Civil Appeal No257 of 1958
Appeal by special leave from the Award dated August 20 1957 of the Industrial Court Bombay in Reference IC No 197 of 1956
C K Daphtary Solicitor General of India
section N Andley J B Dadachanji and Rameshwar Nathfor the appellant
B P Maheshwari for the respondent
I N Shroff for Interveners Nos 1 and 2
The Intervener No 3 did not appear
1960 January 22 The Judgment of the Court was delivered by SUBBA RAO J
This appeal raises the question as to what extent the reserves can be deducted from the amount required for rehabilitation of plant and machinery and also as to the manner by which the deductible reserves can be ascertained
It would be enough if we narrated only the facts relevant to the question raised
The appellant Khandesh Spinning and Weaving Mills Company Limited is a textile mill and its factory is situate at Jalgaon
The respondent Rashtriya Girni Kamgar Sangh represents the employees of the appellant Company
The respondent on behalf of the employees issued a notice to the appellant under section 422 of the Bombay Industrial Relations Act 1946 demanding payment of reasonable bonus for the period from January 1 1955 to December 31 1955
Negotiations in this regard having failed the respondent made a reference to the Industrial Court under section 73A of the said Act for arbitration of the dispute arising out of the said notice
The arbitrator ie the Industrial Court following the Fall Bench Formula ascertained the surplus to be Rs 220 lakhs after deducting the prior charges from the gross profits of the Company but it did not give any credit to the rehabilitation amount apart from the statutory depreciation
The Industrial Court disallowed this item for the following reasons It estimated the amount required for rehabilitation at Rs 60 lakhs out of this amount it deducted Rs 51 lakhs representing tile reserves and the balance of Rs 9 lakhs spread over a period of 15 years gave the 843 figure of Rs 60000 as the amount that should be set apart for the year in question for rehabilitation
As the statutory depreciation was Rs 83639 it came to the conclusion that the Company would not be entitled to any allocation as a prior charge for rehabilitation
After excluding the said item of rehabilitation it The fixed the surplus in a sum of Rs 220 lakbs and awarded to the employees four months  basic wages as bonus
The learned Solicitor General contended that the Industrial Court accepted the position that the reserves were used as working capital but deducted the said amount from the amount required for rehabilitation on a wrong and unjustified assumption that as the amounts so required would be spent for rehabilitation over a course of 15 years by instalments the temporary user of the said reserves would not affect the question as they would be released in part or in whole in future years
He argued that this assumption was contrary to the view expressed in decided cases and also the principle governing the ascertainment of the amount for rehabilitation purposes
On the contrary the learned counsel for the respondent argued that the Industrial Court only assumed that the reserves had been utilised as working capital as in the view taken by it did not in the least matter whether the reserves were so utilised or not and that even if that view was wrong the appellant could not succeed unless it proved by relevant and acceptable evidence that the reserves were so utilised and that it did not place before the Industrial Court any such evidence to prove that fact
The first ques tion therefore is what is the scope of the finding of the Industrial Court in this regard  The Industrial Court in dealing with the contentions of the parties before it observed as follows It is true that until some amount is required to be spent for rehabilitation replacement or modernization reserves must be used as working capital but Shri Vimadalal s argument overlooks that the amount required to be spent for rehabilitation over a course of 15 years is not required to be 844 spent all at once but by installments over a long period
 These observations did not record any finding that the reserves were used as working capital
It was only an assumption made by the Industrial Court as the view taken by it it was immaterial whether the reserves were used as working capital or not
We do not think that the aforesaid opinion expressed by the Industrial Court is sound
In ascertaining the surplus for the purpose of fixing the bonus for a particular year the state of affairs in that year is the guiding factor
If in a subsequent year any part of the reserves used as working capital is released that amount will have to be taken into account in ascertaining the surplus for that year and so on for subsequent years otherwise it will lead to the anomaly of the reserves being excluded from the amount required for rehabilitation though as a matter of fact the entire reserves were utilised as working capital and though in future years they were expected to be released but in fact not so released
This would lead to a result inconsistent with the decisions on the subject which have clearly laid down that the reserves which have been used as working capital shall not be deducted from the amount fixed for rehabilitation
This result does not advance the case of the appellant unless it is able to prove by admissible evidence that it has used the reserves as working capital during the bonus year in question
The principles governing the reserves in this context are well settled
This Court in The Associated Cement Companies Ltd vs It3 Workmen 1 restated the principle thus at p 970 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 50 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 1 845 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 avail able at the time when it was awarded in the past and that it bad 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
 This decision therefore lays down so far as it is relevant to the present purpose that two items shall be deducted from the rehabilitation amount ascertained by adopting the Full Bench Formuula namelyigeneral reserves available to the employer and ii reserves which have not already been reasonably earmarked for specific purposes of the industry
The question is whether the mere availability of reserves or the simple earmarking for specific purposes would be sufficient to claim the said amounts as deductions
We do not think that by using the said words this Court meant to depart from the well recognized principle that if the general reserves have not been used as working capital they cannot be deducted from the rehabilitation amount
The reserves may be of two Kinds
Moneys may be set apart by a company to meet future payments which the company is under a contractual or statutory obligation to meet such as gratuity etc
These amounts are set apart and tied down for a specific purpose and therefore they are not available to the employer for rehabilitation purposes
But the same thing cannot be said of the general reserves they would be available to the employer unless he his used them as Working capital
The use of the words reasonably earmarked is also deliberate and significant
The mere nominal allocation for binding purposes such as gratuity etc
 in the company s books is Dot enough
It must be ascertained by the Industrial Court on the material placed before it whether the said amount is far in excess of the requirements of the particular purpose for which 846 it is so earmarked and whether it is only a device to reduce the claim of the labour for bonus
We do not suggest that it is the duty of the Industrial Court to ascertain the correct or exact figure required for a particular purpose but it is certainly its duty to is cover whether the so called earmarking for a particular purpose is a device to circumvent the formula
If it is satisfied that there is such a device it shall deduct that figure in calculating the rehabilitation amount and if possible arrive at a real figure for that purpose
So too in the case of general reserves when an employer claims that a specific amount reserved has been used as working capital it is the duty of the Industrial Court to arrive at a finding whether the said reserves or any part of them have been used as working capital and if so to what extent during the bonus year
Shortly stated before a particular reserve can be deducted from the rehabilitation amount it must be established that it has been reasonably earmarked for a binding purpose or the whole or a part of it has been used as working capital and that only such part of the reserves coming under either of the two heads can be deducted from the said amount
To illustrate take a particular bonus year say 1955
To start with from the gross profits of that year only items specifically declared by this Court in The Associated Cement Companies Ltd vs Its Workmen to have a prior charge over the bonus shall be deducted to arrive at the surplus
No question of deducting any other amount reserved in regard to the profits of that year arises
But the company has specifically earmarked certain amounts for specific binding purposes in 1954 or earlier to meet future binding obliga tions such as gratuity etc  or has reserved amounts for general purposes but not to meet any contractual or statutory obligations and has not utilised the same as working capital
In the former case the amount must be deemed to have been utilised and therefore it cannot be deducted from the rehabilitation amount but in the latter case as the said amounts were not utilised by the employer as working capital they shall be deducted from the rehabilitation amount
1 847 What taken is the procedure to be followed for ascertaining the said facts  The burden is obviously on the employer who claims the exclusion of the reserves from the rehabilitation amount on the ground that they are used as working capital or reasonably earmarked for a specific purpose to establish the said facts and to prove the same by relevant and acceptable evidence
The importance of this question in the context of fixing the amount required for rehabilitation cannot be over estimated
The item of rehabilitation is generally a major item that enters into the calculations for the purpose of ascertaining the surplus and therefore the amount of bonus
So there would be a tendency on the part of the employer to inflate this figure and the employees to deflate it
The accounts of a company are prepared by the management
The balance sheet and the profit and loss account are also prepared by the company s officers
The labour have no concern in it
When so much depends on this item the principles of equity and justice demand that an Industrial Court should insist upon a clear proof of the same and also give a real and adequate opportunity to the labour to canvass the correctness of the particulars furnished by the employer
Cases coming before us disclose that the Industrial Courts and Labour Tribunals are not bestowing so much attention on this aspect of the case as they should
Some of the tribunals act oil affidavits and sometimes even on balance sheets and extracts of accounts without their being proved in accordance with law
For the purpose of holding an enquiry or a proceeding under the Bombay Industrial Relations Act 1946 section 118 of the said Act confers on the Industrial Court the same powers as are vested in Courts in respect of a proof of facts by affidavits b summoning and enforcing the attendance of any person and examining him on oath c compelling the production of documents and d issuing commissions for the examinations of witnesses
In Courts facts have to be established either by oral evidence or by documentary evidence proved in the 108 848 manner prescribed by law
But Order XTX of the Code of Civil Procedure empowers the Court to have particular facts proved by affidavits
Under rule thereof any Court may at any time for sufficient reason order that any particular fact or facts may be proved by affidavit or that the affidavit of any witness may be read at the hearing on such conditions as the Court thinks reasonable
But it is subject to the proviso that where it appears to the Court that either part bonafide desires the production of a witness for cross examination and that such witness can be produced an order shall not be made authorizing the evidence of  such witness to be given by affidavit
Under rule 2 upon any application evidence may be given by affidavit but the Court may at the instance of either party order the attendance for cross examination of the deponent 
A combined effect of the relevant provisions is that ordinarily fact has to be proved by oral evidence but the Courts subject to the conditions laid down in Order XIX may ask a particular fact or facts to proved by affidavits
Industrial Courts may conveniently follow the procedure
In view of the importance of the item of rehabilitation in the matter of arriving at the surplus for fixing the bonus principles of equity and justice demand that tribunals should weigh with great care the evidence adduced by the management as well as by the labour to ascertain every sub item that goes into or is subtracted from the rehabilation
If the parties agreeagrred figure can be accepted
If they agree to the decision of affidavits that course may be followed
in the absence of an agreement the procedure prescribed in Order XIX of the Code of Civil Procedure may usefully be followed by the tribunals so tlitt both the parties may have full opportunity to Establish their respective cases
Recent decisions of this Court emphasize this aspect of the matter
In lndian Hume Pipe Company Ltd vs Their workmen 1 the balance sheet was upon for proving that the amounts were available for use as working capital and that the 1 5 849 balance sheet showed that they were in fact so used
Bhagwati J who delivered the judgment of the Court presumably to meet the contention that the balance sheet had not been proved observed at p 362 thus   Moreover no objection was urged in this behalf nor was any finding to the contrary recorded by the tribunal
 In that case it was conceded that the reserves were in fact used as working capital
It is suggested that the learned Judge solely relied upon the relevant items in the balance sheet in support of his conclusion and that the said observation was only an additional ground given by him but we are inclined to think that the Court would not have accepted the items in the balance sheet as proof of user if it was not satisfied that no objection was taken in that behalf
In Tata Oil Mills Company Ltd vs Its Workmen 1 a similar question was raised
It was contended by the labour in that case that the depreciation reserve was Dot used as working capital and therefore no return should be allowed on the said reserve
The Chief Accountant of the Company made an affidavit on behalf of the Company that the said depreciation reserve along with others had been used as working capital
This Court accepted the affidavit for the year in question but made the following observations for future guidance It will however be open to the workmen in future to show by proper cross examination of the company s witnesses or by proper evidence that the amount shown as the depreciation reserve was not available in whole or in part to be used as working capital and that whatever may be available was not in fact so used in the sense explained above
In the present appeal howeverwe must accept the affidavit of the chief accountant
 These observations also recognized the necessity to give an opportunity to the workmen to cross examine the witnesses put forward by the management to prove the user of any particular reserve as working capital
This Court once again dealt with the same 1 850 subject in Anil Starch Products Ltd vs Ahmedabad Chemical Workers Union 1
That appeal also raised the question whether return should be allowed on the depreciation reserve used as working capital
It was contended for the labour in that case that the depreciation reserve was not used as working capital
Rejecting the said contention Wanchoo J observed It is enough to say in that connection that an affidavit was filed by the manager of the company to the effect that all its reserves including the depreciation fund had been used as working capital
The manager appeared as a witness for the company before the Tribunal and swore that the affidavit made by him was correct
He was cross examined as to the amount required for rehabilitation which was also given by him in that affidavit but no question was put to him to challenge his statement that the entire depreciation reserve had been used as working capital In the circumstances we must accept the affidavit so far as the present year is concerned and hold that the working capital was Rs 34 lacs
 Notwithstanding the said finding the learned Judge took care to reserve the rights of the workmen in future by making the following observations It will however be open to the workmen in future to show by proper cross examination of the companys witnesses or by proper evidence that the amount shown as depreciation reserve was not available in whole or in part as explained above to be used as working capital and that whatever was available was not in fact so used
 This judgment again reinforces the view of this Court that proper opportunity should be given to the labour to test the correctness of the evidence given on affidavit on behalf of the management in regard to the user of the reserves as working capital
What is the position in the present case  It is not suggested that there is any reserve which has been reasonably earmarked to discharge a contractual or statutory obligation
We are only concerned with 1 Civil Appeal No 684 Of 1957 not reported 851 general reserves
The learned Solicitor General contends that the balance sheet discloses that the entire reserves have been used as working capital and that the respondent did not canvass this position in the statement filed by it before the Industrial Court
We have already pointed out that the balance sheet without its being proved by a person competent to do so cannot prove that any reserves have been utilised as working capital
In the written statement filed by the appellant before the Industrial Court no specific allegation is made that the reserves were utilised as working capital though in its statement of calculations the said reserves were not excluded from the amount claimed towards rehabilitation
As there is no specific allegation the respondent also in its statement did not deny the said fact but in its statement of calculations it did not deduct the reserves from the rehabilitation amount
Therefore it must be held that the respondent did not accept the position that the reserve funds were utilised as working capital
Strong reliance is placed upon the evidence of the General Superintendent of the appellant Company but a perusal of that evidence discloses that the said witness has not deposed that the Company used the reserves as working capital nor does the said witness seek to prove either the balancesheet or any extract taken therefrom
In the circumstances the respondent had no opportunity to cross examine him in respect of the alleged user of the reserves
For the aforesaid reasons we have no option but to hold that Rs 51 lakhs representing the reserves were not used as working capital and therefore the said amount was rightly deducted by the Industrial Court from Rs 60 lakhs fixed by it towards rehabilitation
As the balance of Rs 9 lakhs spread over 15 years came to only Rs 60000 during the bonus year and as the statutory depreciation was Rs 83639 the Industrial Court rightly excluded the entire rehabilitation amount from its calculations in arriving at the surplus
No other points were raised before us
In the result the appeal fails and is dismissed with costs
Appeal dismissed


Summary:
The respondent proprietor of Ramnagar Estate filed a suit against the appellant proprietor of Ganeshpur Estate for the recovery of certain properties
The appellant filed a cross suit against the respondent
During the pendency of the suits the appellant was declared to be a person of unsound mind and the Court of Wards assumed superintendence of her properties under the U P Court of Wards Act and placed them in charge of the Deputy Commissioner of Barabanki
Thereupon the cause titles on the suits were amended and in place of the appellant s name the Deputy Commissioner Barabanki IC Court of Wards Ganeshpur Estate  was substituted
The Trial Court partly decreed the respondent s suit and dismissed the appellant s suit
Both parties preferred appeals to the High Court
While the appeals were pending the Court of Wards took over the Estate of the respondent also and placed it also in charge of the Deputy Commissioner Barabanki
The cause titles of the appeals were then amended and for the name of the respondent the name Deputy Commissioner Barabanki IC Court of Wards Ramnagar Estate  was substituted
Thereafter the Court of Wards passed a resolution settling the appeal on certain terms and under its instructions the lawyers for the parties presented petitions to the High Court for recording compromises in the appeals
The High Court passed decrees in terms of the compromises
Shortly afterwards the Court of Wards released the two estates
Later the appellant recovered from her affliction and was declared to be of sound mind
She presented two applications to the High Court alleging that the compromise decrees were a nullity and praying for a proper disposal of the appeals
The High Court rejected the applications
The appellant contended that the compromise decrees were a nullity i as the Court of Wards had not complied with the mandatory provisions of section 56 of the Act ii as there could not in law be a compromise unless there were two parties but in this case there was only one party the Deputy Commissioner Barabanki and iii as the High Court failed to appoint a disinterested person
as I guardian of the appellant who 432 was of unsound mind under 0
XXXII of the Code of Civil Procedure
Held per section K Das and A K Sarkar jj  that the compromise decrees were not a nullity and were binding on the parties
Section 56 of the Act which provided that when in a suit or proceeding two or more wards had conflicting interests  the Court of Wards shall appoint for each such ward a representative  to conduct or defend the case on behalf of the ward whom he represented was clearly direct and the failure of the Court of Wards to observe the provisions thereof did not render the compromise decrees a nullity
A directory provision did not give discretionary power to do or not to do the thing directed  it was intended to be obeyed but a failure to obey it did not render a thing duly done in disobedience of it a nullity
When the appeals were compromised the compromise between the parties to the appeals namely the appellant and the respondent
It was not a compromise which the Deputy Commissioner Barabanki made with himself though he repre sented both the parties
There was nothing in the Act which indicated that the Court of Wards did not have the power of making a contract between two wards
The Deputy Commissioner Barabanki had been appointed the guardian of the appellant under the Act and he was entitled to act as her guardian for the appeals under 0
XXXII r 4 Of the Code
The Court of Wards was different from a private guardian and could be trusted to be impartial
The High Court was right in leaving the interests of the appellant in charge of the Court of Wards though it was also in charge of the interests of the respondent
Per K Subba Rao J
The compromise decrees were a nullity
The provisions of section 56 of the Act were mandatory and a non compliance therewith vitiated the proceedings
The inten tion of the legislature should be gathered from the object of the Act and from a consideration of the inconvenience that may be caused by accepting the one or the other of the views
The object of section 56 was to prevent the anomaly of the same person representing two conflicting interests and to safeguard the interests of the wards placed under the supervision of the Court of Wards
No inconvenience would result from holding the provisions to be mandatory
The word  shall  in section 56 could not be read as  may 
jagan Nath vs jaswant Singh   Queen vs Ingall  Caldow vs Pixwell  Hari Vishnu Kamath vs Syed Ahmad Ishaque  and Braja Sunder Deb vs Rajendra Narayan Bhanj Deo 1937 LR 65 IA 57 referred to