The Employers of Azam Jahi Mills Ltd.
Vs. The Workmen  INSC 21 (30 January 1967)
30/01/1967 MITTER, G.K.
BHARGAVA, VISHISHTHA RAMASWAMI, V.
CITATION: 1967 AIR 1222 1967 SCR (2) 520
CITATOR INFO :
F 1973 SC 353 (38)
Industrial Dispute-Bonus agreed to be paid
only on available surplus Calculation of surplus--Whether gratuity and
retrenchment compensation to be deducted in one year or spread over
more-Whether deduction of amount in respect of idle machinery from notional
amount of normal depreciation justified-Rehabilitation charges-Nature of
evidence required to justify deduction.
The appellants and their workmen had entered
into an agreement in February 1960 which provided that a claim for bonus would
only arise if there should be an available surplus after making a provision for
all the prior charges including a fair return on paid up capital and on
reserves utilised towards the working capital in terms of the Full Bench formula.
In a dispute between the appellants and their
workmen relating to the payment of bonus for the years 1960-61 and 1961-62, the
Industrial Tribunal found that there was an available surplus for the first
year but none for the second, and therefore directed payment of bonus of one
week's wages to all the workmen over and above the two weeks' bonus which the
employees had agreed to pay irrespective of any profits made by the company.
In the appeal before this Court it was
contended, inter alia, on behalf of the appellants that in the calculation of
the gross profits, the entire amount in respect of gratuity and retrenchment
paid by the company during the year 1960-61 should have been excluded as it had
to be paid out of the profits of the company during the relevant year and the
Tribunal had wrongly decided that it should be spread over five years; that in
calculating prior charges, the Tribunal had wrongly deducted a sum of Rs. 1.50
lakhs in respect of idle machinery from the figure of notional normal depreciation
and some of the other prior charges were not dealt with in accordance with the
terms of the agreement between the parties; and that if. calculations were made
on a correct basis there would be no available surplus.
HELD : On a recalculation of the gross
profits and prior charges, that the Tribunal was not right in finding that
there was an available surplus for calculation of bonus for the year 1960-61.
[527 A-B] Gratuity would have to be paid year after year to workmen who retire
or leave the company's service in terms of the scheme of gratuity and
retrenchment compensation may have to be paid in any year if there be
modernisation of the plant or for any other reason which renders any workmen
The Tribunal's decision that the amount on
this account should be spread over five years was therefore erroneous and the
gross profit as calculated by the appellants was the correct figure. [523 A-C]
Britannia Engineering Co. v. Their Workmen  II L.L.J.
144; referred to.
The depreciation taken into account being, in
accordance with well settled principles, a notional amount of normal
depreciation, the Tribunal was not justified in deducting therefrom a further
sum in respect of idle machiner. [523 H;
524 C-D] 521 U.P. Electric Supply Co. Ltd. -v.
Their Workmen  II L.L.J. 431; Surat Electricity Company's Staff Union v.
Surat Electricity Co, Ltd.  II L.L.J. 648; The Associated Cement
Companies Ltd. v. its Workmen  SC.R. 925, 960;
On the facts, there was sufficient evidence
to show the need for rehabilitation and there was no force in the contention
that there was no basis for calculation of the provision for rehabilitation
because no experts were examined before the Tribunal. [526 C] M/s Peirce Leslie
& Co. Ltd. Kozhikode v. Their Workmen  3 S.C.R. 194 Aluminium
Corporation of India, Ltd. v.
Their Workmen,, --H L.L.J. 629,
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 971 and 972 of 1965.
Appeals by special leave from the Award dated
December 21 1963 of the Industrial Tribunal, Andhra Pradesh, Hyderabad in
Industrial Dispute No. 28 of 1963.
A. K. Sen, R. V. Pillai and B. K. Seshu, for
the appellant (in C.A. No. 971 of 1965) and the respondent (in C.A. No. 972 of
1965) M. K. Ramamurthi, for the respondent (in C.A. No. 971 of 1965) and the
appellant (in C.A. No. 972 of 1965).
The Judgment of the Court was delivered by
Mitter, J. This is an appeal against an award dated December 21, 1963 in
Industrial Dispute No. 28 of 1963 of the Industrial Tribunal, Andhra Pradesh,
Hyderabad on special leave granted by this Court.
The dispute which was referred to the
Industrial Tribunal related to the question of payment of bonus for the years
1960-61 and 1961-62 demanded by the workers of Azam Jahi Mills, Warrangal. The
Tribunal found that there was an available surplus for the first year but none
for the second. It directed payment of bonus of one week's wages to all the
workmen over and above the two weeks' bonus which the employers had agreed to pay
irrespective of any profits made by the company. In appeal before us the
appellants contend that as there was no available 'Surplus, if properly
quantified, the question of payment of bonus in addition to that for the two
weeks already agreed upon, does not arise.
It is to be noted that the parties had
entered into a settlement on February 22,1960 which was to be operative for a
period of five years commencing on October 1, 1958 and ending on September 30,
1963. By that settlement, it was provided that the claim for bonus would only
arise if there should be an available surplus after making a provision for all
the prior charges including a fair return on paid-up capital, and on reserves
utilised towards the working capital in terms of the Full Bench formula laid
down by the Labour Appellate Tribunal in Millowners' Association v.
Rashtriya Mills Mazdoor Sangh, Bombay. The
agreement also provided that prior charges would include (a) statutory
depreciation and development rebate, (b) taxes, (c) 522 reserve for
rehabilitation, replacement and modernisation of Block as calculated by the
Industrial Court (basic year 1947) and (d) a fair return at 6% on paid up
capital in cash or otherwise including bonus shares and 2% on reserves employed
as working capital. It was also a term or the agreement that the amount of the
total gross profits of the mill for the year shall be the amount of profits as
disclosed in published balance sheets of the company without making a provision
for depreciation and for bonus, but after deducting from it the amount of
extraneous income (like interest from investments, rent from property) which is
'unrelated to the efforts of the workers. With regard to statutory depreciation
and development rebate, the parties agreed that if in any year the total of
these two exceed the amount of reserve for rehabilitation, the full ;amount of
statutory depreciation and development rebate would be adopted as a prior
charge and no extra provision would be made for rehabilitation in that year.
Further, in terms of the agreement, the workers would be entitled to an amount
equivalent to 1/24th of the basic wages if the mill had an available surplus of
profits after providing for all prior charges on the basis of the Full Bench
formula as described above, up to an amount equivalent to 25 % of the total
basic wages earned during the year.
The contention of the appellants before us is
that in working out the available surplus the Tribunal went beyond the Full
Bench formula and the settlement between the parties. Our task was considerably
lightened by counsel for the appellants handing over a table showing the
figures for the working out of the Full Bench formula, as found by the Tribunal
compared to those propounded by the Management and the workers. There is no dispute
that the net profits as disclosed by the balance sheet for the year 1960-61 was
9,03,378/-. The only difference between the
management and the Tribunal with regard to the calculation of gross profits
relates to the figure Rs. 5,39,963/for gratuity and retrenchment compensation
paid by the company during the year in question. According to the Tribunal,
this sum should be spread over five years while according to, the company, this
sum should not be included at all as it had to be paid out of the profits of
the company during the relevant year.
Mr. Sen, counsel for the appellants, relied
on s. 37(1) of the Income-tax Act, 1961 for the purpose of showing that any
expenditure (not being expenditure of the nature described in sections 30 to 36
and not being in the nature of capital expenditure or personal ,expenses of the
assessee) laid out or expended wholly and exclusively for the purpose of the
business or profession of the assessee has to be allowed in computing the
income chargeable under the head 'profits and gains of business or profession'.
He argued that gratuity is to be paid every year to the workmen who retire and
retrenchment compensation has to be paid'-as and when workmen are retrenched
and that there could be little doubt that 523 these expenses were incurred
exclusively for the purpose of the business of the company. He also drew our
attention to a judgment of this Court in Britannia Engineering Co. v. Their
Workmen( ) where it was laid down that the amount of provident fund contribution
and gratuity payments were not to be added back to the net profits disclosed by
the balance sheet of the company for fixing the amount of gross profits in
working out the Full Bench formula. The Tribunal apparently recognised the
force of the contention of the employers but observed that the amount should be
distributed over a number of years which it fixed as five in this case.
This. finding of the Tribunal is erroneous
inasmuch as gratuity will have to be paid year after year to workmen who retire
or leave the company's services in terms of the scheme of gratuity and
retrenchment, compensation may have to be paid in any year if there be
modernisation of the plant, or for any other reason which renders any workmen
superfluous. It seems to us, therefore, that the gross profits as calculated by
the employers at Rs. 19,05,496/is the correct figure.
Coming next to the ascertainment of prior
charges, the material discrepancy between the figures adopted by the company
and those by the Tribunal arises thus-we find that the notional normal
depreciation has been taken to be Rs.
6,44,351/in both sets of charts but the
Tribunal has deducted therefrom a sum of Rs. 1,50,000/in respect of idle
machinery. We are unable to accept this view of the Tribunal. It is well
settled that depreciation allowed under the Income-tax Act after 1948 was to
consist of the statutory normal depreciation as well as initial depreciation
and additional depreciation. The Full Bench formula of the Labour Appellate
Tribunal decided in U.P.
Electric Supply Co. Ltd. v. Their Workmen(2)
that the depreciation which should be deducted from the gross profits in
working the formula was normal depreciation including the multiple shift
depreciation but excluding the initial depreciation and additional depreciation
allowable tinder the Income-tax Act. This decision was followed by another
Labour Appellate Tribunal of India in Surat Electricity Company's Staff Union
v. Surat Electricity Co. Ltd.(3).There it was pointed out that the deduction
allowed under the head of depreciation in the early years of the use of the
machinery was rather heavy under the provisions of the Indian Income-tax Act
which would have the effect of unduly lessening the available surplus under the
bonus formula to the prejudice of workers even in a year of prosperity and that
is why the Full Bench postulated for a more even distribution of depreciation
over a period of years. This accounted for the ignoring of the initial and
additional depreciation in working out the bonus formula. The net result was
that the depreciation to be taken into account for working out the bonus
formula was a notional amount of normal (1)  II L.L.J. 144.
(3)  11 L.L.J. 648.
(2)  11 L.L.J. 431.
524 depreciation. No objection can be taken
to this because the bonus formula itself is theoretical one. Both these
decisions were referred to in The Associated Cement Companies Ltd. v. Its
Workmen(1), and the latter decision was approved of by this Court (see at page
We find by referring to Schedule E of the
accounts of the company for the year 1960-61 that depreciation for the year was
calculated at Rs. 16,03,149/-. This is also referred to in the Director's
Report. Deducting there from the sum of Rs. 9,58,798/which is referred to in
the profit and loss account for the year ended 30th September 1961 as balance
provision for depreciation to comply with s. 205 of the Companies Act of 1956,
we get the figure of Rs. 6,44,351/which is to be found in the chart both under
the table of figures adopted by the management as also by the Tribunal.
The figure being a notional figure for
working out the bonus formula, the Tribunal was not justified in deducting
there from a further sum of Rs. 1,50,0001in respect of machinery which was said
to be idle.
In terms of the agreement between the
parties, the prior charges must include the development rebate as well unless
the statutory depreciation and development rebate added up to a higher figure
than the figure for reserve and rehabilitation. It therefore appears to us that
the Tribunal was not justified in excluding the amount of the development
rebate reserve. There is no dispute that the figure for income-tax should be
Rs. 4,74,020/or that for the return on paid-up capital should be Rs. 4,32,000/-.
The workmen in their chart have calculated the return at 4 % on Rs. 72 lakhs
which is not justified. Both the Tribunal and the company calculated return on
reserves used as working capital at Rs. 49,678/-. This, in our view, is not
justified as we find from a reference to schedule E, (fixed assets of the
company for the year 1960-61) that a sum of Rs. 14,49,664/was spent for
addition of new plant and machinery. On a reference to schedules A, B, C and D
for the year in question and the corresponding figures for the previous year,
we find that the figure of reserves and surplus in schedule A has gone down by
Rs. 1,00,000/-. The figure for secured loans in schedule C remains the same
while the current liabilities at shown in schedule D has gone up by Rs. 3,50,000/in
the year in question as compared to the previous year and loans secured from
banks show a reduction of Rs. 13,22,000/-. Thus the liability in respect of the
loans has been reduced approximately by Rs.
10 lakhs. Setting off the diminution the
overall liability was diminished by Rs. 9 lakhs. We also find from a reference
to Schedules F, G, H and 1 (of investments, current assets and loans by the
company) that the total thereof has gone down by Rs. 8 lakhs from the figure of
the previous year. The net (1)  S. C. R. 925.
525 result seems to be that the reduction of
liability when set off against the reduction in the value of the assets and
investments gives a deficit of Rs. 1,00,000/approximately.
As the company has not incurred any fresh
loans for the purpose of buying plant and machinery we can proceed on the basis
that Rs. 14,49,664/and Rs. 1 lakh have come out of the working capital.
Consequently, the reserves used as working capital should be approximately Rs.
24,83,000/as shown by the company less Rs. 15,49,664/i.e. Rs. 8,34,000/and the
return thereon at 2% would be approximately Rs. 16,000/in place of Rs.
Further, we find that the Tribunal was not
right in including Rs. 1,07,992/as gratuity and retrenchment compensation among
its list of prior charges.
On the basis of the above, it seems to us
that deducting the prior charges from the gross profits irrespective of the
question of the amount to be deducted for rehabilitation, modernization etc.,
comes to the figure arrived at is Rs. 80,000/or there about only.
There was a good deal of controversy between
the parties with regard to the correct amount of the figure for rehabilitation.
In this connection, our attention was drawn to the evidence on record. The Chief
Engineer of the Company stated before the Tribunal that the machinery had been
purchased in 1932, that its condition was bad due to fatigue and that it was
costing more and more every year for repairs even up to Rs. 21 lakhs. According
to him, it required replacement, the average life of a textile mill being no
more than 25 years. The witness also said that one half of the entire machinery
had been purchased and installed between 1948 and 1952 and the cost in 1952 was
five times that of the 1932 figure. The other witness examined on behalf of the
employers was the Secretary of the mill. He stated that the provision for
rehabilitation was Rs.
93,30,000/-, the working capital being Rs.
24,83,904/-. He gave certain figures to show how the figure of Rs.
93,30,000/was arrived at. He stated further
that the company had approached the Government for a loan of Rs. 56 lakhs for
replacement of the spinning machinery and part of the weaving machines. The
application for loan is not in dispute before us. As a matter of fact, the
Tribunal accepted the evidence that the age of the' textile mill machinery was
about 25 years and more than half the machinery had passed that age. This
justified the need for rehabilitation. The Tribunal referred to a letter of the
company to the Government dated October 10, 1963 according to which several
experts had opined that the amount required for replacement of the old
machinery was Rs. 56 lakhs. The Tribunal added thereto the sum of Rs. 2 lakhs
for replacement of the buildings and thus arrived at the total figure of
rehabilitation of Rs. 58 lakhs. In our opinion, the figures arrived at by the
Tribunal are acceptable but we have to deduct therefrom the amount of the
reserves of the company. According to us, as already shown, 526 the reserves
which could be used as working capital were no more than Rs. 8,34,000/-. Thus
the total for rehabilitation comes to Rs. 50 lakhs approximately. The Tribunal
accepted the divisior 5 to give effect to the bonus formula on the basis that
the cost of rehabilitation should be spread over five years. In our opinion.
the Tribunal proceeded on the right basis except on the figure of reserves
which has to be deducted. Dividing Rs. 50 lakhs by five, we get a figure of Rs.
10 lakhs. In terms of the bonus formula therefore, there was no available
surplus for the year 1960-61 but there was a deficit.
We were not impressed by the argument on
behalf of the respondents that as no experts were examined before the Tribunal,
there was no basis for calculation of the provison for rehabilitation. In this
connection our attention was drawn to a judgment of this Court in M/s Peirce
Ltd. Kohzikode v. Their Workmen (1). It
appears that in support of its claim in that case the company produced a number
of statements prepared by witnesses who claimed to be experts showing the
replacement value of buildings, machinery, furniture etc. We were also referred
to the judgment of this Court in Aluminium Corporation of India, Ltd. v. Their
Workmen(2). On the facts of that case, it was observed by this Court that as
there was no evidence adduced by the employer to substantiate its claim for the
amount of rehabilitation, the same must be rejected. In our view, the Tribunal
must consider a11 the evidence before it and then proceed to ascertain the
figure to 'be adopted for rehabilitation purposes. If the company had no scheme
for rehabilitation, then of -course its claim on that head must be rejected.
Again, the claim made by the company cannot be accepted unless substantiated by
evidence. In this case, we find that half the machinery was over 25 years old,
that it required over Rs. 2 lakhs every year for repairs according to the
evidence of the Chief Engineer and that its efficiency had dwindled
considerably. We also see no reason to reject the evidence adduced before the
Tribunal that the company had applied for a loan of Rs. 56 lakhs from the
Government for rebabilitation purposes and we accordingly are of the view that
the Tribunal proceeded on the correct basis so far as rehabilitation ,charges
There remains the point about the working
capital of the company. No case is here made that the reserves of the company
were being used for any purpose other than the business of the company. The
accounts of the company show that its secured liability exceeded Rs.
1,16,00,000/and its unsecured loans exceed Rs. 28,00,000/-. Unless therefore
there is evidence to show that the reserves were non-existent or they were
being utilised for a purpose other than (1)  3 S.C.R. 194.
(2)  11 L.L.J. 629.
527 the business of the company, it is
reasonable to assume that the reserves were being utilised as working capital
of the company.
In our view, therefore, the Tribunal was not
right in finding that there was available surplus for calculation of bonus for
the year 1960-61 and the appeal No. 971 of 1965 must be allowed and the award
The other appeal No. 972 of 1965 which is by
the workmen for enhancement of the bonus consequently must be dismissed.
The first appeal is therefore allowed with
costs and the second appeal is, dismissed but, without any order as to costs.
R.K.P.S. Appeal 972 of '65 dismissed.
Appeal 971 of '65 allowed.