Supreme Court of India

The Employers Of Azam Jahi Mills Ltd vs The Workmen on 30 January, 1967

Equivalent citations: 1967 AIR 1222, 1967 SCR (2) 520, AIR 1967 SUPREME COURT 1222, 1967 2 LABLJ 809, 1967 2 LABLJ 18, 31 FJR 439, 14 FACLR 362, 1968 2 SCJ 388, 1967 2 SCR 520

Author:
G.K. Mitter

Bench:
G.K. Mitter
,
M. Hidayatullah
,
Vishishtha Bhargava
,
V. Ramaswami
,
C.A. Vaidyialingam

PETITIONER:
THE EMPLOYERS OF AZAM JAHI MILLS LTD.

Vs.

RESPONDENT:
THE WORKMEN

DATE OF JUDGMENT:
30/01/1967

BENCH:
MITTER, G.K.
BENCH:
MITTER, G.K.
HIDAYATULLAH, M.
BHARGAVA, VISHISHTHA
RAMASWAMI, V.
VAIDYIALINGAM, C.A.

CITATION:
1967 AIR 1222 1967 SCR (2) 520
CITATOR INFO :
F 1973 SC 353 (38)

ACT:
Industrial Dispute-Bonus agreed to be paid only on available
surplus Calculation of surplus--Whether gratuity and
retrenchment compensation to be deducted in one year or
spread over more-Whether deduction of amount in respect of
idle machinery from notional amount of normal depreciation
justified-Rehabilitation charges-Nature of evidence required
to justify deduction.

HEADNOTE:
The appellants and their workmen had entered into an
agreement in February 1960 which provided that a claim for
bonus would only arise if there should be an available
surplus after making a provision for all the prior charges
including a fair return on paid up capital and on reserves
utilised towards the working capital in terms of the Full
Bench formula.
In a dispute between the appellants and their workmen
relating to the payment of bonus for the years 1960-61 and
1961-62, the Industrial Tribunal found that there was an
available surplus for the first year but none for the
second, and therefore directed payment of bonus of one
week's wages to all the workmen over and above the two
weeks' bonus which the employees had agreed to pay
irrespective of any profits made by the company.
In the appeal before this Court it was contended, inter
alia, on behalf of the appellants that in the calculation of
the gross profits, the entire amount in respect of gratuity
and retrenchment paid by the company durmg the year 1960-61
should have been excluded as it had to be paid out of the
profits of the company during the relevant year and the
Tribunal had wrongly decided that it should be spread over
five years; that in calculating prior charges, the Tribunal
had wrongly deducted a sum of Rs. 1.50 lakhs in respect of
idle machinery from the figure of notional normal
depreciation and some of the other prior charges were not
dealt with in accordance with the terms of the agreement
between the parties; and that if. calculations were made on
a correct basis there would be no available surplus.
HELD : On a recalculation of the gross profits and prior
charges, that the Tribunal was not right in finding that
there was an available surplus for calculation of bonus for
the year 1960-61. [527 A-B]
Gratuity would have to be paid year after year to workmen
who retire or leave the company's service in terms of the
scheme of gratuity and retrenchment compensation may have to
be paid in any year if there be modernisation of the plant
or for any other reason which renders any workmen surplus.
The Tribunal's decision that the amount on this account
should be spread over five years was therefore erroneous and
the gross profit as calculated by the appellants was the
correct figure. [523 A-C]
Britannia Engineering Co. v. Their Workmen [1965] II L.L.J.
144; referred to.
The depreciation taken into account being, in accordance
with well settled principles, a notional amount of normal
depreciation, the Tribunal was not justified in deducting
therefrom a further sum in respect of idle machiner. [523 H;
524 C-D]
U.P. Electric Supply Co. Ltd. -v. Their Workmen [1955] II
L.L.J. 431; Surat Electricity Company's Staff Union v. Surat
Electricity Co, Ltd. [1957] II L.L.J. 648; The Associated
Cement Companies Ltd. v. its Workmen [1959] SC.R. 925, 960;
referred to.
On the facts, there was sufficient evidence to show the need
for rehabilitation and there was no force in the contention
that there was no basis for calculation of the provision for
rehabilitation because no experts were examined before the
Tribunal. [526 C]
M/s Peirce Leslie & Co. Ltd. Kozhikode v. Their Workmen
[1960] 3 S.C.R. 194 Aluminium Corporation of India, Ltd. v.
Their Workmen,, [1963]--H L.L.J. 629, distinguished.

JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 971 and
972 of 1965.

Appeals by special leave from the Award dated December 21
1963 of the Industrial Tribunal, Andhra Pradesh, Hyderabad
in Industrial Dispute No. 28 of 1963.

A. K. Sen, R. V. Pillai and B. K. Seshu, for the
appellant (in C.A. No. 971 of 1965) and the respondent (in
C.A. No. 972 of 1965)
M. K. Ramamurthi, for the respondent (in C.A. No. 971 of
1965) and the appellant (in C.A. No. 972 of 1965).
The Judgment of the Court was delivered by
Mitter, J. This is an appeal against an award dated December
21, 1963 in Industrial Dispute No. 28 of 1963 of the
Industrial Tribunal, Andhra Pradesh, Hyderabad on special
leave granted by this Court.

The dispute which was referred to the Industrial Tribunal
related to the question of payment of bonus for the years
1960-61 and 1961-62 demanded by the workers of Azam Jahi
Mills, Warrangal. The Tribunal found that there was an
available surplus for the first year but none for the
second. It directed payment of bonus of one week's wages to
all the workmen over and above the two weeks' bonus which
the employers had agreed to pay irrespective of any profits
made by the company. In appeal before us the appellants
contend that as there was no available 'Surplus, if properly
quantified, the question of payment of bonus in addition to
that for the two weeks already agreed upon, does not arise.
It is to be noted that the parties had entered into a
settlement on February 22,1960 which was to be operative for
a period of five years commencing on October 1, 1958 and
ending on September 30, 1963. By that settlement, it was
provided that the claim for bonus would only arise if there
should be an available surplus after making a provision for
all the prior charges including a fair return on paid-up
capital, and on reserves utilised towards the working
capital in terms of the Full Bench formula laid down by the
Labour Appellate Tribunal in Millowners' Association v.
Rashtriya Mills Mazdoor Sangh, Bombay. The agreement also
provided that prior charges would include (a) statutory
depreciation and development rebate, (b) taxes, (c)
reserve for rehabilitation, replacement and modernisation of
Block as calculated by the Industrial Court (basic year
1947) and (d) a fair return at 6% on paid up capital in cash
or otherwise including bonus shares and 2% on reserves
employed as working capital. It was also a term or the
agreement that the amount of the total gross profits of the
mill for the year shall be the amount of profits as
disclosed in published balance sheets of the company without
making a provision for depreciation and for bonus, but after
deducting from it the amount of extraneous income (like
interest from investments, rent from property) which is
'unrelated to the efforts of the workers. With regard to
statutory depreciation and development rebate, the parties
agreed that if in any year the total of these two exceed the
amount of reserve for rehabilitation, the full ;amount of
statutory depreciation and development rebate would be
adopted as a prior charge and no extra provision would be
made for rehabilitation in that year. Further, in terms of
the agreement, the workers would be entitled to an amount
equivalent to 1/24th of the basic wages if the mill had an
available surplus of profits after providing for all prior
charges on the basis of the Full Bench formula as described
above, up to an amount equivalent to 25 % of the total basic
wages earned during the year.

The contention of the appellants before us is that in
working out the available surplus the Tribunal went beyond
the Full Bench formula and the settlement between the
parties. Our task was considerably lightened by counsel for
the appellants handing over a table showing the figures for
the working out of the Full Bench formula, as found by the
Tribunal compared to those propounded by the Management and
the workers. There is no dispute that the net profits as
disclosed by the balance sheet for the year 1960-61 was Rs.
9,03,378/-. The only difference between the management and
the Tribunal with regard to the calculation of gross profits
relates to the figure Rs. 5,39,963/- for gratuity and
retrenchment compensation paid by the company during the
year in question. According to the Tribunal, this sum
should be spread over five years while according to, the
company, this sum should not be included at all as it had to
be paid out of the profits of the company during the
relevant year.

Mr. Sen, counsel for the appellants, relied on
s. 37(1)
of
the Income-tax Act, 1961 for the purpose of showing that any
expenditure (not being expenditure of the nature described
in
sections 30
to
and not being in the nature of capital
expenditure or personal ,expenses of the assessee) laid out
or expended wholly and exclusively for the purpose of the
business or profession of the assessee has to be allowed in
computing the income chargeable under the head 'profits and
gains of business or profession'. He argued that gratuity
is to be paid every year to the workmen who retire and
retrenchment compensation has to be paid'-as and when
workmen are retrenched and that there could be little doubt
that
these expenses were incurred exclusively for the purpose of
the business of the company. He also drew our attention to
a judgment of this Court in
Britannia Engineering Co. v.
Their Workmen
( ) where it was laid down that the amount of
provident fund contribution and gratuity payments were not
to be added back to the net profits disclosed by the balance
sheet of the company for fixing the amount of gross profits
in working out the Full Bench formula. The Tribunal
apparently recognised the force of the contention of the
employers but observed that the amount should be distributed
over a number of years which it fixed as five in this case.
This. finding of the Tribunal is erroneous inasmuch as
gratuity will have to be paid year after year to workmen who
retire or leave the company's services in terms of the
scheme of gratuity and retrenchment, compensation may have
to be paid in any year if there be modernisation of the
plant, or for any other reason which renders any workmen
superfluous. It seems to us, therefore, that the gross
profits as calculated by the employers at Rs. 19,05,496/- is
the correct figure.

Coming next to the ascertainment of prior charges, the
material discrepancy between the figures adopted by the
company and those by the Tribunal arises thus-we find that
the notional normal depreciation has been taken to be Rs.
6,44,351/- in both sets of charts but the Tribunal has
deducted therefrom a sum of Rs. 1,50,000/in respect of idle
machinery. We are unable to accept this view of the
Tribunal. It is well settled that depreciation allowed
under the
Income-tax Act
after 1948 was to consist of the
statutory normal depreciation as well as initial
depreciation and additional depreciation. The Full Bench
formula of the Labour Appellate Tribunal decided in
U.P.
Electric Supply Co. Ltd. v. Their Workmen
(2) that the
depreciation which should be deducted from the gross profits
in working the formula was normal depreciation including the
multiple shift depreciation but excluding the initial
depreciation and additional depreciation allowable tinder
the
Income-tax Act
.
This decision was followed by another
Labour Appellate Tribunal of India in Surat Electricity
Company's Staff Union v. Surat Electricity Co. Ltd.(3).There
it was pointed out that the deduction allowed under the
head of depreciation in the early years of the use of the
machinery was rather heavy under the provisions of the

Indian Income-tax Act
which would have the effect of unduly
lessening the available surplus under the bonus formula to
the prejudice of workers even in a year of prosperity and
that is why the Full Bench postulated for a more even
distribution of depreciation over a period of years. This
accounted for the ignoring of the initial and additional
depreciation in working out the bonus formula. The net
result was that the depreciation to be taken into account
for working out the bonus formula was a notional amount of
normal
(1) [1965] II L.L.J. 144.

(3) [1957] 11 L.L.J. 648.

(2) [1955] 11 L.L.J. 431.
depreciation. No objection can be taken to this because the
bonus formula itself is theoretical one. Both these
decisions were referred to in
The Associated Cement
Companies Ltd. v. Its Workmen
(1), and the latter decision
was approved of by this Court (see at page 960).
We find by referring to Schedule E of the accounts of the
company for the year 1960-61 that depreciation for the year
was calculated at Rs. 16,03,149/-. This is also referred to
in the Director's Report. Deducting therefrom the sum of
Rs. 9,58,798/- which is referred to in the profit and loss
account for the year ended 30th September 1961 as balance
provision for depreciation to comply with
s. 205
of the
Companies Act of 1956, we get the figure of Rs. 6,44,351/-
which is to be found in the chart both under the table of
figures adopted by the management as also by the Tribunal.
The figure being a notional figure for working out the bonus
formula, the Tribunal was not justified in deducting
therefrom a further sum of Rs. 1,50,0001- in respect of
machinery which was said to be idle.

In terms of the agreement between the parties, the prior
charges must include the development rebate as well unless
the statutory depreciation and development rebate added up
to a higher figure than the figure for reserve and
rehabilitation. It therefore appears to us that the
Tribunal was not justified in excluding the amount of the
development rebate reserve. There is no dispute that the
figure for income-tax should be Rs. 4,74,020/- or that for
the return on paid-up capital should be Rs. 4,32,000/-. The
workmen in their chart have calculated the return at 4 % on
Rs. 72 lakhs which is not justified. Both the Tribunal and
the company calculated return on reserves used as working
capital at Rs. 49,678/-. This, in our view, is not
justified as we find from a reference to schedule E, (fixed
assets of the company for the year 1960-61) that a sum of
Rs. 14,49,664/- was spent for addition of new plant and
machinery. On a reference to schedules A, B, C and D for
the year in question and the corresponding figures for the
previous year, we find that the figure of reserves and
surplus in schedule A has gone down by Rs. 1,00,000/-. The
figure for secured loans in schedule C remains the same
while the current liabilities at shown in schedule D has
gone up by Rs. 3,50,000/- in the year in question as
compared to the previous year and loans secured from banks
show a reduction of Rs. 13,22,000/-. Thus the liability in
respect of the loans has been reduced approximately by Rs.
10 lakhs. Setting off the diminution the overall liability
was diminished by Rs. 9 lakhs. We also find from a
reference to Schedules F, G, H and 1 (of investments,
current assets and loans by the company) that the total
thereof has gone down by Rs. 8 lakhs from the figure of the
previous year. The net
(1) [1959] S. C. R. 925.
result seems to be that the reduction of liability when set
off against the reduction in the value of the assets and
investments gives a deficit of Rs. 1,00,000/- approximately.
As the company has not incurred any fresh loans for the
purpose of buying plant and machinery we can proceed on the
basis that Rs. 14,49,664/- and Rs. 1 lakh have come out of
the working capital. Consequently, the reserves used as
working capital should be approximately Rs. 24,83,000/- as
shown by the company less Rs. 15,49,664/- i.e. Rs.
8,34,000/- and the return thereon at 2% would be
approximately Rs. 16,000/- in place of Rs. 49,678/-.
Further, we find that the Tribunal was not right in
including Rs. 1,07,992/- as gratuity and retrenchment
compensation among its list of prior charges.
On the basis of the above, it seems to us that deducting the
prior charges from the gross profits irrespective of the
question of the amount to be deducted for rehabilitation,
modernization etc., comes to the figure arrived at is Rs.
80,000/- or there about only.

There was a good deal of controversy between the parties
with regard to the correct amount of the figure for
rehabilitation. In this connection, our attention was drawn
to the evidence on record. The Chief Engineer of the Company
stated before the Tribunal that the machinery had been
purchased in 1932, that its condition was bad due to fatigue
and that it was costing more and more every year for repairs
even up to Rs. 21 lakhs. According to him, it required
replacement, the average life of a textile mill being no
more than 25 years. The witness also said that one half of
the entire machinery had been purchased and installed
between 1948 and 1952 and the cost in 1952 was five times
that of the 1932 figure. The other witness examined on
behalf of the employers was the Secretary of the mill. He
stated that the provision for rehabilitation was Rs.
93,30,000/-, the working capital being Rs. 24,83,904/-. He
gave certain figures to show how the figure of Rs.
93,30,000/was arrived at. He stated further that the
company had approached the Government for a loan of Rs. 56
lakhs for replacement of the spinning machinery and part of
the weaving machines. The application for loan is not in
dispute before us. As a matter of fact, the Tribunal
accepted the evidence that the age of the' textile mill
machinery was about 25 years and more than half the
machinery had passed that age. This justified the need for
rehabilitation. The Tribunal referred to a letter of the
company to the Government dated October 10, 1963 according
to which several experts had opined that the amount required
for replacement of the old machinery was Rs. 56 lakhs. The
Tribunal added thereto the sum of Rs. 2 lakhs for
replacement of the buildings and thus arrived at the total
figure of rehabilitation of Rs. 58 lakhs. In our opinion,
the figures arrived at by the Tribunal are acceptable but we
have to deduct therefrom the amount of the reserves of the
company. According to us, as already shown,
the reserves which could be used as working capital were no
more than Rs. 8,34,000/-. Thus the total for rehabilitation
comes to Rs. 50 lakhs approximately. The Tribunal accepted
the divisior 5 to give effect to the bonus formula on the
basis that the cost of rehabilitation should be spread over
five years. In our opinion. the Tribunal proceeded on the
right basis except on the figure of reserves which has to be
deducted. Dividing Rs. 50 lakhs by five, we get a figure of
Rs. 10 lakhs. In terms of the bonus formula therefore,
there was no available surplus for the year 1960-61 but
there was a deficit.

We were not impressed by the argument on behalf of the res-
pondents that as no experts were examined before the
Tribunal, there was no basis for calculation of the provison
for rehabilitation.
In this connection our attention was
drawn to a judgment of this Court in M/s
Peirce Leslie Co.
Ltd. Kohzikode v. Their Workmen
(1). It appears that in
support of its claim
in that case
the company produced a
number of statements prepared by witnesses who claimed to be
experts showing the replacement value of buildings,
machinery, furniture etc.

We were also referred to the
judgment of this Court in
Aluminium Corporation of India,
Ltd. v. Their Workmen
(2). On the facts of that case, it was
observed by this Court that as there was no evidence adduced
by the employer to substantiate its claim for the amount of
rehabilitation, the same must be rejected. In our view, the
Tribunal must consider a11 the evidence before it and then
proceed to ascertain the figure to 'be adopted for
rehabilitation purposes. If the company had no scheme for
rehabilitation, then of -course its claim on that head must
be rejected. Again, the claim made by the company cannot be
accepted unless substantiated by evidence. In this case, we
find that half the machinery was over 25 years old, that it
required over Rs. 2 lakhs every year for repairs according
to the evidence of the Chief Engineer and that its effi-
ciency had dwindled considerably. We also see no reason to
reject the evidence adduced before the Tribunal that the
company had applied for a loan of Rs. 56 lakhs from the
Government for rebabilitation purposes and we accordingly
are of the view that the Tribunal proceeded on the correct
basis so far as rehabilitation ,charges are concerned.
There remains the point about the working capital of the
company. No case is here made that the reserves of the
company were being used for any purpose other than the
business of the company. The accounts of the company show
that its secured liability exceeded Rs. 1,16,00,000/- and
its unsecured loans exceed Rs. 28,00,000/-. Unless
therefore there is evidence to show that the reserves were
non-existent or they were being utilised for a purpose other
than
(1) [1960] 3 S.C.R. 194.

(2) [1963] 11 L.L.J. 629.
the business of the company, it is reasonable to assume that
the reserves were being utilised as working capital of the
company.

In our view, therefore, the Tribunal was not right in
finding that there was available surplus for calculation of
bonus for the year 1960-61 and the appeal No. 971 of 1965
must be allowed and the award set aside.

The other appeal No. 972 of 1965 which is by the workmen for
enhancement of the bonus consequently must be dismissed.
The first appeal is therefore allowed with costs and the
second appeal is, dismissed but, without any order as to
costs.

R.K.P.S. Appeal 972 of '65 dismissed.

Appeal 971 of '65 allowed.