the same
and selling them than there is, say, in buying raw cotton in the market,
spinning yarn there from, making it into cloth and selling such cloth, or in
raw jute, spinning yarn there from weaving it
into gunny cloth and selling the same. No case for any higher return on the
paid up capital or working capital has been made out by the evidence.
Nor can the fact that the agency business of
the company does not require much in the way of capital be considered to be a
reason for allowing a higher rate of return in those lines. If in the agency
businesses considerable profits are earned with a small amount of capital the
contribution to such earning by labour including both those at the top and
those at the bottom is necessarily considerable. There is no justification for
compensating the entrepreneur for the fact that with a small amount of capital
considerable profits are earned.
This brings us to the appellant's case about
higher rehabilitation allowance than what has been allowed by the Tribunal. The
company put its claim for rehabilitation allowance at the figure of pound,
31,780 but the Tribunal accepted only a sum of pound 9 11,250 as the reasonable
figure towards statutory depreciation and rehabilitation together. In support
of its claim, the Company produced a number of statements prepared by witnesses
claimed to be experts showing the replacement value of buildings, machinery,
furniture and sundry plants which constituted the fixed capital of the company.
Statements are also produced showing the further expectation of life of each of
these items. The services of a chartered accountant firm were also
requisitioned and we have on the record a statement showing how the figures
required for replacement have been worked out for the various items of
buildings, machinery and furniture and sundry plants. According to Exhibit
E-50, the statement on which great reliance was place by the company, the total
replacement value of its assets was RS. 1,08,02,330 made up of Rs. 77,86,350
for buildings, Rs. 18,52,320 for plants' and machinery,' 199 Rs. 3,63,550 for
furniture and Rs. 8,00,110 for sundry plants. Different items of buildings and
machinery are put in separate groups according as the replacement is necessary
in view of the residual age, during 1955-60, 1960-65, 196570, 1970-75, 1975-80,
1980-85, 1985-90, 1990-95, 1995-2000, 2000-2005. 2005 is taken as. the last
year, as the residual age is calculated from 1955 and the maximum residual age
is taken to be 50 years. Exhibit E-43 shows the detailed calculations on this
basis how the sum of Rs. 77,86,335 was arrived at as the replacement cost of
buildings. Exhibit E46 is a similar statement in respect of replacement costs
of plant and machinery. Ex. E-29A shows how after taking reserves for
rehabilitation for the different groups of buildings into consideration, the
rehabilitation charge for the season 1952-53 is worked out at Rs. 19,878 for
buildings and the rehabilitation for plant and machinery is worked out as
pound, 5,435. Details are also given as regards the calculation of pound, 4,744
as the rehabilitation costs to be provided for sundry plants and pound, 1,723
as the rehabilitation costs for furniture in the year 1954-55.
The very fact that such care has been taken
in furnishing details to the Court inclines one prima, facie to accept the
correctness of these figures without much scrutiny.
Scrutiny is however very much needed before
the figures and the calculations are ,accepted. Mention may first be made of
the fact that though it was stated by the witness who is responsible for the
preparation of the replacement costs of the machinery that he obtained
quotations from different firms, no such quotation has been placed on record.
That, as the Tribunal itself recognized, affected very much the value of these figures.
As however after mentioning the infirmities of the evidence the Tribunal
decided to accept as a reasonably accurate statement this figure of Rs. 1,08,02,330
as the total replacement value we need not consider whether we ourselves would
have been prepared to accept the evidence if the matter was being considered by
us in the first instance.
200 A more serious question however is
whether the basis adopted by the appellant's expert for the calculation of this
sum as the replacement costs to be provided over the years in the application
of the Full Bench Formula can be accepted. As the appellant's expert himself
has stated the value he has given as the rehabilitation cost for any particular
building is on the basis of what would be required to construct a, similar
building if the existing building was pulled down in 1955. He has proceeded on
the same way as regards the machinery and other assets. The Tribunal after
accepting the figure of Rs. 1,08,02,330 as the correct figure for replacement
deducted the sum which in its opinion was available in the reserves towards
such rehabilitation and then divided the remainder by 50 as 50 years would be
the period that these buildings and machinery would last if replaced in 1955 by
new buildings and new machinery.
It has been urged before us that the Tribunal
was wrong in dividing the sum obtained after the total amount to be provided
was ascertained by 50 inasmuch as the figure of Rs. 1,08,02,330 was itself
arrived at on the basis of the sum that would have to be provided for the
different groups of buildings and the sum to be provided in 1954-55 for all
these different groups should have been accepted at these figures worked out in
It appears to us that this method of arriving
at the rehabilitation costs to be provided in a particular year is not useful
and cannot be safely relied upon. To understand the fallacy of the method
applied we may briefly state the logic behind the provisions for
rehabilitation. Because the fixed capital of any industry is the victim of
gradual deterioration the prudent businessman creates reserves out of his
profits so that as soon as any portion of the fixed capital has become too
deteriorated for efficient working it may be replaced. The economic welfare of
the country as a whole no less than the interests of the businessman requires
that the company's capital fund should remain :Intact. It is for this reason
that an amount reasonably sufficient for the notional requirement of
rehabilitation during the relevant 201 year is deducted as a prior charge in
ascertaining surplus profits from which bonus can be paid. The basis of the
prior charge is the assumption that rehabilitation is a continuing process and
so needs allotment from year to year.
That is why it has now been held that if the
amount allotted for a specific year is not used, it should be taken into
account in the later year.
This has been recognized in the Full Bench
Formula and has received the authoritative recognition from this Court in
numerous cases. A full discussion of the principle involved can be found in
Associated Cement Company's Case (1). It is important to note what was pointed
out there as regards the replacement value being calculated on the basis of
what would be required to replace the fixed assets in question at the date when
replacement is due. One way of ascertaining that was to multiply the original
cost, by the figure which would reflect the expected rise or fall in prices at
the date for replacement. After the replacement cost is ascertained it is
necessary to deduct there from the amount already lying in reserves for this
purpose and then to see over what period the balance will have to be found.
There will no doubt be difficulties in the way of estimating the replacement
costs in this manner, but that cannot justify the attempt at over
simplification by working out the replacement cost on the hypothesis that
replacement cost at the date of replacement will be the same as on the present
date. If the prices fall in the meantime too much will have been set apart for
rehabilitation, if prices rise too little. To take the instance of buildings
which form the greater portion of the assets of the appellant company, it may
well be that by the time some of these buildings require replacement, the cost of
construction will have become less than at the present time by reason of more
efficient production of cement and steel in the country. So, also the price of
machinery some years later, may well be less than the price now, by reason of
such machinery being produced in our own country. The layman's apprehension
that prices rise (1)  S.C.R. 925.
26 202 never to fall again cannot be accepted
as a correct basis for calculation of the replacement cost on a future date.
The entire basis of the calculation of the
replacement cost by the appellant's experts is what such costs will be if the
building was pulled down or the machinery scrapped in 1955 and had to be
replaced by a new machinery on that date. His estimate of the replacement cost
cannot therefore be accepted as a sure basis for any calculation of the
rehabilitation costs to be provided.
It is unnecessary therefore to go into the
further question as to whether the Tribunal was justified in treating the sum
of pound 20,000/and also another sum of pound 44,760 as available towards
rehabilitation. We may however indicate that if it were necessary to go into
the question we would have probably hesitated to hold that these sums were not
in fact available for rehabilitation.
A strict view of the evidence thus justifies
a. conclusion that the appellant company has failed to make out any case for
rehabilitation allowance in addition to the ordinary depreciation. As however
the learned counsel for the respondent did not challenge the correctness of the
allowance of pound,11,250 assessed by the Tribunal as the total allowances
towards statutory depreciation and rehabilitation together it would be proper
to apply the formula on that basis.
The other question in dispute was as regards
the amount of reserves actually used as working capital. Out of what was
claimed by the company as reserves employed as working capital the Tribunal
disallowed two items. One was in respect of a sum of pound 2,09,339 which
appeared in the balance-sheet as provision for taxation liability; another was
an item of pound 8,250 as provision for proposed dividend on deferred ordinary
shares. The Tribunal was of opinion that the company had not made any attempt
to prove that these amounts had actually been used in the business.
The appellant contends before us that a
scrutiny of the balance-sheet is sufficient to satisfy any one that these
amounts had actually been employed as working 203 capital. It is stressed in
this connection that when the balance-sheets were put in evidence through the
company's officer no challenge as to the correctness of the statement made
therein Was made in cross-examination. Though no direct challenge to the
correctness of the statements appearing in the balance sheets about the value
of the different assets appears to have been made it is important to notice
that the employer's witness No. 2 through whom the balance sheets and the
profit and loss accounts of the company were put in evidence was asked in
cross-examination as regards the discrepancy between the statements in the
balance-sheet E-8 where the bank overdraft was shown as pound1,95,990 and the
statement Exhibit E-12 which showed the bank overdraft in June 1955 as 37-5
lakhs which is equivalent to pound 2,75,000. The difference being of about
pound80,000, the witness was asked which is correct, whether E-8 or E-127 and
when the witness answered that both were correct, he was asked "how".
His answer-was "I do not know".
It may be that there is a satisfactory
explanation of this difference but the evidence on record does not disclose
this. When there remains prima facie such discrepancy as regards the very
important figure as regards bank overdraft the Tribunal would well be justified
in refusing to base any conclusion on the valuation of different assets as
There is apart from this the important fact
that the company itself does not claim that whatever appears to be on the asset
side over and above the paid up capital has come from the reserves. Exhibit
E-30 is the statement prepared by the company's Chartered Accountant to show
"Reconciliation of working capital as on 30th June, 1958." It arrives
at the figure of pound6,05,564 as the working capital by deducting from the
current assets as per balance-sheet as on June 30, 1955, six out of nine items
under "Current liabilities & provisions",-3 items not deducted
are those under (1) liability for taxation other than U.K. Income-tax,(2)
proposed dividend on deferred ordinary shares and (3) capital profits on
proposed distribution. The obvious reason for deducting the six items from the
current assets to arrive at the working capital is that 204 these items in the
balance-sheets under current liabilities and provision would have to be met
during the year out of a portion of the current assets, which portion would
accordingly not be available for use as working capital. If that is the case as
regards the other items under current liabilities and provisions it is not
clear why that should not also be the case as regards the current liabilities
under "liabilities for taxation other than U.K. Income-tax" and under
"proposed dividend on deferred ordinary shares".
In the absence of evidence to the contrary
there is no ground for thinking that these current liabilities had not also to
be met out of the current assets during the year.
No such evidence has been produced. The
Tribunal is therefore right in our opinion in rejecting the company's claim
that these amounts were also employed as working capital.
As regards the other prior charges there is
no dispute. The Tribunal applying the Full Bench Formula on the basis of the
different findings hold after deducting the bonus already paid voluntarily by
the company that the company had still in its hand a sum of pound55,137 out of
which it could pay a reasonable amount to these workmen.
When deciding how much out of this
pound956,137 could reasonably be paid as additional bonus to these workmen the
Tribunal had to consider the contention raised on behalf of the
appellant-company that it would be unfair-to ignore the fact that not these
staff members alone but 11,247 other workmen as well have contributed to the
emergence of this surplus. The appellant's argument was that staff members who
have raised this dispute should not be allowed to steal an advantage over the
numerous other workers of the company and that just as results of the different
branches of the company have been considered as a whole in arriving at the
figure of available surplus it is just and proper that these workmen who have
raised the dispute should be given only a fair share out of that portion of the
surplus which may be considered properly payable to all the workmen of the
company. In dealing with this question the Tribunal has said 205 " But the
fortune of the 11,247 workers depend upon the trading results of the department
in which they are working;
the bonus of the workers is decided
compartment-wise and not on the basis of the overall profits of the company.
Cashew workers are given bonus on the basis of the cashew department profits
and not on the basis of the total profits of the company. The staff members are
transferable from one department to another and from one branch to another
branch." We are not able to understand how in spite of the way the
company's balance-sheets and profit and loss accounts have been kept the
different departments of the company could be treated separately for the
purposes of bonus. The mere fact that the company has actually done so does not
make such distribution right. Obviously if cashew workers would in fact be
entitled to a larger bonus on the overall results of the company they have been
unfairly treated by the company in having been given lesser bonus on the basis
of cashew department profits. It is urged on behalf of the,appellant that the
fact that the workmen other than these staff members have got less than they
would have been entitled to does not justify the grant of a larger share to the
present workmen than what they would be entitled to if those other workmen had
been given a fair share.
This Court had to deal with a somewhat
similar position in Indian Hume Pipe Co. v. Their Workmen(1). The respondents
there were workmen only of the Wadala factory. The appellant had however paid
to various workmen elsewhere as and by way of bonus varying between 4% and 29%
of the basic wages for the year in question. It was clear that the sum of Rs.
1,23,138/only had been paid in full and final settlement to the workmen in some
of the factories and the bonus calculations on an all-India basis would work to
the advantage of the appellant, in so far as they would result in saving to the
appellant of the difference between the amounts to which those workmen would be
entitled to on the basis of the all-India figures adopted by the tribunal and
the amounts actually (1)  SUPP. 2 S.C.R. 948.
206 paid to them as a result of agreements,
conciliation or adjudication. On behalf of the respondents it was therefore
contended that the calculations should be made after taking into account the
savings thus effected:. Dealing with this contention this Court observed :
" We are afraid we cannot accept this
contention. If this contention was accepted, the respondents before us would
have an advantage over those workmen with whom settlements have been made and
would get larger amounts by way of bonus merely by reason of the fact that the
appellant had managed to settle the claims of those workmen ,at lesser figures.
If this contention of the respondents was
pushed to its logical extent, it would also mean that in the event of the non-fulfillment
of the conditions imposed by the tribunal in the award of bonus herein bringing
in savings in the hands of the appellant, the respondents would be entitled to
take advantage of those savings also and should be awarded larger amounts by
way of bonus, which would really be the result of the claimants entitled to the
same not receiving it under certain circumstances-an event which would be
purely an extraneous one and unconnected with the contribution of the
respondents towards the gross profits earned by the appellant. The tribunal
was, therefore, right in calculating the bonus on an all-India basis."
Though in the present case there has been no settlement" strictly speaking
with the other workers in the various branches, the considerations which
weighed with the Court in the above case are fully applicable to this case and
the Tribunal must be held to have committed an error in treating the sum still
in the hands of the company as a matter only between the company and these
In deciding what relief may reasonably be
given to the appellant company in view of this error in the Tribunal's approach
to the question of distribution of the amount still available, we have however
to take into account two errors which have been made by the Tribunal in this
connection in favour of the appellant. One of these is that in distributing the
available 207 surplus the Tribunal omitted to take into account the important
fact that a sum of no less than pound1,10,000/has been capitalised out of the
reserves at the beginning of the year. The second error was that the Tribunal
in saying that after paying 8 months' bonus there is a balance of pound 34,397
with the employer, omitted to take into consideration the fact that the company
would also have the benefit of a large amount as income-tax rebate in respect
of the bonus paid to its clerical staff.
Taking all these facts into consideration we
are of opinion that a fair order would be to award to the staff bonus
equivalent to 3 months' basic wages in addition to the amount already paid
We therefore allow the appeal in part and in
modification of the award made by the Industrial Tribunal award to the staff of
M/s. Peirce Leslie Co., Ltd., bonus equivalent to 3 months' basic wages in
addition to the amount already voluntarily paid by the company. There will be
no order as to costs.
Appeal partly allowed.