PETITIONER: THE ASSOCIATED CEMENT COMPANIES LTD.,DWARKA CEMENT WORKS, DW Vs. RESPONDENT: ITS WORKMEN & ANOTHER DATE OF JUDGMENT: 05/05/1959 BENCH: GAJENDRAGADKAR, P.B. BENCH: GAJENDRAGADKAR, P.B. DAS, SUDHI RANJAN (CJ) BHAGWATI, NATWARLAL H. DAS, S.K. WANCHOO, K.N. CITATION: 1959 AIR 967 1959 SCR Supl. (2) 925 CITATOR INFO : R 1959 SC1081 (12) F 1959 SC1089 (9) R 1959 SC1114 (6,8,9) F 1959 SC1276 (5,8) F 1959 SC1317 (3) F 1960 SC 12 (23) R 1960 SC 571 (5,6) R 1960 SC 826 (10) R 1960 SC1003 (5) F 1960 SC1025 (8) F 1960 SC1346 (5) F 1961 SC 867 (2,4,7,9) R 1961 SC 941 (2,7,9) RF 1961 SC 977 (7,9) RF 1961 SC1165 (2,5,6) R 1961 SC1191 (3) RF 1961 SC1200 (13) R 1962 SC1221 (4) R 1962 SC1255 (1,5,7) R 1963 SC 474 (4) R 1963 SC1007 (6,12,13) RF 1963 SC1710 (5) R 1964 SC1766 (13) RF 1967 SC 691 (7,11,22) R 1967 SC1222 (5) R 1967 SC1450 (5) R 1968 SC 538 (2,10,12,25,32) R 1968 SC 963 (2,3,11,12,25,26,28,29,30,31) RF 1969 SC 530 (8) RF 1969 SC 612 (23) RF 1969 SC 976 (13) R 1971 SC2521 (8,16,18) RF 1971 SC2567 (1) RF 1972 SC 70 (15,21) R 1972 SC 330 (7,18) RF 1972 SC1954 (15,23) RF 1973 SC 353 (22) ACT: Industrial Dispute-Bonus-Available surplus-Determination of- Full Bench formula-Basis-Applicability-Revision if required -Prior Charges-Mode of calculation-Gross Profits, ascertainment of-Rehabilitation charges, how determined- Gratuity fund, whether can be claimed as Prior charge- Distribution of surplus--Overtime Payment, if can be taken into consideration in awarding bonus. HEADNOTE: For the year 1953-54, the employers paid bonus to the workmen equal to three months' wages, but the workmen demanded bonus equivalent to seven months and six months basic wages with dearness allowance. The employers contended that after making deductions for the prior charges from the gross profits in accordance with the formula evolved by the Full Bench of the Labour Appellate Tribunal in Mill Owners Association, Bombay v. The -Rashtriya Mill Mazdoor Sangh, (1950) L.L.J. 1247, there was no available surplus left and consequently the 926 workmen could claim no bonus. The workmen countered that the formula required revision as the employers were becoming increasingly more rehabilitation conscious and their appetite for the provision for rehabilitation was fast growing with the result that in most cases, after allowing for rehabilitation, there was no surplus left for the payment of bonus and the main object of the formula was thus frustrated. The workmen further contended that the whole of the rehabilitation expenses should not be provided for out of trading profits and that the claim for rehabilitation should be fixed at a reasonable amount and the industry should be required to find the balance from other sources: Held, that though there may be some force in the plea made for the revision of the Full Bench formula, the problem raised by the said plea is of such a character that it can be appropriately considered only by a high-powered commission and not by this Court while hearing the present group of appeals. Besides the Full Bench formula had on the whole worked fairly satisfactorily in a large number of industries all over the country, and the claim for bonus should be decided by Tribunals on the basis of this formula without attempting to revise it. The formula was elastic enough to meet reasonably the claims of the industry and labour for fair play and justice. If the content of each item specified in the formula was determined objectively in the light of all relevant and material facts, the Tribunals would generally find it possible to make reasonable adjustments between the rival claims and provide for a fair distribution of the available surplus. Muir Mills Co. Ltd. v. Suti Mills Mazdoor Union, Kanpur, [1955] 1 S.C.R. 991, Baroda Borough Municipality v. Its Workmen, [1957] S.C.R. 33, Sree Meenakshi Mills Ltd. v. Their Workmen, [1958] S.C.R. 878 and The State of Mysore v. The Workers of Kolar Gold Mines, [1959] S.C.R. 895, referred to. The formula was based on two considerations: first, that labour was entitled to claim a share in the trading profits of the industry, because it had partially contributed to the same; and second, that labour was entitled to claim that the gap between its actual wage and the living wage should, within reasonable limits, be filled up. In dealing with the claims for bonus, the two-fold basis of the formula must always be kept in mind. Further, it was not necessary that the workmen must actually manufacture or produce the goods before they become entitled to claim any bonus. Burma Shell Oil Storage & Distributing Co. of India Ltd. v. Their Workmen, (1953) 2 L.L.J. 246, applied. The working of the formula begins with the figure of gross profits, taken from the profit and loss account, which are arrived at after payment of wages and dearness allowance to employees 927 and other items of admissible expenditure. It would be open to the Tribunal to examine the accounts and to disallow deliberate and mala fide debit entries made to reduce the amount of gross profits. It would likewise be open to the parties to claim the exclusion of items, credit or debit, on the ground that they were patently and obviously extraneous and entirely unrelated to the trading profits of the year. But the Tribunal must resist the temptation of dissecting the balance-sheet too minutely or attempting to reconstruct it. J.f. K. Cottton Manufacturers Ltd., Kanpur v. Their Workmen, (1954) L.A.C. 716, applied. The formula deals with the claims for bonus on the basis that the relevant year is a self-sufficient unit and the appropriate accounts have to be made on the notional basis in respect of the said year. Hence, the refund of excess profits and the adjustment of the previous year's depreciation and losses cannot be made against the bonus year's profits. Model Mills etc. Textile Mills, Nagpur v. The Rashtriya Mills Mazdoor Sangh (1955) 1 L.L.J. 534; Bennett Coleman and Co. Ltd. v. Their Workmen, (1955) 2 L.L.J. 60, referred to. After ascertaining the amount of gross profits, the first item of deduction therefrom relates to depreciation. The depreciation which has to be deducted from the gross profits should be the notional normal depreciation as explained in the case of Surat Electricity Co. Ltd., (1957) 2 L.L.J. 648, and should not include the initial and additional depreciation allowable under the Income-tax Act. U.P. Electric Supply Co. Ltd. v. Their Workmen, (1955) 2 L.L.J. 431; Surat Electricity Co's. Staff Union v. Surat Electricity Co. Ltd., (1957) 2 L.L.J. 648, referred to. The second item of deduction is on account of income-tax. On the balance obtained after deducting the depreciation from the gross profits the tribunal has to calculate the amount of income-tax payable for the bonus year. In making this calculation it would not be reasonable to allow the employer to claim under the item of income-tax an additional amount in respect of the two further depreciations which are expressly authorised under s. 10(2)(vi) of the Income-tax Act. Therefore the two concessions thus given by the Income-tax Act should not be taken into account in determining the amount of income-tax under the formula. Sree Meenakshi Mills Ltd. v. Their Workmen, [1958] S.C.R. 878, explained and followed. The third item of deduction under the formula relates to the return on paid up capital as well as working capital. The formula provides generally for the payment of interest at 6% 118 928 per annum on the paid up capital and at 2% on working capital. These rates are not inflexible and will vary according to the circumstances of each case. Workmen of Assam Co. Ltd. v. Assaam Co. Ltd., [1959] S.C.R. 327 ; Rustom and Hoynsby (India) Ltd. v. Their Workmen (1955):I L.L.J. 73, Mill Owners Association, Bombay v. The Rashtriya Mill Mazdoor Sangh, (1952) 1 L.L.J. 518, Tea and Coffee Workers Union v. Brooke Bond (India) (Private) Ltd., (1956) 1 L.L.J. 645, U. P. Elcctric Supply Co. Ltd. v. Their Workmen, (1955) 2 L.L.J. 4I3, referred to. The fourth item of deduction is on account of rehabilitation which includes replacement and modernisation but not expansion. Rehabilitation has to be calculated for the plant and machinery as well as the buildings. The whole of the rehabilitation charges have to come out of the trading profits as this guarantees the continuance of the industry to the benefit both of the employer and labour. The Tribunal has to estimate the probable cost of replacement of plant and machinery at the time when such replacement would become due. In determining such cost, the Tribunal has to project the price level into the future, determined not only in the light of the prices prevailing during the bonus year, but also of subsequent price levels. The decision on the question of the probable cost of rehabilitation is always reached by adopting a suitable multiplier. This multiplier is based on the ratio between the cost price of the plant and machinery and the probable price which may have to be paid for its rehabilitation, replacement or modernisation. As there has been a continuous rise in the price of industrial plant and machinery, the older the plant which needs rehabilitation, the higher is the multiplier. If the employer has deliberately or mala fide refrained from rehabilitating his old machinery with a view to claim a higher multiplier, his conduct may be taken into account in determining the multiplier and the amount of rehabilitation payable to him. Once a proper multiplier is adopted, the probable cost of rehabilitation can be easily determined by multiplying the original cost by the multiplier. At this stage the divisor steps in. The total amount required for rehabilitation has to be divided by a suitable divisor in order to ascertain the annual requirement of the employer in that behalf year by year. Before awarding an appropriate amount in respect of rehabilitation for the bonus year, deductions have to be made, first on account of the break-down value of the plant and machinery which is usually calculated at the rate Of 5% Of the cost price, secondly the depreciation and general liquid resources available to the employer other than those earmarked for specific purposes, thirdly all the rehabilitation amounts which may have been allowed to the employers in the previous years, but had remained unused in the meanwhile. 929 It is only after all the prior charges have thus been deter- mined and deducted from the gross profits that the available surplus can be ascertained for payment of bonus. The procedure adopted by some Tribunals of nationally working out the amount of bonus and then giving it priority in the calculations before the determination of the income-tax payable inevitably lessens the amount of tax proportionately, and should be deprecated. Rehabilitation cannot be given priority before the income-tax payable is ascertained and deducted from the gross profits. No addition should be made to the list of prior charges re- cognised by the formula even with respect to the employers claim for deductions on account of gratuity fund created for the benefit of the workmen. But the Tribunal ought to, when the available surplus is determined, take into account such a claim and reasonable amount of allowance should be definitely borne in mind in finally fixing the amount of bonus. M/s. Metro Motors v. Their Workmen, (1952) 2 L.L.J. 205, referred to. When the available surplus has been ascertained, three parties are entitled to claim shares therein : labour's claim for bonus, the industry's claim for the purpose of expansion and other needs and the share-holders' claim for additional return on the capital invested by them. The ratio of distribution would obviously depend on several factors: such as the gap between the actual wages and the living wages, the setting apart of a gratuity fund by the employer and the amount thereof, the extent of the available surplus, the dividends actually paid by the employer and those paid by comparable concerns, the probabilities of expansion, the general financial condition of the employer and his necessity to meet urgent liabilities. It would be wrong on principle to take overtime payment into account in calculating the bonus payable to each workman. Once the total amount payable as bonus is determined on the principles as indicated, the question of overtime payment being taken into account can no longer be a dispute between the employer and his workmen but one between the workmen inter se. JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 459 and 460
of 1957.
Appeals by special leave from the judgment and order dated
the 30th November, 1956, of the Industrial Tribunal, Bombay,
in Reference 1. T. Nos. 10 and 13 of 1956.
R.H. Kolah, Dadachanji and S. N. Andley, for the
appellant.
930
C.L. Dudhia and I. N. Shroff, for the respondents in C.
A. No. 459 of 1957.
A.S. R. Chari and 1. N. Shroff, for the respondents in C.
A. No. 460 of 1957.
1959. May 5. The Judgment of the Court was delivered by
GAJENDRAGADKAR J.-These two appeals arise out of a demand
for bonus made against the appellants by their workmen for
the year 1953-54. The Associated Cement Companies Ltd.,
Bombay, the Cement Marketing Company of India Ltd., Bombay
and the Concrete Association of India, Bombay, were faced
with a demand of their workmen employed in their offices at
Bombay for bonus equivalent to seven months’ basic wages
with dearness allowance. The industrial dispute arising out
of this demand was referred by the Government of Bombay for
adjudication before the Industrial Tribunal, Bombay, under
s. 10 of the Industrial Disputes Act and it was numbered I.
T. No. 10 of 1956. The Associated Cement Companies Ltd.,
Dwarka Cement Works, Dwarka, was similarly faced with a
demand of its workmen for bonus equivalent to 50% of total
earnings or six months’ total earnings. This dispute was
referred to the same tribunal and was numbered 1. T. No. 13
of 1956. By consent of parties both the references were
heard together and evidence was recorded and documents
tendered in the first reference. By its award delivered on
November 30, 1956, the tribunal directed the companies to
pay their workmen drawing a basic pay or wages up to Rs. 500
per month bonus equivalent to 1/3 of their basic wages or
pay (less bonus already paid for the year 1953-54) subject
to the conditions specified in the award. It is against
this award that the respective companies have preferred the
two appeals by special leave. In this judgment the said
companies will hereafter be described as the appellant and
their workmen as respondents.
The A. C. C. is the principal company concerned in the
dispute. The Cement Marketing Company of
931
India Ltd., (hereafter -called the C. M. I.) has been
separately registered under the Indian Companies Act as a
Joint Stock Company; but it is a hundred per cent.
subsidiary of the A. C. C. The C. M. I. are the Sales
Managers of the A. C. C. while the Concrete Association of
India (hereafter called the C. A. I.) is merely a department
of the C. M. 1. As a result of the agreement which came into
operation from’ August 1, 1953, all financial transactions
of the C. M. 1. in relation to sales now find a place in the
accounts of the A. C. C. Similarly all of its fixed assets
have been taken over and appear in the balance-sheets of the
A. C. C. All the three concerns have a common staff in
Bombay. The A. C. C. had already paid to its employees
bonus equivalent to three months’ basic wages for the year
1953-54 and so had the C. M. I. to its workmen. It appears
that the C. M. I., including the C. A. I., undertakes to pay
to its employees the same amount of bonus as has been paid
or awarded to the employees of the A. C. C.
There is no dispute that the A. C. C. is the biggest amongst
the companies in India which manufacture cement. It owns 15
cement factories at different places in India and 2 in
Pakistan. Out of the total quantity of cement despatched by
all the cement factories in India in 1953-54 the A. C. C.
despatched 55.46 %. The A. C. C. came into existence in 1936
as a result of the merger of four important groups of
companies engaged in the manufacture of cement. These were
F. E. Dinshaw, Tatas, Killick Nixon and Khatau, groups. It
appears that 11 companies in all merged with the A. C. C.
Before the tribunal the case for the respondents was that
the appellant held a position of monopoly in the cement
industry and was easily in a position to pay the bonus
claimed by them. Their allegation was that the appellant
had inflated the capital invested by the merging companies
while taking them over in 1936; it had set up new factories
out of the profits earned by it without raising fresh
capital and thereby had used profits for the purpose of
expansion. In the year 195354 the appellant had capitalised
the full amount
932
standing to the credit of the premium-on-shares account and
had transferred a part of the reserves for taxation to the
capital account thus increasing the aggregate capital. The
emoluments of the workers were inadequate and so they were
entitled to the bonus claimed by them in order to fill up
the gap between the actual wage paid to them and the living
wage due to them. The respondents also contended that the
claim made by the appellant for rehabilitation and
replacement in the dispute for the year 195152 included not
only the amount required for rehabilitation and replacement
but also expansion; and so, according to them, the appellant
was not entitled to any amount for rehabilitation purposes
in the year in dispute. They also alleged that the
appellant was not entitled to claim. interest at more than
4% on paid-up capital and 2 % on working capital. Thus the
respondents urged that if all the relevant facts are taken
into account it would be found that the claim for bonus made
by them in the two respective references was just and
proper. In support of their case the respondents filed
several statements which, they claimed, had been prepared in
accordance with the Full Bench formula, and they also cross-
examined Mr. Tongaonkar who gave evidence on behalf of the
appellant.
This claim was resisted by the appellant. It was urged on
its behalf that the points raised by the respondents in the
present references bad been heard and finally decided in the
previous adjudication (Ref. I. T. No. 115 of 1953) which
dealt with their claim for bonus for the preceding year; and
it was alleged that the respondents were barred from raising
the same questions over again in the present adjudication.
The cement machinery, though heavy, is subject to rigours of
extremely tough and heavy duties and the machinery has to
run ceaselessly day and night throughout the year. The
appellant contended that, having regard to the special
features of the cement industry, the machinery had to be
kept on the highest standards of maintenance and needed
frequent replacement and rehabilitation. A cement factory
is a very expensive industrial proposition. The appellant
denied that
933
it was in a monopolistic position and pleaded that its
object was to deliver cement as cheaply as possible to the
consumers. The respondents’ allegation that there was ”
puffing up of block capital at the time of the merger in
1936 ” was denied by the appellant and it was not admitted
that ever since its inception it had steadily made huge
profits. The appellant also denied the allegation of the
respondents that the profits, coming out of the business had
been used in expanding its factories. It had used all
available resources including premium on issue of shares and
depreciation fund for replacement, rehabilitation and
modernisation. It was not true that the appellant had built
huge reserves and that the wages paid by the appellant to
its employees were inadequate; on the contrary they compared
very favourably with those in other comparable industries.
The appellant denied the statement of the respondents that
no plant reinstatement reserve over and above the deprecia-
tion allowance was necessary in the current year and it
urged that the calculations made by the respondents alleged
to be in terms of the Labour Appellate Tribunal formula were
inaccurate. In its turn the appellant claimed more than 6%
interest on paid-up capital and more than 4% interest on
working capital. The appellant also emphasised that it had
already paid to the respondents bonus for three months
though the strict working out of the formula would show that
there was no available surplus for the relevant year and so
the respondents would not be entitled to any bonus at all.
In support of its case the appellant examined Mr. G. R.
Tongaonkar, its controller of planning and development, and
produced a statement (Ex. C-2) showing the original cost of
the blocks to be replaced and the approximate replacement
cost. It also produced amongst other documents a statement
(Ex. C-10) showing the cost of the assets of the merging
companies on July 31, 1936, as taken over by the appellant
and the statement (Ex. C-29) showing the capital
expenditure from 1936-37 to 1953-54 on expansion,
modernisation, rehabilitation, replacement, sundry capital
jobs, etc.
934
In addition a statement was filed by the appellant (Ex. C-
23) showing that the calculations made under the Full Bench
formula would show a substantial deficit and that would
support its case that there was no available surplus for the
relevant year from which any bonus could be claimed by the
respondents.
Ex. C-2 is a statement prepared by Mr. Tongaonkar showing
the original cost of the block to be replaced and the
approximate replacement cost. This statement has been
prepared on the basis that the approximate cost to the
merging companies of their assets as on 31-7-1936 was 5.73
crores. It is admitted that this statement has lumped
together all the properties of the appellant including plant
and machinery, as well as buildings, roads, bridges and
railway-sidings and has classified them into four
categories. The statement contains 9 columns. The first
column gives the year or years of purchase of machinery.
This could classifies the four categories of the blocks
according to their respective years of purchase. The first
category consists of blocks purchased up to 1939, the second
purchased between 1940-44, the third purchased between 1945-
47 and the last purchased between 1949-54. Column 2 gives
the original cost of the said categories as on 31-7-1954.
Column 3 gives particulars of such portions of the blocks as
have been discarded, scrapped or sold. In this column the
years in which the blocks were discarded, scrapped or sold
are indicated and their original cost is me
935
figures mentioned in col. 5 for 1939 and 1940-44 blocks have
been arrived at by reducing the corresponding figures given
in col. 4 by 20%. Column 6 gives the approximate present
life of the machinery and plant mentioned in col. 4; col. 7
sets out the breakdown value of the machinery referred to in
col. 4, whilst col. 8 gives the approximate cost of
rehabilitation of machinery as shown in col. 5 less
breakdown value as shown in col. 7. The last column works
out the annual requirements of the appellant in respect of
the rehabilatation of the four categories of blocks. The
figures in this column are arrived at by dividing the
amounts mentioned in col. 8 by the respective divisors
mentioned in col. 6. The total annual requirement of the
appellant in respect of rehabilitation is shown as of the
order of Rs. 3,29,61,752.
Ex. C-23 is a statement prepared by Mr. Tongaonkar to show
the deficiency in profits in relation to payment of
additional bonus claimed by the respondents for the
accounting year 1953-54. This statement has been prepared
alternatively on the basis of statutory depreciation
allowable by income-tax authorities and also on the basis of
straight computation at ordinary rates. The first method
results in a deficit of Its. 107.20 lakhs, while the second
in a deficit of 97.86 lakhs. In working out the provision
for rehabilitation, this statement first takes the
replacement cost of block up to 1939 as per Ex. C-2 to be
Rs. 1601.19 lakhs. From this amount the available reserves
as on 1-8-1953 which are of tile order of Rs. 311 lakhs are
deducted, leaving a balance of Rs. 1290.19 lakhs. Then the
replacement costs of the three remaining categories of
blocks are taken into account and all the said amounts are
divided by the appropriate divisors mentioned in col. 6 of
Ex. C-2. The result is the sum of Rs. 284.48 lakhs, and
that is claimed by the appellant as the provision for
rehabilitation under the formula.
In his evidence Mr. Tongaonkar has given reasons in support
of the respective multipliers and divisors adopted by him in
making his calculations in Ex. C-2. 119
119
936
He has also given several details on all the relevant and
material points in support of the appellant’s case.
Naturally the respondents have cross-examined him at length.
One of the questions in controversy between the parties in
the present appeals centres round the appreciation of Mr.
Tongaonkar’s evidence and the value to be attached to the
statements prepared by him.
On the contentions raised by the parties before it the
tribunal framed ten issues for determination and it has made
its findings on them in the light of the evidence adduced
before it. It has held that the appellant had not inflated
the capital invested by the merging companies while taking
them over in 1936. It has allowed 6% interest on the entire
paid-up capital of Rs. 1267.59 lakhs, and 4% interest on the
working capital. In regard to the claim for depreciation
the tribunal has held that it was normal depreciation
calculated according to the straight line method which
should be allowed. On the question of income-tax, the
tribunal has allowed the same at 83.4 pies in a rupee as
claimed by the appellant on its net profits. It has,
however, rejected the appellant’s case that the income from
investments in shares and securities received by it should
be excluded for the purpose of bonus; while it has allowed
the sum of Rs. 10 lakhs provided by the appellant as annual
contribution to the reserve for gratuity, as also the
expenditure on the cost of dismantling buildings,
prospecting expenses, etc. It did not accept the
respondents’ case that the bonus paid by the appellant to
its officers should be reduced or wholly disallowed for the
purpose of calculations under the formula; and, on the
question as to whether overtime payment should be included
in the payment of bonus, it has upheld the respondents’
contention and allowed the inclusion of the said payment.
Having disposed of these minor issues, the tribunal examined
at length the claim made by the appellant in regard to the
provision for rehabilitation, replacement and modernisation.
Indeed this was the most controversial and the most
important issue raised
937
before it. The tribunal examined the evidence of Mr.
Tongaonkar as well as Ex. C-2 and other documents produced
by him, and came to the conclusion that ” Ex. C-2 presents
an incorrect and exaggerated picture of the A.C.C.’s
requirements of rehabilitation and replacement” and so it
cannot be relied upon. According to the tribunal the
multiplier 4.28 adopted by Mr. Tongaonkar was itself an
inflationary figure; and it thought that ” the consequence
of applying it not to the original price but to its
increased price paid by the A.C.C. would be to obtain an
inflationary result. It appears that the tribunal wag
inclined to hold that 2.7 was a fair multiplier representing
the price increase over the pre-war base. The tribunal was
also not satisfied with Mr. Tongaonkar’s evidence in regard
to the life of plant and machinery ; and so it held that the
period of life given in col. 6 of Ex. C-2 cannot be
accepted as correct. While dealing with the question about
the rise in prices, the tribunal has held that it was usual
to take the average level of prices prevailing in a period
of about five years in preference to the prices prevailing
in a particular year as was done by Mr. Tongaonkar. The
tribunal subjected Mr. Tongaonkar’s evidence on the question
of replacement, rehabilitation and modernisation to a close
examination and held that the method adopted by Mr.
Tongaonkar in distinguishing between modernisation and
expansion was of a purely subjective estimate ” which does
not bear the scrutiny of an objective test “. On the whole
the tribunal was not prepared to accept Mr. Tongaonkar’s
evidence at its face value and it was not prepared to treat
Ex. C-2 and consequently Ex. C-23 as reliable. It is
relevant to point out at this stage that the tribunal has
not made any finding about the life of the machinery nor has
it recorded any conclusion as to a proper divisor. In fact
it has completely left out of consideration Exs. C-2 and C-
23 while determining the amount which should be allowed for
the appellant’s claim for rehabilitation for the relevant
year.
The tribunal then examined the principle underlying the Full
Bench formula and held that, it was not
938
intended to be worked out as a rigid mathematical formula.
” We must make it “, says the tribunal, ” as flexible as
possible so as to do justice to everybody concerned in the
earning of profits”. The general question, which it has
considered in this connection, is how far and to what extent
profits of a concern should contribute to the satisfaction
of the claims of industry for replacement; rehabilitation
and modernisation. It was impressed by the argument that,
where the requirements under these items are so huge as to
be out of tune with the profits, it would be open to an
industrial adjudicator to allow only a reasonable provision
to be made out of the profits for the said items and leave
the industry concerned to tap other resources to make up the
balance. In support of this conclusion it has referred to
the observations made by F.R.M. de Paula in his “Principles
of Auditing”, the report of the Taxation Enquiry Commission
and of the working party for the Cotton Textile Industry.
It has also relied on a part of the speech delivered by Mr.
J. R.D. Tata in addressing the annual general meeting of the
shareholders of the Tata Iron and Steel Company in August
1950.
In this connection the tribunal has expressed its
apprehension that if all the money required for a continuous
process of modernisation and expansion is to come out of the
profits made by the concern, labour will rarely see a day
when they will enjoy bonus granted to them out of profits;
though it has hastened to add that it was far from its mind
that a progressive concern like the A.C.C. should not keep
pace with time and modernise its machinery; but it only
wished that it should give a fair deal to the workers in the
distribution of the profits. Having hold that, if the
claims for rehabilitation turn out to be huge and out of
tune with the profits made by the industry, it would be open
to the tribunal to grant the claim of the industry in that
behalf only to the extent that it deems to be reasonable and
fair, it proceeded to consider how far and to what extent
the appellant’s claim should be allowed in the present
proceedings.
It is necessary to mention that in dealing with this
939
question the tribunal was considerably influenced by the
past conduct of the appellant. It thought that for
rehabilitation the appellant had claimed no more than Rs.
192 or 193 lakhs in the previous adjudication proceedings
where the dispute for bonus had reference to the year 1951-
52. If the claim then made by the appellant was no more
than Rs. 192 or 193 lakhs, the present claim for Rs. 284
lakhs, the tribunal thought,’ was obviously inflated and
unreal. Similarly the tribunal emphasised the fact that the
programme earlier submitted by the appellant to the Tariff
Commission was in turn more modest than the claim made in
the said adjudication proceedings. It appears that in the
said programme the appellant had made out a case for the
estimated expenditure of Rs. 18.36 crores to be spread over
a period of ten years from 1-8-1952 to 31-7-1962 and that
works out approximately at the figure of Rs. 184 lakhs per
year. It was on these facts that the tribunal held that ”
if the A.C.C. estimated its annual requirements of
rehabilitation, replacement and modernisation at Rs. 192
lakhs per year during the period of ten years commencing
from 1-8-1952, 1 do not think that it should be allowed to
depart from it now”. In substance, according to the
tribunal, the present claim for rehabilitation was very much
inflated, it had no relation to realities, and so the
appellant should not be allowed to make such a claim. That
is why it did not think it necessary to record any finding
as to the proper divisor, and to determine, in the light of
Mr. Tongaonkar’s evidence, what approximately would be a
fair or reasonable amount for rehabilitation under the
formula.
It is thus clear that in making its final calculations the
tribunal has assumed that the claim made by the appellant
for rehabilitation, replacement and modernisation must be
taken to be no more than Rs. 192 or 193 lakhs, and on that
assumption it has considered to what extent the claim should
be allowed. Ultimately the tribunal came to the conclusion
that in the circumstances of the case it would be fair to
allow the appellant about Rs. 165 to 170 lakhs as annual
provision for the said items. In support of this conclusion
940
the tribunal has relied on the fact that for the two years
1952-53 and 1953-54 the appellant had spent about Rs. 339.76
lakhs for the purpose of rehabilitation, replacement land
modernisation and that works at the average of Rs. 170 lakhs
per year. The tribunal has then taken into account the fact
that the appellant had a plant reinstatement reserve of Rs.
235 lakhs and a general reserve of Rs. 76 lakhs in the
beginning of the year 1953-54. If these amounts which would
be available for rehabilitation are spread over the ten year
period of the tentative programme planned by the appellant,
the annual figure would come to Rs. 31 lakhs; and this
amount would have to be deducted from Rs. 165 lakhs which
the tribunal was inclined to grant in respect of the
relevant item. That is how the tribunal has made the
appropriate calculations under the formula, and has shown
that, even after the payment of one month’s additional bonus
as directed by it, the appellant would still be left with a
surplus of Rs. 23.48 lakhs. That in brief is the nature and
effect of the findings made by the tribunal.
Before dealing with the merits of the points raised in these
appeals it would be convenient to refer to the genesis and
the terms of the formula which has been evolved by the Full
Bench of the Labour Appellate Tribunal in the case of The
Mill Owners Association, Bombay v. The Rashtriya Mill
Mazdoor Sangh, Bombay (1) in 1950. It appears that from
1940 A. D. onwards the claims for bonus made by the
employees against their employers in different industries
were dealt with on an ad-hoe basis from case to case.
Sometimes the employers voluntarily paid bonus to their
workmen; and where disputes arose they were decided by the
tribunals in the light of the circumstances of each case
without relying on any broad consideration of policy or
without attempting to lay down any general principles. In
1948 a bonus dispute arose between the Mill Owners
Association, Bombay and its employees, and it was referred
for adjudication to the Industrial Court. In considering
this dispute the Industrial Court went
(1)(1950) L.L.J. 1247.
941
elaborately into the matter, laid down certain principles
and awarded to the workmen bonus equivalent in amount to 3/8
of the total basic earnings of each workman subject to
certain conditions.
In the subsequent year a similar dispute arose between
the same parties; and it was again referred to the
Industrial Court for adjudication. The Court made its award
on July 7, 1950, directing 55 mills of the Association to
pay to their workmen, whether permanent or temporary, 1/6 of
the basic earnings of each of them as bonus. This award was
challenged by the Association before the Labour Appellate
Tribunal. It was urged on behalf of the Association that
the wage structure in the textile industry had been settled
by standardisation and so bonus must be regarded as a
gratuitous payment; and it was argued that at any rate grant
of bonus cannot be made for the purpose of making up the
deficiency between the actual and living wages. These
contentions were rejected by the Labour Appellate Tribunal
and the question about the grant of bonus was considered on
general principles on the basis of which a formula,, often
described as the First Full Bench Formula, was ultimately
evolved. “As both capital and labour contribute to the
earnings of the industrial concern “, observed the appellate
tribunal, ” it is fair that labour should derive some
benefit if there is a surplus after meeting prior or
necessary charges “. The appellate tribunal was also of the
view that where the goal of living wages had been attained,
bonus, like profit sharing, would represent more as the cash
incentive to better efficiency and production; but where the
industry had not the capacity to pay a living wage bonus
must be looked upon as the temporary satisfaction wholly or
in part of the needs of the employee. In other words,
according to this decision, the award of bonus is based on a
two-fold consideration. It is made in recognition of the
fact that labour has made some contribution to the profit
earned by the industry, and so it is entitled to claim a
share in it; and it is also intended to help labour to
bridge or narrow down the gap, as far as may be reasonably
possible, between the living wage to which labour is
entitled and the actual wage received by it.
942
Dealing with the problem from this point of view the
appellate tribunal conceded that investment necessarily
implies the legitimate expectation of the investor to secure
recurring returns on the money invested by him in the
industrial undertaking, and so it held that it was essential
that the plant and machinery should be kept continuously in
good working order for the purpose of ensuring that return.
Such maintenance of the plant and machinery would
necessarily be to the advantage of labour because the better
the machinery the larger the earnings and the brighter the
chance of securing a good bonus. On this consideration it
was held that the amount of money that would be necessary
for rehabilitation, replacement and modernisation of the
machinery would be a prior charge on the gross profits of
the year. Since the depreciation allowed by the income-tax
authorities is only a percentage on the written-down value
the depreciation fund set apart on that basis would not be
sufficient for the purposes of rehabilitation and an extra
amount would have to be annually set apart nationally under
the heading of ‘reserves’ to make up the deficit. This
position was apparently not disputed by the employees.
The claim made by the industry that a fair return on the
paid-up capital must be secured and that ordinarily it
should be paid at the rate of 6% per annum was also not
disputed. The employees, however, challenged the claim of
the industry that reserves employed as working capital
should carry any interest; but their objection was overruled
and it was held that working capital also would be entitled
to interest though at a much lower rate than that on the
paid-up capital. Then the question of taxes was considered
and it was agreed that a provision had to be made for taxes
which would be payable on the amount determined after
deducting depreciation from the gross profits less any bonus
which may be awarded. In the result the appellate tribunal
laid down the manner and method in which the available
surplus should be determined. The notional accounting for
this purpose starts with the figure of the gross profits
which are
943
arrived at after payment of wages and dearness allowance, to
the employees and other relevant items of expenditure. Then
a deduction for depreciation is made, and on the notional
balance thus derived a provision for taxes payable is
allowed. Then follow the provisions for reserves for
rehabilitation, return on paid-up capital and return on
reserves employed as working capital. That gives the amount
of surplus if’ any. Whenever the working of this formula
leaves an amount of available surplus, labour was held
entitled to claim a reasonable share in this amount by way
of bonus for the current year. This formula is based on
considerations of social justice and is intended to satisfy
the legitimate claims of both capital and labour in respect
of the profits made by the industry in a particular year.
It takes the particular year’ as a unit and makes all its
notional calculations on the basis of the gross profits
usually taken from the profit and loss account; in this
particular case the available surplus determined by the
application of the formula was found to be 2.61 crores; and
out of this surplus 0.30 crores were awarded as bonus to
clerks and other staff and 1.86 crores was awarded as bonus
to the employees leaving a net notional balance of 0.45
crores.
This Court had occasion to consider the said formula in Muir
Mills Co. Ltd. v. Suti Mills Mazdoor Union, Kanpur (1). The
judgment in that case indicates that without committing
itself to the acceptance of the formula in its entirety,
this Court in general accepted as sound the view that since
labour and capital both contribute to the earnings of the
industrial concern, it is fair that labour should derive
some benefit if there is a surplus after meeting the four
prior or necessary charges specified in the formula. It is
relevant to add that in dealing with the concept of bonus
this Court ruled that bonus is neither a gratuitous payment
made by the employer to his workmen nor can it be regarded
as a deferred wage. According to this decision, where wages
fall short of the living
(1) [1955] S.C.R. 991
120
944
standard and the industry makes profit part of which is due
to the contribution of labour, a claim for bonus can be
legitimately made. However, neither the propriety nor the
order of priority as between the four prior charges and
their relative importance nor their content was examined by
this Court in that case; and though the formula has
subsequently been generally accepted by this Court in
several reported decisions (Baroda Borough Municipality v.
Its Workmen (1), Sree Meenakshi Mills, Ltd. v. Their Workmen
(2) and The State of Mysore v. The Workers of Kolar Gold
Mines (3) ) the question about the adequacy, propriety, or
validity of its provisions has not been examined nor has the
general problem as to whether the formula needs any
variation, change or addition been argued and considered.
It is for the first time since 1950 that, in the present
appeals, we are called upon to examine the formula carefully
and express our decision on the merits of its specific
provisions. As we have already indicated, in dealing with
the present dispute the tribunal has held that, in working
out the formula, it could relax its provisions even though
the proposed relaxation may mean a material variation of the
formula itself. On behalf of the appellant Mr. Kolah has
taken strong exception to this approach. He has argued
that, in the last eight years and more, on the whole the
formula has worked fairly well in the interest of both
capital and labour, and so the tribunal was not justified in
departing from it in the present case. This argument
undoubtedly raises a question of considerable importance.
Before examining this argument, however, it is necessary to
consider one preliminary point: Was the tribunal justified
in holding that the appellant could not be allowed to add to
its previous claim for rehabilitation ? The decision of the
tribunal on this point seems to indicate that the tribunal
thought that the appellant was estopped from making any such
claim; and the correctness of this conclusion is challenged
by the appellant.
(1)[1957] S.C.R. 33, 39.
(2) [1958] S.C.R. 878, 884.
(3) [1959] S.C.R. 895.
945
It is true that, in the report submitted by the appellant
before the Tariff Commission in April 1953, it had set out
the details of its ten year programme which included,
besides replacement, rehabilitation, modernisation and
expansion, mechanisation of quarries as well as construction
and improvement of houses for its labour staff. The report
of the Tariff Commission (p. 30) shows that the cost of the
programme was’ estimated at Rs. 18.36 crores, excluding the
cost of a new plant at Sindri, or about Rs. 184 lakhs per
annum. Subsequently in January 1954, when Mr. Tongaonkar
gave evidence in the previous adjudication proceedings, he
produced a statement (Ex. U-8) according to which the
appellant’s annual requirements for rehabilitation would be
of the order of Rs. 192 or 193 lakhs, whereas in the present
proceedings the said claim is made at Rs. 284 lakhs. A bare
statement of these facts prima facie suggests that the
appellant’s present claim for rehabilitation has been
growing from stage to stage, and in its present form it is
very much inflated; and that is what the tribunal has also
assumed. In our opinion this assumption is not wholly
correct. Mr. Tongaonkar’s evidence shows that in the report
of the jobs submitted to the Tariff Commission the appellant
had not included all relevant items of rehabilitation,
replacement and modernisation. The report merely gave a
list of the jobs which the appellant had proposed to
undertake during the ten year period ending July 31, 1962.
It was in no sense an exhaustive statement about the
appellant’s requirements in regard to the rehabilitation of
all its blocks. In fact, having regard to the nature and
scope of the enquiry before the Tariff Commission, the
report made by the appellant had to be restricted to the
urgent jobs which it wanted to undertake during the execu-
tion of its ten year programme; and so it would not be
reasonable to hold that the figure of annual rehabilitation
expenses which can be deduced from the said report has any
relation to the claim for rehabilitation made by the
appellant in terms of the working of the formula.
Then again the appellant’s claim for rehabilitation
946
in the earlier proceedings has also been satisfactorily
explained by Mr. Tongaonkar. The respondents have placed
considerable reliance on the statement filed by Mr.
Tongaonkar in the said proceedings (Ex. U-8). This
document has been produced by the respondents in support of
their contention that it purports to make a claim for Rs.
192 lakhs per year ‘for rehabilitation. That no doubt is
true ; but in terms the document purports to show the
estimated expenditure required during the ten year period
there specified; and as Mr. Tongaonkar has stated, it does
not include a full statement of the claim in regard to the
rehabilitation of all the blocks belonging to the appellant.
In considering the respondents’ argument on this point, it
is necessary to bear in mind that in the earlier proceedings
the appellant had filed a separate statement showing the
amount to which it was entitled by way of rehabilitation
under the formula; this statement was Ex. C-3 and it has
been produced in the present case and exhibited as U-5. It
appears that in the earlier proceedings the tribunal did not
attach any importance to the said document and virtually
ignored it because, like the present tribunal, it held that
” it does not appear to be necessary to plan further ahead
than ten years and it is desirable to base calculations of
rehabilitation on realities “(1). Even so the Labour
Appellate Tribunal found that the appellant’s contention
that its workmen were not entitled to any additional bonus
was not well-founded even if its claim for rehabilitation
was confined to Rs. 192 or Rs. 193 lakhs. Besides, Mr.
Tongaonkar has stated on oath that Ex. U-8 was not among
the documents originally submitted by the appellant to the
tribunal in 1954. it was in fact prepared and submitted at a
later stage at the instance of the tribunal itself. It is,
therefore, clear that Ex. U-8 was not intended to, and did
not supply, the basis of the appellant’s claim in the
earlier proceedings in accordance with the formula.
A study of the items contained in Ex. U-8 also supports the
same conclusion. Mr. Tongaonkar has
(1) (1955) 1 L.L.J. 588,592.
947
stated that the total amount of the estimated expenditure
shown in this document included only a small portion of the
expenditure required for rehabilitation of the post- 1944
block. It is true that Mr. Tongaonkar’s statement that in
the said total amount nearly Rs. 50 lakhs represent the
amount for replacement or rehabilitation of post-1944 block
is inaccurate. The Chaibasa Cement Factory and the Sevalia
Cement Factory for the rehabilitation of which Rs. 64.98 and
85.15 lakhs have been claimed in Ex. U-8 are undoubtedly
parts of the post 1944 block and the amounts claimed for
them are very much more than Rs. 50 lakhs. It is
nevertheless clear that ‘the items in Ex. U-8 do not
include a claim for rehabilitation for all the blocks of the
appellant, and it is not surprising either, because a claim
for the rehabilitation of all the blocks had been separately
made by the appellant in the earlier proceedings under Ex.
C-3. Thus there can be no doubt that neither the report
submitted by the appellant before the Tariff Commission nor
the estimate given by Ex. U-8 was prepared under the
formula; and so any disparity in the amounts claimed in the
two earlier documents cannot be seriously pressed into
service against the appellant when it seeks to make a claim
for rehabilitation strictly in accordance with the formula.
We must, therefore, hold that the tribunal was in error in
coming to the conclusion that by reason of its previous
conduct the appellant could not be allowed to place its
claim for rehabilitation at a figure higher than Rs. 192
lakhs in the relevant year. In this connection it would be
pertinent to remember that in dealing with the employer’s
claim for rehabilitation the tribunal is called upon to
assess respective values of the relevant factors on
hypothetical and empirical considerations, and so it may
generally not be useful or wise to take recourse to strict
legalistic principles like estoppel in deciding this
question and indeed all material questions in industrial
adjudications.
Does the formula need to be revised, and should it be
revised and reconstructed ? That is the question
948
which we must now consider. It appears that some tribunals
have taken the view that the rigid working of the formula
may defeat its object of recognising the social justice of
labour’s claim for bonus and so they have made suitable
adjustments in its operation. It is this approach which has
raised the larger issue of principle in the group of appeals
which have been placed for disposal before the Constitution
Bench. So we must examine this question in its broad
aspects and if we decide not to change the formula we must
state what, in our opinion is the content of the different
items mentioned in the formula and how they should be
calculated and mutually adjusted.
Let us first set out the case as it has been made for
changing the formula. It is ‘urged that though the formula
purports to recognise the principle of social justice on
which labour’s claim for bonus is based, it does not accord
to the said claim the high priority it deserves. Social
justice has been given a place of pride in the preamble to
the Constitution and it has been enshrined in the Directive
Principles under Arts. 38 and 43. Since 1950, ideas about
social and economic justice have made an appreciable
progress and they require the readjustment of priorities
prescribed by the formula in favour of the claim for bonus.
It is also contended that experience in industrial
adjudication during the last eight years and more shows that
employers are becoming increasingly more rehabilitation-
conscious and their appetite for the provision of
rehabilitation is fast growing from year to year. In the
present case, for instance, though the appellant occupies a
dominant position in its line of trade and though it makes
large profits, it has made such a tall claim for
rehabilitation that if the said claim is allowed the working
of the formula leaves no available surplus from which bonus
can be granted to labour. The appellant has no doubt paid
bonus for three months and it is unlikely that the appellant
would depart from its practice of paying the said bonus even
in future; but that does not affect the
949
position that in the light of the appellant’s claim for
rehabilitation the working of the formula would not justify
the grant of any bonus to labour. This shows that the
notional claim for rehabilitation which an employer can make
under the formula tends to be completely divorced from the
reality or actuality of the need of rehabilitation; and that
needs to be corrected.
Besides, it is said, that the theory that the trading
profits of the industry must provide for the whole of the
rehabilitation expenses is not universall accepted by
enlightened and progressive businessmen and economists. In
this connection reliance is placed on the observations of F.
R. M. de Paula in his ” Principles of Auditing ” that ” the
object of depreciation is the replacement of original
investment capital and that an increase in replacement cost
is an important matter and means that additional capital is
required in order to maintain the original earning capacity
“. It is also pointed out that the Institute of Chartered
Accountants in England and Wales, in its recommendations
made in 1949 under the heading ” Rising price levels in
relation to accounts ” has pointed out that ” the gap
between historical and replacement costs might be too big to
be bridged by a provision made for replacement spread over a
period of years either by way of supplementing the
depreciation charges or by setting up in lieu of
depreciation a provision for renewals based on estimated
replacement costs “. It is therefore suggested that in
revising the formula the claims for rehabilitation should be
fixed at a reasonable amount and industry should be required
to find the balance from other sources and if necessary from
its share in the available surplus.
In this connection it is pointed out that when the Labour
Appellate Tribunal evolved the formula it was dealing
directly with the needs of the textile industry and there
was no dispute that the plant and machinery of the textile
industry had become old and obsolescent and needed immediate
replacement, rehabilitation and modernisation. It is
doubtful whether, in giving priority to the claim for
rehabilitation in the
950
context of the needs of the textile industry with which the
appellate tribunal was concerned, it really intended that
rehabilitation should be claimed ‘by every industry on
theoretical considerations whether or not the said claim was
justified by its actual or practical need for
rehabilitation.
In substance the argument is that the Full Bench of the
Labour Appellate Tribunal evolved its formula in order that
labour may get a reasonable share in the available surplus
and may thereby receive assistance in filling up the gap
between its actual wage and the living wage which it looks
forward to receive in due course; and if it is found that,
in working out the items which are treated as prior charges,
in a majority of cases the formula leaves no available
surplus, then its main object is frustrated and that is the
justification for revising it and readjusting its
priorities.
In support of this view reliance has also been placed on the
recommendations of the Committee on ‘Profit-sharing’. This
Committee had been appointed in 1948 to advise the
Government of India ” on the principles to be followed for
the determination of (a) fair wages to labour, (b) fair
return to capital employed in the industry, (e) reasonable
reserves for the maintenance and expansion of the
undertaking, and (d) labour’s share of the surplus profits,
calculated on a sliding scale normally varying with
production, after provision has been made for (b) and (c)
above “. The Committee viewed its problem from three im-
portant angles, viz., ” profit-sharing as an incentive to
production, profit-sharing as a method of securing
industrial peace, and profit-sharing as a step in the
participation of labour in management “. The Committee
recognised that putting back profits into the industry is
one of the most useful forms of capital investment and this
should be encouraged and it recommended that a figure of 20%
for reserves should be generally aimed at, though it
considered that, as a first charge, 10% of the net profits
should be compulsorily set aside for reserves, leaving it to
the good sense of the management to allocate the balance or
more out of their own share of surplus profits. In regard
951
to the labour’s share in the surplus profits, the Committee
stated that, having due regard to the conditions prevailing
in the industry selected for an experiment in profit-
sharing, it had come to the conclusion that labour’s share
should be 50% of the surplus profits of the undertakings.
It is a matter of common knowledge that so far Government
have not thought it desirable, expedient or possible to
legislate in this matter in the light of the recommendations
made by this Committee; but it is suggested that these
recommendations afford a rational basis for reconstructing
the formula.
It may be conceded that there is some force in some of the
arguments urged in support of the plea that the formula
should be revised and its priorities should be readjusted
and redefined; but, on the other hand, we cannot ignore the
fact that on the whole the formula has worked satisfactorily
in a large number of industries all over the country.
Except for a few cases, particularly in Bombay, where some
of the tribunals have taken the view that, in its rigid
form, the formula has become unworkable from the point of
view of labour, in a majority of cases industrial disputes
arising between employers and their workmen in regard to
bonus have been settled by tribunals on the basis of this
formula; and it would not be unreasonable or inaccurate to
say that by and large labour’s claim for bonus has been
fairly and satisfactorily dealt with. The main source of
contest in the working of the formula centres round the
industry’s claim for rehabilitation; but, as we shall
presently point out, if this claim is carefully scrutinised
and examined in the light of evidence which the employer has
to produce in support of his claim, even the settlement of
this item would, as it is intended to, invest the tribunal
with sufficient discretion to make the working of the
formula elastic enough to meet its two-fold object of doing
justice both to industry and labour.
It is true that in the working of the formula employers
sometimes make an attempt to add items to the list of prior
claims. In The State of Mysore v. The
121
952
workers of Kolar Gold Mines (1), it was urged before this
Court by the industry that it was a wasting industry and as
such it needed special consideration. The contention was
that for the prosperity and longevity of the industry a
special provision for the prospecting of new ore has to be
made and that should be added as an additional item in the
list of prior charges. This argument was, however, rejected
and it was held that the special features of the industry
would be taken into account in determining the amount which
could be reasonably claimed under rehabilitation. This
decision shows the reluctance of this court to vary or add
to the formula which oil the whole has so far worked fairly
satisfactorily.
The theory that the whole of the rehabilitation charges need
not come out of the trading profits of the industry does not
appear to be generally accepted. As has been observed by
Paula himself: ” In the past the accepted principle has been
that the main object of providing for the depreciation of
wasting assets is to recoup the original capital invested in
the purchase of such assets. As part of the capital of the
concern has been invested in the purchase of these assets,
therefore, when their working life comes to an end, the
earning capacity of these assets ceases. Thus they will
become valueless for the purposes of the business, and the
original capital sunk in their acquisition, less any scrap
value, will have been lost. Hence, in order to keep the
original capital of a business intact, if any part thereof
is invested in the purchase of’ wasting assets, revenue must
be held back by means of depreciation charges to profit and
loss account, in order to replace the capital that is being
lost by reason of the fact that it is represented by assets
that are being consumed or exhausted in the course of
trading or seeking to earn income It is also stated by the
same author that ” in all cases where One of the direct
causes of earning revenue is gradually to consume fixed
assets of wasting nature, the depreciation of such assets
should be provided for out of revenue ” (3). It is true
(1) [1959] S C.R. 895.
(2) F.R.M. de Paula’s Principles of Auditing’, 1957, P.
136.
(3) Ibid, p. 138.
953
that the author recognises that ” owing to the very
considerable increase in the price level since the
termination of the 1939-45 war, industry is finding its
original money capital insufficient for its needs. Thus the
cost of replacement of fixed assets has greatly increased
and in addition, further working capital is required to
finance a given volume of production. Many economists,
industrialists, and accountants contend that provision
should be made, in arriving at profits, for this increased
capital requirement “. Having noticed this view the author
adds that ” at the time of writing this matter is still
being debated and final decisions have not yet been reached
“, and he concludes that ” until a final solution of this
complex problem is reached it would be inadvisable for the
auditor to act on any principle other than that recommended
by the Institute “(1); and that principle appears to be that
depreciation should be provided for out of revenue.
Besides, it must be borne in mind that, in adjusting the
claims of industry and labour to share in the profits on a
notional basis, it would be difficult to repel the claim of
the industry that a provision should be made for the
rehabilitation of its plant and machinery from the trading
profits. On principle the guaranteed continuance of the
industry is as much for the benefit of the employer as for
that of labour; and so reasonable provision made in that
behalf must be regarded as justified.
The recommendations made by the Committee on Profit-sharing’
cannot be of much assistance because they raise questions of
policy and principle which Legislature can more
appropriately consider. If the Legislature feels that the
claims for social and economic justice made by labour should
be redefined on a clearer basis it can step in and legislate
in that behalf. It may also be possible to have the
question comprehensively considered by a high-powered
commission which may be asked to examine the pros and cons
of the problem in all its aspects by taking evidence from
all industries and all bodies of workmen. The plea for the
revision of the formula raises an issue
(1)F.R.M. de Paula’s Principles of Auditing’, 1957, P-
80.
954
which affects all industries; and before any change is made
in it, all industries and their workmen would have to be
heard and their pleas carefully considered. It is obvious
that while dealing with the present group of appeals it
would be difficult, unreasonable and inexpedient to attempt
such a task. That is why we think that labour’s claim for
bonus should be decided by tribunals on the basis of the
formula without attempting to revise it.
Whilst we are not prepared to accede to the argument that
the formula should be revised, we wish to emphasise that the
formula is elastic enough to meet reasonably the claims of
the industry and labour for fairplay and justice. In its
broad features it recognises the claims of the industry and
tabulates them under different items as prior charges, and
then provides for the distribution of available surplus
between the labour, the industry and the shareholders. The
items specified in the formula have to be worked out notion-
ally on theoretical grounds; in determining the content of
each one of the items it is therefore essential to
scrutinise and weigh carefully all the relevant and material
facts. If the content of each item is determined
objectively in the light of all relevant and material facts,
the tribunals would generally find it possible to make
reasonable adjustments between the rival claims and provide
for a fair distribution of the available surplus. In this
sense it is necessary to treat the formula as elastic and
not rigid in working out detailed calculations under it.
We have no doubt that if the industry and labour genuinely
desire to settle the disputes as to bonus without the
intervention of the conciliator or the adjudicator, the
formula would help them to arrive at a reasonable
settlement. If the employer does not make an unduly
inflated claim under the items which safeguard industry’s
interests, and if workmen do not make an exaggerated demand
for bonus, it would normally not be beyond the co-operative
effort of the parties to arrive at a reasonable figure which
should be paid to labour by way of bonus from year to year.
It is unnecessary to emphasise that industrial disputes
955
settled amicably are in the interest of both capital and
labour. Amicable settlements of such disputes lead to’
peace, harmony and co-operation between capital and labour
and that invariably helps more production which is a matter
of great national importance at present.
But unfortunately, in many cases, both the industry and
labour do not appear to be too keen on settling’ these
disputes amicably, with the result that claims for bonus
give rise to disputes year after year and inevitably the
machinery under the Industrial Disputes Act is set in
motion. Conciliation efforts are made but they do not
succeed; then reference is made under s. 10 of the Act and
the dispute is taken before the tribunal; since both the
parties are not in a mood to co-operate with each other,
over-statements are made on both sides, allegations are met
by counter-allegations and they are sought to be supported
by evidence. In such a case the tribunals must examine the
rival contentions and scrutinise the evidence adduced by the
parties objectively and in a judicial manner. If proper
evidence is led and it is judicially weighed, the tribunal
would be able to work the formula in a reasonable manner and
arrive at a result which would be substantially in
conformity with the object underlying the formula. It is
obvious that, in making the relevant calculations under the
items of prior charges specified in the formula, the
tribunals should have a clear idea as to the content of each
one of the said prior charges; and so it is necessary to
examine carefully this aspect of the matter.
We have already noticed that the formula for awarding bonus
to workmen is based on two considerations; first that labour
is entitled to claim a share in the’ trading profits of the
industry because it has partially contributed to the same;
and second that labour is entitled to claim that the gap
between its actual wage and the living wage should within
reasonable limits be filled up. The concept of labour’s
contribution to the profits of the industry has reference to
the contribution made by the employer and the workmen taken
together as a class; and so it would
956
not be relevant to, inquire which sectionof labour
has contributed to what share of the profits.The board
idea underlying this concept is that the capital invested by
the employer and labour contributed by workmen jointly
produce the profits of an industry. This does not
necessarily mean that, in theindustry in question, labour
must actually manufacture or produce goods, though, in the
case of manufacture and,production of goods contribution of
labour. is patent and obvious. In the Burma Shell Oil
Storage and Distributing Co., of India Pd. v. Their,
Workmen(1) the Labour Appellate Tribunal rejected the
employers’ claim that, since workmen employed by them did
not manufacture or produce any goods but merely assisted
them in the distribution Of oil, they were not. entitled to
claim any bonus under the formula. It is wrong to say “,
observed the labour Appellate, Tribunal, that because the
employees of these oil companies merely market the oil they
have not earned the right to any bonus”. It was also Pointed
out that the workmen had to perform :duties of various
intensity for marketing an article of public. utility,. and
in that sense they contribute to, production according to
the concept of economists”. So were the clerks held entitled
to bonus for,their duties in the, general business of the
concern though, they had nothing to do with the physical act
of marketing the commodity it was also emphasised that the
other object of granting the bonus was to help the workmen
to fill up the gap between their actual wages and the living
wage. Thus in dealing with the claim for bonus made by
workmen the two-fold basis of the formula must always be
kept in mind.
The working of the formula begins with the figure of gross
profits taken from the profit and loss account which are
arrived at after,payment of wages and dearness allowance to
the employees and other items of expenditure. As a general
rule the amount of gross profits thus ascertained is.
accepted without submitting the statement of the’ profit and
loss ‘account to a close scrutiny. If, however, it appears
that
(1)(1953) 11, L.L.J. 246.
957
entries have, been made on the debit side, deliberately and
mala fide to reduce the amount of gross profits, it would be
open to the tribunal to examine the question and if it is
satisfied that the impugned entries have been made mala fide
it may disallow them. This principle has been recognised by
the Labour Appellate Tribunal when it observed, for
instance, in M/s. J. K. Cotton Manufacturers Ltd., Kanpur
v. Their Workmen (1) that if managing agents deliberately
divert profits to the selling, agents with a view to deprive
labour of their bonus and pay commission to the selling.
agents at high rates then certainly the matter must be taken
into consideration in the determination of available surplus
balance ” It would likewise be open to the parties to claim
the exclusion of items either on the credit or on the debit
side on the ground that the impugned items are. wholly
extraneous and entirely unrelated to the trading profits of
the year. In considering such a plea the tribunal must
resist the temptation of dissecting the balance-sheet too
minutely or of attempting to reconstruct it in any manner.
It is only glaring cases, where the impugned item may be
plently and obviously extraneous that a plea for its
exclusion should be entertained. Where the employer makes
profits in the course of carrying on his trade or business,
it would be unreasonable to inquire whether each one of the,
items of the said profit is related to the contribution made
by labour. In such matters, the tribunal must take an
overall, practical and commonsense view. Thus it ma be
stated that as a rule the gross profits appearing at the
foot of the statement of the profit, and loss account should
be taken a,% the basic figure while working out the formula.
In, working out the formula the other important fact which
should not be ignored is, that the formula proceed’s to deal
with the labour’s claim for bonus on the basis that the
relevant year for which bonus is claimed is a self-
sufficient unit and the appropriate accounts have, to. be
made on the notional basis in respect of the said, It is
substantially because
(1)[1954] L.A.C. 716, 745. (Also vide [1952] L.A.C. 420,
421.)
958
of this basic assumption that if an employer receives during
the bonus year a refund with respect to the excess profits
tax paid by him in a previous year the amount of refund is
not included on the credit side. In Model Mills etc.’
Textile Mills, Nagpur v. The Rashtriya Mill Mazdoor Sangh
(1) the Labour Appellate Tribunal observed that according to
the. formula, the income-tax is to be deducted as a prior
charge on trading results of the year just as much as the
bonus is to be ascertained upon the trading results of the
year. The concession made by the income-tax authorities in
making a refund of the excess profits tax already paid by
the employer is intended to aid a concern on account of past
losses and so it has nothing to do with the formula. The
same principle governs cases where owing to a loss incurred
in the previous year or years the employer is entitled to
claim allowance for adjustment under s. 24 (2) of the
Income-tax Act during the bonus year; and so it is held that
the allowance for adjustment which the employer claims
cannot be taken into account in determining the amount of
income-tax payable on the profits of the bonus year under
the formula. In Bennett Coleman and co., Ltd. v. Their
Workmen (2) the Labour Appellate Tribunal rejected the
contention raised by labour that since under s. 24 (2) the
employer would not be liable to pay tax during the bonus
year no provision for payment of tax should be made in
working out the formula. The Labour Appellate Tribunal
pointed out that the fact that the employer was not required
to pay tax during the bonus year was the result of the
adjustment of the previous year’s unabsorbed depreciation
and losses against current year’s profit, and that had no
relevance in determining the available surplus from the
trading profits of the bonus year. The same view has been
taken in several other decisions to which the Labour
Appellate Tribunal has referred. In our opinion, once it is
realised that in working out the formula the bonus year is
taken as a unit self-sufficient by itself, the decisions of
the Labour Appellate Tribunal in regard
(1) (1955) I J. 534, 540.
(2) (1955) I J. 60.
959
to the refund of excess profits tax and the adjustment of
the previous year’s depreciation and losses against the
bonus year’s profits must be treated as logical and sound.
Having ascertained the amount of gross profits, the first
item of deduction relates to depreciation. The propriety of
this deduction was not questioned before the Labour
Appellate Tribunal which evolved the formula; but the
content of the item of depreciation became a matter of
controversy subsequent to 1950. After 1948, s. 10 (2) (vi)
of the Income-tax Act has provided for initial and
additional depreciation besides the statutory depreciation
which was already admissible. In other words, depreciation
allowed under the Income-tax Act now consists of what may be
called the statutory normal depreciation calculated under r.
8 as well as initial depreciation and additional
depreciation. The allowance of these depreciations is an
exception to the general rule that the income has to be
taxed without reference to the diminution in the value of
the capital. Under the amended provision of s. 10 (2) (vi)
of the Income-tax Act the employers began to claim that from
the gross profits all the depreciations admissible under the
Income-tax Act should be debited; and this claim was upheld
by some tribunals and rejected by others. This conflict of
decisions led to confusion; and so a Full Bench of the
Labour Appellate Tribunal was constituted to decide this and
other points in the case of the U. P. Electric Supply Co.,
Ltd., etc. Electricity Supply Undertakings v. Their
Workmen(1). The Full Bench held that ” the depreciation
which should be deducted from the gross profits in working
the formula is annual depreciation allowable under the
provisions of the Income-tax Act including the multiple
shift depreciation; it also held that the initial
depreciation and additional depreciation which were also
allowed under the Income-tax Act are abnormal additions to
the income-tax depreciation designed to meet particular
contingencies and for a limited period;
(1) (1955) II J. 431.
122
960
and so it would not be fair to the workmen that these two
depreciations should be rated as prior charges before the
available surplus is ascertained “. Apparently some doubt
arose as to what exactly was allowed to be deducted under
this Full Bench decision; and two of the members of the Full
Bench took occasion to clarify the position in Surat
Electricity Co.’s Staff Union v. Surat Electricity Co., Ltd.
(1). This decision shows that what the Full Bench intended
to treat as depreciation for the purpose of the formula was
a notional amount of normal depreciation; in order to avoid
any future doubt or confusion, the judgment in the case has
set out the manner in which this notional normal
depreciation has to be worked out. Since this decision was
pronounced it is the notional normal depreciation that is
deducted from the gross profits in working the formula. It
seems to us that the view taken by the Full Bench is wholly
consistent with the basic idea of social justice on which
the original formula is founded. The relevant provisions of
the Income-tax Act allowing further depreciation are based
on considerations which have no relevance to the original
formula; indeed, as the Full Bench has pointed out, if the
said two items of depreciations are allowed to be deducted
from the gross profits it would in a majority of cases
defeat the object of the formula itself. We would
accordingly hold that the depreciation which has to be
deducted from the gross profits should be the notional
normal depreciation as explained in the case of Surat
Electric Co., Ltd. (1).
The balance obtained after deducting depreciation from the
gross profits is then taken as the amount on which
calculations have to be made about the income-tax payable
for the bonus year. This item gives rise to a controversy
between the parties. It is urged for the employers that in
determining the amount payable by way of income-tax on this
balance the tribunal should not take into consideration
allowances which are made under the relevant provisions of
the Income-tax Act. There is no doubt that in taxing the
employer for the bonus year the Income-tax Act would
(1)(1957) II L. L. J. 648.
961
make allowance not only for the normal depreciation but also
for the initial and additional depreciations; but the
argument is that the income-tax should be determined
nationally without reference to the said allowances. In
support of this argument it is further urged that though the
employer may obtain credit for the two further depreciations
for some years, later on the said allowances will not be
made and his liability’ to pay tax would be correspondingly
increased. It is but fair, so the argument runs, that the
employer should be allowed to create a fund of income-tax
reserve from which he would be able to bear his tax
liability in future as and when it is bound to increase.
On the other hand it is contended on behalf of workmen that
while determining the amount of tax payable for the bonus
year the tribunal cannot ignore the concession given to the
employer by the Income-tax Act by making the allowance of
two further depreciations. What the employer claims is not
the amount of tax payable during the bonus year but much
more in addition in order to build up a reserve and this
notion of building up a tax reserve for meeting future,
though certain, increased tax liability is foreign to the
basic idea of the formula. For making calculations under
the formula the bonus year is taken as a unit and all items
specified in the formula should be worked out on that basis.
That is why the refund of the excess profits tax received in
the bonus year is excluded from consideration and the right
of the employer to adjust his previous year’s losses and
depreciation against the trading profits of the bonus year
is likewise ignored. So too the fact that the employer may
have to pay increased taxes in future years must be treated
as irrelevant. That in brief is the case for workmen.
In our opinion, having regard to the basis of the formula
and the manner in which the other items of the formula are
required to be worked out, it would not be reasonable to
allow the employer to claim under the item of income-tax an
additional amount is respect of the two further
depreciations which are expressly allowed to him under s.
10(2)(vi) of the Income-tax
962
Act. It is clear that the amount determined under this item
would not represent the actual tax which the income-tax
department will recover from the employer. In that sense it
would always be a notional amount ; but in calculating even
this notional amount it would be unfair and unjust to ignore
the concessions allowed to the employer by s. 10(2)(vi).
The creation of a fund of income-tax reserve may conceivably
lead to unnecessary complications. Besides, if on principle
the further depreciations allowed by the Income-tax Act are
treated as inadmissible under the formula and so are
excluded from consideration, it would be substantially
inconsistent with the object of such exclusion to allow the
employer to claim tax in respect of the said amounts of the
two depreciations. It is clear that even if the amount of
income-tax is determined after taking into account the
concession given to the employer by s. 10(2)(vi) it would
work no hardship to the employer, for the simple reason that
in future years when these concessions cease to be operative
and his liability to pay the tax correspondingly increases,
he would be entitled to claim the amount of income-tax which
would then be payable by him. This method of calculating
income tax is thus fair to both the parties and it has
besides the merit of being consistent with the basic
character of the formula. It would be relevant in this
connection to remember that, though in most of the
industries workmen continue to be employed from year to
year, nationally and on principle, the claim for bonus for a
particular year is made on behalf of workmen employed during
the said year; and in that sense, the relevant calculations
have to be made with the bonus year as a unit. That is why
considerations of future tax liability of the employer are
foreign to the calculation under the formula. We would,
therefore, bold that in calculating the amount of tax
payable for the bonus year the tribunals should not take
into account the concessions given by the Income-tax Act to
the employers under the two more depreciations allowed under
s. 10(2)(vi) of the Income-tax Act.
This point has been considered by this Court in
963
Sree Meenakshi Mills, Ltd. v. Their Workmen (1) where has
upheld the view taken by the Full Bench the Labour Appellate
Tribunal in the case of the U. Electric Co., Ltd., etc.,
Electricity Supply Undertakings (2) and has directed that in
determining amount of income-tax payable during the bonus
yea the further depreciations permissible under the income-
tax Act should be taken into account. We would only like to
add that in that case this Court had occasion to say what
exactly the normal depreciation meant; but it is clear that
the normal depreciation mentioned in the judgment was not
intended to mean anything other than the notional normal
depreciation as explained by the Labour Appellate Tribunal
in the case of the Surat Electric Co., Ltd. (3 ). The amount
income-tax thus determined has then to be deduct( as a prior
charge.
The next step in the working of the formula related to the
deduction of an appropriate amount in respect of the return
on paid-up capital as well as working capital. We have
already noticed that the formula provides generally for the
payment of interest at 69 per annum on the paid-up capital
and at 2% on worldling capital. Subsequent decisions show
that the tribunals do not regard the said rates as
inflexible and they have suitably modified them in the light
of the relevant circumstances in each case. We think that
this is a correct approach and that it is necessary to fix
the rates of interest on the two items of paid-up capital
and working capital according to the circumstances of each
case. In this connection it may be added that ordinarily
industrial tribunals awards interest at the rate of 6% per
annum on paid-up capital.
In Workmen of Assam Co., Ltd. v. Assam Co., Ltd. this Court
held that interest allowed by the tribunal a 7% on paid-up
capital and confirmed by the Labour Appellate Tribunal was
justified because ” an industry connected with agriculture
like the tea industry is exposed to greater risks than any
other industry such
(1) [1958] S.C.R. 878.
(3) (1957) 11 L.L.J. 648.
(2) (1955) II L.L.J.- 431.
(4) [1959] S.C.R. 327]
964
weather, pests in the plants and gradual deterioration of
the soil “. On the other hand, in Ruston and ornsby (India)
Ltd. v. Their Workmen (1) the Labour appellate Tribunal
allowed only 4% return on the art of paid-up capital
represented by bonus shares for the year in which such
shares were issued and ,)served that ,for subsequent years
no distinction between it and other paid-up capital
represented by paid-up shares should be made “. Similarly,
in regard reserves or depreciation used as working capital
interest has been allowed either at 4% or at 3% or ,Ten at
2% according to the relevant circumstances. in the Mill
Owners Association, Bombay v. The Rashtriya Mill Mazdoor
Sangh (2) the Labour Appellate Tribunal has observed that ”
as we have said before, there is no fixed rule as to the
rates of such return (on capital) and each case must depend
on its individual acts. We have in appropriate cases given
as high as % but in case of the mills the Full Bench has
considered that the equivalent of 2% would be reasonable nd
we propose to retain it at that level for the present “. In
Tea and Coffee Workers Union v. Brooke Bond (India)
(Private) Ltd. (3) the Industrial Tribunal as considered the
previous decisions on the question of the return on working
capital and held that, in the case before it, it would be an
adequate return on the working capital if 3% interest is
allowed because there were no special reasons existing for
allowing a higher ate.
In dealing with this aspect of the matter it is relevant to
point out that no distinction has been made )y tribunals
between reserves used as working capital and depreciation
fund similarly used. In the Mill Owners Association, Bombay
v. The Rashtriya Mill Mazdoor Sangh (2) (page 523) when
labour objected to the depreciation fund earning any return
even if it was utilised in or about the business of the
year, the labour Appellate Tribunal overruled the objection
and observed that ” no essential difference could be made
between the depreciation fund and any other
(1) (1955) 1 L.L.J. 73. (2) (1952) 1 L.L.J. 518. 522.
(3)(1958) 1 L.L.J. 645.
965
fund belonging to the company which could be invested so as
to earn a return “. It is thus clear that what is material
is not the origin of the fund. It is the fact that the fund
in the hands of the concern has been used as working capital
that justifies the claim for art adequate return on it. We
think it is commonsense that if the concern utilises liquid
funds available in its hands for the purpose of meeting its
working expenses rather than borrow the necessary amounts it
is entitled to claim some reasonable return on the funds
thus used. It is of course necessary that the employer must
show that the amount under the depreciation fund was in fact
available and that it has actually been used as working
capital during the relevant year. What return should be
allowed on such funds must inevitably be a question of fact
to be decided by the tribunal in its discretion in each case
in the light of the relevant circumstances. It would thus
be noticed that in working out these two items under the
formula there is no fixed or rigid rule about the rate of
interest which can be claimed and awarded. It is also clear
that if any fund is used by the employer for the purpose of
expanding his business he is not entitled to claim any
return on such fund under those items. In the case of the
U. P. Electric Supply Co., Ltd. etc. Electricity Supply
Undertakings (1) the Full Bench of the Labour Appellate
Tribunal held that ” considering all the factors presented
to them they did not think that a case had been made out for
giving a special prior charge in the shape of return on the
reserves utilised for expansion “. When the amounts
awardable to the employer under these two items are
determined they have to be treated as prior charges in the
calculation of available surplus under the formula.
The original formula referred to replacement, rehabilitation
and modernisation of the plant and machinery. Soon after
the formula was evolved a dispute arose as to whether the
industry was entitled to claim rehabilitation for its
buildings as well and it was held that ” a claim for
rehabilitation for buildings had to
(1) (1955) II L.L.J. 431.
966
be treated as a prior charge just like the claim for the
rehabilitation of plant and machinery ” (1). :This position
is not disputed before us, and we think rightly.
That takes us to the item of rehabilitation and it is this
item which poses a very difficult problem. We have already
noticed that the object of providing depreciation of wasting
assets in commercial accounting is to recoup the original
capital invested in the purchase of such assets; but the
amount of depreciation which is allowed under the formula
can hardly cover the probable cost of replacement. That is
why the formula has recognised the industry’s claim for
rehabilitation in addition to the admissible depreciation.
Since the Second World War prices of industrial plant and
machinery have registered a continuous upward rise and its
inevitable consequence has been a proportionate rise in the
claim for rehabilitation. In considering the claim for
rehabilitation it is first necessary to divide the blocks
into plant and machinery on the one hand and other assets
like buildings, roads, railway-sidings, etc., on the other.
Then the cost of these separate blocks has to be ascertained
and their probable future life has to be estimated. Once
this estimate is made it becomes possible to anticipate
approximately the year when the plant or machinery would
need replacement; and it is the probable price of such
replacement on a future date that ultimately decides the
amount to which the employer is entitled by way of
replacement cost. This problem can be considered item wise
where the industry does not own too many factories and item
wise study of the plant and machinery is reasonably
possible; but if the industry owns several factories and the
number of plants and machines is very large it would be
difficult to make a study of the replacement costs item-
wise, and in such a case the study has to be blockwise. In
either case what the tribunal has to estimate is the
probable cost of replacement of plant and machinery at the
time when such replacement would become due. It would be
clear that the decision of this question would inevitably
depend upon several uncertain
(11) (1952) 1 L.L.J. 518, 522.
967
factors. The estimate about the probable life of the plant
and machinery is itself to some extent a matter of guess
work and any anticipation, however intelligently made, about
the probable trend of prices during the intervening period
would be nothing but a guess. That is how, in the
determination of this problem, several imponderables face
the tribunals.
One of the points which raises a controversy in this’
connection is: What level of prices should the tribunal
consider in making its calculations about the probable cost
of replacement ? Would it be the price level prevailing
during the bonus year or that prevailing at the time when
the tribunal holds its enquiry ? Prima facie it may appear
that it is the price level prevailing in the bonus year that
should be treated as relevant; but if the relevance of the
evidence about the price level is limited only to the bonus
year, it may hinder rather than help the process of a
satisfactory determination of the probable cost of
replacement. What the tribunal has to do in determining
such cost is to project the price level into the future and
this can be more satisfactorily done if the price level
which has to be projected into the future is determined not
only in the light of the prices prevailing during the bonus
year but also in the light of subsequent price levels. It
seems to us that in order to enable the tribunal to make an
estimate in this matter as near actualities or realities as
possible it is necessary that the tribunal should be given
full discretion to admit all relevant evidence about the
trend in price levels. The price level during the bonus
year would no doubt be admissible; but that alone should not
be taken as the basis for decision. That is the view which
the tribunals have taken in a majority of cases in dealing
with the question of rehabilitation and we do not think that
there is any justification for disturbing the usual practice
in that behalf.
The problem of determining the probable cost of replacement
itself is very difficult; but the difficulty is immeasurably
increased when it is remembered that the claim for
rehabilitation covers not only cases of
123
968
replacement pure and simple but of rehabilitation and
modernisation. In the context rehabilitation is distin-
guished from ordinary repairs which go into the working
expenses of the industry. It is also distinguished from
replacement. It is quite conceivable that certain parts of
machines which constitute a block may need rehabilitation
though the block itself can carry on for a number of years;
and this process of rehabilitation is in a sense a continual
process. Unlike replacement, its date cannot always be
fixed or anticipated. So with modernisation; and all these
three items are included in the claim for rehabilitation.
That is why we think it is necessary that the tribunals
should exercise their discretion in admitting all relevant
evidence which would enable them to determine this vexed
question satisfactorily.
At this stage it is relevant to remember that the claim
under this item is confined to rehabilitation, replacement
and modernisation. It is common ground that expansion of
the plant and machinery is not included in this item; but in
several cases it is not easy to distinguish between
modernisation of the plant and machinery and its expansion.
It is urged that an expert can, if he so chooses, make an
attempt to include expansion within what he may describe as
modernisation by clever use of technical words and details,-
and that it is precisely this aspect of the matter which has
to be carefully examined by the tribunal. The industry
sometimes claims that a plant may become obsolescent because
it has become out of date and has to be substituted by a new
modern plant. Is the introduction of the new modern plant
in such circumstances an item of expansion or mere modern-
isation ? It is difficult to lay down any general tests
which would govern the decision of this question. If it
appears fairly on the evidence that the introduction of the
modern plant or machine is in substance an item of expansion
of the industry, expenses incurred in that behalf have to be
excluded. On the other hand, if the employer had to
introduce the new plant essentially because the use of the
old plant though capable of giving service-was uneconomic
and other-
969
wise wholly inexpedient, it may be a case of modernisation.
Similarly, if by the introduction of a modern plant or
machine the production capacity of the industry has
appreciably increased, it would be relevant for the tribunal
to consider in an appropriate case whether it would be
possible to apportion expenses on the basis that it is a
case of partial modernisation and partial expansion. If,
however, the increased production is not of a significant
order it may be regarded as incidental to replacement or
modernisation and the question of apportionment may not
arise. We have set out these considerations in order to
emphasise the fact that in dealing with the problem of
rehabilitation the tribunal must carefully examine the
evidence and consider the employer’s claim in all its
aspects before determining the amount which should be
allowed by way of rehabilitation as a prior charge in the
relevant year.
The decision on the question of the probable cost of
rehabilitation is always reached by adopting a suitable
multiplier. This multiplier is based on the ratio between
the cost price of the plant and machinery and the probable
price which may have to be paid for its rehabilitation,
replacement or modernisation. Since there has been a
continuous rise in the prices of industrial plant and
machinery the older the plant which needs rehabilitation the
higher is the multiplier. That is why there is always a
competition between industry and workmen on this point.
Industry is sometimes tempted to keep its old pre- 1939
block alive with a view to claim a higher multiplier which
gives it a larger amount of rehabilitation expenditure;
whereas workmen urge that the old pre-1939 block has been
nominally kept alive as a device and so press for a lower
multiplier which would reduce the claim for rehabilitation.
Once a proper multiplier is adopted in respect of each one
of the blocks the first step in determining the probable
cost of rehabilitation can be easily taken. It then becomes
a matter of mere arithmetical calculation.
At this stage the divisor steps in. The total amount
required for rehabilitation which is determined by the
970
application of a suitable multiplier in respect. of each
block has to be divided by a suitable divisor in respect of
each block in order to ascertain the annual requirement of
the employer in that behalf year by year. In the case of
the divisor the employer seeks for a lower divisor whereas
workmen claim a higher divisor and this contest has to be
decided by the tribunal by reaching a fair conclusion on the
evidence before it about the probable future life of the
block in question. It would thus be noticed that the
adoption of a suitable multiplier and divisor plays a very
important part in the decision of the vexed question about
the employer’s rehabilitation claim.
Before actually awarding an appropriate amount in respect of
rehabilitation for the bonus year certain deductions have to
be made. The first deduction is made on account of the
breakdown value of the plant and machinery which is usually
calculated at the rate of 5% of the cost price of the block
in question. Then the depreciation and general liquid
reserves available to the employer are deducted. The
reserves which have already been reasonably earmarked for
specific purposes of the industry are, however, not taken
into account in this connection. Last of all the
rehabilitation amount which may have been allowed to the
employer in previous years would also have to be deducted if
it appears that the amount was available at the time when it
was awarded in the past and that it had not been used for
rehabilitation purposes in the meanwhile. These are the
broad features of the steps which have to be taken in
deciding the employer’s claim for rehabilitation under the
working of the formula. ”
It would thus be clear that the decision of this major item
in the working of the formula presents many difficulties;
and in the last analysis its decision depends upon several
hypothetical and empirical considerations. It is,
therefore, not surprising that in the case of Metal Box Co.
of India, Ltd. v. Its Workmen (1) the Labour Appellate
Tribunal has observed that ” It is unfortunately too true
that all
(1) [1952] L.A.C. 315, 321.
971
our calculations as to rehabilitation may be disproved by
subsequent events; it is impossible to say what the trend of
world prices would be in the next fifteen years or which
circumstances will intervene before that period to upset
such calculations one way or the other, and no calculations
of this kind are capable of mathematical accuracy. We have
to take a commonsense view of these matters and make an
allowance’ for rehabilitation to the best of our ability and
in accordance with our formula “. It has also been observed
by the Labour Appellate Tribunal that if an appropriate
multiplier and divisor are determined ” they are generally
used because the tribunals take the view that the
reconsideration of the said multiplier and divisor should
not be hastily undertaken and could be justified only on the
basis of a substantial change of a stable character
extending or likely to extend over a sufficient number of
years so as to make a definite and appreciable difference in
the cost of replacement “. (Vide: The Mill Owners
Association Bombay v. The Rashtriya Mill Mazdoor Sangh (1)
In dealing with the employer’s claim for rehabilitation
tribunals have always placed the onus of proof on the
employer. He has to prove the price of the plant and
machinery, its age, the period during which it requires
replacement, the cost of replacement, the amount standing in
the depreciation and reserve fund, and to what extent the
funds at his disposal would meet the cost of replacement.
If the employer fails to lead satisfactory evidence on these
points tribunals have on occasions totally rejected his
claim for rehabilitation. (Vide: Ganesh Flour Mills Co.
Ltd., Kanpur v. Ganesh Flour Mills Staff Union, Kanpur (2);
Bombay Gas Co. Ltd. v. Their Workmen (3); Dharangadhra
Chemical Works Ltd. v. Its Workmen (4)). If the tribunals
are satisfied that the employer is deliberately and without
a sufficient cause not taking any steps to rehabilitate,
replace or modernise his machinery even though an
appropriate allowance is made in that behalf from year to
year, they may take into
(1)(1952) 1 L.L.J. 518.
(3)(1955) 11 L.L.J. 152.
(2) [1952] L.C. 172
(4) (1956) 1 L.L.J. 475.
972
account this conduct in determining the extent of such
allowance in the bonus year in question. Similarly if it
appears that the employer has deliberately or mala fide
refrained from rehabilitating or replacing his old machinery
with a view to claim a higher multiplier in calculating the
rehabilitating amount, the tribunals may take his conduct
into account in determining the actual allowance of
rehabilitation to him.
The main difficulty in deciding questions about reha-
bilitation arises from the fact that satisfactory evidence
is not always placed before the tribunals and it is urged
that the evidence given by the employers’ experts is
interested and the workmen with their limited resources are
not able to test the said evidence by adequate or effective
cross-examination. In such a case the tribunal may, if it
so desires and if it is possible, secure the assistance of
assessors (vide s. 38 of the Industrial Disputes Act). It
is therefore necessary that the tribunal should require the
employer to give clear and satisfactory evidence about all
the relevant facts on which it can make the requisite
estimate. The questions which the tribunal has to consider
under this item are essentially questions of fact and its
final decision on them is bound to be hypothetical, since it
would be based on a fair evaluation of several circumstances
which are by no means certain and which cannot be predicated
with any amount of precision or even definiteness. That is
why it is of the utmost importance that all relevant and
material evidence should be adduced by the employer and it
should be properly tested by cross-examination. When that
is done the tribunal must do its best to consider the said
evidence objectively and reach its final decision in a
judicial manner.
Once the amount of rehabilitation is thus determined the
available surplus for the bonus year is ascertained and the
final stage is reached when the tribunal has to give
directions for the distribution of the said available
surplus. It is not seriously disputed that three parties
are entitled to claim a share in this available surplus;
labour claims bonus from it, the industry claims a share for
the purpose of its expansion
973
and other needs, and share-holders claim a share by way of
additional return on the capital invested by them. In the
case of the Mill Owners Association, Bombay (1) where the
formula was evolved, out of the available surplus of Rs.
2.61 crores 2.16 crores was distributed by way of bonus
leaving a balance of 0.45 crores with the industry. In the
Trichinopoly Mills Ltd. v. National Cotton Mills Workers’
Union (2) the available surplus was found to be Rs. 34,660
and out of it Rs. 30,000 was ordered to be distributed as
bonus to the workmen. These two and other similar in-
stances, however, cannot be pressed into service for the
purpose of evolving any general rule as to the ratio or
proportion in which the available surplus should be
distributed. The ratio of distribution would obviously
depend upon several facts: What are the wages paid to the
workmen and what is the extent of the gap between the same
and a living wage? Has the employer set apart any gratuity
fund ? If yes, what is the amount that should be allowed for
the bonus year ? What is the extent of the available surplus
? What are the dividends actually paid by the employer and
what are the probabilities of the industry entering upon an
immediate programme of expansion? What dividends are
usually paid by comparable concerns ? What is the general
financial position of the employer? Has the employer to
meet any urgent liability such as redemption of debenture
bonds ? These and similar considerations will naturally
determine the actual mode of distribution of the available
surplus. In this connection labour’s claim to fill up the
gap between the wage actually paid to it and the living wage
has an important bearing on the decision of this point.
Industry’s claim for paying additional return on capital and
for making additional provision for expansion would also
have to be considered. The fact that the employer would be
entitled to a rebate of income-tax on the amount of bonus
paid to his workmen has to be taken into account and in many
cases it plays a significant part in the final distribution.
Therefore, in our opinion once the
(1) (1952) 1 L.L.J. 518. (2) (1953) 11 L.L.J. 361.
974
available surplus is determined, the tribunal should, in the
light of all relevant circumstances, proceed to make an
award directing the payment of a fair and just amount to
labour by way of bonus. If the formula is thus worked
reasonably it would in a large majority of cases succeed in
achieving its principal object of doing justice both to
labour and industry.
Before we part with the question of working the formula it
is necessary to observe that the practice adopted by some
tribunals in giving the amount of bonus a priority in the
calculations is not justified. Logically it is only after
all the prior charges have been determined and deducted from
the gross profits that available surplus can be ascertained;
and it is only after the available surplus is ascertained
that the question of awarding bonus can be considered. Some
tribunals seem to work out nationally the amount of bonus
which they think can be awarded and place that amount higher
up in the process of making calculations before the income-
tax payable is determined. The inevitable consequence of
this procedure is to make the amount of tax proportionately
less. We wish to make it clear that this procedure should
not be followed. As we have already pointed out, in
directing the distribution of the available surplus the
tribunal has to take into account the rebate of income-tax
to which the employer is entitled on the amount of bonus
paid to his workmen but that on principle is different from
placing the amount of bonus immediately after depreciation
in the working of the formula.
It has been urged before us by the respondents that the
amount of rehabilitation as well as the amount of
depreciation should be deducted from the gross profits
before income-tax payable is ascertained. In this
connection reliance is placed on the fact that in its
judgment which evolved the formula the Labour Appellate
Tribunal has at one place described rehabilitation as the
first charge in priorities. Having regard to the context in
which the said statement is made it is clear that all that
the Labour Appellate Tribunal wanted to emphasise was that
the textile industry
975
with which it was directly concerned in the said case needed
rehabilitation very urgently. The final calculations made
in the judgment give a clear indication as to how the
formula has to be worked out. We are, therefore, satisfied
that rehabilitation cannot be given the high priority
claimed for it by the respondents,
We must now consider whether the tribunal was right in
directing that overtime payment should be’ included in the
calculation of the bonus which it has directed the appellant
to pay. Mr. Kolah contends that the direction to include
overtime wages is contrary to the usual practice followed by
industrial tribunals and it is also unsound on principle.
This dispute arises between the employer and the workmen in
this acute form because the total amount of bonus is not
determined logically after ascertaining the available
surplus. If the said amount is logically determined as
indicated by us, then the question as to whether overtime
wages should be included or not would really be a matter of
dispute between workmen inter se because once the amount of
bonus is determined, how it should be distributed between
workmen inter se would cease to be a matter of direct
concern to the employer. Therefore we think that there
would be no occasion for such a dispute between the employer
and his workmen if the tribunals follow the logical method
of determining the amount of bonus in the manner indicated
by us.
On principle we do not think it would be fair to the workmen
as a whole that overtime should be included in calculating
the bonus which each workman should receive. Workmen who do
overtime get additional payment for such overwork. If in
addition to such payment they are allowed to include the
said payment in their wages in calculating bonus to which
they are entitled, obviously the gap between their actual
wage and the living wage would be filled up to a larger
extent than in the case of other workmen who do not receive
such additional overtime payment. Besides, if the payment
of bonus proceeds on the broad consideration that it is due
to the workmen for their contribution to the profits it
would be unreasonable to make
124
976
a distinction between workmen and workmen on the ground that
some have contributed more to the profit than others; and
that is exactly what would follow if overtime workers are
allowed to claim a larger amount of bonus than their other
colleagues. That is why we think that the tribunal was not
justified in directing that the calculations of bonus should
be made on the basis that overtime payments constituted a
part of the basic wages of the employees.
The next point to consider relates to the return on paid-up
capital to which the appellant is entitled. The tribunal
has awarded to the appellant return at the rate of 6% on
paid-up capital and at 4% on the working capital. The
appellant claims a return at a higher rate on paid-up
capital whereas the respondents contend that the return
should be paid on the paid-up capital at a lower rate. In
support of its claim for a higher return the appellant has
relied on the fact that it has consistently paid dividends
at a reasonably low rate and it did not seek to make undue
profits even during the years of war. In this connection
Mr. Kolah has invited our attention to a statement, Ex. C-
1, showing the percentage of dividend to paid-up capital and
invested capital for the eighteen financial years 1936-37 to
1953-54 and he has asked us to contrast the low rates of
dividend evidenced by it with dividends paid by other
companies as shown by another document Ex. C-12. He has
also asked us to take into account the highest and the
lowest quotation for the company’s shares in the Bombay
Stock Exchange during the period 1949-55. On the other hand
Mr. Dudhia has urged that during the relevant year the
appellant has capitalised Rs. 35.85 lakhs from the reserve
fund and 175.45 lakhs from Premium-on Shares Account by
issuing one bonus share for every five shares held by the
shareholders; and he argues that the tribunal was in error
in allowing 6% on the paidup capital during the bonus year.
Incidentally Mr. Dudhia also relied, though halfheartedly,
on the finding of the tribunal that the appellant had paid
an inflated price for the pre-1939 block. It is true that
in one place the tribunal has made an observation to
977
this effect ; but it is clear that the said observation is
inconsistent with its definite finding recorded earlier in
the course of its judgment that it was not prepared to hold
that the A. C. C. had inflated the capital invested by the
merging companies by taking them over in 1936. Therefore
this part of Mr. Dudhia’s argument is invalid.. In our
opinion, the question as to what return should be allowed to
paid-up capital in’ a given case must be left to be
determined by the tribunal in its discretion having regard
to all the relevant facts; and if the tribunal has in its
discretion awarded 6% interest on the paid-up capital we see
no reason to interfere with its decisions It is clear that
no question of principle or law is involved in the matter.
There is one more point which we must consider before we
proceed to deal with the facts in the present case. This
point relates to the employer’s claim to treat the amount in
the gratuity fund as a prior charge; and this claim has been
allowed by the tribunal. It appears that in M/S. Metro
Motors v. Their Workmen (1) the Labour Appellate Tribunal
observed that it was desirable in all cases to create a
separate reserve fund for the payment of gratuity and it
directed that the modest fund claimed by the employer for
the year in question was a proper deduction from its
profits. The question which we have to decide is whether
the allowance on this account should be treated as a prior
charge in making the calculations under the formula. There
can be no doubt that, in a sense, the gratuity fund is
created for the benefit of workmen and there should be no
difficulty in recognising the appellant’s claim for the
deduction of an appropriate amount on this account; but we
think on principle it is desirable that no addition should
be made to the list of prior charges recognised by the
formula. Even so when the available surplus is determined
the tribunal ought to take into account the employer’s claim
on account of the gratuity fund created for the benefit of
his workmen and the amount which the tribunal may regard as
a reasonable
(1)(1952) II L.L.J. 205.
978
allowance in that behalf should be definitely borne in mind
in finally deciding the amount which should be paid to the
workmen by way of bonus. This method will meet the
employer’s claim adequately without making any addition to
the list of priorities specified in the formula. Mr. Dudhia
contended that the tribunal should not have allowed Rs. 10
lakhs under this item but we do not think there is any
substance in this contention.
Incidentally Mr. Dudhia has pointed out that in dealing with
the appellant’s claim for a return on working capital the
tribunal has made a mistake by including a further sum of
0.66 lakhs as return on investments. Mr. Kolah has conceded
that this is a mistake and so the return on the working
capital would stand at 26.10 lakhs only.
It is now necessary to consider the evidence of Mr.
Tongaonkar and decide the most controversial point of fact
in dispute between the parties about the appellant’s
requirements for rehabilitation. Mr. Tongaonkar holds the
Degree of Bachelor of Science of the London University, and
he is also a Member of the Institution of Electrical
Engineers, London. He joined the appellant in November
1934, but before that he had nearly three years’ practical
experience in England in various engineering firms; and on
his return to India, he had joined the Dinshaw group of
cement factories. He continued to work with the said group
until its merger with the appellant in 1936, when he was
appointed by the appellant. Mr. Tongaonkar is in charge of
the department which deals with the construction of new
cement factories, modernisation and extension of the
existing cement factories, design and manufacture of cement
machinery for A. C. C., and major engineering problems of
the A.C.C. Since April 1956 he has been appointed the
Controller of Planning and Development of the A. C. C. He
visits the A. C. C. factories very frequently and claims to
be acquainted with the condition of the plant and machinery
at all the A. C. C. factories. There is no doubt that Mr.
Tongaonkar is qualified to give evidence on the technical
points which are relevant in
979
dealing with the question of rehabilitation. Even so, in
appreciating ‘his evidence, it would not be unreasonable to
bear in mind the fact that he is an officer employed by the
appellant, and as such he is likely to be interested in
supporting the claim for rehabilitation which the appellant
has decided to make.
According to Mr. Tongaonkar, the average future life of the
plant and machinery existing in 1939 would’ be approximately
seven years from 1-8-1954. Similarly, the approximate
future life of the three other categories of blocks would be
13, 15 and 20 years respectively. He has stated that in
calculating the life of machinery, it is necessary to take
into consideration, first the mechanical condition of the
machinery, second whether it is efficient or has been
rendered obsolete because new machinery of modern design
with a considerably better efficiency has come into the
market. In other words, the probable useful life of the
machinery may be prematurely determined by the emergence of
more efficient machinery. In support of this statement he
has given some instances where the appellant’s plant or
machinery had to be changed mainly for the reason that a new
corresponding plant or machinery was more efficient and gave
more satisfactory results. However, stated generally,in the
opinion of the witness, the average life of a cement plant
taken as a whole would be 25 years if it is properly main-
tained.
Mr. Tongaonkar then gave evidence about the rise in prices
of plant and machinery and he produced Ex. C-36 which is a
statement showing the progressive increase in prices from
pre-war days up to 1955-56 of major items of machinery, gear
boxes, motors and power plant used in cement factories. He
has stated that the said statement had been prepared on the
basis of actual quotations which he had in his possession.
His evidence shows that between 1951-54 there has been a
rise of 11%, whereas between 1954-56 there has been a rise
of 7% in the prices of the relevant items of machinery. He
then sought to corroborate his evidence on this point by the
expenditure actually incurred by the appellant while putting
into commission
980
a new cement factory at Sindri in about 1955. The
calculations made by him in this behalf show that the cost
of construction of a new factory is approximately 4.3 times
the cost of construction of similar factory in 1939.
In regard to the life of buildings, Mr. Tongaonkar stated
that first-class buildings lived approximately for 40 years
provided they are properly maintained and provided they are
not in earthquake zone; but he added, that for the main unit
of the cement plant it is usual to take the life of
buildings at 25 years. He also stated that in many cases
the existing buildings have got to be either demolished or
considerably modified when the main machinery whose life is
25 years has to be replaced by modern machinery which is of
a different design and which would require buildings and
foundations of different size and type. Thus, for this
special circumstance also, he was not prepared to give the
buildings of the appellant an average life longer than 25
years.
In regard to the increase in the cost of constructing
buildings, he produced two statements, C-6 and C-14. Ex. C-
6 shows the increase in prices of building materials since
1938-1954, whereas Ex. C-14 shows the continually
increasing amount of expenditure incurred by the appellant
for construction of labour quarters, etc.
It is on this evidence that Mr. Tongaonkar has adopted the
respective multipliers and divisors in arriving at the
figure of the amount required for rehabilitation. As we
have already pointed out, for the pre-1939 block he has
taken 4.28 as the multiplier, whereas for the block
purchased between 1940-44 he has taken 2.8 as the
multiplier. He has explained that the multiplier of 4.28 is
really made up of two multipliers. Certain portion of the
plant and equipment which is obtained from abroad is
estimated at 60% of the total cost and the expenditure on
the remaining items is estimated at 40% of the total cost.
The multipliers of these two groups are estimated at 4.8 and
3.5 respectively, and by calculations it has been noticed
that the average ratio comes to 4.28. This is the
981
genesis of, and the justification for, the adoption of 4.28
as the multiplier. He has also added that the proportion of
60% and 40% which he had mentioned was based on his
experience of building a number of cement factories and of
carrying out extension and modernisation of existing cement
factories. The multiplier was based, said the witness, on
the state, of comparative quotations of plant and machinery
received in 1939 and quotations received of similar
machinery recently. It would thus be clear that in devising
the multiplier and divisor, Mr. Tongaonkar has drawn very
largely on his experience and has drawn inferences which he
thought were reasonable. Besides in making the relevant
calculations he has not dealt with the plant and machinery
and the buildings and other assets separately, but has
lumped them together under the respective blocks.
The approximate cost of the merging companies of their
assets as on July 31, 1936, was 5.73 crores of rupees. Ex.
C-3 which is a certificate issued by the Chartered
Accountants shows that ” according to the blocks, the
original cost of the block of fixed assets excluding
goodwill and purchase of rights and land as at 31st July,
1954, of the appellant under the groups of years of
acquisition”, amounted to Rs. 19,41,38, 100. Similarly, Ex.
C-28 which is also a certificate issued by the Chartered
Accountants, shows that the original cost of such portion of
fixed assets excluding goodwill and purchase of rights and
lands as have been discarded, scrapped or sold as on July
31, 1954, of the appellant companies under the groups of
years of acquisition noted in the certificate, amounted to
Rs. 1,70,91, 296. The figures supplied by these two
certificates are mentioned in cols. 2 and 3 respectively in
Ex. C-2. Under the method adopted by Mr. Tongaonkar the
cost of discards is shown in the respective years when the
portions of blocks were discarded; and the amounts spent on
rehabilitation from year to year have gone with the blocks
of the said respective years shown in col. 2. The amount of
rehabilitation has thus been calculated by the adoption of
the multiplier and divisor selected by Mr. Tongaonkar. The
question
982
which calls for our decision is whether the multipliers and
divisors adopted by Mr. Tongaonkar can be said to be
appropriate. As we have already mentioned, it is the
multipliers and divisors that play a decisive part in the
determination of the employer’s claim for rehabilitation in
all bonus proceedings,
Mr. Tongaonkar’s evidence has been severely criticised by
the respondents and in fact, the tribunal does not appear to
have been favourably impressed by it. Before dealing with
the criticism made against his evidence, it would be
pertinent to observe that the witness has given exhaustive
details on the points put to him in examination-in-chief,
and his evidence, read as a whole, does make an imposing
reading. But sometimes the wealth of details given by
experts is Apt to complicate the narrow points of dispute
between the parties and to create doubt and confusion; the
large number of technical details expressed in technical
language may, in some cases, tend to cloud rather than
clarify the points which the tribunal has to consider. We
feel inclined to hold that is what has happened to some
extent in the present case. But that by itself cannot
obviously be said to introduce any infirmity in the evidence
given by the expert or affect its credibility. It only
means the tribunal has to analyse his statements, examine
them carefully in the light of his cross-examination and
decide how far it would be justified in acting on them.
It has been urged before us by the respondents that the
claim made by Mr. Tongaonkar in regard to the rehabilitation
of the pre-1939 block should be rejected. The contention is
that, this block must have been completely replaced before
1953 and no claim for its rehabilitation can be entertained.
This argument was based substantially on the assumption that
a part of Rs. 997.42 lakhs must have been utilised for the
purpose of replacing the said block. Mr. Tongaonkar has
stated that prior to 1-8-1954 the total amount spent on
modernisation, replacement and rehabilitation and other
sundry jobs, but excluding’ expansion, was approximately Rs.
9.97″crores, and in support of this ‘statement he produced
Ex. C-29,
983
which shows the said expenditure year by year. According to
this statement 78 lakhs had been spent on the construction
of Rohri Works and Kistna Works, and Rs. 622-13 lakhs had
been spent on the expansion during the post-war period.
This gives the figure of Rs. 700.13 lakhs. Deducting this
amount from the total expenditure of Rs. 1697-55 lakhs, the
balance of, Rs. 997.42 lakhs is shown as expenditure on
modernisation, rehabilitation, replacement and other sundry
capital jobs. It is in respect of this amount of Rs. 997.42
lakhs that Mr. Tongaonkar was severely cross-examined. In
cross-examination he stated that he was not in a position to
say whether out of the total expenditure of Rs. 997.42 lakhs
shown in Ex. C-29 a major portion had been spent on
rehabilitation and replacement of the pre-1939 block and
1940-44 block. He admitted that the figures in Ex. C-29
had been prepared by the Accounts Department from the
Financial Books so far as year to year total expenditure was
concerned and he also stated that it was not possible for
him to give details about the said expenditure. These
answers indicated that the amount of Rs. 997.42 lakhs had
been ascertained mechanically by deducting from the total
expenditure of Rs. 1697.55 lakhs incurred on all jobs up to
31-7-1954 the estimated expenditure of Rs. 700.13 lakhs
which was treated as expenditure for expansion during the
said period. It is on these statements that the respondents
placed reliance in support of their argument that the amount
of Rs. 997.42 lakhs must have been utilised for completely
replacing the pre- 1939 block. Thus presented, the argument
no doubt appeared very plausible, and so we asked Mr. Kolah
to give us a satisfactory explanation about the items of
this expenditure. Accordingly Mr. Kolah has filed a
statement, Ex. I which gives a rough classification of the
total capital expenditure of about Rs. 997 lakhs incurred up
to 31-7-1954 on modernisation, replacement, rehabilitation
and other sundry and miscellaneous jobs. The several items
of this expenditure are broadly indicated under eight heads,
the last of which covering an
125
984
amount of Rs. 160 lakhs has in its turn been split up into
five separate items by the statement 1(a). There was some
dispute before us about the admissibility of some of the
said items under cl. 5 of this document 1(a). But Mr. Kolah
contends, and it is not disputed by the respondents either,
that even if the whole of the disputed item 5 is excluded,
the remaining items on Ex. 1 give a fairly satisfactory
explanation about the work of rehabilitation, replacement
and modernisation on which the bulk of Rs. 997.42 lakhs must
have been spent. In view of this statement we must hold
that the assumption made by the respondents that the said
amount of Rs. 997.42 lakhs must have been utilised for
replacing the pre-1939 block is not well-founded.
It is then contended that there is no justification for
keeping the pre-1939 block still alive in view of the
estimate made by Mr. Tongaonkar about the life of the cement
plant and machinery. The suggestion is that the oldest
block is deliberately kept alive in order to enable the
appellant to claim a higher multiplier in calculating the
rehabilitation amount. It cannot be said that there is no
force at all in this criticism. In fact Mr. Tongaonkar
himself has admitted that a given portion of this block
could have been discarded earlier, but he added, that a part
of it had been rehabilitated as a temporary measure in order
to carry on. That is why that particular portion of the
block had not been discarded so far. According to him the
pre-1939 block contains a portion whose useful life is
already over, but the appellant would have to carry on with
it until finances could be found for modernisation or
reconstruction or entire replacement of the said block. In
our opinion, this explanation cannot be said to be wholly
satisfactory. If the useful life of the whole block had
really expired, the appellant would have easily found it
possible to replace the said block in due time having regard
to its general financial position.
The next criticism made against Mr. Tongaonkar’s evidence is
that admittedly he has not calculated the average life of
the said block. He stated that he had assessed the pre-1939
block by his personal visits to
985
the factory by observing to what extent it had been
rehabilitated as a temporary measure and by considering what
its present condition was. It is possible that with his
knowledge and experience Mr. Tongaonkar may be able to form
a proper assessment about the life of the machinery in the
manner deposed to by him. But unfortunately, effective
cross-examination on this point has been stifled to some
extent because’ we find that on some material points
questions put to the witness were objected to by Mr. Kolah
and the objection was upheld by the tribunal. The witness
was asked whether he could tell the tribunal with his wide
experience, how many years on the average 1939 block had
spent prior to 1939. This question was clearly relevant and
from the respondents’ point of view it was important. If
the witness was able to predicate about the future useful
life of the machinery from his examination of the plant, it
was suggested to him that it should be possible for him to
give an estimate about the life already spent by it by the
same process. The object of this question obviously was to
show that the machinery in question had lived much longer
than its estimated life as deposed to by the witness. This
question having been disallowed, any further cross-
examination to test the claim of the witness that from the
inspection and examination of the machinery he can predicate
the period of its future useful life became impossible. The
witness was further asked to state whether it would be
correct to assume that the said pre-1939 block had on an
average spent more than 15 years of its life. This question
also was disallowed, and the respondents naturally make a
serious grievance that they were not given an opportunity to
show that Mr. Tongaonkar’s estimate about the life of the
plant and machinery was a gross under statement.
The respondents have then objected to the inclusion of
several items in the approximate cost of rehabilitation
mentioned in col. 8 of Ex. C-2. The new additional packing
machine in regard to the factory at Banmore as well as the
crane storage are, it is urged, not items of rehabilitation,
but of expansion. Similar
986
criticism is made in regard to the dust-collector plants,
coal-handling plants, items in regard to the fluidification
system, diesel engine shunting locomotive and similar other
items. The respondents’ grievance is that by including
these items which are really matters of expansion, the
amount of approximate cost of rehabilitation has been unduly
increased. We are unable to say if the grievance is
justified.
In regard to the multiplier adopted by Mr. Tongaonkar, the
criticism is that it is based on hypothetical considerations
determined by him in a subjective manner. It is also
pointed out that the failure of the witness to take out the
present day replacement cost of individual items of the pre-
1939 block has introduced an additional element of
uncertainty in the final calculations made by him in regard
to the multiplier. No doubt, the witness has stated that he
has used the multiplier of 4.8 on a comparative study of the
quotations received between 1939 and the present day, but
dealing with the machinery blockwise is not a very
satisfactory way of determining such a multiplier. In
support of this argument, reference is made to the
statements made by the witness to the cost of 180-ton per-
day kiln, if manufactured by the appellant, would be lower
than that of a 300-ton-a-day kiln. The witness then added
that the appellant does not manufacture a 180-ton-a-day
kiln, and if such a kiln is imported from abroad its cost
would be somewhat higher than that of a 300-ton-a-day kiln
manufactured by the appellant under present day conditions.
He was then asked whether he had got a quotation of a 180-
ton-a-day kiln, and he admitted that he had none, and that
he had estimated it approximately at Rs. 11 1/2 lakhs. The
respondents urged that this estimate about the cost of an
imported 180-ton-a-day kiln is purely notional and is not
based on any material at all. This part of the criticism is
justified.
The next argument urged against the statements prepared by
Mr. Tongaonkar is that he appears to have taken into account
the prices prevailing in 1956 and has completely ignored the
prices as they obtained in the previous years. We have
already observed that
987
in deciding the amount of rehabilitation by the adoption of
an appropriate multiplier, the tribunal should take into
account all relevant facts and these would not be confined
to the price level prevailing in any one particular year.
When deciding the hypothetical question as to what would be
the price in future when the plant and machinery would have
to be replaced or rehabilitated, the tribunal has to take an
overall picture of prices into account, and the argument is
that concentration on the price level of 1956 alone has
introduced an infirmity in the calculations made by the
witness.
There is another infirmity in these calculations which has
been criticised by the respondents. Mr. Tongaonkar has
lumped together the plant and machinery as well as buildings
and other properties belonging to the appellant in col. 2 of
Ex. C-2. The more scientific and satisfactory method of
dealing with the question of rehabilitation is to treat the
plant and machinery separately from the buildings and other
assets that need rehabilitation. In fact we asked Mr. Kolah
to give us a statement showing the cost of the plant and
machinery and the buildings and other assets separately in
order to enable us to have a clearer picture about the
extent of the rehabilitation needs of the appellant. He has
accordingly filed a statement, Ex. F (a).
There is yet another point on which Mr. Tongaonkar’s
evidence has been criticised by the respondents. It is
argued that this evidence shows that under his concept of
modernisation several items of expansion can be included.
Mr. Tongaonkar has stated that by ‘ modernisation’ he meant
‘a composite scheme comprising replacement of the part of
the old machinery by new machinery, installation of
additional machinery because the layout of the composite
modernisation scheme is different from the previous layout
and rehabilitation of the remaining machinery as a short
term measure’. By ‘ rehabilitation’ he ment ‘alterations to
a machine or machinery, installation for improving its
mechanical performance, its technical efficiency or to
extend its life by a further span’. This would also
988
include what he compendiously describes as the removal of
weak links. According to him expansion can be divided into
two groups, viz., Group No.-1 construction of the completely
new factory solely for obtaining additional production; and
Group No. 2 would cover the specific additional machines
which are installed not for modernisation purposes as such,
but with the primary object of obtaining additional
production. He concedes that in the ‘modernisation of an
existing factory’ expansion is only a part of the scheme.
This means that in the modernisation scheme’ there would be
an element of’ expansion’. It would thus be clear that the
very broad and wide description of modernisation’ given by
the witness would justifiably give rise to an apprehension
in the minds of workmen that under the heading of ‘modern-
isation’ items of expansion ‘ pure and simple are likely to
creep in. That is why evidence given by experts in such
proceedings needs to be scrutinised carefully, with a view
to exclude items of ‘expansion’ properly so called from the
relevant calculations.
Mr. Tongaonkar has stated that when plant or machinery is
rehabilitated or replaced it may lead to increase in
production. But such an in Crease is purely incidental.
But what would be the position where, for instance, a 180-
ton-a-day kiln is substituted by a 300-ton-a-day kiln by way
of rehabilitation or replacement ? The employer is entitled
to say that the first category of kilns is not available in
the market or that the later category of kilns is more
profitable Ind economically more useful. That being so, if
the first kiln is discarded and is substituted by the
latter, that is an item of rehabilitation or replacement and
not of expansion. On the other hand, by the substitution of
the latter kiln there would be such an appreciable increase
in production that the workmen may be entitled to contend
that some apportionment should be made and the
rehabilitation part of the machinery should be separated
from the expansion part which has crept into the
transaction. We confess that it would be- very difficult to
undertake the task of making any such apportionment.
989
Even so, tribunals may have to consider the workmen’s plea
if they are satisfied that the steps taken by the employer
by way of rehabilitation have led to a very large increase
in production. In this connection the respondents have
relied on Ex. H. 0. C-2 which, according to them, shows
considerable increase in production, and that, it is urged,
is the result of expansion and not of rehabilitation.
Mr. Tongaonkar has suggested in his evidence that it is the
intention of the employer that decides the character of the
transaction. If the employer wants to instal new machinery
solely with the object of expanding his business, that is
expansion; but if he purchases new machinery for business
reasons and not for the purposes of expansion, it would be
rehabilitation notwithstanding the fact that the new
machinery gives rise to increased production. This
approach, in our opinion, gives undue importance to the
intention of the employer and we think that, on a proper
occasion, the question may have to be considered by the
application of some objective tests. In this connection it
would be relevant to bear in mind the fact that the steps
taken by the appellant for rehabilitating, replacing or
modernising its machinery are a part of its plan of
expanding its business so as to meet the growing demand for
cement in our country.
In deciding the question as to whether the claim as
disclosed by the statements prepared by Mr. Tongaonkar is
inflated or not, the respondents have asked us to consider
the estimate made by the appellant’s Chairman in that
behalf. In his speech delivered on January 24, 1951, at the
Fourteenth Annual General Meeting of the appellant company,
the Chairman stated that most of the company’s pre-war plant
would be due for replacement in the course of the next ten
years and he added that ” at the present price levels,
replacement will cost on an average 2 1/2 times the original
cost. This will involve an expenditure of about Rs. 8
crores over and above the provision already made for
depreciation “. The contention is that, considered in the
light of this estimate, the pre,sent claim for
rehabilitation is very much inflated.
990
When Mr. Tongaonkar was asked about this estimate he stated
that the Chairman had not consulted him while drafting the
annual report or while drafting the portion of the speech in
regard to ‘rehabilitation’ and he also added that he did not
agree with the figures given by the Chairman regarding the
replacement cost of plant and machinery in his report dated
January 24, 1951. This explanation may not be very
satisfactory. But we cannot ignore the fact that when the
Chairman made his statement he did not purport to calculate
the claim for rehabilitation in terms of the formula and so
it would not be fair to test the evidence of the witness in
the light of the estimate given by the Chairman in his
speech.
We have so far considered the broad arguments urged against
Mr. Tongaonkar’s evidence. Unfortunately, the tribunal has
contented itself merely with the observation that the
multiplier of 2.7 would be adequate; and it has given no
finding as to the suitable divisor. That is why we must now
proceed to adopt a suitable multiplier and divisor for
deciding the question of rehabilitation. We have already
stated our conclusions in regard to some of the infirmities
in the evidence of Mr. Tongaonkar and the statements
prepared by him. He has lumped together all assets of the
appellant that need rehabilitation. He has taken into
account the prices prevailing only in 1956, and in the
selection of an average multiplier he has probably been
slightly generous to the appellant. His estimate about the
life of the plant and machinery has not been allowed to be
sufficiently tested in crossexamination and, on the whole,
it appears to err a little too much on the side of a
conservative estimate ; and if that is so his divisor may
need revision; it is also probable that in the items
included by him under rehabilitation may have been included
some which are more of the character of expansion than
rehabilitation, replacement or modernisation. Besides, it
is not unlikely that the steps taken by the appellant
ostensibly for rehabilitation, replacement and modernisation
of the machinery have appreciably increased its production,
and that may partly be due to the fact that the
991
general plan of expansion adopted by the appellant has been
in operation for some time past. It is in the light of
these facts that we have to examine the appellant’s claim
for rehabilitation. In doing so, we have taken Ex. C-2,
Ex. C-23 and Ex. F (a) as a basis for our calculations.
It is somewhat unfortunate that in making its claim for
rehabilitation Mr. Tongaonkar did not make calculations
separately in respect of plant and machinery as distinct
from buildings, roads, bridges and railway sidings. It is
true that at our instance a statement Ex. F (a) has been
filed before us; but if such a statement had been filed
before the tribunal, the respondents would have had a better
opportunity of testing the accuracy of the calculations made
in it and the basis on which the respective multipliers and
divisors are sought to be deduced from it. We would,
therefore, like to make it clear that the calculations which
we now propose to make in regard to the item of
rehabilitation should not be ,taken to be binding on the
parties in subsequent years. If, in the light of our
decision on the principal points raised before us in the
present appeals, the parties decide to settle their disputes
about bonus for subsequent years there would be no occasion
for the tribunal to deal with them on the merits. If,
however, these disputes have to be, settled by the tribunal,
it would be open to the parties to lead evidence in support
of their respective contentions. The tribunal also would be
at liberty to consider the matter afresh and come to its own
conclusion on the merits.
Let us now proceed to make the relevant calculations. The
first step to take is to correct the figures in Ex. C-2 by
excluding the cost of buildings, roads, ,bridges and
railway-sidings from the total cost mentioned in it against
the several blocks. This cost has been supplied to us by
the appellant in Ex. F (a). This is how the corrections
work out. In our calculations all figures are expressed in
‘lakhs’:
126
992
Chart I.
Period Original cost Less cost of Balance
of block buildings etc.
(1) (2) (3) (4)
Up to 1939 486.89 132.98 353.91
1940-44 59.91 22.38 37.53
1945-47 208.93 68.15 140.78
1948-54 1144.81 333.47 811.34
In Ex. F (a) the appellant has shown the respective average
ratios in col. 5 in regard to items of property mentioned in
col. 2. We think, in making our calculations, it would on
the whole be fair to adopt 3.5 as a suitable multiplier up
to 1939, 2 from 1940.47 and 1 from 1948-54 (as in C-2) for
replacement by part A.C.C. machinery. We have not disturbed
the divisors taken by C-2 though we feel inclined to hold
that Mr. Tongaonkar has underestimated the probable life of
machinery. The amount of yearly requirement for
rehabilitation for the total block minus buildings, etc.,
would then work out at Rs. 229.39. This does not take into
account the available reserves; that aspect is considered
later on:
Chart II.
Period Original
cost of Multiplier Total Less Balance Life Yearly
break- of require-
down as machi- ment in Ex. C-2 nery (in Yrs.) (1) (2) (3) (4) (5) (6) (7) (8) (approx.)
UP to 1939 353.91 x3.5 1238.68 65.921172.767 167.54
1940-44 37.53 x2 75.06 4.66 70.40135.41
1945-47 140.78 x2 281.56 11.19 270.371518.02
1948-54 811.34 x1 811.34 42.84 768.502038.42
……….
Total 229.39 ..........
Then we would deal with the buildings, roads, bridges and
railway-sidings., These may be given an average life of 30
years for all blocks in order to compensate for cases where
they have to be demolished on account of modernisation.
According to the previous statements of the appellant the
life of factory buildings was about 35 years and residential
993
areas 50 years. Even so we propose to take the average life
of 30 years in making our calculations in respect of these
blocks. The multipliers may be taken as 2.25 for pre-1939
blocks, 1.5 for 1940-47 blocks, 1 for 1948-54 blocks. The
Bombay block has been taken as in Ex. C-2:
Chart III.
Period Cost Multi- Total Less Balancelife Yearly
plier break down require-
valued at 5% ment
of cost
(1) (2) (3) (4) (5) (6) (7) (8)
UP to 1939 132.98 X 2.25 299.20 6.65 292.55 20 144.63
1940-44 22.38 x 1.5 33.57 1.12 32.45 25 1.29
1945-47 68.15 x 1.5 102.22 3.40 98.82 25 3.95
1948-54 333.47 x 1 333.47 16.67 316.80 30 10.56
Bombay
office 40.83 50.28 .73 49.55 69 .71
block
………….
Total 31.14
………….
Thus the total yearly requirement for rehabilitation of this
block would come to 31.14 lakhs.
The appellant’s claim for rehabilitation can now be
calculated on the basis of Ex. C-23 as corrected in the
light of the three charts prepared by us. As, the
calculations in the chart show, we would hold that the
appellant is entitled to an allowance of 216.10 lakhs for
rehabilitation in the relevant year:
Chart IV.
Replacement of pre-1939 block:
Cost of machinery (Chart II) 1172.76 Deduct reserves 311.00 Balance 861.76 divided by 7: 123.11 Add for buildings (Chart III) 14.63 .............. Total 137.74 Replacement cost of 1940-44 block
Including buildings etc. (5.41 plus 1.29) … 6.70
do for 1945-47 (18.02 plus 3.95) … 21.97
do for 1948-54 (38.42 plus 10.56) … 48.98
do for Bombay Office … .71
……………..
total … 216.10
994
Having decided that the total claim for rehabilitation
admissible to the appellant is 216.10 lakhs for the relevant
year, we must now proceed to determine whether on the
working of the formula any surplus profit is available. We
have made the following calculations in the light of the
principles laid down by us in this judgment:
Chart V.
Total profit excluding Bhupendra factory 428.71 Less notional normal depreciation (p. 428, Pt. 1) 100.22 Less income-tax payable @ 7 as. in the Rupee as per Note A below 115.16 Less 6% on paid-up capital 76.06 Less 4% on working capital 26.10 ............. Total...317.54 317.54 Balance.. 111.17
Less provision for rehabilitation.. 115.88**
………….
Balance…4.71
This is how we have calculated theincome-tax payable for
the relevant year:
Note A.
Gross profits 428.71 Less statutory depreciation 165.49 ------------------ Balance 263.22 Income-tax @ 7 as. in the Rupee 115.16
**Provision for rehabilitation (vide Chart V):
Total from Chart IV. 216.10
Less notional normal
depreciation... 100.22
----------------
Balance... **115.88
-----------------
995
We ought to add that in our calculations we have not taken
into account the Bhupendra Factory because the relevant
material for working out the figures in regard to this
factory is not adequate or satisfactory. However from such
material as is available it appears that if the profits made
by the said factory are included in the calculations and
rehabilitation required by it is worked out, it would not
materially affect the’ figure of rehabilitation amount
determined by us.
The result is that there is no available surplus from which
the respondents can claim any bonus for the relevant year.
It is true that the appellant has already paid the
respondents 20.65 lakhs as bonus for the relevant year, and
it is likely that it may continue to do so in future ; but
that is a matter which is not governed by the formula.
In view of the fact that the working of the formula leaves
no available surplus the appeal must be allowed and the
award made by the tribunal set aside. Since the appellant
had come to this Court for the decision of the larger and
more important question about the revision of the formula,
we would direct that there should be no order as to costs.
Appeal allowed.