The Associated Cement Companies Ltd.,
Dwarka Cement Works Vs. Its Workmen & ANR  Insc 65 (5 May 1959)
DAS, SUDHI RANJAN (CJ) BHAGWATI, NATWARLAL H.
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)
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.
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,  1 S.C.R. 991, Baroda Borough Municipality v. Its Workmen,
 S.C.R. 33, Sree Meenakshi Mills Ltd. v. Their Workmen,  S.C.R. 878
and The State of Mysore v. The Workers of Kolar Gold Mines,  S.C.R. 895,
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
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
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,
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.,
 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
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
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
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
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.
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
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
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
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)  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
(1) S.C.R. 33, 39.
(2)  S.C.R. 878, 884.
(3)  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.
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
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)  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. If the
Legislature feels that the claims for social and economic justice made by
labour should be redefined on a clearer basis it can step in and legislate in
that behalf. It may also be possible to have the question comprehensively
considered by a high-powered commission which may be asked to examine the pros
and cons of the problem in all its aspects by taking evidence from all
industries and all bodies of workmen. The plea for the revision of the formula
raises an issue (1)F.R.M. de Paula's Principles of Auditing', 1957, P80.
954 which affects all industries; and before
any change is made in it, all industries and their workmen would have to be
heard and their pleas carefully considered. It is obvious that while dealing
with the present group of appeals it would be difficult, unreasonable and
inexpedient to attempt such a task. That is why we think that labour's claim
for bonus should be decided by tribunals on the basis of the formula without
attempting to revise it.
Whilst we are not prepared to accede to the
argument that the formula should be revised, we wish to emphasise that the
formula is elastic enough to meet reasonably the claims of the industry and
labour for fairplay and justice. In its broad features it recognises the claims
of the industry and tabulates them under different items as prior charges, and
then provides for the distribution of available surplus between the labour, the
industry and the shareholders. The items specified in the formula have to be
worked out notionally on theoretical grounds; in determining the content of
each one of the items it is therefore essential to scrutinise and weigh
carefully all the relevant and material facts. If the content of each item is
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. In this sense it is necessary to treat the formula as elastic and not
rigid in working out detailed calculations under it.
We have no doubt that if the industry and
labour genuinely desire to settle the disputes as to bonus without the
intervention of the conciliator or the adjudicator, the formula would help them
to arrive at a reasonable settlement. If the employer does not make an unduly
inflated claim under the items which safeguard industry's interests, and if
workmen do not make an exaggerated demand for bonus, it would normally not be beyond
the co-operative effort of the parties to arrive at a reasonable figure which
should be paid to labour by way of bonus from year to year.
It is unnecessary to emphasise that
industrial disputes 955 settled amicably are in the interest of both capital
and labour. Amicable settlements of such disputes lead to' peace, harmony and
co-operation between capital and labour and that invariably helps more
production which is a matter of great national importance at present.
But unfortunately, in many cases, both the
industry and labour do not appear to be too keen on settling' these disputes
amicably, with the result that claims for bonus give rise to disputes year
after year and inevitably the machinery under the Industrial Disputes Act is
set in motion. Conciliation efforts are made but they do not succeed; then
reference is made under s. 10 of the Act and the dispute is taken before the
tribunal; since both the parties are not in a mood to co-operate with each
other, over-statements are made on both sides, allegations are met by
counter-allegations and they are sought to be supported by evidence. In such a
case the tribunals must examine the rival contentions and scrutinise the
evidence adduced by the parties objectively and in a judicial manner. If proper
evidence is led and it is judicially weighed, the tribunal would be able to
work the formula in a reasonable manner and arrive at a result which would be
substantially in conformity with the object underlying the formula. It is
obvious that, in making the relevant calculations under the items of prior
charges specified in the formula, the tribunals should have a clear idea as to
the content of each one of the said prior charges; and so it is necessary to
examine carefully this aspect of the matter.
We have already noticed that the formula for
awarding bonus to workmen is based on two considerations; first that labour is
entitled to claim a share in the' trading profits of the industry because it
has partially contributed to the same;
and second that labour is entitled to claim
that the gap between its actual wage and the living wage should within
reasonable limits be filled up. The concept of labour's contribution to the
profits of the industry has reference to the contribution made by the employer
and the workmen taken together as a class; and so it would 956 not be relevant
to, inquire which section of labour has contributed to what share of the
profits. The board idea underlying this concept is that the capital invested by
the employer and labour contributed by workmen jointly produce the profits of
an industry. This does not necessarily mean that, in theindustry in question,
labour must actually manufacture or produce goods, though, in the case of
manufacture and, production of goods contribution of labour. is patent and
obvious. In the Burma Shell Oil Storage and Distributing Co., of India Pd. v.
Their, Workmen(1) the Labour Appellate Tribunal rejected the employers' claim
that, since workmen employed by them did not manufacture or produce any goods
but merely assisted them in the distribution Of oil, they were not. entitled to
claim any bonus under the formula. It is wrong to say ", observed the
labour Appellate, Tribunal, that because the employees of these oil companies
merely market the oil they have not earned the right to any bonus". It was
also Pointed out that the workmen had to perform :duties of various intensity
for marketing an article of public. utility,. and in that sense they contribute
to, production according to the concept of economists". So were the clerks
held entitled to bonus for,their duties in the, general business of the concern
though, they had nothing to do with the physical act of marketing the commodity
it was also emphasised that the other object of granting the bonus was to help
the workmen to fill up the gap between their actual wages and the living wage.
Thus in dealing with the claim for bonus made by workmen the two-fold basis of
the formula must always be kept in mind.
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 the employees and
other items of expenditure. As a general rule the amount of gross profits thus
accepted without submitting the statement of
the' profit and loss 'account to a close scrutiny. If, however, it appears that
(1)(1953) 11, L.L.J. 246.
957 entries have, been made on the debit
side, deliberately and mala fide to reduce the amount of gross profits, it
would be open to the tribunal to examine the question and if it is satisfied
that the impugned entries have been made mala fide it may disallow them. This
principle has been recognised by the Labour Appellate Tribunal when it
observed, for instance, in M/s. J. K. Cotton Manufacturers Ltd., Kanpur v.
Their Workmen (1) that if managing agents deliberately divert profits to the
selling, agents with a view to deprive labour of their bonus and pay commission
to the selling.
agents at high rates then certainly the
matter must be taken into consideration in the determination of available
surplus balance " It would likewise be open to the parties to claim the
exclusion of items either on the credit or on the debit side on the ground that
the impugned items are. wholly extraneous and entirely unrelated to the trading
profits of the year. In considering such a plea the tribunal must resist the
temptation of dissecting the balance-sheet too minutely or of attempting to
reconstruct it in any manner.
It is only glaring cases, where the impugned
item may be plenty and obviously extraneous that a plea for its exclusion
should be entertained. Where the employer makes profits in the course of
carrying on his trade or business, it would be unreasonable to inquire whether
each one of the, items of the said profit is related to the contribution made
by labour. In such matters, the tribunal must take an overall, practical and
commonsense view. Thus it ma be stated that as a rule the gross profits
appearing at the foot of the statement of the profit, and loss account should
be taken a,% the basic figure while working out the formula.
In, working out the formula the other
important fact which should not be ignored is, that the formula proceedsí to
deal with the labour's claim for bonus on the basis that the relevant year for
which bonus is claimed is a self sufficient unit and the appropriate accounts
have, to. be made on the notional basis in respect of the said, It is
substantially because (1) L.A.C. 716, 745. (Also vide  L.A.C. 420,
421.) 958 of this basic assumption that if an employer receives during the
bonus year a refund with respect to the excess profits tax paid by him in a
previous year the amount of refund is not included on the credit side. In Model
Mills etc.' Textile Mills, Nagpur v. The Rashtriya Mill Mazdoor Sangh (1) the
Labour Appellate Tribunal observed that according to the. formula, the
income-tax is to be deducted as a prior charge on trading results of the year
just as much as the bonus is to be ascertained upon the trading results of the
year. The concession made by the income-tax authorities in making a refund of
the excess profits tax already paid by the employer is intended to aid a
concern on account of past losses and so it has nothing to do with the formula.
The same principle governs cases where owing to a loss incurred in the previous
year or years the employer is entitled to claim allowance for adjustment under
s. 24 (2) of the Income-tax Act during the bonus year; and so it is held that
the allowance for adjustment which the employer claims cannot be taken into
account in determining the amount of income-tax payable on the profits of the
bonus year under the formula. In Bennett Coleman and co., Ltd. v. Their Workmen
(2) the Labour Appellate Tribunal rejected the contention raised by labour that
since under s. 24 (2) the employer would not be liable to pay tax during the
bonus year no provision for payment of tax should be made in working out the
formula. The Labour Appellate Tribunal pointed out that the fact that the
employer was not required to pay tax during the bonus year was the result of
the adjustment of the previous year's unabsorbed depreciation and losses
against current year's profit, and that had no relevance in determining the
available surplus from the trading profits of the bonus year. The same view has
been taken in several other decisions to which the Labour Appellate Tribunal
has referred. In our opinion, once it is realised that in working out the
formula the bonus year is taken as a unit self-sufficient by itself, the
decisions of the Labour Appellate Tribunal in regard (1) (1955) I J. 534, 540.
(2) (1955) I J. 60.
959 to the refund of excess profits tax and
the adjustment of the previous year's depreciation and losses against the bonus
year's profits must be treated as logical and sound.
Having ascertained the amount of gross
profits, the first item of deduction relates to depreciation. The propriety of
this deduction was not questioned before the Labour Appellate Tribunal which evolved
the formula; but the content of the item of depreciation became a matter of
controversy subsequent to 1950. After 1948, s. 10 (2) (vi) of the Income-tax
Act has provided for initial and additional depreciation besides the statutory
depreciation which was already admissible. In other words, depreciation allowed
under the Income-tax Act now consists of what may be called the statutory
normal depreciation calculated under r.
8 as well as initial depreciation and
additional depreciation. The allowance of these depreciations is an exception
to the general rule that the income has to be taxed without reference to the
diminution in the value of the capital. Under the amended provision of s. 10
(2) (vi) of the Income-tax Act the employers began to claim that from the gross
profits all the depreciations admissible under the Income-tax Act should be
debited; and this claim was upheld by some tribunals and rejected by others.
This conflict of decisions led to confusion; and so a Full Bench of the Labour
Appellate Tribunal was constituted to decide this and other points in the case
of the U. P. Electric Supply Co., Ltd., etc. Electricity Supply Undertakings v.
Their Workmen(1). The Full Bench held that " the depreciation which should
be deducted from the gross profits in working the formula is annual
depreciation allowable under the provisions of the Income-tax Act including the
multiple shift depreciation; it also held that the initial depreciation and
additional depreciation which were also allowed under the Income-tax Act are
abnormal additions to the income-tax depreciation designed to meet particular
contingencies and for a limited period;
(1) (1955) II J. 431.
122 960 and so it would not be fair to the
workmen that these two depreciations should be rated as prior charges before
the available surplus is ascertained ". Apparently some doubt arose as to
what exactly was allowed to be deducted under this Full Bench decision; and two
of the members of the Full Bench took occasion to clarify the position in Surat
Electricity Co.'s Staff Union v. Surat Electricity Co., Ltd.
(1). This decision shows that what the Full
Bench intended to treat as depreciation for the purpose of the formula was a
notional amount of normal depreciation; in order to avoid any future doubt or
confusion, the judgment in the case has set out the manner in which this
notional normal depreciation has to be worked out. Since this decision was
pronounced it is the notional normal depreciation that is deducted from the
gross profits in working the formula. It seems to us that the view taken by the
Full Bench is wholly consistent with the basic idea of social justice on which
the original formula is founded. The relevant provisions of the Income-tax Act
allowing further depreciation are based on considerations which have no
relevance to the original formula; indeed, as the Full Bench has pointed out,
if the said two items of depreciations are allowed to be deducted from the
gross profits it would in a majority of cases defeat the object of the formula
itself. We would accordingly hold that the depreciation which has to be
deducted from the gross profits should be the notional normal depreciation as
explained in the case of Surat Electric Co., Ltd. (1).
The balance obtained after deducting
depreciation from the gross profits is then taken as the amount on which
calculations have to be made about the income-tax payable for the bonus year.
This item gives rise to a controversy between the parties. It is urged for the
employers that in determining the amount payable by way of income-tax on this
balance the tribunal should not take into consideration allowances which are
made under the relevant provisions of the Income-tax Act. There is no doubt
that in taxing the employer for the bonus year the Income-tax Act would
(1)(1957) II L. L. J. 648.
961 make allowance not only for the normal
depreciation but also for the initial and additional depreciations; but the
argument is that the income-tax should be determined nationally without
reference to the said allowances. In support of this argument it is further
urged that though the employer may obtain credit for the two further
depreciations for some years, later on the said allowances will not be made and
his liability' to pay tax would be correspondingly increased. It is but fair,
so the argument runs, that the employer should be allowed to create a fund of
income-tax reserve from which he would be able to bear his tax liability in
future as and when it is bound to increase.
On the other hand it is contended on behalf
of workmen that while determining the amount of tax payable for the bonus year
the tribunal cannot ignore the concession given to the employer by the
Income-tax Act by making the allowance of two further depreciations. What the
employer claims is not the amount of tax payable during the bonus year but much
more in addition in order to build up a reserve and this notion of building up
a tax reserve for meeting future, though certain, increased tax liability is
foreign to the basic idea of the formula. For making calculations under the
formula the bonus year is taken as a unit and all items specified in the
formula should be worked out on that basis.
That is why the refund of the excess profits
tax received in the bonus year is excluded from consideration and the right of
the employer to adjust his previous year's losses and depreciation against the
trading profits of the bonus year is likewise ignored. So too the fact that the
employer may have to pay increased taxes in future years must be treated as irrelevant.
That in brief is the case for workmen.
In our opinion, having regard to the basis of
the formula and the manner in which the other items of the formula are required
to be worked out, it would not be reasonable to allow the employer to claim under
the item of income-tax an additional amount is respect of the two further
depreciations which are expressly allowed to him under s. 10(2)(vi) of the
Income-tax 962 Act. It is clear that the amount determined under this item
would not represent the actual tax which the income-tax department will recover
from the employer. In that sense it would always be a notional amount ; but in
calculating even this notional amount it would be unfair and unjust to ignore
the concessions allowed to the employer by s. 10(2)(vi).
The creation of a fund of income-tax reserve
may conceivably lead to unnecessary complications. Besides, if on principle the
further depreciations allowed by the Income-tax Act are treated as inadmissible
under the formula and so are excluded from consideration, it would be
substantially inconsistent with the object of such exclusion to allow the
employer to claim tax in respect of the said amounts of the two depreciations.
It is clear that even if the amount of income-tax is determined after taking
into account the concession given to the employer by s. 10(2)(vi) it would work
no hardship to the employer, for the simple reason that in future years when
these concessions cease to be operative and his liability to pay the tax
correspondingly increases, he would be entitled to claim the amount of
income-tax which would then be payable by him. This method of calculating
income tax is thus fair to both the parties and it has besides the merit of
being consistent with the basic character of the formula. It would be relevant
in this connection to remember that, though in most of the industries workmen
continue to be employed from year to year, nationally and on principle, the
claim for bonus for a particular year is made on behalf of workmen employed during
the said year; and in that sense, the relevant calculations have to be made
with the bonus year as a unit. That is why considerations of future tax
liability of the employer are foreign to the calculation under the formula. We
would, therefore, bold that in calculating the amount of tax payable for the
bonus year the tribunals should not take into account the concessions given by
the Income-tax Act to the employers under the two more depreciations allowed
under s. 10(2)(vi) of the Income-tax Act.
This point has been considered by this Court
in 963 Sree Meenakshi Mills, Ltd. v. Their Workmen (1) where has upheld the
view taken by the Full Bench the Labour Appellate Tribunal in the case of the
U. Electric Co., Ltd., etc., Electricity Supply Undertakings (2) and has
directed that in determining amount of income-tax payable during the bonus yea
the further depreciations permissible under the income-tax Act should be taken
into account. We would only like to add that in that case this Court had
occasion to say what exactly the normal depreciation meant; but it is clear
that the normal depreciation mentioned in the judgment was not intended to mean
anything other than the notional normal depreciation as explained by the Labour
Appellate Tribunal in the case of the Surat Electric Co., Ltd. (3 ). The amount
income-tax thus determined has then to be deduct( as a prior charge.
The next step in the working of the formula
related to the deduction of an appropriate amount in respect of the return on
paid-up capital as well as working capital. We have already noticed that the
formula provides generally for the payment of interest at 69 per annum on the
paid-up capital and at 2% on worldling capital. Subsequent decisions show that
the tribunals do not regard the said rates as inflexible and they have suitably
modified them in the light of the relevant circumstances in each case. We think
that this is a correct approach and that it is necessary to fix the rates of
interest on the two items of paid-up capital and working capital according to
the circumstances of each case. In this connection it may be added that
ordinarily industrial tribunals awards interest at the rate of 6% per annum on
In Workmen of Assam Co., Ltd. v. Assam Co.,
Ltd. this Court held that interest allowed by the tribunal a 7% on paid-up
capital and confirmed by the Labour Appellate Tribunal was justified because
" an industry connected with agriculture like the tea industry is exposed
to greater risks than any other industry such (1)  S.C.R. 878.
(3) (1957) 11 L.L.J. 648.
(2) (1955) II L.L.J.431.
(4)  S.C.R. 327] 964 weather, pests in
the plants and gradual deterioration of the soil ". On the other hand, in
Ruston and orns by (India) Ltd. v. Their Workmen (1) the Labour appellate
Tribunal allowed only 4% return on the art of paid-up capital represented by
bonus shares for the year in which such shares were issued and ,)served that
,for subsequent years no distinction between it and other paid-up capital
represented by paid-up shares should be made ". Similarly, in regard
reserves or depreciation used as working capital interest has been allowed
either at 4% or at 3% or ,Ten at 2% according to the relevant circumstances. in
the Mill Owners Association, Bombay v. The Rashtriya Mill Mazdoor Sangh (2) the
Labour Appellate Tribunal has observed that " as we have said before,
there is no fixed rule as to the rates of such return (on capital) and each
case must depend on its individual acts. We have in appropriate cases given as
high as % but in case of the mills the Full Bench has considered that the
equivalent of 2% would be reasonable nd we propose to retain it at that level
for the present ". In Tea and Coffee Workers Union v. Brooke Bond (India)
(Private) Ltd. (3) the Industrial Tribunal as considered the previous decisions
on the question of the return on working capital and held that, in the case
before it, it would be an adequate return on the working capital if 3% interest
is allowed because there were no special reasons existing for allowing a higher
In dealing with this aspect of the matter it
is relevant to point out that no distinction has been made )y tribunals between
reserves used as working capital and depreciation fund similarly used. In the
Mill Owners Association, Bombay v. The Rashtriya Mill Mazdoor Sangh (2) (page
523) when labour objected to the depreciation fund earning any return even if
it was utilised in or about the business of the year, the labour Appellate
Tribunal overruled the objection and observed that " no essential
difference could be made between the depreciation fund and any other (1) (1955)
1 L.L.J. 73. (2) (1952) 1 L.L.J. 518. 522.
(3)(1958) 1 L.L.J. 645.
965 fund belonging to the company which could
be invested so as to earn a return ". It is thus clear that what is
material is not the origin of the fund. It is the fact that the fund in the
hands of the concern has been used as working capital that justifies the claim
for art adequate return on it. We think it is commonsense that if the concern
utilises liquid funds available in its hands for the purpose of meeting its
working expenses rather than borrow the necessary amounts it is entitled to
claim some reasonable return on the funds thus used. It is of course necessary
that the employer must show that the amount under the depreciation fund was in
fact available and that it has actually been used as working capital during the
relevant year. What return should be allowed on such funds must inevitably be a
question of fact to be decided by the tribunal in its discretion in each case
in the light of the relevant circumstances. It would thus be noticed that in
working out these two items under the formula there is no fixed or rigid rule
about the rate of interest which can be claimed and awarded. It is also clear
that if any fund is used by the employer for the purpose of expanding his
business he is not entitled to claim any return on such fund under those items.
In the case of the U. P. Electric Supply Co., Ltd. etc. Electricity Supply
Undertakings (1) the Full Bench of the Labour Appellate Tribunal held that
" considering all the factors presented to them they did not think that a
case had been made out for giving a special prior charge in the shape of return
on the reserves utilised for expansion ". When the amounts awardable to
the employer under these two items are determined they have to be treated as
prior charges in the calculation of available surplus under the formula.
The original formula referred to replacement,
rehabilitation and modernisation of the plant and machinery. Soon after the
formula was evolved a dispute arose as to whether the industry was entitled to
claim rehabilitation for its buildings as well and it was held that " a
claim for rehabilitation for buildings had to (1) (1955) II L.L.J. 431.
966 be treated as a prior charge just like
the claim for the rehabilitation of plant and machinery " (1). :This
position is not disputed before us, and we think rightly.
That takes us to the item of rehabilitation
and it is this item which poses a very difficult problem. We have already
noticed that the object of providing depreciation of wasting assets in
commercial accounting is to recoup the original capital invested in the
purchase of such assets; but the amount of depreciation which is allowed under
the formula can hardly cover the probable cost of replacement. That is why the
formula has recognised the industry's claim for rehabilitation in addition to
the admissible depreciation.
Since the Second World War prices of
industrial plant and machinery have registered a continuous upward rise and its
inevitable consequence has been a proportionate rise in the claim for
rehabilitation. In considering the claim for rehabilitation it is first
necessary to divide the blocks into plant and machinery on the one hand and
other assets like buildings, roads, railway-sidings, etc., on the other.
Then the cost of these separate blocks has to
be ascertained and their probable future life has to be estimated. Once this
estimate is made it becomes possible to anticipate approximately the year when
the plant or machinery would need replacement; and it is the probable price of
such replacement on a future date that ultimately decides the amount to which
the employer is entitled by way of replacement cost. This problem can be
considered item wise where the industry does not own too many factories and
item wise study of the plant and machinery is reasonably possible; but if the
industry owns several factories and the number of plants and machines is very large
it would be difficult to make a study of the replacement costs item wise, and
in such a case the study has to be block wise. In either case what the tribunal
has to estimate is the probable cost of replacement of plant and machinery at
the time when such replacement would become due. It would be clear that the
decision of this question would inevitably depend upon several uncertain (11)
(1952) 1 L.L.J. 518, 522. factors. The estimate about the probable life of the
plant and machinery is itself to some extent a matter of guess work and any
anticipation, however intelligently made, about the probable trend of prices
during the intervening period would be nothing but a guess. That is how, in the
determination of this problem, several imponderables face the tribunals.
One of the points which raises a controversy
in this' connection is: What level of prices should the tribunal consider in
making its calculations about the probable cost of replacement ? Would it be
the price level prevailing during the bonus year or that prevailing at the time
when the tribunal holds its enquiry ? Prima facie it may appear that it is the
price level prevailing in the bonus year that should be treated as relevant;
but if the relevance of the evidence about the price level is limited only to
the bonus year, it may hinder rather than help the process of a satisfactory
determination of the probable cost of replacement. What the tribunal has to do
in determining such cost is to project the price level into the future and this
can be more satisfactorily done if the price level which has to be projected
into the future is determined not only in the light of the prices prevailing
during the bonus year but also in the light of subsequent price levels. It
seems to us that in order to enable the tribunal to make an estimate in this
matter as near actualities or realities as possible it is necessary that the
tribunal should be given full discretion to admit all relevant evidence about
the trend in price levels. The price level during the bonus year would no doubt
be admissible; but that alone should not be taken as the basis for decision.
That is the view which the tribunals have taken in a majority of cases in
dealing with the question of rehabilitation and we do not think that there is
any justification for disturbing the usual practice in that behalf.
The problem of determining the probable cost
of replacement itself is very difficult; but the difficulty is immeasurably
increased when it is remembered that the claim for rehabilitation covers not
only cases of 123 968 replacement pure and simple but of rehabilitation and
modernisation. In the context rehabilitation is distinguished from ordinary
repairs which go into the working expenses of the industry. It is also
distinguished from replacement. It is quite conceivable that certain parts of
machines which constitute a block may need rehabilitation though the block
itself can carry on for a number of years;
and this process of rehabilitation is in a
sense a continual process. Unlike replacement, its date cannot always be fixed
or anticipated. So with modernisation; and all these three items are included
in the claim for rehabilitation.
That is why we think it is necessary that the
tribunals should exercise their discretion in admitting all relevant evidence
which would enable them to determine this vexed question satisfactorily.
At this stage it is relevant to remember that
the claim under this item is confined to rehabilitation, replacement and
modernisation. It is common ground that expansion of the plant and machinery is
not included in this item; but in several cases it is not easy to distinguish
between modernisation of the plant and machinery and its expansion.
It is urged that an expert can, if he so
chooses, make an attempt to include expansion within what he may describe as
modernisation by clever use of technical words and details,and that it is
precisely this aspect of the matter which has to be carefully examined by the
tribunal. The industry sometimes claims that a plant may become obsolescent
because it has become out of date and has to be substituted by a new modern
plant. Is the introduction of the new modern plant in such circumstances an
item of expansion or mere modernisation ? It is difficult to lay down any general
tests which would govern the decision of this question. If it appears fairly on
the evidence that the introduction of the modern plant or machine is in
substance an item of expansion of the industry, expenses incurred in that
behalf have to be excluded. On the other hand, if the employer had to introduce
the new plant essentially because the use of the old plant though capable of
giving service-was uneconomic and other969 wise wholly inexpedient, it may be a
case of modernisation.
Similarly, if by the introduction of a modern
plant or machine the production capacity of the industry has appreciably
increased, it would be relevant for the tribunal to consider in an appropriate
case whether it would be possible to apportion expenses on the basis that it is
a case of partial modernisation and partial expansion. If, however, the
increased production is not of a significant order it may be regarded as
incidental to replacement or modernisation and the question of apportionment
may not arise. We have set out these considerations in order to emphasise the
fact that in dealing with the problem of rehabilitation the tribunal must
carefully examine the evidence and consider the employer's claim in all its
aspects before determining the amount which should be allowed by way of
rehabilitation as a prior charge in the relevant year.
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 modernisation. Since there has been a continuous
rise in the prices of industrial plant and machinery the older the plant which
needs rehabilitation the higher is the multiplier. That is why there is always
a competition between industry and workmen on this point.
Industry is sometimes tempted to keep its old
pre1939 block alive with a view to claim a higher multiplier which gives it a
larger amount of rehabilitation expenditure;
whereas workmen urge that the old pre-1939
block has been nominally kept alive as a device and so press for a lower
multiplier which would reduce the claim for rehabilitation.
Once a proper multiplier is adopted in respect
of each one of the blocks the first step in determining the probable cost of
rehabilitation can be easily taken. It then becomes a matter of mere
At this stage the divisor steps in. The total
amount required for rehabilitation which is determined by the 970 application
of a suitable multiplier in respect. Of each block has to be divided by a
suitable divisor in respect of each block in order to ascertain the annual
requirement of the employer in that behalf year by year. In the case of the
divisor the employer seeks for a lower divisor whereas workmen claim a higher
divisor and this contest has to be decided by the tribunal by reaching a fair
conclusion on the evidence before it about the probable future life of the
block in question. It would thus be noticed that the adoption of a suitable
multiplier and divisor plays a very important part in the decision of the vexed
question about the employer's rehabilitation claim.
Before actually awarding an appropriate
amount in respect of rehabilitation for the bonus year certain deductions have
to be made. The first deduction is made on account of the breakdown value of
the plant and machinery which is usually calculated at the rate of 5% of the
cost price of the block in question. Then the depreciation and general liquid
reserves available to the employer are deducted. The reserves which have
already been reasonably earmarked for specific purposes of the industry are,
however, not taken into account in this connection. Last of all the rehabilitation
amount which may have been allowed to the employer in previous years would also
have to be deducted if it appears that the amount was available at the time
when it was awarded in the past and that it had not been used for
rehabilitation purposes in the meanwhile. These are the broad features of the
steps which have to be taken in deciding the employer's claim for
rehabilitation under the working of the formula. " It would thus be clear
that the decision of this major item in the working of the formula presents
and in the last analysis its decision depends
upon several hypothetical and empirical considerations. It is, therefore, not
surprising that in the case of Metal Box Co.
of India, Ltd. v. Its Workmen (1) the Labour
Appellate Tribunal has observed that " It is unfortunately too true that
all (1)  L.A.C. 315, 321.
971 our calculations as to rehabilitation may
be disproved by subsequent events; it is impossible to say what the trend of
world prices would be in the next fifteen years or which circumstances will
intervene before that period to upset such calculations one way or the other,
and no calculations of this kind are capable of mathematical accuracy. We have
to take a commonsense view of these matters and make an allowance' for
rehabilitation to the best of our ability and in accordance with our formula
". It has also been observed by the Labour Appellate Tribunal that if an
appropriate multiplier and divisor are determined " they are generally
used because the tribunals take the view that the reconsideration of the said
multiplier and divisor should not be hastily undertaken and could be justified
only on the basis of a substantial change of a stable character extending or
likely to extend over a sufficient number of years so as to make a definite and
appreciable difference in the cost of replacement ". (Vide: The Mill
Owners Association Bombay v. The Rashtriya Mill Mazdoor Sangh (1) In dealing
with the employer's claim for rehabilitation tribunals have always placed the
onus of proof on the employer. He has to prove the price of the plant and
machinery, its age, the period during which it requires replacement, the cost
of replacement, the amount standing in the depreciation and reserve fund, and
to what extent the funds at his disposal would meet the cost of replacement.
If the employer fails to lead satisfactory
evidence on these points tribunals have on occasions totally rejected his claim
for rehabilitation. (Vide: Ganesh Flour Mills Co. Ltd., Kanpur v. Ganesh Flour
Mills Staff Union, Kanpur (2);
Bombay Gas Co. Ltd. v. Their Workmen (3);
Dharangadhra Chemical Works Ltd. v. Its Workmen (4)). If the tribunals are
satisfied that the employer is deliberately and without a sufficient cause not
taking any steps to rehabilitate, replace or modernise his machinery even
though an appropriate allowance is made in that behalf from year to year, they
may take into (1)(1952) 1 L.L.J. 518.
(3)(1955) 11 L.L.J. 152.
(2)  L.C. 172 (4) (1956) 1 L.L.J. 475.
972 account this conduct in determining the
extent of such allowance in the bonus year in question. Similarly if it appears
that the employer has deliberately or mala fide refrained from rehabilitating
or replacing his old machinery with a view to claim a higher multiplier in
calculating the rehabilitating amount, the tribunals may take his conduct into
account in determining the actual allowance of rehabilitation to him.
The main difficulty in deciding questions
about rehabilitation arises from the fact that satisfactory evidence is not
always placed before the tribunals and it is urged that the evidence given by
the employers' experts is interested and the workmen with their limited
resources are not able to test the said evidence by adequate or effective
cross-examination. In such a case the tribunal may, if it so desires and if it
is possible, secure the assistance of assessors (vide s. 38 of the Industrial
Disputes Act). It is therefore necessary that the tribunal should require the
employer to give clear and satisfactory evidence about all the relevant facts
on which it can make the requisite estimate. The questions which the tribunal
has to consider under this item are essentially questions of fact and its final
decision on them is bound to be hypothetical, since it would be based on a fair
evaluation of several circumstances which are by no means certain and which
cannot be predicated with any amount of precision or even definiteness. That is
why it is of the utmost importance that all relevant and material evidence
should be adduced by the employer and it should be properly tested by
cross-examination. When that is done the tribunal must do its best to consider
the said evidence objectively and reach its final decision in a judicial
Once the amount of rehabilitation is thus
determined the available surplus for the bonus year is ascertained and the
final stage is reached when the tribunal has to give directions for the
distribution of the said available surplus. It is not seriously disputed that
three parties are entitled to claim a share in this available surplus;
labour claims bonus from it, the industry
claims a share for the purpose of its expansion 973 and other needs, and
share-holders claim a share by way of additional return on the capital invested
by them. In the case of the Mill Owners Association, Bombay (1) where the
formula was evolved, out of the available surplus of Rs. 2.61 crores 2.16
crores was distributed by way of bonus leaving a balance of 0.45 crores with
the industry. In the Trichinopoly Mills Ltd. v. National Cotton Mills Workers'
Union (2) the available surplus was found to be Rs. 34,660 and out of it Rs.
30,000 was ordered to be distributed as bonus to the workmen. These two and
other similar instances, however, cannot be pressed into service for the
purpose of evolving any general rule as to the ratio or proportion in which the
available surplus should be distributed. The ratio of distribution would
obviously depend upon several facts: What are the wages paid to the workmen and
what is the extent of the gap between the same and a living wage? Has the
employer set apart any gratuity fund ? If yes, what is the amount that should
be allowed for the bonus year ? What is the extent of the available surplus ?
What are the dividends actually paid by the employer and what are the
probabilities of the industry entering upon an immediate programme of
expansion? What dividends are usually paid by comparable concerns ? What is the
general financial position of the employer? Has the employer to meet any urgent
liability such as redemption of debenture bonds ? These and similar
considerations will naturally determine the actual mode of distribution of the
available surplus. In this connection labour's claim to fill up the gap between
the wage actually paid to it and the living wage has an important bearing on
the decision of this point.
Industry's claim for paying additional return
on capital and for making additional provision for expansion would also have to
be considered. The fact that the employer would be entitled to a rebate of
income-tax on the amount of bonus paid to his workmen has to be taken into
account and in many cases it plays a significant part in the final
Therefore, in our opinion once the (1) (1952)
1 L.L.J. 518. (2) (1953) 11 L.L.J. 361.
974 available surplus is determined, the
tribunal should, in the light of all relevant circumstances, proceed to make an
award directing the payment of a fair and just amount to labour by way of
bonus. If the formula is thus worked reasonably it would in a large majority of
cases succeed in achieving its principal object of doing justice both to labour
Before we part with the question of working
the formula it is necessary to observe that the practice adopted by some
tribunals in giving the amount of bonus a priority in the calculations is not
justified. Logically it is only after all the prior charges have been
determined and deducted from the gross profits that available surplus can be
ascertained; and it is only after the available surplus is ascertained that the
question of awarding bonus can be considered. Some tribunals seem to work out
nationally the amount of bonus which they think can be awarded and place that
amount higher up in the process of making calculations before the income tax
payable is determined. The inevitable consequence of this procedure is to make
the amount of tax proportionately less. We wish to make it clear that this
procedure should not be followed. As we have already pointed out, in directing
the distribution of the available surplus the tribunal has to take into account
the rebate of income-tax to which the employer is entitled on the amount of
bonus paid to his workmen but that on principle is different from placing the
amount of bonus immediately after depreciation in the working of the formula.
It has been urged before us by the
respondents that the amount of rehabilitation as well as the amount of
depreciation should be deducted from the gross profits before income-tax
payable is ascertained. In this connection reliance is placed on the fact that
in its judgment which evolved the formula the Labour Appellate Tribunal has at
one place described rehabilitation as the first charge in priorities. Having
regard to the context in which the said statement is made it is clear that all
that the Labour Appellate Tribunal wanted to emphasise was that the textile
industry 975 with which it was directly concerned in the said case needed
rehabilitation very urgently. The final calculations made in the judgment give
a clear indication as to how the formula has to be worked out. We are,
therefore, satisfied that rehabilitation cannot be given the high priority
claimed for it by the respondents, We must now consider whether the tribunal
was right in directing that overtime payment should be' included in the
calculation of the bonus which it has directed the appellant to pay. Mr. Kolah
contends that the direction to include overtime wages is contrary to the usual
practice followed by industrial tribunals and it is also unsound on principle.
This dispute arises between the employer and
the workmen in this acute form because the total amount of bonus is not
determined logically after ascertaining the available surplus. If the said
amount is logically determined as indicated by us, then the question as to
whether overtime wages should be included or not would really be a matter of
dispute between workmen inter se because once the amount of bonus is
determined, how it should be distributed between workmen inter se would cease
to be a matter of direct concern to the employer. Therefore we think that there
would be no occasion for such a dispute between the employer and his workmen if
the tribunals follow the logical method of determining the amount of bonus in
the manner indicated by us.
On principle we do not think it would be fair
to the workmen as a whole that overtime should be included in calculating the
bonus which each workman should receive. Workmen who do overtime get additional
payment for such overwork. If in addition to such payment they are allowed to
include the said payment in their wages in calculating bonus to which they are
entitled, obviously the gap between their actual wage and the living wage would
be filled up to a larger extent than in the case of other workmen who do not
receive such additional overtime payment. Besides, if the payment of bonus
proceeds on the broad consideration that it is due to the workmen for their
contribution to the profits it would be unreasonable to make 124 976 a
distinction between workmen and workmen on the ground that some have
contributed more to the profit than others; and that is exactly what would
follow if overtime workers are allowed to claim a larger amount of bonus than
their other colleagues. That is why we think that the tribunal was not
justified in directing that the calculations of bonus should be made on the
basis that overtime payments constituted a part of the basic wages of the
The next point to consider relates to the
return on paid-up capital to which the appellant is entitled. The tribunal has
awarded to the appellant return at the rate of 6% on paid-up capital and at 4%
on the working capital. The appellant claims a return at a higher rate on
paid-up capital whereas the respondents contend that the return should be paid
on the paid-up capital at a lower rate. In support of its claim for a higher
return the appellant has relied on the fact that it has consistently paid
dividends at a reasonably low rate and it did not seek to make undue profits
even during the years of war. In this connection Mr. Kolah has invited our
attention to a statement, Ex. C1, showing the percentage of dividend to paid-up
capital and invested capital for the eighteen financial years 1936-37 to
1953-54 and he has asked us to contrast the low rates of dividend evidenced by
it with dividends paid by other companies as shown by another document Ex.
C-12. He has also asked us to take into account the highest and the lowest
quotation for the company's shares in the Bombay Stock Exchange during the
period 1949-55. On the other hand Mr. Dudhia has urged that during the relevant
year the appellant has capitalised Rs. 35.85 lakhs from the reserve fund and
175.45 lakhs from Premium-on Shares Account by issuing one bonus share for
every five shares held by the shareholders; and he argues that the tribunal was
in error in allowing 6% on the paidup capital during the bonus year.
Incidentally Mr. Dudhia also relied, though
halfheartedly, on the finding of the tribunal that the appellant had paid an
inflated price for the pre-1939 block. It is true that in one place the
tribunal has made an observation to 977 this effect; but it is clear that the
said observation is inconsistent with its definite finding recorded earlier in
the course of its judgment that it was not prepared to hold that the A. C. C.
had inflated the capital invested by the merging companies by taking them over
in 1936. Therefore this part of Mr. Dudhia's argument is invalid.. In our
opinion, the question as to what return should be allowed to paid-up capital
in' a given case must be left to be determined by the tribunal in its
discretion having regard to all the relevant facts; and if the tribunal has in
its discretion awarded 6% interest on the paid-up capital we see no reason to
interfere with its decisions It is clear that no question of principle or law
is involved in the matter.
There is one more point which we must
consider before we proceed to deal with the facts in the present case. This
point relates to the employer's claim to treat the amount in the gratuity fund
as a prior charge; and this claim has been allowed by the tribunal. It appears
that in M/S. Metro Motors v. Their Workmen (1) the Labour Appellate Tribunal
observed that it was desirable in all cases to create a separate reserve fund
for the payment of gratuity and it directed that the modest fund claimed by the
employer for the year in question was a proper deduction from its profits. The
question which we have to decide is whether the allowance on this account
should be treated as a prior charge in making the calculations under the
formula. There can be no doubt that, in a sense, the gratuity fund is created
for the benefit of workmen and there should be no difficulty in recognising the
appellant's claim for the deduction of an appropriate amount on this account;
but we think on principle it is desirable that no addition should be made to
the list of prior charges recognised by the formula. Even so when the available
surplus is determined the tribunal ought to take into account the employer's
claim on account of the gratuity fund created for the benefit of his workmen
and the amount which the tribunal may regard as a reasonable (1)(1952) II
978 allowance in that behalf should be definitely
borne in mind in finally deciding the amount which should be paid to the
workmen by way of bonus. This method will meet the employer's claim adequately
without making any addition to the list of priorities specified in the formula.
Mr. Dudhia contended that the tribunal should not have allowed Rs. 10 lakhs
under this item but we do not think there is any substance in this contention.
Incidentally Mr. Dudhia has pointed out that
in dealing with the appellant's claim for a return on working capital the
tribunal has made a mistake by including a further sum of 0.66 lakhs as return
on investments. Mr. Kolah has conceded that this is a mistake and so the return
on the working capital would stand at 26.10 lakhs only.
It is now necessary to consider the evidence
of Mr. Tongaonkar and decide the most controversial point of fact in dispute
between the parties about the appellant's requirements for rehabilitation. Mr.
Tongaonkar holds the Degree of Bachelor of Science of the London University,
and he is also a Member of the Institution of Electrical Engineers, London. He
joined the appellant in November 1934, but before that he had nearly three
years' practical experience in England in various engineering firms; and on his
return to India, he had joined the Dinshaw group of cement factories. He
continued to work with the said group until its merger with the appellant in
1936, when he was appointed by the appellant. Mr. Tongaonkar is in charge of
the department which deals with the construction of new cement factories,
modernisation and extension of the existing cement factories, design and
manufacture of cement machinery for A. C. C., and major engineering problems of
the A.C.C. Since April 1956 he has been appointed the Controller of Planning
and Development of the A. C. C. He visits the A. C. C. factories very
frequently and claims to be acquainted with the condition of the plant and
machinery at all the A. C. C. factories. There is no doubt that Mr. Tongaonkar
is qualified to give evidence on the technical points which are relevant in 979
dealing with the question of rehabilitation. Even so, in appreciating 'his
evidence, it would not be unreasonable to bear in mind the fact that he is an
officer employed by the appellant, and as such he is likely to be interested in
supporting the claim for rehabilitation which the appellant has decided to
According to Mr. Tongaonkar, the average
future life of the plant and machinery existing in 1939 would' be approximately
seven years from 1-8-1954. Similarly, the approximate future life of the three
other categories of blocks would be 13, 15 and 20 years respectively. He has
stated that in calculating the life of machinery, it is necessary to take into
consideration, first the mechanical condition of the machinery, second whether
it is efficient or has been rendered obsolete because new machinery of modern
design with a considerably better efficiency has come into the market. In other
words, the probable useful life of the machinery may be prematurely determined by
the emergence of more efficient machinery. In support of this statement he has
given some instances where the appellant's plant or machinery had to be changed
mainly for the reason that a new corresponding plant or machinery was more
efficient and gave more satisfactory results. However, stated generally in the
opinion of the witness, the average life of a cement plant taken as a whole
would be 25 years if it is properly maintained.
Mr. Tongaonkar then gave evidence about the
rise in prices of plant and machinery and he produced Ex. C-36 which is a
statement showing the progressive increase in prices from pre-war days up to
1955-56 of major items of machinery, gear boxes, motors and power plant used in
cement factories. He has stated that the said statement had been prepared on
the basis of actual quotations which he had in his possession.
His evidence shows that between 1951-54 there
has been a rise of 11%, whereas between 1954-56 there has been a rise of 7% in
the prices of the relevant items of machinery. He then sought to corroborate
his evidence on this point by the expenditure actually incurred by the
appellant while putting into commission 980 a new cement factory at Sindri in
about 1955. The calculations made by him in this behalf show that the cost of
construction of a new factory is approximately 4.3 times the cost of
construction of similar factory in 1939.
In regard to the life of buildings, Mr.
Tongaonkar stated that first-class buildings lived approximately for 40 years
provided they are properly maintained and provided they are not in earthquake
zone; but he added, that for the main unit of the cement plant it is usual to
take the life of buildings at 25 years. He also stated that in many cases the
existing buildings have got to be either demolished or considerably modified
when the main machinery whose life is 25 years has to be replaced by modern
machinery which is of a different design and which would require buildings and
foundations of different size and type. Thus, for this special circumstance
also, he was not prepared to give the buildings of the appellant an average
life longer than 25 years.
In regard to the increase in the cost of
constructing buildings, he produced two statements, C-6 and C-14. Ex. C6 shows
the increase in prices of building materials since 1938-1954, whereas Ex. C-14
shows the continually increasing amount of expenditure incurred by the
appellant for construction of labour quarters, etc.
It is on this evidence that Mr. Tongaonkar
has adopted the respective multipliers and divisors in arriving at the figure
of the amount required for rehabilitation. As we have already pointed out, for
the pre-1939 block he has taken 4.28 as the multiplier, whereas for the block
purchased between 1940-44 he has taken 2.8 as the multiplier. He has explained
that the multiplier of 4.28 is really made up of two multipliers. Certain
portion of the plant and equipment which is obtained from abroad is estimated
at 60% of the total cost and the expenditure on the remaining items is estimated
at 40% of the total cost.
The multipliers of these two groups are
estimated at 4.8 and
5 respectively, and by calculations it has
been noticed that the average ratio comes to 4.28. This is the 981 genesis of,
and the justification for, the adoption of 4.28 as the multiplier. He has also
added that the proportion of 60% and 40% which he had mentioned was based on
his experience of building a number of cement factories and of carrying out
extension and modernisation of existing cement factories. The multiplier was
based, said the witness, on the state, of comparative quotations of plant and
machinery received in 1939 and quotations received of similar machinery
recently. It would thus be clear that in devising the multiplier and divisor,
Mr. Tongaonkar has drawn very largely on his experience and has drawn
inferences which he thought were reasonable. Besides in making the relevant
calculations he has not dealt with the plant and machinery and the buildings
and other assets separately, but has lumped them together under the respective
The approximate cost of the merging companies
of their assets as on July 31, 1936, was 5.73 crores of rupees. Ex. C-3 which
is a certificate issued by the Chartered Accountants shows that "
according to the blocks, the original cost of the block of fixed assets
excluding goodwill and purchase of rights and land as at 31st July, 1954, of
the appellant under the groups of years of acquisition", amounted to Rs.
19,41,38, 100. Similarly, Ex. C-28 which is also a certificate issued by the
Chartered Accountants, shows that the original cost of such portion of fixed
assets excluding goodwill and purchase of rights and lands as have been
discarded, scrapped or sold as on July 31, 1954, of the appellant companies
under the groups of years of acquisition noted in the certificate, amounted to
Rs. 1,70,91, 296. The figures supplied by these two certificates are mentioned
in cols. 2 and 3 respectively in Ex. C-2. Under the method adopted by Mr.
Tongaonkar the cost of discards is shown in the respective years when the
portions of blocks were discarded; and the amounts spent on rehabilitation from
year to year have gone with the blocks of the said respective years shown in
col. 2. The amount of rehabilitation has thus been calculated by the adoption
of the multiplier and divisor selected by Mr. Tongaonkar. The question 982
which calls for our decision is whether the multipliers and divisors adopted by
Mr. Tongaonkar can be said to be appropriate. As we have already mentioned, it
is the multipliers and divisors that play a decisive part in the determination
of the employer's claim for rehabilitation in all bonus proceedings, Mr.
Tongaonkar's evidence has been severely criticised by the respondents and in
fact, the tribunal does not appear to have been favourably impressed by it.
Before dealing with the criticism made against his evidence, it would be
pertinent to observe that the witness has given exhaustive details on the
points put to him in examination-in-chief, and his evidence, read as a whole,
does make an imposing reading. But sometimes the wealth of details given by
experts is Apt to complicate the narrow points of dispute between the parties
and to create doubt and confusion; the large number of technical details
expressed in technical language may, in some cases, tend to cloud rather than
clarify the points which the tribunal has to consider. We feel inclined to hold
that is what has happened to some extent in the present case. But that by
itself cannot obviously be said to introduce any infirmity in the evidence
given by the expert or affect its credibility. It only means the tribunal has
to analyse his statements, examine them carefully in the light of his
cross-examination and decide how far it would be justified in acting on them.
It has been urged before us by the
respondents that the claim made by Mr. Tongaonkar in regard to the
rehabilitation of the pre-1939 block should be rejected. The contention is
that, this block must have been completely replaced before 1953 and no claim
for its rehabilitation can be entertained.
This argument was based substantially on the
assumption that a part of Rs. 997.42 lakhs must have been utilised for the
purpose of replacing the said block. Mr. Tongaonkar has stated that prior to
1-8-1954 the total amount spent on modernisation, replacement and
rehabilitation and other sundry jobs, but excluding' expansion, was
approximately Rs. 9.97"crores, and in support of this 'statement he
produced Ex. C-29, 983 which shows the said expenditure year by year. According
to this statement 78 lakhs had been spent on the construction of Rohri Works
and Kistna Works, and Rs. 622-13 lakhs had been spent on the expansion during
the post-war period.
This gives the figure of Rs. 700.13 lakhs.
Deducting this amount from the total expenditure of Rs. 1697-55 lakhs, the
balance of, Rs. 997.42 lakhs is shown as expenditure on modernisation,
rehabilitation, replacement and other sundry capital jobs. It is in respect of
this amount of Rs. 997.42 lakhs that Mr. Tongaonkar was severely
cross-examined. In cross-examination he stated that he was not in a position to
say whether out of the total expenditure of Rs. 997.42 lakhs shown in Ex. C-29
a major portion had been spent on rehabilitation and replacement of the
pre-1939 block and 1940-44 block. He admitted that the figures in Ex. C-29 had
been prepared by the Accounts Department from the Financial Books so far as
year to year total expenditure was concerned and he also stated that it was not
possible for him to give details about the said expenditure. These answers
indicated that the amount of Rs. 997.42 lakhs had been ascertained mechanically
by deducting from the total expenditure of Rs. 1697.55 lakhs incurred on all
jobs up to 31-7-1954 the estimated expenditure of Rs. 700.13 lakhs which was
treated as expenditure for expansion during the said period. It is on these
statements that the respondents placed reliance in support of their argument
that the amount of Rs. 997.42 lakhs must have been utilised for completely replacing
the pre1939 block. Thus presented, the argument no doubt appeared very
plausible, and so we asked Mr. Kolah to give us a satisfactory explanation
about the items of this expenditure. Accordingly Mr. Kolah has filed a
statement, Ex. I which gives a rough classification of the total capital
expenditure of about Rs. 997 lakhs incurred up to 31-7-1954 on modernisation,
replacement, rehabilitation and other sundry and miscellaneous jobs. The
several items of this expenditure are broadly indicated under eight heads, the
last of which covering an 125 984 amount of Rs. 160 lakhs has in its turn been
split up into five separate items by the statement 1(a). There was some dispute
before us about the admissibility of some of the said items under cl. 5 of this
document 1(a). But Mr. Kolah contends, and it is not disputed by the
respondents either, that even if the whole of the disputed item 5 is excluded,
the remaining items on Ex. 1 give a fairly satisfactory explanation about the
work of rehabilitation, replacement and modernisation on which the bulk of Rs.
997.42 lakhs must have been spent. In view of this statement we must hold that
the assumption made by the respondents that the said amount of Rs. 997.42 lakhs
must have been utilised for replacing the pre-1939 block is not well-founded.
It is then contended that there is no
justification for keeping the pre-1939 block still alive in view of the
estimate made by Mr. Tongaonkar about the life of the cement plant and
machinery. The suggestion is that the oldest block is deliberately kept alive
in order to enable the appellant to claim a higher multiplier in calculating
the rehabilitation amount. It cannot be said that there is no force at all in
this criticism. In fact Mr. Tongaonkar himself has admitted that a given
portion of this block could have been discarded earlier, but he added, that a
part of it had been rehabilitated as a temporary measure in order to carry on.
That is why that particular portion of the block had not been discarded so far.
According to him the pre-1939 block contains a portion whose useful life is
already over, but the appellant would have to carry on with it until finances
could be found for modernisation or reconstruction or entire replacement of the
said block. In our opinion, this explanation cannot be said to be wholly
satisfactory. If the useful life of the whole block had really expired, the
appellant would have easily found it possible to replace the said block in due
time having regard to its general financial position.
The next criticism made against Mr.
Tongaonkar's evidence is that admittedly he has not calculated the average life
of the said block. He stated that he had assessed the pre-1939 block by his
personal visits to 985 the factory by observing to what extent it had been rehabilitated
as a temporary measure and by considering what its present condition was. It is
possible that with his knowledge and experience Mr. Tongaonkar may be able to
form a proper assessment about the life of the machinery in the manner deposed
to by him. But unfortunately, effective cross-examination on this point has
been stifled to some extent because' we find that on some material points
questions put to the witness were objected to by Mr. Kolah and the objection
was upheld by the tribunal. The witness was asked whether he could tell the
tribunal with his wide experience, how many years on the average 1939 block had
spent prior to 1939. This question was clearly relevant and from the
respondents' point of view it was important. If the witness was able to
predicate about the future useful life of the machinery from his examination of
the plant, it was suggested to him that it should be possible for him to give
an estimate about the life already spent by it by the same process. The object
of this question obviously was to show that the machinery in question had lived
much longer than its estimated life as deposed to by the witness. This question
having been disallowed, any further crossexamination to test the claim of the
witness that from the inspection and examination of the machinery he can
predicate the period of its future useful life became impossible. The witness
was further asked to state whether it would be correct to assume that the said
pre-1939 block had on an average spent more than 15 years of its life. This
question also was disallowed, and the respondents naturally make a serious
grievance that they were not given an opportunity to show that Mr. Tongaonkar's
estimate about the life of the plant and machinery was a gross understatement.
The respondents have then objected to the
inclusion of several items in the approximate cost of rehabilitation mentioned
in col. 8 of Ex. C-2. The new additional packing machine in regard to the
factory at Banmore as well as the crane storage are, it is urged, not items of
rehabilitation, but of expansion. Similar 986 criticism is made in regard to
the dust-collector plants, coal-handling plants, items in regard to the
fluidification system, diesel engine shunting locomotive and similar other
items. The respondents' grievance is that by including these items which are
really matters of expansion, the amount of approximate cost of rehabilitation
has been unduly increased. We are unable to say if the grievance is justified.
In regard to the multiplier adopted by Mr.
Tongaonkar, the criticism is that it is based on hypothetical considerations
determined by him in a subjective manner. It is also pointed out that the
failure of the witness to take out the present day replacement cost of
individual items of the pre1939 block has introduced an additional element of
uncertainty in the final calculations made by him in regard to the multiplier.
No doubt, the witness has stated that he has used the multiplier of 4.8 on a
comparative study of the quotations received between 1939 and the present day,
but dealing with the machinery block wise is not a very satisfactory way of
determining such a multiplier. In support of this argument, reference is made
to the statements made by the witness to the cost of 180-ton per day kiln, if
manufactured by the appellant, would be lower than that of a 300-ton-a-day
kiln. The witness then added that the appellant does not manufacture a
180-ton-a-day kiln, and if such a kiln is imported from abroad its cost would
be somewhat higher than that of a 300-ton-a-day kiln manufactured by the
appellant under present day conditions.
He was then asked whether he had got a
quotation of a 180ton-a-day kiln, and he admitted that he had none, and that he
had estimated it approximately at Rs. 11 1/2 lakhs. The respondents urged that
this estimate about the cost of an imported 180-ton-a-day kiln is purely
notional and is not based on any material at all. This part of the criticism is
The next argument urged against the
statements prepared by Mr. Tongaonkar is that he appears to have taken into
account the prices prevailing in 1956 and has completely ignored the prices as
they obtained in the previous years. We have already observed that 987 in
deciding the amount of rehabilitation by the adoption of an appropriate
multiplier, the tribunal should take into account all relevant facts and these
would not be confined to the price level prevailing in any one particular year.
When deciding the hypothetical question as to
what would be the price in future when the plant and machinery would have to be
replaced or rehabilitated, the tribunal has to take an overall picture of
prices into account, and the argument is that concentration on the price level
of 1956 alone has introduced an infirmity in the calculations made by the
There is another infirmity in these
calculations which has been criticised by the respondents. Mr. Tongaonkar has
lumped together the plant and machinery as well as buildings and other
properties belonging to the appellant in col. 2 of Ex. C-2. The more scientific
and satisfactory method of dealing with the question of rehabilitation is to
treat the plant and machinery separately from the buildings and other assets
that need rehabilitation. In fact we asked Mr. Kolah to give us a statement
showing the cost of the plant and machinery and the buildings and other assets
separately in order to enable us to have a clearer picture about the extent of
the rehabilitation needs of the appellant. He has accordingly filed a statement,
Ex. F (a).
There is yet another point on which Mr.
Tongaonkar's evidence has been criticised by the respondents. It is argued that
this evidence shows that under his concept of modernisation several items of
expansion can be included.
Mr. Tongaonkar has stated that by '
modernisation' he meant 'a composite scheme comprising replacement of the part
of the old machinery by new machinery, installation of additional machinery
because the layout of the composite modernisation scheme is different from the
previous layout and rehabilitation of the remaining machinery as a short term
measure'. By ' rehabilitation' he ment 'alterations to a machine or machinery,
installation for improving its mechanical performance, its technical efficiency
or to extend its life by a further span'. This would also 988 include what he
compendiously describes as the removal of weak links. According to him
expansion can be divided into two groups, viz., Group No.-1 construction of the
completely new factory solely for obtaining additional production; and Group
No. 2 would cover the specific additional machines which are installed not for
modernisation purposes as such, but with the primary object of obtaining
additional production. He concedes that in the 'modernisation of an existing
factory' expansion is only a part of the scheme.
This means that in the modernisation scheme'
there would be an element of' expansion'. It would thus be clear that the very
broad and wide description of modernisation' given by the witness would justifiably
give rise to an apprehension in the minds of workmen that under the heading of
'modernisation' items of expansion ' pure and simple are likely to creep in.
That is why evidence given by experts in such proceedings needs to be
scrutinised carefully, with a view to exclude items of 'expansion' properly so
called from the relevant calculations.
Mr. Tongaonkar has stated that when plant or
machinery is rehabilitated or replaced it may lead to increase in production.
But such an in Crease is purely incidental.
But what would be the position where, for
instance, a 180ton-a-day kiln is substituted by a 300-ton-a-day kiln by way of
rehabilitation or replacement ? The employer is entitled to say that the first
category of kilns is not available in the market or that the later category of
kilns is more profitable and economically more useful. That being so, if the
first kiln is discarded and is substituted by the latter, that is an item of
rehabilitation or replacement and not of expansion. On the other hand, by the
substitution of the latter kiln there would be such an appreciable increase in
production that the workmen may be entitled to contend that some apportionment
should be made and the rehabilitation part of the machinery should be separated
from the expansion part which has crept into the transaction. We confess that
it would be very difficult to undertake the task of making any such
989 Even so, tribunals may have to consider
the workmen's plea if they are satisfied that the steps taken by the employer
by way of rehabilitation have led to a very large increase in production. In
this connection the respondents have relied on Ex. H. 0. C-2 which, according
to them, shows considerable increase in production, and that, it is urged, is the
result of expansion and not of rehabilitation.
Mr. Tongaonkar has suggested in his evidence
that it is the intention of the employer that decides the character of the
transaction. If the employer wants to install new machinery solely with the
object of expanding his business, that is expansion; but if he purchases new
machinery for business reasons and not for the purposes of expansion, it would
be rehabilitation notwithstanding the fact that the new machinery gives rise to
increased production. This approach, in our opinion, gives undue importance to
the intention of the employer and we think that, on a proper occasion, the
question may have to be considered by the application of some objective tests.
In this connection it would be relevant to bear in mind the fact that the steps
taken by the appellant for rehabilitating, replacing or modernising its
machinery are a part of its plan of expanding its business so as to meet the
growing demand for cement in our country.
In deciding the question as to whether the
claim as disclosed by the statements prepared by Mr. Tongaonkar is inflated or
not, the respondents have asked us to consider the estimate made by the
appellant's Chairman in that behalf. In his speech delivered on January 24,
1951, at the Fourteenth Annual General Meeting of the appellant company, the
Chairman stated that most of the company's pre-war plant would be due for
replacement in the course of the next ten years and he added that " at the
present price levels, replacement will cost on an average 2 1/2 times the
original cost. This will involve an expenditure of about Rs. 8 crores over and
above the provision already made for depreciation ". The contention is
that, considered in the light of this estimate, the present claim for
rehabilitation is very much inflated.
990 When Mr. Tongaonkar was asked about this
estimate he stated that the Chairman had not consulted him while drafting the
annual report or while drafting the portion of the speech in regard to
'rehabilitation' and he also added that he did not agree with the figures given
by the Chairman regarding the replacement cost of plant and machinery in his
report dated January 24, 1951. This explanation may not be very satisfactory.
But we cannot ignore the fact that when the Chairman made his statement he did
not purport to calculate the claim for rehabilitation in terms of the formula
and so it would not be fair to test the evidence of the witness in the light of
the estimate given by the Chairman in his speech.
We have so far considered the broad arguments
urged against Mr. Tongaonkar's evidence. Unfortunately, the tribunal has
contented itself merely with the observation that the multiplier of 2.7 would
be adequate; and it has given no finding as to the suitable divisor. That is
why we must now proceed to adopt a suitable multiplier and divisor for deciding
the question of rehabilitation. We have already stated our conclusions in
regard to some of the infirmities in the evidence of Mr. Tongaonkar and the
statements prepared by him. He has lumped together all assets of the appellant
that need rehabilitation. He has taken into account the prices prevailing only
in 1956, and in the selection of an average multiplier he has probably been
slightly generous to the appellant. His estimate about the life of the plant
and machinery has not been allowed to be sufficiently tested in cross-examination
and, on the whole, it appears to err a little too much on the side of a
conservative estimate ; and if that is so his divisor may need revision; it is
also probable that in the items included by him under rehabilitation may have
been included some which are more of the character of expansion than
rehabilitation, replacement or modernisation. Besides, it is not unlikely that
the steps taken by the appellant ostensibly for rehabilitation, replacement and
modernisation of the machinery have appreciably increased its production, and
that may partly be due to the fact that the 991 general plan of expansion
adopted by the appellant has been in operation for some time past. It is in the
light of these facts that we have to examine the appellant's claim for
rehabilitation. In doing so, we have taken Ex. C-2, Ex. C-23 and Ex. F (a) as a
basis for our calculations.
It is somewhat unfortunate that in making its
claim for rehabilitation Mr. Tongaonkar did not make calculations separately in
respect of plant and machinery as distinct from buildings, roads, bridges and
railway sidings. It is true that at our instance a statement Ex. F (a) has been
filed before us; but if such a statement had been filed before the tribunal,
the respondents would have had a better opportunity of testing the accuracy of
the calculations made in it and the basis on which the respective multipliers
and divisors are sought to be deduced from it. We would, therefore, like to
make it clear that the calculations which we now propose to make in regard to
the item of rehabilitation should not be, taken to be binding on the parties in
subsequent years. If, in the light of our decision on the principal points
raised before us in the present appeals, the parties decide to settle their
disputes about bonus for subsequent years there would be no occasion for the
tribunal to deal with them on the merits. If, however, these disputes have to
be, settled by the tribunal, it would be open to the parties to lead evidence
in support of their respective contentions. The tribunal also would be at
liberty to consider the matter afresh and come to its own conclusion on the
Let us now proceed to make the relevant calculations.
The first step to take is to correct the figures in Ex. C-2 by excluding the
cost of buildings, roads, ,bridges and railway-sidings from the total cost
mentioned in it against the several blocks. This cost has been supplied to us
by the appellant in Ex. F (a). This is how the corrections work out. In our
calculations all figures are expressed in 'lakhs':
126 992 Chart I.
Period Original cost Less cost of Balance of
block buildings etc.
(1) (2) (3) (4) Up to 1939 486.89 132.98
353.91 1940-44 59.91 22.38 37.53 1945-47 208.93 68.15 140.78 1948-54 1144.81
333.47 811.34 In Ex. F (a) the appellant has shown the respective average
ratios in col. 5 in regard to items of property mentioned in col. 2. We think,
in making our calculations, it would on the whole be fair to adopt 3.5 as a
suitable multiplier up to 1939, 2 from 1940.47 and 1 from 1948-54 (as in C-2)
for replacement by part A.C.C. machinery. We have not disturbed the divisors
taken by C-2 though we feel inclined to hold that Mr. Tongaonkar has
underestimated the probable life of machinery. The amount of yearly requirement
for rehabilitation for the total block minus buildings, etc., would then work
out at Rs. 229.39. This does not take into account the available reserves; that
aspect is considered later on:
Period Original cost of Multiplier Total Less
Balance Life Yearly breakof requiredown as machiment in Ex. C-2 nery (in Yrs.)
(1) (2) (3) (4) (5) (6) (7) (8) (approx.) UP to 1939 353.91 x3.5 1238.68
65.921172.767 167.54 1940-44 37.53 x2 75.06 4.66 70.40135.41 1945-47 140.78 x2
281.56 11.19 270.371518.02 1948-54 811.34 x1 811.34 42.84 768.502038.42
Total 229.39 ..........
Then we would deal with the buildings, roads,
bridges and railway-sidings., These may be given an average life of 30 years
for all blocks in order to compensate for cases where they have to be
demolished on account of modernisation.
According to the previous statements of the
appellant the life of factory buildings was about 35 years and residential 993
areas 50 years. Even so we propose to take the average life of 30 years in
making our calculations in respect of these blocks. The multipliers may be
taken as 2.25 for pre-1939 blocks, 1.5 for 1940-47 blocks, 1 for 1948-54
blocks. The Bombay block has been taken as in Ex. C-2:
Period Cost MultiTotal Less Balancelife
Yearly plier break down requirevalued at 5% ment of cost (1) (2) (3) (4) (5)
(6) (7) (8) UP to 1939 132.98 X 2.25 299.20 6.65 292.55 20 144.63 1940-44 22.38
x 1.5 33.57 1.12 32.45 25 1.29 1945-47 68.15 x 1.5 102.22 3.40 98.82 25 3.95
1948-54 333.47 x 1 333.47 16.67 316.80 30 10.56 Bombay office 40.83 50.28 .73
49.55 69 .71 block .............
Total 31.14 .............
Thus the total yearly requirement for
rehabilitation of this block would come to 31.14 lakhs.
The appellant's claim for rehabilitation can
now be calculated on the basis of Ex. C-23 as corrected in the light of the
three charts prepared by us. As, the calculations in the chart show, we would
hold that the appellant is entitled to an allowance of 216.10 lakhs for
rehabilitation in the relevant year:
Replacement of pre-1939 block:
Cost of machinery (Chart II) 1172.76 Deduct
reserves 311.00 Balance 861.76 divided by 7: 123.11 Add for buildings (Chart
III) 14.63 ..............
Total 137.74 Replacement cost of 1940-44
block Including buildings etc. (5.41 plus 1.29) ... 6.70 do for 1945-47 (18.02
plus 3.95) ... 21.97 do for 1948-54 (38.42 plus 10.56) ... 48.98 do for Bombay
Office ... .71 .................
total ... 216.10 994 Having decided that the
total claim for rehabilitation admissible to the appellant is 216.10 lakhs for
the relevant year, we must now proceed to determine whether on the working of
the formula any surplus profit is available. We have made the following
calculations in the light of the principles laid down by us in this judgment:
Total profit excluding Bhupendra factory
428.71 Less notional normal depreciation (p. 428, Pt. 1) 100.22 Less income-tax
payable @ 7 as. in the Rupee as per Note A below 115.16 Less 6% on paid-up
capital 76.06 Less 4% on working capital 26.10 .............
Total...317.54 317.54 Balance.. 111.17 Less
provision for rehabilitation.. 115.88** .............
Balance...4.71 This is how we have calculated
the income-tax payable for the relevant year:
Gross profits 428.71 Less statutory
depreciation 165.49 -----------------Balance 263.22 Income-tax @ 7 as.
in the Rupee 115.16 **Provision for
rehabilitation (vide Chart V):
Total from Chart IV. 216.10 Less notional
normal depreciation... 100.22 ---------------Balance... **115.88
----------------995 We ought to add that in our calculations we have not taken
into account the Bhupendra Factory because the relevant material for working
out the figures in regard to this factory is not adequate or satisfactory.
However from such material as is available it appears that if the profits made
by the said factory are included in the calculations and rehabilitation
required by it is worked out, it would not materially affect the' figure of
rehabilitation amount determined by us.
The result is that there is no available
surplus from which the respondents can claim any bonus for the relevant year.
It is true that the appellant has already
paid the respondents 20.65 lakhs as bonus for the relevant year, and it is
likely that it may continue to do so in future ; but that is a matter which is
not governed by the formula.
In view of the fact that the working of the
formula leaves no available surplus the appeal must be allowed and the award
made by the tribunal set aside. Since the appellant had come to this Court for
the decision of the larger and more important question about the revision of
the formula, we would direct that there should be no order as to costs.