Appeal No 54 of 1958
Appeal by special leave from the Award dated January 14 1957 of the Industrial Tribunal at Bombay in Reference I T No 75 of 1956
M C Setalvad Attorney Generalfor India and I N Shroff for the appellants
N V Phadke T section Venkataraman K R Sharma and K R Chaudhury for respondent No I and the Intervener
May 5
The Judgment of the Court was delivered by 950 BHAGWATI J
This appeal with special leave challenges the award made by the Industrial Tribunal Bombay in Reference IT No 75 of 1956 between the appellant and the respondents whereby the Industrial Tribunal awarded to the respondents 4 12 months  basic wages as bonus for the year 1954 55 year ending June 30 1955
The appellant is a subsidiary of the Premier Construction Co Ltd and manufactures Hume Pipes
It has factories in different parts of India Pakistan and Ceylon
The respondents are the workers employed in the appellant s factory at Antop Hill Wadala Bombay
In October 1955 respondent I who are workmen represented by the Engineering Mazdoor Sabha made a demand for the payment of six months  wages as bonus for the year 1954 55
The matter was also referred to the Conciliation Officer requesting him to initiate Conciliation Proceedings
The Conciliation Proceedings went on before the Conciliation Officer upto March 23 1956 on which date both the parties arrived at and executed an Agreement to refer the matter to an Industrial Tribunal for adjudication
Accordingly on April 30 1956 both the parties drew up and signed a joint application for referring the dispute for adjudication to a Tribunal and the Government of Bombay thereupon in exercise of the powers conferred by sub section
2 of section 10 of the  by its order dated June 11 1956 referred the following dispute to the Tribunal   DEMAND Every Workman daily rated should be paid bonus for the year 1954 55 year ending 30th June 1955 equivalent to six months  wages without it attaching any condition thereto 
Respondent No I filed their statement of claim before the Tribunal on June 29 1956
They alleged that the profits of the appellant during the year 195455 were higher than those during the year 1953 54 for which year the appellant had paid four months  basic wages as bonus
They also alleged that the wages paid to them by the appellant fell short of the living wage and therefore the appellant should pay the in six months  basic wages as bonus for the relative year
951 The appellant filed its written statement in answer on August 14 1956
The appellant submitted that after providing for  the prior charges  according to the formula laid down by the Labour Appellate Tribunal the profits made during the year under consideration did riot leave any surplus and tile respondents were not entitled to any bonus
It denied that it bad made huge profits during the year in question and submitted that the profits made were not even sufficient to provide for  the prior charges  etc
The Tribunal after hearing the parties came to the conclusion that even if payment of a bonus equal to 4 12 months  basic wages were made a fair surplus would be left in the hands of the appellant to the tune of Rs 330 lacs and therefore awarded the same subject to the following conditions a Any employee who has been dismissed for misconduct resulting in financial loss to the company shall not be entitled to bonus to the extent of the loss caused
b Persons who are eligible for bonus but who are no longer in the service of the company on the date of the payment shall be paid the same provided that they make a written application for the same within three months of publication of this award
Such bonus shall be paid within one month of receipt of application provided that no claim can be enforced before six weeks from the date this award becomes enforceable
Being aggrieved by the said award of the Tribunal the appellant applied for and obtained from this Court special leave to appeal against the same under article 136 of the Constitution and hence this appeal
The formula evolved by the Full Bench of the Labour Appellate Tribunal in Millowners  Association Bombay vs Rashtreeya Mill Mazdoor Sangh Bombay1 is based on this idea that  as both labour and capital contribute to the earnings of the industrial concerti it is fair that labour should derive some benefit if there is a surplus after meeting  prior or necessary charges 
The following were prescribed as the first charges on 1 952 gross profits viz 1 Provision for depreciation 2 reserves for rehabilitation  3 a return at 6on the paid up capital 4 a return on the working capital at a lesser rate than the return on paid up capital and 5 an estimated amount in respect of the payment of income tax
The surplus that remained after making the aforesaid deductions would be available for distribution among the three sharers viz the shareholders the industry and the workmen See Muir Mills Co Ltd vs Suti Mills Mazdoor Union Kanpur 1 and Sree Meenakshi Mills Ltd vs Their Workmen 2
This Full Bench Formula has been working all throughout the country since its enunciation as aforesaid and has been found to be in the main fairly satisfactory
It is conducive to the benefit of both labour and capital and even though certain variations have been attempted to be made therein from time to time the main features thereof have not been substantially departed from
We feel that a formula which has been thus adopted all throughout the country and has so far worked fairly satisfactorily should be adhered  to though there is scope for certain flexibility in the working thereof in accordance with the exigencies of the situation
In the working of the said formula however regard must be had both to the interests of capital and labour
In any given industry there are three interests involved viz the shareholders the Company and the workmen and all these interests have got to get their proper share in the surplus profits ascertained after due provision is made for these  prior charges 
The shareholders may look to larger dividends commensurate with the prosperity of the industrial concern the company would apart from rehabilitation and replacement of buildings plant and machinery look forward to expansion and satisfaction of other needs of the industry and the workmen would certainly be entitled to ask for a share in the surplus profits with a view to bridge the gap between the wages earned by them and the living wages
All these interests 1 19551 1s
CR 991 998
2   884 953 have therefore got to be duly and properly provided for having regard to the principles of social justice and once surplus profits available for distribution amongst these respective interests are determined after making due provision for the  prior charges  as aforesaid the Industrial Tribunal adjudicating upon the dispute would have a free hand in the distribution of the same having regard of course to the considerations mentioned hereinabove
But so far as the determination of the surplus profits is concerned the formula must be adhered to in its essential particulars as otherwise there would be no stability nor uniformity of practice in regard to the same
It maybe noted however that in regard to the depreciation which is a prior charge on the gross profits earned by a concern there is always a difference in the method of approach which is adopted by the income tax authorities and by the industrial tribunals
It was pointed out by us in Sree Meenakshi Mills Ltd vs Their Workmen 1 that the whole of the depreciation admissible under the Income tax Act was not allowable in determining the available surplus
The initial depreciation and the additional depreciation were abnormal additions to the income tax depreciation and it would not be fair to the workmen if these depreciations were rated as prior charges before the available surplus was ascertained
Considerations on which the grant of initial and additional depreciations might be justified under the Income tax Act were different from considerations of social justice and fair apportionment on which the Full Bench Formula in regard to the payment of bonus to workmen was based
This was the reason why we held in that case that only normal depreciation including multiple shift depreciation but not initial or additional depreciation should rank as prior charge
We approved of the decision of the Labour Appellate Tribunal in U P Electric Supply Co Ltd vs Their Workmen 2 in arriving at the above conclusion and disallowed the claim of the company there to deduct the initial or additional depreciation as prior charge in bonus calculations
1  120 2 954 When this decision was reached we had not before us the decision of the Labour Appellate Tribunal in Surat Electricity Company s Staff Union vs The Surat Electricity Co Ltd 1 where a Bench of the Labour Appellate Tribunal had negatived the contention that if only the  normal  depreciation allowed by the Income tax law were allowed a company would be able to recoup the original cost of the assets and observed that  For the purpose of bonus formula the initial and additional depreciation which are disallowed by that formula must be ignored in fixing the written down value and in determining the period over which the normal depreciation will be allowed
The result will be a notional amount of normal depreciation  but as we have said repeatedly the bonus formula is a notional formula
 We have already expressed in the judgment delivered by us in Associated Cement Co Ltd vs Its Workmen 1 that for the purpose of the bonus formula the notional normal depreciation should be deducted from the gross profits calculated on the basis adopted in Surat Electric Supply Co Staff Union vs Surat Electricity Co Ltd 1 and not merely the normal depreciation including multiple shift depreciation allowed by the income tax authorities as stated in U P Electric Supply Co Ltd vs Their Workmen 3
It is well settled that the actual income tax payable by the company on the basis of the full statutory depreciation allowed by the income tax authorities for the relevant accounting year should be taken into account as a prior charge irrespective of any set off allowed by the Income tax authorities for prior charges or any other considerations such as building up of income tax reserves for payment of enhanced liabilities of income tax accruing in future
It is also well settled that the calculations of the surplus available for distribution should be made having regard to the working of the industrial concern in the relevant 1 2 3 955 accounting year without taking into consideration the credits or debits which are referable to the working of the previous years eg the refund of excess profits tax paid in the past or loss of previous years carried forward but written off in the accounting year as also any provision that may have to be made to meet future liabilities eg redemption of debenture stock or provision for Provident Fund and Gratuity and other benefits etc which however necessary they may be cannot be included in the category of prior charges
If regard be had to the principles enunciated above it is clear that the items of Rs 114 lacs representing the Lahore factory balance written off Rs 034 lacs being patents written off and Rs 009 lacs shown as loss on sale of Tardeo property cannot be allowed as proper deductions from the gross profits for the purposes of bonus calculations
The first two items represented debits in connection with the working of previous years
Loss of the Lahore factory had been incurred during the three previous accounting years and had been carried forward from year to year and the only thing which was done during the year under consideration was that it was then written off as irre coverable
The patents also had been worked off in previous years and the amounts spent in the purchase thereof were therefore to be written off but had reference to the working of the company during the previous years
The last item of Rs 009 lacs was trivial and was therefore not pressed with the result that all these three items were rightly added back in the calculations of the gross profits of the appellant and the figure of gross profits taken at Rs 3621 lacs was correctly arrived at by the Tribunal
The depreciation allowed by the Tribunal was Rs 982 lacs which was the full statutory depreciation allowed by the Income tax authorities
That should not have been done and the only depreciation allowed should have been the notional normal depreciation which was agreed between the parties before us at Rs 623 lacs
Working the figure of income tax deducted by the 956 appellant on the basis adopted in Shree Meenakshi Mills Ltd vs Their Workmen 1 the income tax on the gross profits of Rs 3621 lacs less the statutory depreciation allowed by the income tax authorities viz Rs 982 lacs would be equivalent to 7 annas in the rupee on Rs 2639 lacs ie Rs 1155 lacs thus leaving a balance of Rs 1682 lacs from which the other prior charges would have to be deducted in order to ascertain the distributable surplus
6 return on the ordinary share capital and 5 return on the preference share capital would come to Rs 430 lacs
The appellant however claimed that even on the preference shares 6 return should be allowed and not 5 even though preference shareholders were not entitled to anything beyond 5 under the terms of issue
The appellant obviously relied upon the wording of the formula  return at 6 on the paid up capital  and contended that the preference shares also being paid up capital it would be entitled to a return of 6 on the preference shares for the purposes of the bonus formula even though in fact it would have to pay only 5 return on the same
We cannot accept this contention
Even though the bonus formula is a notional one we cannot ignore the fact that in no event would the appellant be bound to pay to the preference shareholders anything beyond 5 by way of return
The Full Bench Formula cannot be so literally construed
There is bound to be some flexibility therein the 6 which is prescribed there as the return on paid up capital is not inexorable and the Tribunals could if the circumstances warrant vary the rate of interest either by increasing or decreasing the same
On the facts of this case however there is no warrant for allowing anything beyond 5 return on preference share capital and the amount of Rs 430 lacs should therefore be deducted as another prior charge from the grsos profits of the appellant
4 return on reserves used as working capital was calculated merely at a figure of Rs 029 lacs worked out on a total figure of Rs 742139
The Tribunal 1 957 did not take into consideration another sum of Rs 4181196 which represented the depreciation fund which according to the appellant had been used as working capital during the year
If that had been allowed a further sum of Rs 167 lacs should have been added to Rs 029 lacs and the total amount of 4 return on reserves used as working capital would have amounted to Rs 196 lacs
Two arguments were advanced against this contention of the appellant
One was that there was nothing like a depreciation fund that it merely represented a credit item introduced in the balance sheet as against the value of the fixed capital at its original cost and would have disappeared as such if the proper accounting basis had been adopted viz the fixed block bad been showed at its depreciated value after deducting the amount of depreciation from the original cost
Such book entries it was contended did not convert that credit item into a depreciation fund available to the company and there was therefore no basis for the contention that such a depreciation fund ever existed and could be used as working capital in the business
The other was that there was nothing on the record to show that such a depreciation fund if any had been in fact used as working capital in the business during that year
The answer furnished by the appellant in regard to both these contentions was that on a true reading of the balance sheet Rs 4181196 were reserves used as working capital vide calculations in Exhibit C 12
Provision for depreciation was Rs 11029954 and the paid up capital was Rs 8000000 thus totaling to Rs 19029954
The total capital block as shown in page 5 of the balance sheet for the year ending June 30 1955 was Rs 14848758 and the working capital therefore was Rs 4181196
This was apart from Rs 742139 which was the total of the three items at page 4 of the balance sheet Rs 98405 capital reserves Rs 473734 other reserves and Rs 170000 provision for doubtful debts as also the investments cash and bank balance
This being the true position it follows on the facts of the present case that this 958 amount was available for use as working capital and the balance sheet showed that it was in fact so used
Moreover DO objection was urged in this behalf nor was any finding to the contrary recorded by the Tribunal
We are therefore of the opinion that the reasoning adopted by the Tribunal was not correct and the appellant was entitled to 4 return on the reserves used as working capital including the sum of Rs 4181196
The appellant was thus entitled to Rs 196 lacs as the 4 return on reserves used as working capital and not merely Rs 029 lacs as allowed by the Tribunal
The provision for rehabilitation bad been claimed by the appellant at Rs 110 lacs on the basis of 10 of the net profits relying upon para
20 of the Report of the Committee on Profit Sharing in which the Committee had proposed that 10 of the net profits should compulsorily be set aside for reserves to meet emergencies as well as for rehabilitation modernization and reasonable expansion
No evidence was at all led by the appellant before the Tribunal showing the cost of the machinery as purchased the age of the machinery the estimate for replacement etc
 in order to substantiate this claim for rehabilitation and the appellant was content merely to rely upon this recommendation of the Committee on Profit sharing
This was rightly considered by the Tribunal as insufficient to support the appellant s claim though it allowed for rehabilitation in addition to the statutory depreciation the amount for which the appellant had actually made provision viz the sum by which the depreciation written off for the year exceeded the statutory depreciation i e Rs 1000000 minus Rs 982799Rs 17201
The amount was really small and did not affect the bonus to be awarded
The Tribunal in fact allowed the same though it appears that in the absence of evidence of the nature above referred to even that sum of Rs 017 lacs ought not to have been allowed
In this state of affairs it is really impossible for us to allow the appellant s claim for rehabilitation in anything beyond the sum of Rs 017 lacs actually 959 allowed by the Tribunal and the claim of the appellant for any further provision for rehabilitation must be disallowed for the purpose of the bonus calculations for the year under consideration
It will however be open to the appellant to claim higher rehabilitation for subsequent years if it can substantiate its claim by adducing proper evidence
In addition to these various sums allowed to the appellant by way of prior charges against the gross profits earned during the accounting year the Tribunal also allowed to the appellant Rs 250 lacs by way of provision for debenture redemption fund
The claim of the appellant was for a sum of Rs 350 lacs for the same and it arose under the following circumstances
The appellant had issued debentures of the value of Rs 30 lacs in the year 1942 43 and they were redeemable in the year 1962 63
No annual provision had been made from profits for redemption of the same inasmuch as until the year 1949 the appellant was not working at a profit
Such provision was made only thereafter
For the year 1950 51 the appellant made a provision for Rs 75000 for debenture redemption fund for 195152 Rs 150000 for 1952 53 Rs 150000 for 1953 54 Rs 75000 and further provision had to be made for redemption of debentures in a sum of Rs 2450000
In so far as 7 more years were left before the due date for redemption the appellant claimed Rs 350000 as the annual sum to be set apart though as a matter of fact in the balance sheet only a provision of Rs 250000 had been made by it for debenture redemption reserve
The Tribunal pointed out that when the appellant had in its accounts appropriated Rs 250000 for the debenture redemption fund the claim to have Rs 350000 for the purposes of bonus formula was clearly untenable
It however was of the opinion that a reasonable provision for redemption fund should be allowed as a prior charge and actually allowed the sum of Rs 250000 which had been actually provided for the purpose in the balance sheet negativing the contention of the respondents that no provision should be allowed for debenture redemption fund in the bonus formula
960 We are of the opinion that the Tribunal was not justified in allowing the sum of Rs 250000 for debenture redemption fund as a prior charge in the bonus calculations
The Full Bench Formula does not envisage any such prior charge
It is no doubt true that capital is shy and it would not be practicable for the industrial concern to raise large amounts by way of fresh debentures when they become due
It is also true that the debentures do not stand on a par with other debts of a concern because the debentureholders would in a conceivable situation be able to enforce their security by bringing the industry to a stand still by taking over charge of the whole concern
It would therefore appear that the redemption of these debentures would be one of the primary obligations of the industrial concern and due provision has of necessity to be made for redemption thereof on due date
This however does not mean that in the calculations of the distributable surplus the provision for such redemption should be given the status of a prior charge though of course that would be a relevant con sideration while distributing the available surplus between the various interests entitled thereto
We are therefore of opinion that the Tribunal was wrong in allowing Rs 250000 as a prior charge in the bonus calculations
This disposes of all the contentions which have been urged on behalf of both the parties and calculating the figure on that basis we arrive atthe following Rs in lacs
Gross Profit as per Tribudal s calculations 3621 Less Notional Normal Depreciation 623 2998 Less Tax  7 as
in a rupee 1155 1843 Less 6 return on ordinary share capital and 5 on preference share capital 430 1413 961 Less 4 Return on reserves used as working capital 742139 29  4181196 167 4923335 196 1217 LessProvision for Rehabilitation 017 Available Surplus 1200 This would bring the available surplusfor distribution to a sum of Rs 12 lacs and this would be distributable amongst the shareholders the company and the workmen concerned
It is not feasible to lay down any rigid formula as to what the proportion of such distribution amongst these various interests should be
The shareholders as well as the company would both be naturally interested inter alia in providing the debenture redemption reserves as also meeting the needs of the industry for further expansion
The workmen would no doubt be interested in trying to bridge the gap between their actual wage and the living wage to the extent feasible
This surplus of Rs 12 lacs would have to be distributed amongst them having regard to the facts and circumstances of the case of course bearing in mind the various considerations indicated above
Before we arrive at the figure of the actual bonus which it will be appropriate in the circumstances of this case to allow to the workmen we may advert to one argument which was pressed before us
on their behalf and that was that the bonus calculations should not be made on the basis of the All India figures which were adopted by the Tribunal but on the basis of the actual amounts which the appellant had paid and would have to pay to the workmen concerned
It was pointed out that the respondents here were only the workmen in the Wadala Factory of the appellant
The appellant had however paid to the various workmen elsewhere as and by way of bonus sums varying between 4 and 29 of the basic wages for the year in question
The sum of Rs 123138 only had been 121 962 paid in full and final settlement to the workmen in some of the factories and the bonus calculations on an All India basis would thus work to the advantage of the appellant in so far as they would result in saving to the appellant of the difference between the amounts to which those workmen would be entitled on the basis of the All India figures adopted by the Tribunal and the amounts actually paid to them as a result of agreements conciliation or adjudication
It was therefore contended that the calculations should be made after taking into account the savings thus effected by the appellant and only a sum of Rs 123138  which was the actual sum paid to those workmen should be taken into account and no more
We are afraid we cannot accept this contention
If this contention was accepted the respondents before us would have an advantage over those workmen with whom settlements have been made and would get larger amounts by way of bonus merely by reason of the fact that the appellant had managed to settle the claims of those workmen at lesser figures
If this contention of the respondents was pushed to its logical extent it would also mean that in the event of the non fulfilment of the conditions imposed by the Tribunal in the award of bonus herein bringing in savings in the hands of the appellant the respondents would be entitled to take advantage of those savings also and should be awarded larger amounts by way of bonus which would really be the result of the claimants entitled to the same not receiving it under certain circumstances an event which would be purely an extraneous one and unconnected with the contribution of the respondents towards the gross profits earned by the appellant
The Tribunal was therefore right in calculating the bonus on an All India basis
By our order dated April 12 1957 the appellant was ordered to pay to the respondents within a fortnight from the date thereof bonus for the year 1954 55 equivalent to two months  basic wages that amount has already been paid and works out at Rs 339 lacs on an All India basis
The only question which therefore survives is what further bonus if any would the respondents be entitled 963 to from the distributable surplus of Rs 12 lacs
The sum of Rs 350 lacs required for building up the debenture redemption reserve is an all engrossing need of the appellant and that is a factor which must of necessity be taken into consideration while arriving at the ultimate figure particularly because such redemption of the debentures would enure not only for the benefit of the Company and its shareholders but also of the workmen employed therein
Having regard to all the circumstances of the case we feel that an award of four months  basic wages as aggregate bonus for the year 1954 55 which by the way was the bonus awarded for the previous year 1953 54 also would give a fair share to the labour in the distributable surplus leaving to the shareholders and the company a balance of Rs 522 lacs to be utilised by them not only towards building up of the debenture redemption reserve but also for building up other reserves which would be utilised for various other purposes indicated above
The appellant would no doubt get also the refund of the income tax on the bonus payments made by it
This rebate would also go towards the fulfilment of the very same objectives which would ultimately enure both for the benefit of the capital as well as labour
We have therefore come
to the conclusion that the appellant should pay to the respondents in addition to the two months  basic wages already paid to them in pursuance of this Court s order dated April 12 1957 an additional sum equivalent to two months  basic wages by way of bonus for the year 1954 55 subject to the same conditions as were laid down in the award of the Tribunal above referred to all the dates mentioned therein being calculated from the date of this judgment
We accordingly allow the appeal modify the award of the Industrial Tribunal to the extent mentioned above but in the circumstances of the case we make no order as to costs each party bearing and paying its own costs thereof
Appeal allowed


Summary:
The discharged employees of the Company in liquidation raised an industrial dispute wherein the auction purchaser of the Company was also impleaded as a party
The Tribunal inter alia held that no relationship of employer and employee existed between the auction purchaser and the old staff who had been discharged prior to the purchase of the business and the reference so far as the auction purchaser was concerned was incompetent
The Tribunal directed the liquidators to pay compensation to the discharged employees
The liquidators were refused sanction to appeal from the said award by the High Court whereupon the auction purchaser who was also the managing director of the Company prior to its liquidation preferred an appeal in the name of the Company represented by himself as the managing director and also in his capacity as the auction purchaser of the Company
The Appellate Tribunal dismissed the appeal in limine as incompetent in view of the provisions Of section 457 Of the  on the ground that the appeal was not maintainable as it was not authorised by the High Court
Held that where a party to the Reference in an industrial dispute was exonerated from its terms and no Award was made against him he could not be said to be an aggrieved party thereby attracting the provisions of section 12 of the Industrial Disputes Appellate Tribunal Act 1950 and any appeal by him from the said Award will be incompetent
14 No person other than the Official Liquidator who is place in charge of the affairs of the Company in the process of winding up is authorised with the sanction of the Court to institute any suit prefer an appeal or other legal proceedings in the name and on behalf of the Company
Held further that there is no inconsistency between section 457 of the and section 12 Of the Industrial Disputes Appellate Tribunal Act 1950
But in construing the provisions Of section 12 Of the Industrial Disputes Appellate Tribunal Act 1950 if there was anything in the  with particular reference to section 457 which was inconsistent with the provisions of Industrial Disputes Appellate Tribunal Act 1950 the latter Act shall prevail
Section 457 of the  concerns a very special case it only lays down a condition precedent to the filing of a case if it has to be by the liquidator of a company in the process of winding up
Section 12 of the Industrial Disputes Appellate Tribunal Act 1950 is the usual statutory provision which permits an appeal to be presented to the Appellate Tribunal which otherwise would not lie by any party who is aggrieved by an award it does not either in express terms or by necessary implication override abrogate or modify the provisions Of section 457 Of the  nor does it do away with the necessity for the requisite sanction of the court which is a condition precedent so far as the liquidator is concerned to institute any suit or proceedings in the name or on behalf of the company in liquidation
In the instant case the appeal purported to be filed on behalf of the Company in liquidation through its managing director was wholly incompetent  and the second appellant the auctionpurchaser could not be said to the aggrieved party enabling him to invokes
12 of the Act