Appeal No 321 of 1958
Appeal by special leave from the Award dated the September 27 1957 of the Industrial Tribunal Bombay in Reference IT No 119 of 1957
C K Daphtary Solicitor General of India J B Dadachanji and section N Andley for the appellant
Rajani Patel and Janardan Sharma for respondent No 1 1959
May 5
The Judgment of the Court was delivered by WANCHOO J
This is an appeal by special leave against the award of the Industrial Tribunal Bombay in a dispute between the Tata Oil Mills Co Ltd Bombay hereinafter referred to as the company and its workmen in the matter of profit bonus for the year 1955 56
The dispute arose over a demand made by the workmen for payment unconditionally as bonus for the year 1955 56 of a sum equivalent to four months  wagessalary for all employees drawing wagessalary of less than Rs 500 per menses
This dispute was referred to the Industrial Tribunal by the Government of Bombay by its order dated June 18 1957
The company had already paid 21 months  basic wages as bonus to its workmen and the real dispute was thus only about the remaining bonus for a month and half
3 The case of the workmen was that the company had made record profits during the year and declared a dividend of 12 per centum free of income tax the workmen were getting much less than the living wage and the dearness allowance was not sufficient to fill the gap and therefore profit bonus at the rate of four months  basic wages should be granted
The company on the other hand contended that it was paying graded scale of wages with annual and biennial increments and had already paid profit bonus for 2 12 months
It was not possible for the company to pay more than that as bonus as the available surplus according to the Full Bench formula did not justify it
It was also pointed out that though the company started as far back as 1917 the shareholders began to get dividends only from 1940 and therefore a dividend of 12 per centum free of income tax was in the circumstances not high
The company also claimed that in making calculations for the purposes of the Full Bench formula certain items of extraneous income should not be taken into account
Next it claimed that a profit of Rs 3 lacs appearing in the accounts due to the change in the method of valuation was no real profit due to the efforts of labour and should not be taken into account in arriving at the available surplus
Lastly it also claimed that it was entitled to 4 per centum interest on the working capital including the amount in the depreciation fund
The Industrial Tribunal disallowed the claim of the company on all these three points and after making relevant calculations came to the conclusion that there was a sufficient surplus available to permit the grant of bonus for 3 12 months calculated on basic wages and therefore awarded the same
The company thereupon applied for special leave to appeal which was granted and that is how the matter has now come up before us for decision
We shall first take the question of extraneous income
Six items were sought to be excluded by the company as extraneous income and they were these 4 In lacs Rs i Income earned by way of rent light and power 0 24 iiEstate Revenue 0 08 iii Profit on sale of empty barrels 0 89 iv Excess provision for expenses in the previous year 0 31 V Refund of income tax on revision of Cochin assessment of Excess Profits Tax 0 49 vi Sale proceeds of tin cans scraps logs planks gunnies c 2 11 Total 4 12 The Tribunal rejected the claim with respect to all these items though in the judgment it mentioned only items i ii iii and vi as those in dispute
Apparently items iv and v were not in dispute before it but while making calculations it seems to have lost sight of this and disallowed the claim with respect to these two items also
Learned counsel for the respondents appearing before us has stated that the claim with respect to items iv and v was conceded by the workmen before the Tribunal and it seems that by over sight these items were not excluded by it
He fairly concedes that these two items may be excluded from consideration in making calculations for arriving at the available surplus
We are thus left with four items which were disallowed by the Tribunal
The reason given by the Tribunal for disallowing these items was that they formed part of the profits earned in the course of the company s business and there was no good reason for deducting them from the profits
It further went on to say that as regards income earned by way of rent light and power it was not disputed that expenditure in respect of buildings from which the rent was derived such as on repairs and maintenance is included in the expenditure side of the account and taxes and rates for these buildings were paid by the company
There was thus no reason for deducting this amount from the profits
It did not consider the 5 other three items specifically and was content to include them on the general ground that they were profits earned in the course of the company s business
Mr Daphtary appearing for the company has drawn our attention to a number of cases decided by industrial tribunals as well as labour appellate tribunals where such items of income have been excluded on the ground that they are extraneous income unrelated to the efforts of the workmen
We do not think it necessary to refer to all these decisions and it is sufficient to say that these decisions support the contention put forward
The main reason given in these decisions for excluding what is termed as extraneous income is that they are unrelated to the efforts of workmen
We may refer only to two of these decisions of the labour appellate tribunal in this connection
In The Mill Owners  Association Bombay vs The Rashtriya Mill Mazdoor Sangh Bombay 1 in which the Full Bench formula was evolved the appellate tribunal remarked at page 1257  No scheme of allocation of bonus could be complete if the amount out of which a bonus is to be paid is unrelated to employees  efforts
 The Appellate Tribunal reiterated this in Shalimar Rope Works Mazdoor Union Howrah vs Messrs Shalimar Rope Works Ltd Shalimar Howah 2 by observing at page 372 that  it is however too late in the day to question the view that there are profits unrelated to workers  efforts and referred to as extraneous profits  and that such profits must be left out of account in deciding the question whether there is available surplus in any particular year Income received by way of rent of quarters and by sale of scrap materials has generally been treated as extraneous income by the industrial tribunals on the basis of these decisions of the Labour Appellate Tribunal
It is the correctness of this view which has been canvassed before as in this appeal
Reliance has also been placed by some tribunals on the decision of this Court in Muir Mills Co Ltd vs Suti Mills Mazdoor 1 2 6 Union Kanpur 1 in this connection
This Court observed at page 998 as follows There are however two conditions which have to be satisfied before a demand for bonus can be justified and they are 1 when wages fall short of the living standard and 2 the industry makes huge profits part of which are due to the contribution which the workmen make in increasing production
 It was further observed at page 999  It is therefore clear that the claim for bonus can be made by the employees only if as a result of the joint contribution of capital and labour the industrial concern has earned profits
If in any particular year the working of the industrial concern has resulted in loss there is no basis nor justification for a demand for bonus
 It is clear from these observations that this Court was not dealing with the question of extraneous income as such in the Muir Mills Case 1
The principles laid down in that case show that there must be profits in the particular year for which bonus is claimed resulting in an available surplus before profit bonus can be awarded
It is only when profits are made that profit bonus can be awarded subject to two further conditions namely 1 wages fall short of the living standard and 2 the industry makes large profits part of which are due to the contribution which the workmen make _in production
It is this last condition which seems to have been relied upon by industrial tribunals in holding that there must be direct connection between the efforts of labour and the profits and unless that direct connection is established the profits must be treated as unrelated to the efforts of labour and thus become extraneous income
There is no doubt that there must be contribution of the workmen in earning profits before they are entitled to profit bonus but it was not laid down in the Muir Mills Case 1 that direct connection between the efforts of the workmen and the particular item of profit earned must be established before the profit can be taken into account for the purposes of arriving at the available 1 1955 1 SCR 991 7 surplus
An industrial concern carries on a certain business
In carrying on that business it employs
capital as well as labour and generally speaking the profits earned in the normal course of business at the end of year are the result of the joint effort of capital and labour
Even so it may be recognized that there may be instances of extraneous income for the purpose of the Full Bench formula due i either to some part of the profits not having been earned in that year ii or to some part of profits arising out of fortuitous circumstances altogether unconnected with the efforts of labour
A third category may be the income arising out of sale of fixed or capital assets
Such income or profit may be called extraneous income as either it did not really arise in that year or though it has arisen in that year labour has not contributed anything towards its accrual it may therefore not be taken into account in calculations according to the Full Bench formula
But apart from these cases we cannot see how income arising during the year in the normal course of business of the concern can be called extraneous income merely on the ground that no direct connection between the efforts of labour and the accrual of the income has been established
In this very case we find an instance of the first category in two items relating to return of excess provision for expenses and refund of excess profits tax
These two amounts have gone to swell the profits of this year but they have not arisen in this year and may there fore properly be treated as extraneous income
An instance of the second kind is to be found in the profit of Rs 3 lacs made in this year by a change in the method of valuation of the company s assets which is entirely unconnected with the efforts of labour
But so far as the other four items are concerned they are earned by the company in the normal course Of its business and there is no reason why they should be excluded on the ground that it has not been proved that they are the result of direct efforts of labour in this year
Let us take these four items one by one
The first is the item of income earned by way of rent light and 8 power
It is well known that many industrial concerns provide amenities for their workmen by building quarters which are provided with light and power from the concern s power house
The quarters and power house are built out of capital or profits earned in past years
If they are built out of capital there is provision for a return which is generally at 6 per centum on the paid up capital
Even if they are built out of past profits the depreciation and rehabilitation charges fall on the gross profits before the available surplus is arrived at
Besides expenditure with regard to repairs and maintenance and rates and taxes is all paid out of the income of the concern before the gross profits are arrived at
In other words these expenses are paid out of the profits in the earning of which the workmen have contributed their labour
How can the company claim to exclude the rent etc from the profits while meeting the expenditure relating to such assets out of the profits part of which is attributable to the efforts of labour  In short income by way of rent light and power arises in the normal course of business of the concern and there is no reason why a direct contribution by labour during the year in question must be insisted upon in the case of such income
The company must also be employing some labour for purposes of maintenance and repairs of the quarters and powerhouse even though the labour may not be wholly allocated to this work only
We are therefore of opinion that income from rent light and power arises in the normal course of business of a concern and cannot be treated as extraneous income in the sense described above
The next item is estate revenue
We are told that the company has coconut groves which produce coconuts used in preparing oil which is one of the main items of the company s business
We are also told that sometimes the entire produce of these groves is not used in the manufacture of oil and therefore some part of the produce is sold
This income is out of this part sold in the market
Here again the income arises in the normal course of business and the expenses for looking after and maintaining the groves are paid 9 by the company and entered into its account
The company must also be employing labour to look after the groves
In these circumstances
we fail to see why this income by sale of surplus coconuts should be excluded from the profits for the purpose of the Full Bench formula
Then we come to the profit on sale of empty barrels and sale proceeds of tin cans scraps logs planks gunnies etc
These items may be taken together for the nature of the receipt is the same though on account of the method of accounting employed the income in the case of barrels is shown as profit while in the case of scraps etc it is shown as sale proceeds It is said that this is extraneous income because it is unrelated to the efforts of labour
We cannot accept this contention for this income again is in the normal course of business
Further when the company buys chemicals for example it pays for the chemicals as well as the containers namely the barrels
When the chemicals are used up these empty barrels are sold
Whatever is the income from the sale of these barrels is in reality a reduction in the cost price of chemicals to the company though by the method of accounting employed it may appear as profit on the sale of barrels
We see no reason why the reduction in cost price of chemicals should not be taken into account for the purpose of arriving at gross profits in making calculations for the Full Bench formula
Some scraps are normally left over in the process of manufacture
Whatever income is derived from such scraps also goes to reduce the cost price of materials used in production and thus to increase the profits
We do not see why this income arising in the normal course of the company s business should not be taken into account on the plea that labour has not directly contributed in its accrual
We are therefor of opinion that all these four items were rightly taken into account by the Tribunal in arriving at the gross
profits
Then we come to the profit of Rs 3 lacs made by a change in the method of accounting
The Tribunal did not accept this income as extraneous and in so doing it fell into error
This income of Rs 3 lacs has 10 nothing whatsoever to do with the efforts of labour even though it has arisen this year
It has arisen out of a fortuitous circumstance inasmuch as this year there was a change in the basis of valuation of stock
It is not income in the normal course of business because it is not likely to arise ever again
In the circumstances this income of Rs 3 lacs must be treated as extraneous income and excluded for the purpose of calculations based on the Full Bench formula
The last item with which we are concerned is the return on the amount of depreciation reserve used as working capital
An affidavit was made on behalf of the company that it had used its reserve funds comprising premium on ordinary shares general reserve depreciation reserve workmen s compensation reserve employees  gratuity reserve bad and doubtful debt reserves and sales promotion reserve as working capital
The Tribunal however allowed return at 4 per centum on a working capital of Rs 3188 lacs
This excluded the depreciation reserve but included all other reserves which were claimed by the company and having been used for working capital
The Tribunal gave no reason why it excluded the amount of the depreciation reserve in arriving at the figure of working capital
A return is allowed on the reserves used as working capital on the ground that if these reserves are not used for this purpose the concern would have to borrow money and pay interest on that
This being the basis on which a return on reserves used as working capital is allowed there is no reason why if there is in fact money available in the depreciation reserve and if that money is actually used during the year as working capital a return should not be allowed on such money also
Further if the money has been converted into such assets as stock in trade and stores etc
 ie other than capital or fixed assets it will be obviously available from year to year to that extent as working capital subject to adjustments on account of loans secured or otherwise
Learned counsel for the respondents wanted to contest that the whole amount in the depreciation reserve was not available for being used as working capital
It is enough to say that the 11 affidavit of the Chief Accountant filed on behalf of the company was not challenged before the Industrial Tribunal on behalf of the respondents
It would therefore be impossible for us now to over look that affidavit particularly when the Tribunal gave no reason why it treated the working capital as Rs 3188 lacs only
So far therefore as the present year is concerned we must accept the affidavit and hold that the working capital was Rs 13909 lacs
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 however we must accept the affidavit of the Chief Accountant
The Tribunal allowed 4 per centum interest on the working capital and that must be allowed on the total sum of Rs 139 09 lacs
We now come to the calculations in accordance with the Full Bench formula subject to what we have said above Rs in lacs Rs in lacs Profit for the year
15 53 Add provision for i tax 14 51 ii depreciation 119 75 iii bonus 7 76 34 02 Gross Profits
49 55 Less extraneous income 3 80 Balance 45 75 Less notional normal depreciation 11 12 Balance 34 63 Less income tax payable according to Meenakshi Mills case 1 Per Note A Below 15 90 Balance 18 73 12 Rs in lacs Rs in lacs Less dividend on paid up 5 54 capital Less return on Reserves used 5 56 as working capital of Rs 139 09  Rs 4 per cent
11 10 Available surplus 7 63 Less bonus actually paid 7 90 Less rebate of income tax at 3 40 7 in the rupee 4 50 Amount remaining with the Company  3 13 Note A Rs in lacs Gross Profits 49 55 Less total statutory depreciation 13 19 Balance 36 36 Income tax at 7 in 15 90 a rupee The available surplus of profit thus works out at Rs 7 63 lacs
The company has already paid 2 12 months  bonus amounting to Rs 7 90 lacs to the workmen
The company would be entitled to a rebate of Rs 3 40 lacs on this sum and therefore the amount which the company has actually to pay is Rs 4 50 lacs
This will leave a sum of Rs 3 13 lacs out of the available surplus with the company for its use
It will be seen that more than half the available surplus has already gone to labour according to what the company has paid
There are three sharers in the available surplus namely the industry share holders and labour
In the circumstances no case has been made out for increasing the profit bonus beyond what the company has already paid particularly when we find that the company has claimed no rehabilitation charges in this year
We therefore allow the appeal set aside the order of the Industrial Tribunal and dismiss the claim of the workmen for any bonus 13 beyond what has already been granted by the company
In the particular circumstances of this case we order the parties to bear their own costs
Appeal allowed


Summary:
On the death of H who as the mother of the last male owner had succeeded to the estate the respondents claimed the estate and brought a suit for its recovery on the strength of the pedigree which they set up that they were the sons of the halfsisters of the last male owner and therefore came before the agnates
The suit was contested by some of the agnates of whom the appellant was one who challenged the correctness of the pedigree and maintained that the respondents  mothers were not the half sisters of the last male owner
The trial court agreed with the respondents  case and decreed the suit and this was confirmed by the High Court
The High Court relied on exhibit 1 a petition dated November 2 1917 which S one of the brothers of the third plaintiff on his own behalf and on behalf of his brothers had filed in Suit NO 31 Of 19I7 which was a suit instituted by some of the agnates of H s husband questioning the alienations made by H In the petition S alleged that the applicants were the legal claimants to the properties in the suit and prayed to be added as co defendants to the suit
The petition contained a pedigree which supported the pedigree set up 815 by the respondents and the High Court held that exhibit I was admissible under section 325 of the Indian Evidence Act
The oral evidence of PW 2 and PW 4 supported the respondents  case as to the pedigree set up by them and the High Court held that their evidence was admissible under section 50 Of the Indian Evidence Act
On appeal to the Supreme Court it was contended for the appellant 1 that exhibit I was not admissible under section 325 Of the Indian Evidence Act because a the statement therein was a joint statement of three persons of whom one alone was dead and b it was not made before disputes had arisen  and 2 that the testimony of PW 2 and PW 4 did not fall within the purview Of section 50 Of the Indian Evidence Act and that the High Court erred in admitting and accepting such evidence
Held 1 that section 325 Of the Indian Evidence Act was applicable to the statements as to pedigree in exhibit I because  a they were really made by S for self and on behalf of his brothers and that in any case they were as much statements of S as of the other two brothers who are alive
Chandra Nath Roy vs Nilamadhab Bhattacharjee 1898 ILR  approved
b they were made before the precise question in dispute in the present litigation had arisen as the respondents were not preferential heirs at the time of the previous suit and no question arose or could have arisen then as to the relationship between them and the last male owner
2 that the evidence of PW 2 and PW 4 that they were present at the marriage of the mother of plaintiffs 1 and 2 as also at the Upanayanam ceremonies of plaintiffs 1 and 2 showed the opinion of those witnesses as to the relationship as expressed by their conduct and was admissible under section 50 Of the Indian Evidence Act
The word  opinion  in section 50 Of the Indian Evidence Act means something more than mere retailing of gossip or hearsay it means judgment or belief that is a belief or a conviction resulting from what one thinks on a particular question
Such belief or conviction may manifest itself in conduct or behaviour which indicates the existence of the belief or opinion
Under section 50 such conduct or outward behaviour as evidence of the opinion held is relevent and may be proved
Chander Lal Agarwala vs Khalilay Rahman ILR  approved
Conduct as an external perceptible fact may be proved either by the testimony of the person himself whose opinion is evidence under section 50 or by some other person acquainted with the facts which express such opinion and as the testimony must relate to external facts which constitute conduct and is given by persons personally acquainted with such facts the testimony is in each case direct within the meaning of section 60 of the Indian Evidence Act
816 The observations of Hutchins J in Queen Empress vs Subbarayan Mad 9 that section 50 of the Indian Evidence Act seems to imply that a person whose opinion is a relevant fact cannot be called to state his own opinion as expressed by his conduct and that his conduct may be proved by others only when he is dead or cannot be called disapproved