PETITIONER: M/S. PEIRCE LESLIE & CO., LTD., KOZHIKODE Vs. RESPONDENT: THEIR WORKMEN DATE OF JUDGMENT: 09/03/1960 BENCH: GUPTA, K.C. DAS BENCH: GUPTA, K.C. DAS GAJENDRAGADKAR, P.B. SUBBARAO, K. CITATION: 1960 AIR 826 1960 SCR (3) 194 CITATOR INFO : D 1967 SC1222 (10) R 1968 SC 538 (28) R 1971 SC2521 (18) ACT: Industrial Dispute-Bonus-Full Bench formula-Variation of- Unusual risk in business and employment of small capital-If good grounds for variation-Rehabilitation allowance, Purpose of-Claim for bonus by small percentage of workmen-Whether entire surplus can be taken into account. HEADNOTE: During the year 1954-1955, the appellant paid a sum equiva- lent to 3 months basic wages as bonus to its monthly paid clerical staff. These employees raised an industrial dispute claiming an additional bonus equal to 7 months basic wages. The Industrial Tribunal to which the dispute was referred awarded additional bonus equal to 5 months basic wages. The appellant contended that (i) since the element of risk in the business was great and the capital employed was small the Full Bench formula had to be materially altered and rates higher than 6% on paid up capital and 4% on reserves employed as working capital should be allowed (ii) a higher allowance ought to be made for rehabilitation; and (iii) the entire surplus ought not to be treated as available for distribution as only a small percentage of the workmen had made the claim for bonus. Held, that since the claim for additional bonus was made only by a small percentage of the workmen the entire available surplus could not be treated as available in distributing bonus to them. Not only the 882 staff members who had raised the claim but II, 247 other workmen as well had contributed to the emergence of the surplus. The sum still in the hands of the company could not be treated as a matter only between the company and these present claimants. Indian Hume Pipe Co., v. Their Workmen, [1959] SUPP. 2 S.C.R. 948. L.L.I. 357, applied. Return on invested capital had always to provide for pure interest plus compensation for the risks of business. In a particular industry where the risk was appreciably less than usual there would be good cause for providing less than 6 % ; and in an industry where extraordinary risks were run more than 6% could reasonably be provided for. There was no unusual risk run by the appellants in their business and no case was made out for allowing any higher return on the paid up capital or working capital. There was no justification for compensation of the entrepreneur for the fact that with a small amount of capital considerable profits were earned. As fixed capital was liable to gradual deterioration reserves had to be created out of profits for replacing any portion of it as soon as it became too deteriorated for efficient use. It was neces- 195 sary that the company's capital fund remained intact. An amount reasonably sufficient for the notional requirement of rehabilitation during the relevant year was deducted as a prior charge in ascertaining surplus profits from which bonus could be paid. The basis of the prior charge was the assumption that rehabilitation was a continuing process and needed allotment from year to year. But in the present 'case the appellant had failed to make out any case for rehabilitation allowance in addition to the ordinary depreciation. Associated Cement Company's case, [1959] S.C.R. 925, relied on. JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 209/58.
Appeal by special leave from the Award dated September 16,
1957 of the Industrial Tribunal No. 11, Ernakulam, in
Industrial Dispute No. 34 of 1957.
G. B. Pai and Sardar Bahadur,for the appellants.
A. V. Viswanatha Sastri and M. S. K. Sastri, for the
respondents.
1960. March 9. The Judgment of the Court was delivered by
DAS GUPTA, J.-The appellant-M/s. Peirce Leslie & Co., Ltd.,
is a private limited company engaged in various enterprises
mainly in South. India. It started business in this
country over a century ago and though it is registered in
England almost all its activities appear to be carried on in
this country. The principal activities that require mention
are the business in cashew nuts which the Company sells
after roasting raw cashew nuts purchased in this country and
in Africa, and business in coir products and several other
country produce like ginger, lemon grass oil etc. A large
portion of the products in which it trades is exported to
foreign countries. Apart from these trading activities the
company is also engaged in agency business including working
as managing agents of many companies. For many years the
company as a whole had made good profits, though in some of
its many lines, losses were incurred. The company has on
its pay roll a large number of employees and apart from
superior officers in its covenanted and uncovenanted staff
both Indian and European it employs in its various lines of
business a large number of workmen including clerical staff.
The
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clerical staff alone consists of 882 monthly paid employees.
For many years the Company has voluntarily paid bonus to all
its employees out of the surplus profits. To the monthly
paid employees with whom we are concerned in the present
appeal the company paid during the year 1954-55 a sum
equivalent to three months’ basic wages as bonus. Not
content with this these employees through their Union put
forward a claim for additional bonus. The industrial
dispute thus raised was referred by the Government to the
Industrial Tribunal sitting at Coimbatore. Before the
Tribunal the workmen claimed an additional bonus equal to
seven months’ basic wages. The company’s case was that the
peculiar nature of its activities specially the fact that in
its agency business very little capital was employed and the
fact that in the cashew business and other produce business
the element of risk was unusually treat justify material
alteration in the Full Bench Formula for ascertainment of
the available surplus in several respects. The main
alteration asked for before the Tribunal appears to have
been that rates higher than 6% of paid up capital and 4% on
reserves employed as working capital should be, allowed in
working the Full Bench Formula in view of the special risks
in its business and the further fact that its agency
business requires very little capital. These claims were
rejected by the Tribunal. The Tribunal also accepted only
partially the company’s claims as regards rehabilitation
allowances for the year and as regards actual amounts used
as working capital. Having arrived on its calculations at
the figure of pound 55,137 as the available surplus after
meeting all prior and necessary charges the Tribunal awarded
bonus equal to five months’ basic wages in addition to three
months’ basic wages already voluntarily paid by the company.
In making this distribution the Tribunal rejected the
company’s case that as this claim was raised by only a small
percentage of the workmen the entire available surplus
should not be treated as available in distributing bonus to
these few workmen.
The first contention urged in appeal before us is that the
Tribunal was wrong in rejecting the com-
197
pany’s claim for higher return than usual on paid up capital
and reserves used as working capital. The appellants’
counsel has taken us through the evidence, oral and
documentary, as regards what he’ characterized as the heavy
” fluctuations ” in the price of raw cashew nuts which the
company had to purchase and the price in the foreign market
of the finished goods. That there is some amount of risk is
undoubtedly true. We are not convinced however that the
company’s business whether in cashew nuts or in any other
line is attended with such unusual risk as would justify the
provision of more than the usual rate of return. Return on
invested capital has always to provide for pure interest
plus compensation for the risks of the business. Prevailing
interest in the money market yielded by giltedged security
is ordinarily taken to be a fair index of what should be
considered reasonable as pure interest. For many years now
this figure has varied from 3 to 4 per cent. If no risks
were involved, this percentage should have been considered a
fair return on invested capital. It is because most
businesses contain an element of risksome more some less-
because of fluctuations, on the one hand in the prices of
raw material and on the other hand in the effective demand
for the finished goods-apart from cyclical booms and
depressions that an additional return of 2 to 3% is
generally considered necessary to compensate for the risks.
It is in view of this that a return of 6% is ordinarily
considered to be a fair return on the capital invested in
the shape of paid up capital. In a particular industry
where the risk is appreciably less than usual there will be
good cause for providing less than 6%. And similarly, in an
industry where extraordinary risks are run more than 6%
should reasonably be provided for.
If therefore there was reason to think that the appellant
company’s contention that its business was attended with
unusual risks was correct there would have been good reason
to allow a higher rate than 6% on the paid up capital and
also a higher rate than 4% on the reserves used as working
capital. We are not however satisfied that any such unusual
risk is
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run. There is no more speculation in buying raw nuts and
roasting the same and selling them than there is, say, in
buying raw cotton in the market, spinning yarn therefrom,
making it into cloth and selling such cloth, or in buying.
raw jute, spinning yarn therefrom weaving it into gunny
cloth and selling the same. No case for any higher return
on the paid up capital or working capital has been made
out by the evidence.
Nor can the fact that the agency business of the company
does not require much in the way of capital be considered to
be a reason for allowing a higher rate of return in those
lines. If in the agency businesses considerable profits are
earned with a small amount of capital the contribution to
such earning by labour including both those at the top and
those at the bottom is necessarily considerable. There is
no justification for compensating the entrepreneur for the
fact that with a small amount of capital considerable
profits are earned.
This brings us to the appellant’s case about higher
rehabilitation allowance than what has been allowed by the
Tribunal. The company put its claim for rehabilitation
allowance at the figure of pound, 31,780 but the Tribunal
accepted only a sum of pound 9 11,250 as the reasonable
figure towards statutory depreciation and rehabilitation
together. In support of its claim, the Company produced a
number of statements prepared by witnesses claimed to be
experts showing the replacement value of buildings,
machinery, furniture and sundry plants which constituted the
fixed capital of the company. Statements are also produced
showing the further expectation of life of each of these
items. The services of a chartered accountant firm were
also requisitioned and we have on the record a statement
showing how the figures required for replacement have been
worked out for the various items of buildings, machinery and
furniture and sundry plants. According to Exhibit E-50, the
statement on which great reliance was place by the company,
the total replacement value of its assets was RS.
1,08,02,330 made up of Rs. 77,86,350 for buildings, Rs.
18,52,320 for plants’ and machinery,’
199
Rs. 3,63,550 for furniture and Rs. 8,00,110 for sundry
plants. Different items of buildings and machinery are put
in separate groups according as the replacement is necessary
in view of the residual age, during 1955-60, 1960-65, 1965-
70, 1970-75, 1975-80, 1980-85, 1985-90, 1990-95, 1995-2000,
2000-2005. 2005 is taken as. the last year, as the residual
age is calculated from 1955 and the maximum residual age is
taken to be 50 years. Exhibit E-43 shows the detailed
calculations on this basis how the sum of Rs. 77,86,335 was
arrived at as the replacement cost of buildings. Exhibit E-
46 is a similar statement in respect of replacement costs of
plant and machinery. Ex. E-29A shows how after taking
reserves for rehabilitation for the different groups of
buildings into consideration, the rehabilitation charge for
the season 1952-53 is worked out at Rs. 19,878 for buildings
and the rehabilitation for plant and machinery is worked out
as pound, 5,435. Details are also given as regards the
calculation of pound, 4,744 as the rehabilitation costs to
be provided for sundry plants and pound, 1,723 as the
rehabilitation costs for furniture in the year 1954-55.
The very fact that such care has been taken in furnishing
details to the Court inclines one prima, facie to accept the
correctness of these figures without much scrutiny.
Scrutiny is however very much needed before the figures and
the calculations are ,accepted. Mention may first be made
of the fact that though it was stated by the witness who is
responsible for the preparation of the replacement costs of
the machinery that he obtained quotations from different
firms, no such quotation has been placed on record. That,
as the Tribunal itself recognized, affected very much the
value of these figures. As however after mentioning the
infirmities of the evidence the Tribunal decided to accept
as_a reasonably accurate statement this figure of Rs.
1,08,02,330 as the total replacement value we need not
consider whether we ourselves would have been prepared to
accept the evidence if the matter was being considered by us
in the first instance.
200
A more serious question however is whether the basis adopted
by the appellant’s expert for the calculation of this sum as
the replacement costs to be provided over the years in the
application of the Full Bench Formula can be accepted. As
the appellant’s expert himself has stated the value he has
given as the rehabilitation cost for any particular building
is on the basis of what would be required to construct a,
similar building if the existing building was pulled down in
1955. He has proceeded on the same way as regards the
machinery and other assets. The Tribunal after accepting
the figure of Rs. 1,08,02,330 as the correct figure for
replacement deducted the sum which in its opinion was
available in the reserves towards such rehabilitation and
then divided the remainder by 50 as 50 years would be the
period that these buildings and machinery would last if
replaced in 1955 by new buildings and new machinery.
It has been urged before us that the Tribunal was wrong in
dividing the sum obtained after the total amount to be
provided was ascertained by 50 inasmuch as the figure of Rs.
1,08,02,330 was itself arrived at on the basis of the sum
that would have to be provided for the different groups of
buildings and the sum to be provided in 1954-55 for all
these different groups should have been accepted at these
figures worked out in Exhibit E-29A.
It appears to us that this method of arriving at the
rehabilitation costs to be provided in a particular year is
not useful and cannot be safely relied upon. To understand
the fallacy of the method applied we may briefly state the
logic behind the provisions for rehabilitation. Because the
fixed capital of any industry is the victim of gradual
deterioration the prudent businessman creates reserves out
of his profits so that as soon as any portion of the fixed
capital has become too deteriorated for efficient working it
may be replaced. The economic welfare of the country as a
whole no less than the interests of the businessman requires
that the company’s capital fund should remain :Intact. It
is for this reason that an amount reasonably sufficient for
the notional requirement of rehabilitation during the
relevant
201
year is deducted as a prior charge in ascertaining suprlus
profits from which bonus can be paid. The basis of the
prior charge is the assumption that rehabilitation is a
continuing process and so needs allotment from year to year.
That is why it has now been held that if the amount allotted
for a specific year is not used, it should be taken into
account in the later year.
This has been recognized in the Full Bench Formula and has
received the authoritative recognition from this Court in
numerous cases. A full discussion of the principle involved
can be found in Associated Cement Company’s Case (1). It is
important to note what was pointed out there as regards the
replacement value being calculated on the basis of what
would be required to replace the fixed assets in question at
the date when replacement is due. One way of ascertaining
that was to multiply the original cost, by the figure which
would reflect the expected rise or fall in prices at the
date for replacement. After the replacement cost is
ascertained it is necessary to deduct therefrom the amount
already lying in reserves for this purpose and then to see
over what period the balance will have to be found. There
will no doubt be difficulties in the way of estimating the
replacement costs in this manner, but that cannot justify
the attempt at over simplification by working out the
replacement cost on the hypothesis that replacement cost at
the date of replacement will be the same as on the present
date. If the prices fall in the meantime too much will have
been set apart for rehabilitation, if prices rise too
little. To take the instance of buildings which form the
greater portion of the assets of the appellant company, it
may well be that by the time some of these buildings require
replacement, the cost of construction will have become less
than at the present time by reason of more efficient
production of cement and steel in the country. So, also the
price of machinery some years later, may well be less than
the price now, by reason of such machinery being produced in
our own country. The layman’s apprehension that prices rise
(1) [1959] S.C.R. 925.
26
202
never to fall again cannot be accepted as a correct basis
for calculation of the replacement cost on a future date.
The entire basis of the calculation of the replacement cost
by the appellant’s experts is what such costs will be if the
building was pulled down or the machinery scrapped in 1955
and had to be replaced by a new machinery on that date. His
estimate of the replacement cost cannot therefore be
accepted as a sure basis for any calculation of the
rehabilitation costs to be provided.
It is unnecessary therefore to go into the further question
as to whether the Tribunal was justified in treating the sum
of pound 20,000/- and also another sum of pound 44,760 as
available towards rehabilitation. We may however indicate
that if it were necessary to go into the question we would
have probably hesitated to hold that these sums were not in
fact available for rehabilitation.
A strict view of the evidence thus justifies a. conclusion
that the appellant company has failed to make out any case
for rehabilitation allowance in addition to the ordinary
depreciation. As however the learned counsel for the
respondent did not challenge the correctness of the
allowance of pound,11,250 assessed by the Tribunal as the
total allowances towards statutory depreciation and
rehabilitation together it would be proper to apply the
formula on that basis.
The other question in dispute was as regards the amount of
reserves actually used as working capital. Out of what was
claimed by the company as reserves employed as working
capital the Tribunal disallowed two items. One was in
respect of a sum of pound 2,09,339 which appeared in the
balance-sheet as provision for taxation liability; another
was an item of pound 8,250 as provision for proposed
dividend on deferred ordinary shares. The Tribunal was of
opinion that the company had not made any attempt to prove
that these amounts had actually been used in the business.
The appellant contends before us that a scrutiny of the
balance-sheet is sufficient to satisfy any one that these
amounts had actually been employed as working
203
capital. It is stressed in this connection that when the
balance-sheets were put in evidence through the company’s
officer no challenge as to the correctness of the statement
made therein Was made in cross-examination. Though no
direct challenge to the correctness of the statements
appearing in the balancesheets about the value of the
different assets appears to have been made it is important
to notice that the employer’s witness No. 2 through whom the
balancesheets and the profit and loss accounts of the
company were put in evidence was asked in cross-examination
as regards the discrepancy between the statements in the
balance-sheet E-8 where the bank overdraft was shown as
pound1,95,990 and the statement Exhibit E-12 which showed
the bank overdraft in June 1955 as 37-5 lakhs which is
equivalent to pound 2,75,000. The difference being of about
pound80,000, the witness was asked which is correct, whether
E-8 or E-127 and when the witness answered that both were
correct, he was asked “how”. His answer-was “I do not
know”.
It may be that there is a satisfactory explanation of this
difference but the evidence on record does not disclose
this. When there remains prima facie such discrepancy as
regards the very important figure as regards bank overdraft
the Tribunal would well be justified in refusing to base any
conclusion on the valuation of different assets as stated
therein.
There is apart from this the important fact that the company
itself does not claim that whatever appears to be on the
asset side over and above the paid up capital has come from
the reserves. Exhibit E-30 is the statement prepared by the
company’s Chartered Accountant to show “Reconciliation of
working capital as on 30th June, 1958.” It arrives at the
figure of pound6,05,564 as the working capital by deducting
from the current assets as per balance-sheet as on June 30,
1955, six out of nine items under “Current liabilities &
provisions”,-3 items not deducted are those under (1)
liability for taxation other than U.K. Income-tax,(2) proposed
dividend on deferred ordinary shares and (3) capital profits
on proposed distribution. The obvious reason for deducting
the six items from the current assets to arrive at the
working capital is that
204
these items in the balance-sheets under current liabilities
and provision would have to be met during the year out of a
portion of the current assets, which portion would
accordingly not be available for use as working capital. If
that is the case as regards the other items under current
liabilities and provisions it is not clear why that should
not also be the case as regards the current liabilities
under “liabilities for taxation other than U.K. Income-tax”
and under “proposed dividend on deferred ordinary shares”.
In the absence of evidence to the contrary there is no
ground for thinking that these current liabilities had not
also to be met out of the current assets during the year.
No such evidence has been produced. The Tribunal is
therefore right in our opinion in rejecting the company’s
claim that these amounts were also employed as working
capital.
As regards the other prior charges there is no dispute. The
Tribunal applying the Full Bench Formula on the basis of the
different findings hold after deducting the bonus already
paid voluntarily by the company that the company had still
in its hand a sum of pound55,137 out of which it could pay a
reasonable amount to these workmen.
When deciding how much out of this pound956,137 could
reasonably be paid as additional bonus to these workmen the
Tribunal had to consider the contention raised on behalf of
the appellant-company that it would be unfair-to ignore the
fact that not these staff members alone but 11,247 other
workmen as well have contributed to the emergence of this
surplus. The appellant’s argument was that staff members
who have raised this dispute should not be allowed to steal
an advantage over the numerous other workers of the company
and that just as results of the different branches of the
company have been considered as a whole in arriving at the
figure of available surplus it is just and proper that these
workmen who have raised the dispute should be given only a
fair share out of that portion of the surplus which may be
considered properly payable to all the workmen of the
company. In dealing with this question the Tribunal has
said
205
” But the fortune of the 11,247 workers depend upon the
trading results of the department in which they are working;
the bonus of the workers is decided compartment-wise and not
on the basis of the overall profits of the company. Cashew
workers are given bonus on the basis of the cashew depart-
ment profits and not on the basis of the total profits of
the company. The staff members are transferable from one
department to another and from one branch to another
branch.”
We are not able to understand how in spite of the way the
company’s balance-sheets and profit and loss accounts have
been kept the different departments of the company could be
treated separately for the purposes of bonus. The mere fact
that the company has actually done so does not make such
distribution right. Obviously if cashew workers would in
fact be entitled to a larger bonus on the overall results of
the company they have been unfairly treated by the company
in having been given lesser bonus on the basis of cashew
department profits. It is urged on behalf of the,appellant
that the fact that the workmen other than these staff
members have got less than they would have been entitled to
does not justify the grant of a larger share to the present
workmen than what they would be entitled to if those other
workmen had been given a fair share.
This Court had to deal with a somewhat similar position in
Indian Hume Pipe Co. v. Their Workmen(1). The respondents
there were workmen only of the Wadala factory. The
appellant had however paid to various workmen elsewhere as
and by way of bonus varying between 4% and 29% of the basic
wages for the year in question. It was clear that the sum
of Rs. 1,23,138/only had been paid in full and final
settlement to the workmen in some of the factories and the
bonus calculations on an all-India basis would work to the
advantage of the appellant, in so far as they would result
in saving to the appellant of the difference between the
amounts to which those workmen would be entitled to on the
basis of the all-India figures adopted by the tribunal and
the amounts actually
(1) [1959] SUPP. 2 S.C.R. 948.
206
paid to them as a result of agreements, conciliation or
adjudication. On behalf of the respondents it was therefore
contended that the calculations should be made after taking
into account the savings thus effected:. Dealing with this
contention this Court observed :
” We are afraid we cannot accept this contention. If this
contention was accepted, the respondents before us would
have an advantage over those workmen with whom settlements
have been made and would get larger amounts by way of bonus
merely by reason of the fact that the appellant had managed
to settle the claims of those workmen ,at lesser figures.
If this contention of the respondents was pushed to its
logical extent, it would also mean that in the event of the
non-fulfilment of the conditions imposed by the tribunal in
the award of bonus herein bringing in savings in the hands
of the appellant, the respondents would be entitled to take
advantage of those savings also and should be awarded larger
amounts by way of bonus, which would really be the result of
the claimants entitled to the same not receiving it under
certain circumstances-an event which would be purely an
extraneous one and unconnected with the contribution of the
respondents towards the gross profits earned by the
appellant. The tribunal was, therefore, right in
calculating the bonus on an all-India basis.”
Though in the present case there has been no settlement”
strictly speaking with the other workers in the various
branches, the considerations which weighed with the Court in
the above case are fully applicable to this case and the
Tribunal must be held to have committed an error in treating
the sum still in the hands of the company as a matter only
between the company and these present claimants.
In deciding what relief may reasonably be given to the
appellant company in view of this error in the Tribunal’s
approach to the question of distribution of the amount still
available, we have however to take into account two errors
which have been made by the Tribunal in this connection in
favour of the appellant. One of these is that in
distributing the available
207
surplus the Tribunal omitted to take into account the
important fact that a sum of no less than pound1,10,000/has
been capitalised out of the reserves at the beginning of the
year. The second error was that the Tribunal in saying that
after paying 8 months’ bonus there is a balance of pound
34,397 with the employer, omitted to take into consideration
the fact that the company would also have the benefit of a
large amount as income-tax rebate in respect of the bonus
paid to its clerical staff.
Taking all these facts into consideration we are of opinion
that a fair order would be to award to the staff bonus
equivalent to 3 months’ basic wages in addition to the
amount already paid voluntarily.
We therefore allow the appeal in part and in modification of
the award made by the Industrial Tribunal award to the staff
of M/s. Peirce Leslie Co., Ltd., bonus equivalent to 3
months’ basic wages in addition to the amount already
voluntarily paid by the company. There will be no order as
to costs.
Appeal partly allowed.