PETITIONER:
WORKMEN OF M/S. HINDUSTAN MOTORS LTD.
Vs.
RESPONDENT:
M/S. HINDUSTAN MOTORS,LTD.,& ANR.
DATE OF JUDGMENT:
21/11/1967
BENCH:
BHARGAVA, VISHISHTHA
BENCH:
BHARGAVA, VISHISHTHA
HIDAYATULLAH, M.
VAIDYIALINGAM, C.A.
CITATION:
1968 AIR 963 1968 SCR (2) 311
CITATOR INFO :
R 1971 SC2567 (1,24,10)
R 1972 SC 330 (8)
R 1972 SC1954 (6,23)
RF 1973 SC 353 (31)
R 1973 SC2394 (18,10)
ACT:
Industrial Dispute-Bonus-Rehabilitation surplus,calculation
of Age machinery-Multiplier-Deductions to be made-
Depreciation-Returns on working capital and paid up
capital-Extraneous income-Interest on fixed deposits-Home
delivery commission paid by foreign collaborator.
HEADNOTE:
The workmen of the respondent company raised an industrial
dispute about bonus claimed by them for the year 1960-61.
The Industrial Tribunal applying the Full Bench Formula
held that the sum needed for rehabilitation of machinery
exceeded the surplus otherwise available and therefore no
bonus was payable. Against this decision of the Tribunal
the workmen appealed to this Court and raised various
objections as to the manner in which the available surplus
was calculated by the Tribunal.
HELD: (i) On the facts and the evidence produced in the case
the life of the respondent company's machinery should be
taken at an average of 15 years if the machinery is worked
in two shifts. and 10 years if it is worked in three shifts.
The artificial rule laid down in the Income-tax Act for
calculation of notional depreciation can provide no
criterion at all for determining the life of the machinery,
and the Tribunal committed an error in proceeding on that
basis. [319 H]
The life of machinery taken in other cases is also not a
correct basis for fixing the life of machinery in a
particular case. Various factory come in that affect the
useful life of a machinery. Factors such as the quality of
the material used in the machines, and the nature of the
material on which the machines are to operate, very
materially affect their life.Further the life of a machine
will also depend on the manner in which it is handled in a
particular factory. Consequently the correct principle is
to determine the life of machinery in each case on the
evidence adduced by the parties. [319 E--F; 320 D]
Further what has to be determined is the useful life of the
machinery rather than its economic life. In fact one of the
very major considerations which should be taken into account
is the actual practice of the manufacturers using the
machinery and, if the evidence be available, to find out how
long the manufacturers continue to use the machinery as a
rule. [324 D--H]
The fact that in the Full Bench Formula the breakdown
value of machinery is taken at 5% is certainly an aspect to
be taken into account. but it cannot be accepted that a
machinery should be deemed to have useful life until it
reaches the stage of having a breakdown value of 5% No such
absolute rule can be inferred. [328 A]
The Tribunal was wrong in not taking into account machinery
installed during the bonus year itself for making provision
for rehabilitation.If any machinery is installed in. the
bonus year, the company would be
312
justified in claiming that it must immediately Start making
provision for its rehabilitation, though the period for
rehabilitation of that machinery would only start at the end
of the bonus year. [330 A--C] '
(ii) The multipliers given by the company in the
schedule originally submitted by the company which were not
objected to by the workers were the correct basis for
Calculation of the rehabilitation cost and the Tribunal
should not have departed from them. There was no
justification for taking an average of the multipliers
submitted at first and those submitted thereafter in a
second schedule. The Tribunal also was not justified in
reducing the multipliers on the ground that the new machines
which would be purchased to replace the original ones would
necessarily have more' productive capacity. There was no
material at all from which the Tribunal could justifiably
have inferred that the increase in production would be so.
material as to, attract the principle of apportionment laid
down by this Court in the case of the Associated Cement
Companies Ltd. 1331 A--F; 332
(iii) In calculating the rehabilitation requirement for
the machinery the depreciation provision made in accordance
with the principles of commercial accounting has to be
deducted from the amount that would be required to purchase
the new machinery for replacement. The contention that
deduction should be made only of depreciation reserves
available to the employer cannot be accepted. SUch an
interpretation militates against the very purpose for which
rehabilitation provision is allowed, namely, to enable the
industry to cover the difference between the amount of
depreciation which is recouped by making provision for it in
accoromance with the, principles of commercial accounting
and the amount that would be required to purchase the new
machinery for replacement. Therefore, in the present case,
the Tribunal erred when in calculating the provision for
rehabilitation it took the entire price of the replacement
machinery as required to be provided, entirely out of
profits without reducing the price to the extent of the
depreciation provided for in the accounts. [333 E--334
B--F]
(iv) The claim of the workmen that the sum shown in the
balance-sheet of the company as development rebate reserve
should be deducted from the available surplus must be
allowed. The mere statement of the General Manager on
affidavit to. the effect that the reserves had been utilised
as part of the working capital could not be aceepted as
evidence of the fact. When the balance-sheet itself showed
that cash amounts in the form of fixed deposits were
available which were far in excess of the development rebate
reserve in question, there would be no. justification for
holding that this development. rebate reserve was not
available as a liquid asset and had been included by the
company in the working capital. This development rebate
reserve was a liquid asset available for rehabilitation
and consequently liable to be deducted when calculating the
rehabilitation requirement. [335 A--G]
(v) If some. machines have fully run out their lives,
they must necessarily be replaced out of resources available
immediately and there would be no justification for keeping
the available resources in reserve for future rehabilitation
while not providing out of those available resources for
immediate. replacement of machinery. There is also the
aspect that an employer in order to claim more and, more
rehabilitation provision will have a tendency to keep old
blocks of machinery running and to avoid adoption of such a
device it would be fair that he is required to utilise
available resources at the very first opportunity when the
old blocks of machinery require replacement and claim annual
provision for future only in respect of that machinery
which will require replacement later
313
on.Consequently, in the present case the depreciation
provision and the available development rebate reserve must
be taken into account when calculating the annual provision
for rehabilitation required for replacement of the earliest
installed machinery until it was exhausted, whereafter 'the
annual requirement for the remaining blocks of machinery
would have to be calculated, ignoring these available
resources. [336 G--H; 337 C--D]
(vi) For the purpose of working 'out return on working
capital in the year of bonus the origin of the fund used as
working capital is immaterial and it cannot be said that the
return must be allowed only on reserves used as working
capital and not on any other funds used as such. However the
fund must be available for investment before a claim can be
made by the employer for a return on it. [340 E--F]
But, the mere existence of reserves and funds at the
beginning of the year, even taken together with their
existence at the end of the year cannot lead to any
inference that these reserves and funds must have formed
part of the working capital during the year and could not
form part of other items such as fixed deposits, investments
etc. The affidavit filed by the company in this connection
did not exclude the possibility that they were utilised for
purposes other than that of working capital. in the balance-
sheet the amounts which represented fixed assets, fixed
deposits, investments and other loans and. advances could
not be classified as part of the working capital. The items
representing working capital were current assets, stock-in-
trade, sundry debts, bank and cash. balances, certain
loans and advances and insurance and other claims. The items
representing working capital had a total value of Rs. 498.02
lacs. Deducting from this the sum of Rs. 377.34 lacs
available from subscribed capital or other sources. there
remained a balance of Rs. 120.68 lacs which must have
necessarily come out of the various reserves including the
depreciation, and this amount at least must be held to
represent resources actually used as working capital during
the year by the company. On this amount it would be fair to
allow a 4% return to the company.
[344 F--H; 347 D--E]
(vii) The company's claim that half the amount from the
following sources, namely, (1) the profit in the profit and
loss account worked out at the end of the year, (2)
depreciation reserve for the year, (3) development rebate
for the year, (4) value of discarded fixed. assets written
off should be treated as 'a fund which was available during
the bonus year for being available for being utilised as
working capital, could not be accepted. There was nothing
to show whether any of these amounts became available to the
company during the year and if so when they came available.
[347 F]
(viii) In allowing 6% return on paid-up capital in
accordance with the Full Bench Formula no question could
arise of deducting the amounts invested in subsidiary
companies from the paid-up capital because the said
investment had not been held to have come out of paid-up
capital [348 [348 F]
(ix) The income of the company from interest on fixed
deposits was its extraneous income which accrued to the
company without any contribution by the workmen. this
income had therefore to be excluded in calculating the
available surplus. At the same time the company could not
on equitable grounds be permitted to claim the interest paid
by it on its borrowings as business expenditure. Therefore
the interest on fixed deposits was to be treated as
extraneous income only after deducting from it the interest
paid on the borrowings. [349 D--F]
314
(x) The income received by the company from its
foreign collaborators as commission on sales effected by
the said collaborators of their own cars in India was
extraneous income to which the company's wOrkmen made no
contribution. It was not therefore to be taken into account
in calculating the available surplus. [349 C]
(xi) Calculated in the above manner the available
surplus came 10 Rs. 30.56 lacs. The Tribunal was not right
in its decision that the company was not in a position to
pay bonus at all. However, though the company had earned a
large amount of profit in the year of bonus it had for quite
a large number of years been running at a loss. The
available surplus being only Rs. 30.56 lacs, the workmen's
demand of bonus equivalent to six months' wages amounting to
Rs. 24 lacs was too high. It would be just and proper to
allow bonus at 20% of their annual wages which would come to
Rs. 8.60 lacs. [352 A--E]
Associated Cement Companies Ltd. Dwarka Cement Works,
Dwarka v. Its Workmen & Anr. [1959] S.C.R. 925, Saxby &
Farmer Mazdoor Union, Calcutta v. M/s. Saxby & Farmer
(India) Ltd. [1955] L.A.C. 707, Workmen M/s. Saxby & Farmer
(India) Pvt.. Ltd. v. M/s. Saxby & Farmer (India) Private
Ltd. C.A. 152/64 dr. 12-4-1965, The Millowners' Association,
Bombay v. The Rashuriya Mill Mazdoor Sangh, Bombay, [1950]
L.L.J. 1247. The Honorary Secretary South India Millowners'
Association & Ors. v. The Secretary, Coimbatore District
Textile Workers' Union. [1962] 2 Supp. S.C.R. 926,
National Engineering Industries Ltd. v. The Workmen & Vice
Versa, [1968] 1 S.C.R. M/s. Titaghar Paper Mills Co.
Ltd. v. Its Workmen, [1959] Supp. 2 S.C.R. 1012, Millowners,
Association, Bombay v. The Rashtriya Mill Mazdoor Sangh,
[1952] 1 L.L.J. 518,
Tata Oil Mills Co. Ltd. v. It's Workmen & Ors. [1960] 1
S.C.R. 1, Anil Starch Products Ltd. v. Ahmedabad Chemical
Workers' Union & Ors., A.I.R. 1960 S.C. 1346, Khandesh Spg &
Wvg. Mills Co. Ltd. v. The Rashtriya Girni Karogat Sangh,
Jalgaon, [1960] 2 S.C.R. 841, Bengal Kagazkal Mazdoor
Union & Ors. v. Titagarh Paper Mills Company, Ltd., [1963]
II L.L.J. 358 and Voltas Limited v. Its Workmen, [1961] 3
S.C.R. 167, considered.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 635 of 1965.
Appeal by special leave from the Award dated January 8.
1963 of the First Industrial Tribunal, West Bengal in Case
No. VIH-354 of 1961.
B. Sen, Janardan Sharma, P.K. Ghosh and S.K. Nandy, for
the appellants.
Niren De, Solicitor-General, M. Mukherjee and
Sardar Bahadur. for respondent No. 1.
The JUdgment of the Court was delivered by
Bhargava, J. This appeal by special leave has been
filed by’ the workmen of Messrs Hindustan Motors Ltd.
against the decision of the First Industrial Tribunal, West
Bengal in a dispute relating to payment of bonus for the
year 1960-61. The respondent, M/s Hindustan Motors Ltd.,
(hereinafter referred to as
315
“the Company”) was established in the year 1942 and,
initially, the work taken up by the Company was that of
assembling of motor cars from components imported from
foreign countries. Later on, manufacture of components of
motor cars was started and gradually the Company developed
this work of manufacture of components by increasing the
number of components manufactured by it until, at the
present time, the Company is manufacturing more than 70% of
the components utilised in the cars put on the market by the
Company. The work of manufacturing components was taken in
hand for the first time in the year 1949, according to the
reply of the Company filed on 10th January, 1962, to the
statement filed on behalf of the workmen. before the
Tribunal. At the initial stages of its existence, the
Company was running at a loss and even, as late as the year
1956. the Tariff Commission’s Report on the Automobile
Industry mentioned that this Company was making a loss of
Rs. 833 per car on the Hindustan Landmaster which was the
car put on the market by the Company at that time. Even
Subsequently, for several years. no profit was shown in the
profit and loss account and, consequently, no bonus was paid
to the workmen until the dispute about it was raised for the
first time in respect of the year 1959-60. We were informed
that the dispute relating to the payment of bonus for the
year l 959-60 is still pending before the Industrial
Tribunal, while the dispute with respect to bonus for the
next year 1960-61 has been decided and is now before us in
this appeal. In this year 1960-61, the profit and loss
account of the Company showed a net profit of Rs. 249.71
lacs. Out of this, a sum of Rs. 59.53 lacs was allocated
for payment of dividend on ordinary shares @ 12% and a sum
of Rs. 27.55 lacs for dividend on preference shares @8.57%.
The total amount allocated for payment of dividends was thus
Rs. 87.08 lacs. In view of the fact that, in this year, the
Company had earned a net profit of over Rs. 249 lacs. the
workmen demanded bonus equivalent to six months’ wages. The
monthly wage bill of the workmen is about Rs. 4 lacs, so
that the total amount claimed towards bonus by the workmen
came to Rs. 24 lacs. It was also stated on behalf of the
workmen that, if this bonus to the extent of Rs. 24 lacs is
awarded, the actual amount which the Company would have to
pay will only be 55% of this amount, because 45%
representing income-tax on this amount would be refundable
to the Company from the Government.
Before the Tribunal, there was no dispute between the
parties that, in order to find out whether any surplus was
available for distribution of bonus, calculations must be
made on the basis of the Full Bench Formula approved by this
Court in The Associated Cement Companies Ltd., Dwarka Cement
Works, Dwarka v. Its
316
Workmen & Another(1). The Tribunal, after making all other
deductions from the surplus which have to be made in
accordance with the Full Bench Formula and without taking
into account provision for rehabilitation, arrived at a
figure of Rs. 87.80 lacs as the amount of surplus available.
Thereafter, the Tribunal held that a sum of Rs. 373.62 lacs
every year was needed for rehabilitation purposes and, since
this amount very much exceeded the surplus otherwise
available, there was no scope for granting, any bonus at
all. Consequently, the Tribunal decided the reference
against the workmen and held that no bonus was payable for
this year. The workmen have come up to this Court against
this decision of the Tribunal.
In this appeal also, there is no dispute that the
principles to be applied for working out the surplus
available for distribution of bonus must be those approved
by this Court in the case of Associated Cement Companies
Ltd.(1). On behalf of the workmen, however, it was urged
that the Tribunal committed an error in applying the
Formula in respect of five different items involved in the
calculation. These are:
(1) Rehabilitation,
(2) Return on reserves used as working capital,
(3) Return on paid-up capital,
(4) Interest on fixed deposits, and
(5) Home delivery commission.
Of these items, the most controversial is the first item of
rehabilitation and that is also the most material one,
because, if the figure of annual rehabilitation arrived at
by the Tribunal is accepted, it is clear that no surplus can
possibly remain out of the profits earned during the year
for distribution of bonus. In the calculation of
rehabilitation, various factors are involved which have been
indicated by this Court in the case of Associated Cement
Companies(1). The factors in calculation of rehabilitation
accepted by the Tribunal which have been challenged by the
workmen are:
(i) the divisor, which depends upon the
life of the plant, machinery and buildings,
the year of their installation or erection,
and the residuary life which must be taken
into account when working out the divisor,
(ii) the calculation of the multiplier for
arriving at the replacement cost of the old
machinery which requires rehabilitation. and
(1) [1959] S.C.R. 925.
317
WORKMEN V. HINDUSTAN MOTORS LTD. (Bhargava, 1.) 317
(iii) the deductions which should be made when
working out the annual rehabilitation.
We shall now proceed to deal with these points.
When the dispute was taken up for adjudication by the
Tribunal, the Company, on 3 l st May, 1962 filed statements
showing calculations of rehabilitation provision required
for rehabilitating the plant, machinery and buildings.
Amongst these statements was a statement described as
Schedule IA (hereinafter referred to as “the first Schedule
IA”) and in that statement it was claimed on behalf of the
Company that the average total life of its machinery was 6
years. On behalf of the workmen, it was urged that the life
of the machinery should be taken to be 30 years and on this
basis, ,after the arguments were over a rehabilitation
cost calculation was filed on 21st November, 1962.
Thereafter, in the course of arguments on 22nd November,
1962, some fresh statements were filed by the Company.
These statements in respect of the machinery had two new
Schedules, both marked as Schedule IA. In one of these
Schedules IA filed on 22nd November. 1962, the multiplier
taken for replacement of the machines installed in various
years was higher than the multiplier in the first Schedule
1A. This Schedule shall be referred to. as “the second
Schedule 1A”. At the same time, as mentioned earlier,
another Schedule IA was filed and, in this Schedule IA, the
multipliers were the same as in the first Schedule 1A. This
shall be referred to hereinafter as “the third Schedule 1A”.
In none of these Schedules filed, either on behalf of the
Company or on behalf of the workmen, was there any
classification of plant and machinery into precision or non-
precision machinery. Some statements for the purpose of
calculation of rehabilitation were again filed on behalf of
the Company on 28th December, 1962 under the directions of
the Tribunal and it appears that, taking into account the
evidence which had been led before the Tribunal, the
Tribunal at this stage asked the Company to give separate
Charts for precision machinery and non-precision machinery.
Consequently, the statements flied on 28th December. 1962
classified the machinery into precision and non-preCision
machinery.It seems that the Tribunal, in making this
direction was also influenced by the circumstance that,
under the Income-tax Law, the depreciation allowed in
respect of precision and non-precision machinery is
different, from which the Tribunal. inferred that precision
machinery will have a shorter life than non-precision
machinery.In fact, the Tribunal was of the view that the
proportion between the life of precision and non-precision
machinery can be safely taken to be the same as the
proportion between the depreciation allowed in respect of
the two.Proceeding on this basis, the Tribunal, in the
statements prepared for and annexed as. part of the
LISup.C.I./68–6
318
Award, classified the machinery into precision and non-
precision machinery and worked out different life for the
two kinds of machinery. In the course of arguments before
us, it was urged on behalf of the workmen that the Company
not having claimed that machinery classified as precision
had a shorter life than machinery classified as non-
precision either in the written statements or at the stage
of filing the first Schedule 1A or even the second or third
Schedule IA, there was no justification for the Tribunal to.
accept this. classification and work out different
periods of life for different classes. of machinery. Mr.
Niren De, counsel appearing on behalf o.f the Company, in
his argument before us also urged that the Company at no.
stage put forward the Case that the machinery should be
classified into precision and non-precision machinery and
different life should be attributed to the two classes of
machinery. According to him, the Company’s. case throughout
has been that all machinery installed m the. factory of the
Company has an economic life of 6 years only, so that the
Company is not prepared to justify the decision given by the
Tribunal on the basis of this classification. Since both
parties before us challenge the adoption of this
classification by the Tribunal, we consider that it will be
right to ignore this. classification and to proceed on the
basis that the total life of the machinery must be worked
out on an average for all the machines installed in the
factory of the Company, without making any distinction
between precision machinery and non-precision machinery.
As we have mentioned earlier, the contention on behalf
of the workmen was that the life of the whole machinery
should be taken to be 30 years. Mr. B. Sen, counsel
appearing on behalf of the workmen, drew our attention to a
number of cases, in which the life of the machinery came up
for consideration either before the Labour Appellate
Tribunal or before this Court in connection with calculation
of rehabilitation provision. The. first case brought to our
notice was Saxby & Farmer Mazdoor Union, Calcutta v. M/s.
Saxby & Farmer (India) Ltd., Calcutta(1), in which, for
purposes. of calculation of rehabilitation, the life of
machinery was taken to be 30 years. Another case between
the Workmen of M/s. Saxby & Farmer (India) Pvt. Ltd. v.
M/s. Saxby & Farmer (India) Private Ltd.(2) in respect of a
subsequent year came up before this Court. In that case,
the Tribunal, in its Award, fixed the life of the machinery
at 20 years and on behalf of the, workmen it was urged that
it should have been 30 years as accepted by the Labour.
Appellate Tribunal in respect of the earlier year in the
of Saxby & Farmer Mazdoor Union, Calcutta(1). This Court
held that the life of 30 years. had been taken at a time
when
(1) [1959] L.A.C. 707.
(2) Civil Appeal No. 152 of 1964 decided on 12-4-1965.
319
the machinery was. being worked in two, shifts, while, in
the subsequent case, it was shown that the machinery was
working in three shifts, so that it could not be said that
the Tribunal was wrong in fixing the life in this subsequent
case at 20 years. Relying on these cases, Mr. Sen urged
that, in the present case also, we should take the life of
the machinery to be 30 years. In The Millowners
Association, Bombay v. The Rashtriya Mill Mazdoor
Sangh,Bombay(1), the Full Bench of the Labour Appellate
Tribunal, when laying down the formula that was later
approved by this Court, appears to. have accepted the life
of textile machinery as 25 years, while this Court, in the
case of the Associated Cement Companies Ltd. (2), proceeded
on the basis that the life of the machinery was 30 years.
In the Honorary Secretary, South India Millowners
Association and Others v. The Secretary, Coimbatore District
Textile Workers’ Union(1), this Court confirmed the finding
of the Tribunal that the estimated life of the textile
machinery of the Company concerned in that case should be
taken. to be 25 years. It is on the basis of these
decisions that the claim was put forward that the life of
the machinery in the present case should also. be taken to
be 30 years or at least 25 years. In our opinion.this
argument proceeds on an entirely incorrect basis. The life
of a machinery of one particular factory need not
necessarily be the same as that of another factory. Various
factors come in that affect the useful life of a machinery.
There is, first, the consideration of the quality of
machinery installed. If the machinery is purchased from a
country producing higher quality of machines,it will
naturally have longer life, than the machinery purchased
from another country where the quality of production is
lower.Again, the articles on which the machinery operate.s
may very markedly vary the life of a machine. If, for
example, a machine is utilised for grinding of cement, the
strain on the machine will necessarily not be the same as on
a machine which operates on steel o.r iron. We are,
therefore, unable to accept the suggestion that the: life of
the machinery in the present case should have been fixed on
the basis of the life accepted in other cases in which
decisions were given on bonus disputes either by the Labour
Appellate Tribunal or by this Court.
The Tribunal, in its decision, worked. out the life of
the machinery on ‘the basis of the percentage of
depreciation allowed under the Income-tax Act. The
application of this principle has been attacked before us by
both the parties. It is urged that the artificial rule laid
down in the Income-tax Act for calculation of notional
depreciation can provide no criterion at all for determining
the life of the machinery. We think that the parties are
(1) [1950] L.L.J. 1247. (2) [1959] S.C.R. 925.
(3) [1962] 2 Supp. S.C.R. 926.
320
correct and that the Tribunal committed an error in
proceeding on this basis.
Though, in the case of the Honorary Secretary, South
India Millowners’ Association(1), this Court, on the facts
of that case, accepted the life of the textile machinery as
25 years; the Court also laid down the principle for.finding
out the life of machinery in the following words :–
“We are not prepared to accept either
argument because, in our opinion, the life of
the machinery in every case has to be.
determined in the light of evidence adduced by
the parties.” (p. 933)
Obviously, this is the correct principle, because it is only
when the life of machinery is determined in the light of
evidence adduced by the parties in a particular case that
the authority determining the life can take into account all
the factors applicable to the particular machinery in
question. As we have indicated earlier, when determining
the life of a machinery, factors, such as the quality of the
material used in the machines and the nature of the material
on which the machines are to operate, very materially affect
their life. Further, the life of a machine will also depend
on the. manner in which it is handled in a particular
factory. We, consequently, in this case proceed to examine
the evidence given by the parties. in this behalf.
In order to prove the life of machinery, one method
usually adopted by the Companies is to tender evidence of
experts. In the. present case, the Company tendered in
evidence the statement of an expert, Gerald Waplington,
which was recorded earlier on 5th November, 1961 by the
Fifth Industrial Tribunal in a dispute pending before it.
That dispute was also between this very Company and its
workmen. In giving the life of machinery, Waplington first
classified the machines into two classes–general purpose
machine tools and special or single purpose machine
tools–and expressed the opinion that a general purpose
machine tool used for one single operation is likely to have
a shorter economic life than special or single purpose
machine tool. According to him, a general purpose machine
carrying on work of high accuracy will have an economic life
of the: order of 2 to 3 years only, while a special purpose
machine doing similar work of high accuracy working 400
hours a month will have an economic life of 5 to 6 years.
If the work taken. from the machines is of less accuracy.
then, in his opinion, a general purpose machine may have
an,economic life up to 5 years, and a special purpose
machine an econoevidence available in this case. It may
however, be noted that
(1) [1962] 2 Supp. S.C.R. 926.
321
tinction between economic life and useful life. He twice
stated that economic life of a machine would be only 1/3rd
of the useful life of the machine, so that if, on the basis
of his evidence, the useful life of various classes of
machines mentioned by him is to be worked out, the member of
years given for each class by him above will have to be
multiplied by 3. Thus, according to his evidence, the
economic life of a machine will vary from 2 to 3 years as a
minimum to 7 to 10 years at the maximum, and working out the
useful life on the basis of his statement that economic life
is only 1/3rd of the useful life, the machines would have a
minimum of 6 to 9 years and a maximum of 21 to 30 years
useful life. We shall consider what inferences can be drawn
from his statement at a later stage when we have discussed
the other evidence available in tiffs case. It may, however,
be noted that Waplington is the only expert who can be held
to. be entirely disinterested, because the other two experts
examined are employed as Engineers by the Company itself.
This independent witness, Waplington, was not asked whether
he had seen the various machines in the factory of the
Company, nor was he at any tune requested to indicate how
many different machines in the factory of the Company would
fail in the various classifications mentioned by him for
which he has given different periods in respect of economic
life.
The Other two witnesses examined are Joseph Joyce,
General Master Mechanic, and Girish Chandra Bansal, Master
Mechanic, employed by the Company. Both of them have, in
their statements given out their qualifications and
experience which they. have in dealing with automobile
manufacturing machinery. According to Joyce, the economic
life of the machinery of the Company cannot go beyond 6
years, and this statement was. made on the basis of the
machines working 16 hours a. day in two shifts of 8 hours
each. Later on, he added that, applying American standard,
the life of the machines can only be 6 to 10 years. In
giving the life, he qualified that word with “economic” or
“economic useful”, so that he equated economic life with
economic useful life and gave the figures on this basis. In
cross-examination, he, however, admitted that useful life of
a machine is longer than its economic life. Thus, if
various, statements of his are taken into account and it is
kept in view that he is. an employee. of the Company, it may
be accepted that, according to him, the maximum ,economic
life of the machinery of the Company will be between 6 to 10
years and the useful life will be longer how much longer, he
has not indicated. If we were to assume that he is using
the expressions “economic life” and “useful life” in the
same: sense in which they were used by Waplington, economic
life would be 1/3rd of the useful life, with the result
that, on his evidence, useful life of the machinery of the
Company would work out to be
322
anywhere between 18 to 30 years. The third witness, Girish
Chandra Bansal, estimated the efficient economic life, based
on 16 hours per day working, at 6 to 10 years, which
Coincides with the’ estimate by Joyce. In his case,
however, no questions were put to. elicit from him whether
he would make any distinction between efficient economic
life and useful life, so. that his evidence does not appear
to carry us any farther than the evidence of Joyce.
It may be added that both these witnesses in their evidence
stated that the workmen employed by the Company were not
very skilled workers and this was a factor that had to be
taken into account in considering the life of’ the machines
in this company. It is obvious that, if a machine is handled
by a more skilful worker, it will last longer and have a
longer life. A Statement was also made by Joyce that
machine.s running at high speed will have shorter life than
those running at lower speeds; but this general statement
made by him offers no assistance to us in this case, because
he has not indicated in his evidence how many and which of
the machines of the Company run at high speed and which at
lower speed.
Apart from this evidence of experts, the Company has
attempted to provide some other data which can be of
assistance in assessing the life’ of the machinery. In this
connection, Mr. Niren De, arguing the case on behalf of the
Company; drew our attention to the history of this Company
which showed that, initially, this Company started the work
of assembly of cars from parts imported from foreign
countries. some time in the year 1942-43, but, later, the
policy was. altered and manufacture of components was taken
up and progressively increased so as to minimise foreign.
import. He also pointed out that this policy of progressive
production of indigenous parts was pressed Upon the Company
by the Government and, for this purpose, drew our attention
to the: first and the Second reports of the Tariff
Commission in the years 1953 and 1956, as well as the report
of the lid Hoc Committee on Automobile Industry known as the
Report of the Jha Committee, because Sri L.K. Jha was its
Chairman. This report came out in the year 1960. It was
Urged by Mr. De that, due to. this policy of progressive
increase in manufacture of new components, it was not
possible for the Company to find money to rehabilitate old
machinery and, consequently, the fact that the Company
continued to use old machinery for a number of years should
not be taken as indicating that machinery ‘still had
economic or useful life. It was argued. that the Company per
force had to continue use of these ‘old machines, because it
was under pressure to expand its activities. by taking up
manufacture of components and the Company was running at a
loss. It has already been mentioned earlier’ that in the
second report of the Tariff Commission in 1956 it was
clearly stated that this Company was selling cars at a loss
of
323
Rs. 833 per car. It is in this background that the evidence
given by the Company should be judged to find out what is
the life of the machinery possessed by the Company. He also
drew our attention to the principles laid down in this
connection by the Full Bench of the Labour Appellate
Tribunal in the Millowners’ Association’s case (1), and by
this Court in the Associated Cement Companies’ case(2). In
the former case, when laying down the principle that
provision should be’ made for rehabilitation replacement and
modernization of the machinery, the Tribunal held that:
“It is essential that the plant and
machinery should be kept continuously in good
working Order for the purpose of ensuring good
return. and such maintenance of plant and
machinery would also be to the advantage of
labour, for. the better the machinery the
larger the earnings, and the better the chance
of securing a good
bonus.”
In the latter case, this Court, when examining the scope of
claim for rehabilitation. held that:
“this claim covers not only cases of
replacement pure and Simple but of
rehabilitation and modernisation. In the
context, rehabilitation is distinguished 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.”
Proceeding further to. distinguish between cases of
replacement. modernisation and expansion, the Court held:
“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
(1) [1950] L.L.J. 1247. (2) [1959] S.C.R. 925.
324
of giving service-was uneconomic and otherwise
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.”
It will thus. be seen that, when considering the question of
rehabilitation, what is essentially to be taken into.
account is that the old plant, though capable of giving
service, was uneconomic and otherwise wholly inexpedient
when provision for its replacement and rehabilitation, even
though it will include modernisation would be fully
justified.
In this context, it may be worthwhile examining at this
stage the difference between economic life and useful life
on which emphasis has been laid by Mr. Sen on behalf of the
workmen. We have already indicated earlier that even the
expert examined behalf of the Company, Gerald Waplington,
made a distinction between economic life of machinery and
its useful life, Further, in giving the life, he applied
American standards which may not be applicable in India.
This. Court, in various cases where the question of
rehabilitation has been discussed, has laid emphasis on
useful life rather than on economic life and, oven in the
Associated Cement Companies’ case(1) in the extract quoted
above, the Court held that modernisation is justified when
the use of the old plant becomes uneconomic and otherwise
wholly inexpedient. Thus, two tests were laid down, first,
that it should be uneconomic and, second, that it should be
also otherwise wholly inexpedient. The economic life, as
envisaged by Waplington, was not, therefore, considered the
appropriate. test for determining when rehabilitation of
the plant and machinery would be justified. In fact, one of
the very major considerations, that should be taken into
account is the actual practice of the manufacturers using
the machinery and if evidence be available, to find out how
long the manufacturers continue to use the machinery as a
rule. It may be that, during the last few years of use, the
machinery may.be continued to. be utilised because of want
of resources and compulsion to retain the machinery, because
replacement is not possible at all. It is in the light of
this. situation that we proceed to examine the evidence
given by the Company about the behaviour of its machinery
and the steps taken by the Company to have the old machinery
rehabilitated.
(1) [1959] S.C.R. 925.
325
In this connection, two statements filed on behalf of
the Company are of significance. One of these is a list of
obsolete and/or discarded machines prepared on 26th October,
1962 and marked as Ext. 28. It is to be. noticed that,
though 40 different machines were discarded by 26th October,
1962 when this statement was prepared, none of the machinery
discarded was that installed up to. the year 1947-48. In
fact, this situation is also borne out by the three
Schedules IA which have been referred to earlier by us. In
those Schedules 1 A, the machinery discarded and written off
from books is shown as being worth Rs. 35,000/- out of
machinery of the value of Rs. 89.75 lacs installed in the
year 1947-48. Thus, the machinery of that year discarded
was nominal in value. None of the machinery installed
between ‘the years 1948-49 to 1951-52 was discarded. Again,
the machinery installed in 1952-53 was discarded to the
extent of the nominal value of Rs. 39,000/- out of Rs. 11.06
lacs, and no machinery installed in 1953-54 was discarded.
The machinery discarded was primarily that installed in the
years 1954-55 to 1957-58, and its value was in the region of
Rs. 46 lacs. Thus, right up to 1962, the old machinery
purchased up to the year 1954 was almost all continued in
use and was not discarded, even though machinery installed
in the next four years was considered unfit for further use
and. was discarded or written off,
The second statement is Ext. 21 which bears the heading
“replacement programme condition of machine tools” and which
was prepared in March, 1960 in order to claim foreign
exchange from the Government for replacement of machinery.
That list contains more than 200 machines, but, again, the
machines installed during the year 1947-48 or earlier
included in it are only 5 in number, whereas the majority of
machines. included in that list are those installed in later
years,. Significance attaches to this factor, because the
machines ins.tailed in the year 1947-48 were of very large
value, their cost being. in excess of Rs. 89 lakhs. In
fact, that is the year in which the investment on
installation of machinery was highest, barring the year of
bonus and the year immediately preceding it. This statement
thus shows that, even though the Company wanted replacement
of a number of machines which had been installed even in the
year 1949-50 and some machines installed in later years, the
replacement of those machines was given preference over the
replacement of machines installed earlier in the year 1947-
48. In this statement, in the remarks column,. it was
mentioned that these machines are to be scrapped. but there
was no statement that machines which had been installed in
the year 1947-48 were also in such a condition that they
required scrapping. Thus, these statements provide some
indication of the life of machinery which point both ways.
The fact that old machinery of 1947-48, though of large
value, was not
326
considered to be in such a condition as to require immediate
replacement in preference to machinery installed later would
point towards that machinery having a fairly long life. On
the other hand, there is the factor that machinery installed
in later years was actually scrapped or was sought to be
scrapped, and this necessarily means that later machinery
was considered as having shorter life.
In this connection, another statement of which notice
may be taken is Ext. 29 which shows prices of certain
machines originally purchased by. the Company which is to be
rehabilitated, and the prices of the same machines, which
were purchased in the two years preceding the time when
Girish Chandra Bansal was examined before the Tribunal.
Girish Chandra Bansal’s ,evidence was recorded on 14th
November, 1962 ‘and in his statement before the Tribunal he
stated that Ext. 29 was prepared to compare the prices of
same machines in earlier years when they were purchased
originally and again when similar machines were purchased a
second time in the past two years. This statement has the
significance that, though in the past two years the Company
took the step of purchasing machines which would perform the
identical functions which the old machines were performing,
the Company chose to add these machines as new ones, as a
part of its scheme of expansion rather than replace those
old machines. In the year 1961-62, therefore, the Company
was still of the opinion that it was preferable to add a new
machine of the same type rather than replace an old machine
doing the-same work, and an inference would necessarily
follow that old machine must have been considered to be
sufficiently serviceable. This is the view that the Company
appears to have held in respect of machinery which was
installed 14 or 15 years earlier.
On behalf of the Company, some statements were also.
filed to show that there were very frequent break-downs in
the machinery of the Company and. as an illustration, our
attention was drawn to the statement for the period January,
1960 to September, 1960. It is true that, if there are very
frequent break-downs in machinery, this would give an
indication of the condition of the machinery and lead to the
inference that their useful life is coming to an end. There
is, however, one great difficulty in drawing any conclusion
from the statistics of number of break-downs of the
machinery put forward on behalf of the Company. The Company
has. no doubt, shown us statements that a number of machines
had break-downs during the last few years preceding the year
of bonus. but no material was brought to our notice-from
which it might have been possible to compare how the same
machinery was behaving in earlier years or within the first
few years after it was installed. Unless it be possible to
compare the number of
327
break-downs. when their life is claimed to be over with the
number of break-downs when the machine was almost new’ or
‘was running its economic or Useful life, no assistance is
available for assessing the. life of the machinery from a
mere table showing the number of break-downs. Further, it
was not possible from these statements’ to find out which of
the machines installed in which year were subject to the
break-downs, nor did these statements give us any picture
about the percentage of machines installed in different
years which’ were included in these ‘statements.
Consequently, we have felt handicapped in drawing any
inference from these statements.
Reliance was also placed on some statements showing
that, for purposes of granting incentive bonus, a rated time
was prescribed for various machines and progressively this
rated time in respect of a large number of machines has had
to be increased in order to enable the workmen to earn
bonus, because the machines themselves are not working
efficiently and. if the rated time is not increased, the
workmen would fail to qualify for incentive bonus for no
fault of their own and simply because the machines on
which they were required to work had deteriorated in
condition.It is true that the statement given of increase of
rated time gives some indication that the condition of the
machinery in this factory has been going down and though
this. factor is relevant in determining the useful life of
machinery, it cannot carry us very far, because there is no
evidence’ which would enable us to lay down a correlation
between the increase in the rated time and the expiry of the
useful life of the machinery. It is not possible on the
evidence to discover how much the rated time is expected to
increase before it can be said that the machinery has
completely run out its useful life.
Mr. De also drew our attention to the statements of some
of the witnesses who. deposed that machinery running at
high speed has a shorter life than that running at low
speed. This general statement, however, is of no
assistance, because the Company did not attempt to classify
its machines between high speed and low speed ones and’ to
give evidence in that behalf.
Lastly, it was urged by Mr. Sen on behalf of the
workmen that another factor which should be taken into
account is that, according to the Full Bench Formula, for
calculation of rehabilitation the machinery is treated as
scrapped when its value is reduced to 5%, because the break-
down value of 5% is all that is deducted when calculating
the requirements for rehabilitation. The argument was that
the fact that the. break-down value is taken at 5% indicates
that the machinery ‘for purposes of rehabilitation is
treated as still useful unless its value is reduced to that
low figure.
328
This is, no doubt, another aspect that must be taken into.
account, though we are unable to accept the submission that
a machinery should be deemed to have useful life until it
reaches the stage of having a break-down value of 5%. No
such absolute rule can be inferred.
In this case, the Tribunal, in fixing the life of the
machinery, as we have mentioned earlier, proceeded to
calculate it on the basis of the depreciation rate permitted
under the Income-tax Act. That basis was not acceptable to
either of the parties before us. On behalf of the workmen,
it was urged that it was an entirely wrong principle of
calculating the life, and even o.n behalf of the Company no
attempt was made to support this method adopted by the
Tribunal. In the Honorary Secretary, South India
Millowners, Association’s case(1), this Court also rejected
the argument that the calculation of the life may be based
on the depreciation rate permitted by the income-tax Act.
In these circumstances, we have to consider the
cumulative effect of the various pieces of evidence and
circumstances which we have discussed above and, on its
basis, to estimate what should be considered to be the
useful life of the machinery of this Company.. Reference may
briefly be made to the various conclusions arrived at. The
evidence of the independent expert and of the engineer
employees of the Company gives a figure. for useful life. of
machinery which may be anywhere between 6 years to. 30
years. The lower figures given by them cannot be, accepted
as they relate to economic life in the strict sense of that
expression and are based on American standards. At the same
time, the maximum life worked out from their evidence is on
the hypothesis that the useful life stated by Waplington to
be three times that of economic life is also the useful life
in the same proportion to economic life as given in the
evidence of Joyce. Then, there is the evidence that this
Company itself has been running its old machinery for quite
a large number of years and even after 13 or 14 years of
use, the Company in quite a large number of cases preferred,
when buying similar machines, to utilise them for expansion
rather than for rehabilitation. On the face of it,
replacement of old machinery would have been preferred to
expansion, if the old machinery had really completed its
useful life. In some cases, however, machinery purchased in
later years had to be rehabilitated after much shorter
periods, but no detailed information is available. why such
early replacement became necessary. No.’ material was
provided to show the comparative quality of machines which
have been run for a long time and machines which were
replaced or sought to be replaced after shorter periods of
us. After tak-
(1) [1962] 2 supp. S.C.R. 926.
329
ing into consideration the various factors mentioned by us
above, and on the evidence before us, we think that in this
case, it would. be appropriate to hold that the average life
of the machinery of this. Company in respect of different
kinds of machines obtained from different sources may be
appropriately taken as 15 years. This life of 15 years
arrived at by us, it may be mentioned is on the basis that
the machines of the Company have been running during most of
the. period, to which the evidence relates, in two shifts
only. Girish Chandra Bansal, one of the Engineers of the
Company, examined as a witness, stated that the machines in
this Company were working in two shifts only, until, for the
first time in 1959-60, the factory started to run round-the-
clock, i.e., in three shifts. He added that the factory
had been working in two shifts from the time it was founded.
It is also clear that; if the. factory had been working in
only one shift, the life of the machinery would have been
longer, and we think that in that case lit. would have been
appropriate to take the life of the machinery as 25 years.
On the other hand, after the machines are being worked in
three shifts, the Life of the machinery is bound to be lower
and, consequently, if the machines be worked in three
shifts, it would be appropriate to take the life of the
machinery at 10 years. In the present case, however, we are
accepting the; average life as 15 years for all the machines
requiring rehabilitation, because the evidence, as mentioned
above, shows that the machines have been. working in two
shifts only from the time when the factory started
functioning, with the exception that, in the first few
years, they were worked in only one shift while, from the
year preceding the year of bonus, they have been worked in
three shifts. Consequently, it may be taken that, up to the
year of bonus, the machines have been worked on the average,
in two shifts. In working out the divisor, however, it will
have to be kept in view that future life of the machinery
will have to be calculated on the basis of three shifts and,
consequently, on the basis of the figure of 10 years as the
useful life of the machinery. We may also incidentally
mention that this Court, in the case of National Engineering
‘Industries Ltd. v. The Workmen & Vice Versa(1), accepted
the life of the precision machinery of the Company concerned
in that case as 15 years, so that the conclusion arrived at
by us on the evidence in the present case happens to
coincide with the figure of life accepted in that case.
In this connection, we-may also take notice of one point
urged by Mr. De on behalf of the Company. It appears that,
when working out the divisor and finding out what machinery
required rehabilitation, the Tribunal did not take into
account machinery installed during the bonus year itself for
making provision for mic life of 7 to 10 years. In his
evidence, further, he made a dis-
(1) Civil Appeals Nos. 356-357 of 1966 decided on 6-10-1967.
330
any machinery is installed in bonus1 year, the Company would
be justified in claiming that it must immediately start
making provision for its rehabilitation, though the period
for rehabilitation of that machinery would only start at the
end of the bonus year. Once machinery has been installed and
is in existence. in the bonus year, the Company is entitled.
to say that it will require= rehabilitation in future and
that provision should be made for rehabilitation of that
machinery also and the Company should start keeping
reserves. for that purpose from the year of bonus itself.
Thus, in the present case, the machinery installed in the
year 1960-61 should have been included in the rehabilitation
statement, though the divisor in respect of that machinery
will, on our decision given above, be 15 on the basis of two
shifts and 10 on the basis. of three shifts, as the machines
will still have a residuary life of 15 or 10 years,
computing the period from the bonus year which is also the
year of installation.
The second factor entering the calculation of
rehabilitation requirement about which there was controversy
between the parties is the multiplier. We have already
mentioned the fact that, in the first and the third
Schedules 1A, the Company gave one set of multipliers, while
in’ the second Schedule 1A higher multipliers were given.
The Tribunal took both sets of multipliers into. account and
worked out the average and accepted that as the correct
multiplier, representing the rise in the price: rate of the
machinery requiring rehabilitation. Thereafter, the
Tribunal held that the machinery which was to replace the
old one would have a larger production and proceeded to work
out figures for reducing the multipliers on that account.
The Tribunal held that it would be justified to reduce the
average multipliers arrived at by 75 for machinery installed
up to’ 1951-52, by 55 for machinery installed during the
years 1952-53 to 1955-56, and by 35 for that installed
during the years 1956-57 to 1960-61. Before us, this method
adopted by the Tribunal was criticised by counsel’ for both
parties. On behalf of the workmen, it was contended that
there was no justification for the Tribunal to take the
average of the multipliers in the first and the second
Schedules IA and that the Tribunal should only have
proceeded on the basis that the multipliers given in the
first Schedule IA were proved and were correct ones. On
behalf of the Company, it was urged that the Tribunal should
have accepted the multipliers given in the second Schedule
IA and should not have reduced them by taking into account
those given in the first Schedule 1A, and, further, that
there was no justification at all for the Tribunal to reduce
the figures of the multipliers for the various blocks of
machinery by 75, 55 or 35 on the ground that the machinery
to be installed in replacement would have a higher
production.
331
We were taken by learned counsel for parties into the
evidence tendered on behalf of the Company to prove the
multipliers. We nave found that the correctness of the
multipliers shown in the first Schedule 1A has been very
satisfactorily proved. It appears that those figures were
arrived at by comparing the prices of the old machinery
installed in various years with similar machinery purchased
in subsequent years. That comparison was contained m
statement Ext. 29. The Company’s witness Bansal not only
proved this statement, but also clearly stated that the
machines originally purchased and those purchased later
shown in, that statement Ext. 29 were the same machines.
In cross-examination, he further specifically arrested that
the production capacity of these new machines mentioned in
Ext. 29 was very much the same as that of the original
machines which were to be replaced when they were new. It
is also, significant that these figures of multipliers
included in the first Schedule IA. were not challenged on
behalf of the workmen before the Tribunal. So far as the
figures contained in the second Schedule 1 A are concerned,
it was suggested on behalf of the Company that they were’
based on subsequent quotations received for replacement
machinery which formed part of a series Ext. 31. Learned
counsel for the Company was, however, unable to point out
any statement in the evidence of any witness which would
show that the figures for multipliers incorporated in the
second Schedule IA were actually calculated from the
quotations contained in Ext. 31. In fact, no such evidence
was possible, because the second Schedule IA was filed on
behalf of the Company after the evidence of parties was over
and that second Schedule IA not being a part of the record
before the Tribunal when evidence was recorded, it was not
possible for any witness to give evidence proving those
figures for multipliers. In these circumstances, we must
hold that the. Tribunal committed an error in taking into
account the multipliers given in the second Schedule IA and
that the only figures for multipliers that could have been
and should be accepted are those in the first Schedule 1A.
At the same time, we must also accept ‘the contention on
behalf of the Company that the Tribunal had no.
justification fox reducing the multipliers by deducting 75,
55, and 35 in respect of the three blocks of machinery
sought to be replaced. As we have indicated earlier, the
Tribunal proceeded to hold that this deduction was justified
on the ground that the new machines which had been purchased
and which were being compared with the original machines
sought to be replaced must necessarily have more productive
capacity. We have not been able to find any evidence on the
record of any witness which would support this conclusion.
It is true that the statements. made by Company witnesses,
particularly Bansal show that the new machines were
332
more efficient and were likely to produce better quality
goods. At. no stage, however, in the cross;examination of
Bansal was any statement made admitting that’ these new
machines, whose. prices. were being compared with those of
the old machines for rehabilitation, had a larger productive
capacity than those original machines. In fact, as we have
pointed out earlier, in his cross-examination Bansal made a
definite statement that these new machines will produce
exactly the same number of pieces as the original machines
when they were new. This Court in the case of the
Associated Cement Companies Ltd.(1) had indicated that it is
only if, by the introduction of a modern plant or machine,
the production capacity of the industry has appreciably
increased that 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 (p. 969). It is, of course, possible that Bansal, in
stating that the new machines, the prices of which formed
the basis of calculation of multipliers, have exactly the
same capacity as the original machines to be replaced, may
not be quite correct; but there was no material at all from
which ‘the Tribunal could have justifiably inferred that the
increase in production would be so material as to attract
the principle ‘for apportionment laid down by this Court in
the case cited above and, consequently, the Tribunal fell
into an error in reducing the multipliers merely on the
assumption that the new machines must necessarily have a
larger production capacity than the original machines. In
these circumstances, we hold that the rehabilitation,
provision should have been calculated by the Tribunal on the
basis of the. multipliers given by the Company in the first
Schedule 1A, without taking an average of those multipliers
and the multipliers given in the second Schedule IA and
without decreasing the multipliers by 75, 55 and 35 in
respect of various blocks.
The third contested question with regard to
rehabilitation relates to the deductions which have to. be
made out of the total rehabilitation requirement to arrive
at the annual provision for that purpose which must be
allowed in working out the available surplus for
distribution of bonus. In the Associated Cement
Companies Ltd. case (1), when approving the Full Bench
Formula this Court indicated how the calculations should be
made. It was held :–
“Before actually awarding an appropriate
amount in respect of rehabilitation for the
bonus year certain
(1) [1959] S.C.R. 925.
333
deductions have to be made. The first
deduction is made 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 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.”(p.970).
The dispute in the present case relates to the deduction of
the depreciation and general liquid reserves. One aspect in
controversy in this behalf raised on behalf of the Company
is that even depreciation should not be deducted unless it
is available to the employer for purposes of rehabilitation.
The argument was-that in the sentence “Then the depreciation
and general liquid reserves available to the employer are
deducted” the word “depreciation” should be read with the
words “reserves available to the employer” and,
consequently, the deduction should only be made of.
depreciation reserves available to the employer. We are
unable. to accept this submission, because the very
principle on which rehabilitation provision is allowed when
making calculations for awarding. bonus militates against
this interpretation. This Court, in the:same case, in
explaining why rehabilitation is granted, held:
“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.” (p.
966)
It will thus be seen that the purpose of providing for
rehabilitation charges is to enable the industry to cover
the difference between the amount of depreciation which is
recouped by making provision for it in accordance with the
principles of commercial accounting and the amount that
would be required to purchase the new machinery for
replacement. Once the price of the new machinery
sup.C.1./68–7
334
is known, the rehabilitation amount would, be the difference
between that price and the amount provided as depreciation
of wasting assets in accordance with the principles of
commercial accounting. The deduction of depreciation
provision made in ,the accounts is not, therefore, on the
basis that amount must be available for purchasing the
replacement machinery even in the year when provision for
rehabilitation is being made. That amount is deducted from
the price of the machinery Which will be required to be
purchased in order to determine what amount the industry is
going to require for rehabilitation in spite of having been
allowed depreciation. In our view, therefore, this Court,
when it later held that the depreciation and general liquid
reserves available are to be deducted in calculating the
rehabilitation amount, did not intend to lay down that the
depreciation must also be available in the year of bonus.
The words “available to the employer” were intended to
qualify the expression “general liquid reserves” only and
not the word “depreciation”. General liquid reserves are to
be deducted on the principle that if such reserves are in
the hands of the industry and are not earmarked for binding
purposes, the industry must utilise those reserves for
rehabilitating the old machinery instead of asking for
provision to be made out of profits in the year of bone and
in future years. The principle adopted is that provision
for rehabilitation is to be made only to the extent of the
difference between the price of the machinery which will
have to be paid for replacing the old machinery and the
amount of depreciation provision shown in the accounts
according to the commercial system of accounting and even
that rehabilitation requirement must first be met by the
industry out of available liquid reserves rather than by
asking for provision to be made out of profits. In the
present case, the Tribunal, when calculating the provision
for rehabilitation, took the entire price of the replacement
machinery as required to be provided out of profits and did
not take into account that price should have been reduced to
the extent of the depreciation provided for in the accounts.
The annual report of this Company for the year of bonus
1960-61 was produced before us and at page 24 it showed that
at the beginning of the year 1960-61 depreciation to the
extent of Rs. 325.48 lacs had been provided in the balance-
sheet of the Company. This amount has, therefore, to be
deducted from the price of the machinery which is to replace
the original machinery when rehabilitation is resorted to.
The second question on this aspect that arises is
whether there were any liquid reserves available which
should also have been deducted. In the balance-sheet of the
Company contained in the Annual Report, various kinds of
reserves have been shown. There. was a reserve for
contingencies to the extent of Rs. 10.00 lacs on 31-3-1960
and a development rebate reserve of Rs. 39.51 lacs on
335
the same date. On behalf of the workmen, it was urged that
this amount of Rs. 39.51 lacs should at least be deducted
when calculating the requirement for rehabilitation. From
the balance-sheet itself an inference was sought to be drawn
that this reserve existed in the form of a liquid reserve
available for rehabilitation. For this purpose reference was
made to the entries on the assets side of the balance-sheet
which shows a sum of Rs. 220 lacs as lying in fixed deposit
account. The argument was that if the Company had such a
large sum as Rs. 220 lacs in the fixed deposit account, it
could not possibly urge that the sum of Rs. 39.51 lacs in
respect of development rebate reserve was not a part of it
and was not available as a liquid reserve. It is but
natural that in the balance-sheet the Company could not show
any correlation. between the amounts entered on the two
sides, liabilities and’ assets, as that is not required by
any principle of commercial accounting. The argument of
learned counsel for the company was ,that this development
rebate reserve had been used’ as a part of the working
capital of the Company represented by various items shown on
‘the assets side and this fact was proved by the affidavit
of Satya Narayan Murarka, Commercial Manager of the Company,
who categorically stated that all the reserves had been
utilised as part of the working capital. It seems to us
that a mere statement by the Commercial Manager that the
reserves have been utilised in the working capital cannot be
accepted as conclusive evidence of that fact. When the
balance-sheet itself shows that cash amounts in the form of
fixed deposits were available which were far in excess of
the development rebate reserve in question there would be no
justification for holding that this development rebate
reserve was not available as a liquid asset and had been
included by the Company in its working capital. At the
stage it is not necessary, therefore, to go into any-further
details to arrive at the conclusion that this development
rebate reserve was a liquid asset available for
rehabilitation and, consequently, liable to’ be deducted
when calculating the rehabilitation requirement We shall
deal in greater detail with the question of what items were
included in the working capital at a later stage when
dealing with the controversy relating to the claim of the
Company for return on working capital which is allowed under
the Full Bench Formula, when calculating the surplus
available for distribution of bonus.
On the question of calculation for provision for
rehabilitation, the only point raised on behalf of the
workmen with regard to buildings was that the Tribunal, in
taking the life of the factory buildings at 25 years and
non-factory buildings at 40 years, was not correct and that
the life of the two types of buildings should have been
taken at 40 years and 50 years respectively. At the
336
time of the hearing before the Tribunal, the Company
had claimed that factory buildings have a normal life of 25
years only and non-factory buildings 30 years, while the
claim of the workmen was that the factory buildings had a
life of 40 years and the non-factory buildings 50 years. In
arriving at its decision, the Tribunal primarily took into
account the provisions of Rule 9 of the Rules framed under
the Income-tax Act, 1922 which lays down the principle for
calculation of depreciation in respect of buildings.That
principle, no doubt, cannot be taken as giving any correct
indication of the life of buildings for purposes of
calculation of rehabilitation provision, but, in this case,
there was the difficulty that the Tribunal did not accept
the evidence given by the Company to prove the age of the
buildings as claimed by it, while no evidence was given on
behalf of the workmen in support of their claim that the
life of the buildings should be taken at the figures
contended on their behalf. In the course of arguments
before us. all that learned counsel did was to refer to the
decision of this Court in the Associated Cement Companies
Ltd. case(1) at p. 993 where the calculations made in the
Chart show that the life of the various buildings concerned
in that case were taken to be between 30 and 35 years. We
do not think that, in the absence of evidence showing that
the buildings of the Company were similar to those buildings
whose life came up for consideration in the case cited
above, it is possible to derive any assistance from the
figures accepted in that case. In these circumstances, the
position before us is that neither on behalf of the Company,
nor on behalf of the workmen is there any reliable evidence
brought to our notice on the basis of which we can arrive at
a correct estimate of the life of the buildings of the
Company and, consequently, we do not think that there will
be any justification for us to vary the decision given by
the Tribunal in this behalf.
The last controversy in the calculations for
rehabilitation provision is on the question whether the
depreciation and the liquid reserves available should be
deducted from the total amount of rehabilitation requirement
or whether it should be taken into account at the very first
stage when the machinery or the buildings requiring earliest
rehabilitation are taken into consideration and the annual
requirement in respect of them is worked out. On behalf of
the workmen, we think, it was rightly urged that, if
depreciation and liquid reserves available are to be
deducted, they must be incorporated in the accounts against
the replacement cost of those items which required
replacement earliest in time. It is obvious that if funds
in the form of depreciation provision and other liquid
reserves are available, the Company claiming provision for
rehabilitation must utilise them in rehabilitating those
(1) [1959] S.C.R. 925.
337
machines and buildings which require rehabilitation at the
earliest point of time. There is no principle at all that
the depreciation in respect of a particular machinery must
be deducted when calculating the rehabilitation requirement
in respect of that machinery itself. The Full Bench Formula
approved by this Court only recognises the industry’s claim
to make provision out of profits for rehabilitation of
machinery which might require replacement even in future
only on the ground that the industry may not be able to meet
those replacement cost out of funds available in its hands.
The provision for future requirement of rehabilitation must
at any time depend upon what is immediately available and
what is going to be required in future. If some machines
have fully run out their lives, they fast necessarily be
replaced out of resources available immediately and there
would be no justification for keeping the available
resources in reserves for future rehabilitation, while not
providing out of those available resources for immediate
replacement of the machinery. Then, there is the second
aspect that an employer in order to claim more and more
rehabilitation provision, will have a tendency to keep old
blocks of machinery running and to avoid adoption of such a
device it would be fair that he is required to utilise
available resources at the very first opportunity when the
old blocks of machinery require replacement and claim annual
provision for future only in respect of that machinery which
will require replacement later on. It appears that this
Court in The Associated Cement Companies Ltd. case(1)
proceeded on this very basis when calculating the
rehabilitation requirement, though without discussing this
question in detail. In that case, reserves to the extent of
Rs. 311 lacs were found to be available. The machinery
which required to be rehabilitated was divided into four
blocks, the earliest block consisting of machinery installed
up to 1939 in respect of which the rehabilitation
requirement was Rs. 1172.76 lacs. In respect of three later
blocks, the rehabilitation requirement was Rs. 70.40 lacs,
270.37 lacs and Rs. 768.50 lacs. The total requirements for
rehabilitation in respect of all the four blocks was thus
Rs. 2282.03 lacs. When calculating the annual requirement
the Court did not deduct the sum of Rs. 311 lacs in respect
of available reserves ‘out of this total of Rs. 2282.03
lacs, but instead deducted this amount from the cost of the
machinery required to replace the pre-1939 block for which
the amount arrived at was Rs. 1172.76 lacs. After deducting
this amount of reserves from the replacement cost of that
block, the balance was divided by the divisor 7 which was
treated as the remainder life of the machinery falling
within that block. This calculation adopted in that case,
therefore, fully bears out our view that the depreciation
and available reserves must be taken into account when
calculating the annual
(1) [1959] SC. R, 925.
338
provision in respect of that machinery which requires
earliest replacement and should not be deducted out of the
total rehabilitation cost as urged by learned counsel for
the. Company.
Mr. De in this connection drew our attention to a
decision of the kabour Appellate Tribunal in Saxby & Farmer
Mazdoor Union, Calcutta(1) at pp. 711-712. In that case,
the Tribunal first worked out the total rehabilitation and
replacement cost of ‘the machinery at Rs. 43.81 lacs. From
this amount were deducted a sum of Rs. 14.75 lacs in respect
of available reserve, a sum of Rs 9, 03 lacs as the total
depreciation on the plants and machinery and a sum of Rs.
0.737 lac in respect of the break-down value of the
machinery at 5 % of the cost price, leaving a balance of Rs.
19.364 lacs as the rehabilitation requirement. Then the
Tribunal noticed that, on the basis of total requirement of
Rs. 43.81 lacs over the several periods during which
rehabilitation and replacement was to take place, the annual
requirement was worked out at Rs. 8.04 lacs. Applying the
simple arithmetic of ratio, the Tribunal held that the
proportionate annual requirement would be Rs. 3.54 lacs, if
the total requirements are reduced to Rs. 19.364 lacs. In
that case, thus, the Tribunal proceeded on the basis which
has been canvassed on behalf of the Company before us. The
total rehabilitation requirement was first worked out, while
the annual requirement was also worked out on the basis of
that requirement,. without taking into account the
depreciation, available liquid reserves and the break-down
value of the machinery to be replaced. Thereafter, the
total rehabilitation requirement was reduced. by the amount
of depreciation, liquid reserves available and break-down
value of the machinery, and the annual requirement was
reduced in respect of each block of machinery in the same
proportion as the proportion between the total requirement
and the net amount available arrived at, after deducting
depreciation, ,available liquid reserves and break-down
value. We do not think that the principle adopted by the
labour Appellate Tribunal was correct and should be
accepted. On the face of it, it introduces a very anomalous
position. In a case where some machinery may require
immediate replacement in the year of bonus in question and
resources may be available for meeting the cost of the
entire machinery required to replace it, the principle
adopted by the Tribunal would still permit the industry not
to replace that machinery, but claim future provision for
its replacement on the basis that the available resources
are to be proportionately allocated to machinery which may
require replacement in much later years. We hold that in
approving this course, the Tribunal did not adopt the
correct principle according to which calculation should be
made, when applying the, Full Bench
(1) [1955] L.A.C. 707.
339
Formula for calculation of bonus. Learned counsel also
referred us. to the decision of this Court in M/s. Titaghur
Paper Mills Co. Ltd. v. Its Workmen(1) to show that, in that
case, this Court also, when calculating the rehabilitation
provision, deducted the entire depreciation and reserves
available from the total rehabilitation requirement and did
not adopt the course of deducting it from different blocks
of machinery requiring rehabilitation. That case, however,
does not support the view taken by the Labour Appellate
Tribunal, because in that case this Court had accepted the
decision of the Tribunal that all the machinery in whichever
year it may have been installed had a uniform residuary life
of 10 years, so that all the machinery was to be
rehabilitated simultaneously during the next 10 years.
There was, therefore, no distinction between machinery
installed in one year and that installed in other years
insofar as the year in which it was to be replaced was
concerned.It is true that, in some cases while describing
the Full Bench Formula,this Court has mentioned that the
total depreciation and liquid reserves available are to be
deducted from the total rehabilitation requirement,but we
do not think that it was intended to lay down in those cases
that the method of deduction to be adopted is that laid
down by the Labour Appellate Tribunal in Saxby and Farmer
Mazdoor Union, Calcutta(2). On the other hand as we have
already indicated this Court, in The Associated Cement
Companies Ltd. case(a), very clearly proceeded to apply the
principle which we are accepting in this case.
Consequently, we hold that the depreciation provision of Rs.
325.48 lacs and available development rebate reserve of Rs.
39.51 lacs must be taken in to account when calculating the
annual provision for rehabilitation required for replacement
of the earliest installed machinery until it is exhausted,
whereafter the annual requirement for the remaining blocks
of machinery will have to be calculated, ignoring these
available resources.
The next contest between the parties in this appeal
relates to the claim of the Company to return on reserves
and other funds used as working capital during the bonus
year when calculating the surplus available for distribution
of bonus. That a Company is entitled to return on reserves
used as working capital was recognised by the Full Bench of
the Labour Appellate Tribunal in The Millowners’
Association’s(4) case, when laying down the formula for
calculation of available surplus which was approved by this
Court in the case of The Associated Cement Companies
Ltd.(a). In the latter case in dealing with this aspect of
the matter, the Court pointed out that no distinction has
been made by Tribunals between reserves used as working
capital and depre-
(13 [1959] Supp. 2 S.C.R. 1012 at p. 1042.
(2) [1955] L.A.C. 707.
(3) [1959] S.C.R. 925.
(4) [1950] L.L.J. 1247.
340
ciation fund similarly used. The Court approved the
decision of the Labour Appellate Tribunal in The Millowners’
Association Bombay v. The Rashtriya Mill Mazdoor Sangh(1),
where the objection of the labour to depreciation fund
earning any return, even if it was utilised for or about the
business of the year, was ovre-ruled and the Tribunal
observed that “no essential difference could be made between
the depreciation fund and any other fund belonging to the
Company which could be invested so as to earn return.’ The
Court further held:
“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 an adequate return on it. We
think it is common-sense 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.”
(pp. 964-65).
In this appeal, it is not disputed that the Company is
entitled to claim a return on reserves which were actually
utilised as working capital during the year of bonus, but
Mr. Sen on behalf of the workmen urged that this return must
be allowed only on reserves used as working capital and not
on any other funds used at such, ,On the face of it, this
argument cannot be accepted in view of the decision of this
Court in the case of The Associated Cement Companies
Ltd.,(2) where it has been clearly held that the
origin of the fund is immaterial, though with the
qualification that the fund should be one which is available
for investment before a claim can be made by the employer
for a return on it. This principle has been affirmed or
followed in a number of cases subsequently decided by this
Court, but we do not consider it necessary to refer to them
in view of the fact that Mr. De on behalf of the employer
conceded that this is the settled law and only contended
that, in this case, the Company has in fact discharged the
burden of proving that all the reserves shown in the
balance-sheet for the year of bonus were actually utilised
as working capital. Consequently, we proceed to examine
this submission made on behalf of the Company.
Mr. De, in support of this submission, drew our
attention to the affidavit of Satya Narayan Murarka who is
the Commercial ‘Manager of the Company. In this affidavit,
Murarka stated. that all the sums shown as reserves and
surpluses in the balance-sheet ‘were available for being
utilised as working capital and were, in
(1) [1952] 1.L.L.J. 518, 522. (2) [1959] S.C.R. 925.
341
fact, so utilised. Murarka was also tendered for cross-
examination, so that the workmen hand an opportunity of
testing the correctness of his evidence by cross-examining
him. It was urged by Mr.. De that there was nothing in the
cross-examination of Murarka which would justify rejection
of the statements made by him in his affidavit that all the
reserves and surpluses available had been employed as part
of the working capital of the Company, and, in this
connection, drew our attention to some decisions of this
Court where the evidence given on behalf of the employer on
affidavit has been accepted by this Court as sufficient
proof. The first case cited by him is The Tara Oil Mills
Co., Ltd. v. IIts Workmen and Others(1). In that case, a
question arose whether the Company concerned was entitled to
claim return on the amount of depreciation reserves used as
working capital. Dealing with this claim, the Court held:
“An affidavit was made on behalf of the
Company that it had used its reserve funds
comprising premium on ordinary shares, general
reserve, depreciation reserve, workmen’s
compensation reserve, employees’ gratuity
reserve, bad and doubtful debt reserves and
sales promotion reserve as working capital.
The Tribunal, however, allowed return at 4 per
centum on a working capital of Rs. 31.88 lacs.
This excluded the depreciation reserve but
included all other reserves which were claimed
by the company and having been used for
working capital.”
Proceeding further, the Court held :-
“It is enough to say that the affidavit of
the Chief Accountant filed on behalf of the
company was not challenged before the
Industrial Tribunal on behalf
of the
respondents. It would, therefore, be
impossible for us now to overlook that
affidavit, particularly when the Tribunal gave
no reason why it treated the working capital
as Rs. 31.88 lacs only.”
The Court, thus, accepted the evidence of the affidavit,
though it was added that it will be open to the workmen in
future to show by proper cross-examination of the Company’s
witnesses or by proper evidence that the amount shown as the
depreciation reserve was not available in whole or in part
to be used as working capital and that whatever may be
available was not in fact so used in the sense explained
above.
In Anil Starch Products Ltd. v. Ahmedabad Chemical
Worker’s Union and Others(2) this Court, dealing with the
ques-
(1) [1960] 1 S.C.R. 1 at p. 10.
(2) A.I.R. 1963 S.C, 1346 at p. 1348.
342
tion of proof that depreciation reserve had been used as
working capital, held:
“It is enough to say in that connection
that an affidavit was filed by the manager of
the company to the effect that all its
reserves including the depreciation fund had
been used as working capital. The manager
appeared as a witness for the company before
the Tribunal and swore that the affidavit made
by him was correct. He was cross-examined as
to the amount required for rehabilitation,
which was also given by him in that affidavit;
but no. question was put to him to challenge
his statement that the entire depreciation
reserve had been used as working capital. The
Tribunal also did not go into the question
whether any money was available in the
depreciation reserve fund and had been
actually used as working capital. It
dismissed the claim for return on the
depreciation reserve on entirely different
grounds. In the circumstances, we must
accept the affidavit so far as. the present
year is concerned and hold that the working
capital was Rs. 34 lacs. It will, however, be
open to the workmen in future to show by
proper cross-examination of the company’s
witnesses. or by proper evidence that the
amount shown as depreciation reserve
was not
available in whole or in part as explained
above to be used as working capital and that
whatever was available was not in fact so
used.”
In Khandesh Spg. & Wvg. Mills Co. Ltd. v. The Rashtriya
Girni Kamgar Sangh, Jalgaon,(1) this Court, again dealing
with the question of proof of working capital, referred to
the earlier cases and held:
“This judgment again reinforces the view
of this Court that proper opportunity should
be given to the labour to. test the
correctness of the evidence given on affidavit
on behalf of the management in regard to the
user of the reserves as working capital.”
On the basis of these views expressed by this Court, it was
urged that, in the present case, the affidavit of Murarka
should be accepted as sufficient evidence in proof of the
company’s claim that all the reserves and funds mentioned in
the affidavit were in fact used as working capital, so that
the company is entitled claim a return on them.
It appears to us that the affidavit of Murarka in the
present case is not such that it can be held to have
discharged the burden
(1) [1960] 2 S.C.R. 841 at p. 850.
343
which lay upon the Company to prove that all the reserves
and other funds had, in fact, been utilised as working
capital. In the affidavit, Murarka referred to the balance-
sheet and stated that the various funds claimed as having
been used as working capital were shown at the beginning of
the bonus year as in existence and the further entries
indicated that those amounts were still intact at the end of
the bonus year and were carried forward to the next year.
Such a statement was made by him in respect of reserve for
contingencies amounting to Rs. 10 lacs, forfeited dividends
amounting to Rs. 450 lacs, profit and loss account balance
amount to Rs. 3.63 lacs, provision for depreciation
amounting to Rs. 325.48 lacs, and development rebate reserve
amounting to Rs. 39.51 lacs. It is to be noticed that the
fact that these amounts were shown as in existence at the
beginning of the bonus. year as well as at the end of that
year can certainly lead to a reasonable inference that these
funds were all available to the company for being utilised
in its business during the year; but the mere fact of these
entries showing the existence of these funds at. the
beginning and at the end of the year cannot be the basis for
a conclusion that these funds must have been utilised as
part of the working capital of the Company. In order to
claim a return, it is not enough for a Company to show that
the amounts were available during the year for being
utilised as working capital. The Company has further to
discharge the burden of proving that those funds were in
fact so utilised. This principle was clearly indicated by
this Court in Bengal Kagazkal Mazdoor Union and Others v.
Titagarh Paper Mills Company, Ltd. and Others(1). It was in
that case that this Court gave an indication of how the
availability of reserves and other funds for use as working
capital can be inferred from the balance-sheet. It was
said:
“What is usually done is to take into
account the’ liquid assets of various kinds
available at the beginning of the relevant
year and the total of such assets available at
the beginning of the year is considered as
working capital for that year, if there is
evidence that it has. been actually used
during the year. But when we come to the end
of the year and look at the balance-sheet, we
have to find out the liquid assets available
at the end of the year from which the amount
available as working capital for the next year
may be arrived at. But the liquid assets
available at the end of the year will usually
be of two kinds firstly, there will be cash
assets in the various reserves and secondly,
there will be assets in the shape of raw
materials, etc., and both together become the
available working capital for the next year
subject
(1) [1963] 11 L.L.J. 358 at p. 364.
344
to necessary adjustments and also subject to
the evidence that they were actually used as
working capital.”
Proceeding further, the Court, while dealing with the bonus
year 1955-56, held :-
“Now the working capital is generally
arrived at by finding the liquid reserves
available on 1st April, 1955. These liquid
reserves may be in the form of reserves of
various kinds, i.e., depreciation reserves,
general reserve, renewal reserve, and so on,
and also in the form of investments, advances
and raw materials, etc. in stock. All these
have to be taken into account in arriving at
the working capital after necessary
adjustments. As we have already pointed out,
the amount of working capital thus arrived at,
if there is evidence that it was actually used
as working capital for the year, may be
allowed interest in accordance with the Full
Bench Formula.”
In that case, thus, the two steps necessary for proving the
claim were separately indicated. The first step in proving
that reserves and other funds have been used as working
capital is to show that they were available by proving the
balance-sheet in which those reserves and funds are shown in
existence at the beginning of the year. The second step
indicated is that evidence must be given to prove that
these reserves and funds were actually utilised as working
capital during the year. Obviously, this proof is needed,
because, even though the reserves and funds may be
available, they may not be utilised as part of the working
capital and may form part of cash amounts kept by the
Company or may be utilised for purposes other than that of
working capital. The mere existence of the reserves and
funds at the beginning of the year, even taken together with
their existence at the end of the year, cannot lead to. any
inference that these reserves and funds must have formed
part of the working capital during the year and could not
form part of other items such as fixed deposits,
investments, etc. Murarka in his affidavit, as we have
indicated above, gave his conclusion that the various
reserves were used as part of the working capital only on
the basis that these reserves and funds were in existence
both at the beginning and at the end of the year. The
conclusion drawn by Murarka had, therefore, no basis at all.
The facts on which he relied could only justify an inference
that these reserves and funds were available, but they could
not exclude the possibility that they were utilised for
purposes other than that of working capital. The affidavit
of Murarka in this case cannot thus be held to be
sufficient proof of this second ingredient that the reserves
and
345
funds were in fact utilised as working capital. So far as
the cases referred to by learned counsel are concerned,
which we have discussed earlier, they do not, in our
opinion, lay down the principle that, if in an affidavit
filed on behalf of the employer a broad statement is ‘made
that all reserves and other funds were used as part of the
working capital, that statement must be accepted as.
sufficient proof, even when the statement is coupled with an
admission that it is based on an inference from the balance-
sheet only and no other proof is furnished to show that
these available reserves and funds were in fact brought in
as working capital by the employer during the year in
question. In these circumstances, even though in the cross-
examination of Murarka on behalf’ of the workmen nothing
very material was elicited on this question, we have to hold
that the affidavit given by Murarka is not sufficient
discharge the burden which lay on the Company to prove that
all the reserves and other funds shown in the balance-sheet
as in existence at the beginning and at the end of the bonus
year in question were utilised as working capital.
The balance-sheet, it appears to us, itself gives an
indication. that this claim made on behalf of the Company
cannot be fully justified. In the balance-sheet, the assets
of the Company are shown under various heads and it seems to
us that items falling under certain heads only can be
treated as working capital of the Company during the year,
while others have to be excluded. The items which cannot be
treated as part of the working capital are: fixed assets of
the value of Rs. 411.08 lacs, investments of the value of
Rs. 14.48 lacs, fixed deposit amount of Rs. 220 lacs, loans
and advances recoverable in cash or in kind or for value to
be received or pending adjustment amounting to Rs. 11.74
lacs, and loans and advances from Trust and other
authorities amounting to Rs. 8.09 lacs. On the other hand,
the working capital would consist of current assets of the
value of Rs. 31.34 lacs, Stock in Trade of the value of Rs.
337 lacs, sundry debts of the value of Rs. 69.82 lacs, bank
and cash balances of the value of Rs. 37.98 lacs, loans and
advances of the value of Rs. 14.27 laes, and insurance and
other claims of the value of Rs. 7.61 lacs. Thus, in the
present case, the balance-sheet gives an ‘indication that a
sum of Rs. 498.02 lacs was the amount shown at the beginning
of the year against items of assets which can be classified
as part of the working capital, whereas the remaining sum of
Rs. 665.38 lacs represent fixed assets, fixed deposits,
investments and other loans and advances which cannot be
classified as part of working capital.
Similarly, an examination of the items entered on the
side of liabilities in the balance-sheet shows what were the
sources from which moneys became available for acquisition
of these assets.
346
Amongst these, the reserves shown are only Rs. 10 lacs for
contingencies and Rs. 39.51 lacs as development rebate
reserve. Though the balance-sheet does not itself show the
depreciation fund, it is also clear from the Schedule
attached to the balance-sheet that, up to the beginning of
the year, a depreciation provision had been made to the
extent of Rs. 325.48 lacs. In order not to show it as
available development reserve or fund in the balance-sheet,
what the Company did was to show the depreciated value of
the capital assets at Rs. 411.07 Iacs instead of the actual
value of Rs. 736.56 lacs which was the amount paid in cash
for acquiring those fixed assets. For purposes of dealing
with the question whether any reserve was used as working
capital, we must, therefore, proceed on the basis that there
was a depreciation reserve of Rs. 325.48 lacs, while the
investment on the fixed assets was Rs. 736.56 lacs and not
merely Rs. 411.07 lacs. Taking this depreciation reserve
also into account, it would thus appear that the reserves
available at the beginning of the year Were of the amount of
Rs. 374.99 lacs. The subscribed capital and capital
available from forfeited shares was Rs. 819.57 lacs. Funds
available from other resources, such as profit and loss
account balance, unsecured loans, current liabilities and
provisions, provision for taxation, proposed dividends and
contingent liabilities not provided for, amounted to Rs.
294.33 lacs. The question that arises. is how much money
from each of these’ sources had gone into the working
capital and how much into fixed assets or other items of
assets indicated by us above. In examining this position,
the value of the fixed assets has to be taken as Rs.
736.56 lacs which was the actual amount spent in acquiring
‘those assets and not at the written down value of those
assets at Rs. 411.08 lacs. It seems to us that this being
the position, there was no justification for Murarka to
claim that all the amounts available in reserve had gone
towards the working capital and did not represent other
assets, such as the fixed deposit of Rs. 220 lacs and
similar other items. In these circumstances, we have. to
hold that no reliance can be placed on the affidavit of
Murarka that all the reserves, including the depreciation
reserve and the contingent anti development rebate reserve
were actually used as part of the working capital during
this year.
The question that next arises on this conclusion of ours
is whether any return at all should be allowed to the
Company on reserves or other funds claimed as having been
utilised as working capital during this year. The exact
figure on which the Company could claim return has not been
proved by it, but it seems to us that at least some part of
the reserves must necessarily have been utilised in the
working capital. The-Company had a paid up capital of Rs.
819.57 lacs and it can safely be assumed that ‘this
money:was utilised for acquiring the fixed assets, as that
will
347
be the primary purpose of obtaining capital from the share-
holders. A sum of Rs. 736.56 lacs must, therefore, have
gone in cash into the fixed assets out of this sum of Rs.
819.57 lacs, leaving a balance of Rs. 83.01 lacs. The sum
available from other resources was Rs. 294.33 lacs which,
together with the balance of the subscribed capital left
over, gives a figure of Rs. 377.34 lacs. Consequently, for
purposes of the working capital, a maximum amount of Rs.
377.34 lacs could have been available from the subscribed
capital or other resources and the balance of the amount
must necessarily come out of the reserves. The items of
assets classified as representing the working capital, as we
have indicated above, have a total value of Rs. 498.02 lacs.
Deducting from this amount the sum of Rs. 377.34 lacs
available from subscribed capital or other resources, there
remains a balance of Rs. 120.68 lacs which must have
necessarily come out of the various reserves, including the
depreciation reserve, and this amount at least must be held
to represent reserves acually used as working capital during
the year by the Company. We think that,since the
information available from the balance-sheet itself shows
that at least Rs. 120.68 lacs out of the reserves did form
part of the working capital of the Company, it would be fair
to allow the Company 4% return on this amount, even though
we are not inclined to accept the evidence of Murarka and
have to hold that the Company on its part failed to prove
that this amount or the whole of the amount of reserves had
been utilised as part of them working capital during this
year. Consequently, the amount which the Company has to
be allowed as return on reserves utilised as working capital
comes to Rs. 4.83 lacs.
In this connection, we may also take notice of the claim
made by the Company that return should also be allowed on
certain other sums. used as working capital which have been
described as working income. The Company claimed that it
had money available from four different sources. The
details given were Rs. 249.71 lacs from profit as worked out
in the Profit and Loss Account at the end of the year, Rs.
63.07 lacs as reserve for depreciation for the year. Rs.
36.00 lacs as development rebate for this year and Rs. 4.71
lacs as value of discarded fixed assets written off. The
claim was that at least half the amount represented by these
figures should be treated as a fund which was available
during the bonus year for being utilised as working
capital.This submission, in our opinion, cannot be accepted.
There is nothing to show whether any of these amounts became
available to the Company during the year and if so, when
they became available. In fact, the profit as worked out in
the Profit and Loss. Account can be held to have accrued
to the Company only when the Profit and Loss Account was
worked out at the end of the year. We have already referred
to the decision of this Court in
348
Bengal Kagazkal Mazdoor Union and Others(1) where it was
held that amounts shown as liquid assets at the beginning of
the year are the only amounts which can be held to be
available for utilisation as working capital in that year.
Amounts which accrue during the year or at the end of the
year cannot be held to be available, unless evidence is led
on the basis of which a positive finding can ‘be recorded
that those amounts became available on a particular date
during the year and were thereafter actually utilised as
part of the working capital. Profit for the year and
reserve or development rebate for the year in question
cannot be proved to have accrued on any particular date
during the year and, therefore, it is also not possible to
hold that they were utilised as part of the working capital
during that very year. This claim which is a novel one put
forward on behalf of the Company for the first time in
applying the Full Bench Formula for calculation of available
surplus for distribution of bonus, must, therefore, be
rejected.
A point that was raised on behalf of the workmen, but
which was not seriously argued before us, was that the
return on paid up capital should not be allowed at least to
the extent to which money had been invested in the
subsidiary or other companies. The amount in question is Rs.
14.48 lacs already noticed by us earlier when dealing with
the question of proof of utilisation of reserves as working
capital. In dealing with that question, we have already
proceeded on the basis that the paid-up capital was either
invested in fixed assets, or must have been utilised as part
of the working capital, and have not accepted the plea that
this sum of Rs. 14.48 lacs of investment came out of the
paid-up capital. Consequently, no question can arise of
reducing this amount from the paid-up capital when allowing
6% return on it in accordance with the Full Bench Formula.
Another deduction, while calculating the surplus out of
the profits available for distribution of bonus, which has
been challenged on behalf of the workmen relates to the
income from home delivery commission. From the facts, it
appears that this Company was manufacturing cars in
collaboration with a foreign concern and the arrangement was
that,if that foreign concern sold any of its goods in India,
the Company would be entitled to its commission on those
sales, even though the Company may not be a party to the
transactions of those sales. This arrangement thus
recognised the exclusive right of the Company in respect of
sale of its cars and to reimbursement in case the foreign
collaborator entered into transactions infringing that
right. It seems to us that the income thus accruing to the
Company has to be treated as extraneous income which was
earned by the Company without
(1) [1963] 2 L.L.J. 358.
349
any activities in which the workmen participated or
contributed their labour. Learned counsel for the workmen
referred us to the decisions of this Court in the Tata Oil
Mills Co. Lid. Q) and Voltas Limited v. Its workmen(1). The
situations that were discussed in those cases were
different. In those cases, the principle laid down was
that, if any income was earned in the course of the normal
business of the Company in which the workmen were also
engaged, that income must be included in the profits for
calculation of surplus available for distribution of bonus.
None of the instances that came up for consideration were
similar to the one before us. The home delivery commission
earned in the present case did not require any contribution
of work or labour on the part of the workmen, and accrued to
the Company simply because of its agreement with the foreign
collaborator’ which entitled the Company to claim the
commission without going through any process of
manufacturing or selling the cars or their components. In
the circumstances, the deduction of the home delivery
commission from the profits was fully justified.
The last point urged related to the interest on fixed
deposits earned by the Company during the bonus year. We
have already indicated earlier that a sum of Rs. 220 lacs
was in fixed deposit account and the profit and loss account
shows that a sum of Rs. 5.17 lacs was received as interest
on it by the Company. This has also to be excluded when
calculating the available surplus, because this income also
accrued to the Company without any contribution on the part
of the workmen. It was not the regular business of the
Company to keep money in fixed deposits and earn interest
thereon.’ At the same time, however, we feel that on
equitable grounds, the Company should not be entitled to
claim the sum of Rs. 2.16 lacs as an expenditure of the
business of the Company in respect of interest paid to bank
and others. When the Company was receiving interest on fixed
deposits, it would be proper to hold that at least the
interest paid by the. Company should come out of the
interest earned by it. There seems to be no justification
for permitting a Company to keep money in a fixed deposit
and treat the interest accruing on it as extraneous income,
while, at the same time permitting the Company to take
loans, pay interest and treat that interest as business
expenditure. Consequently, in this case, when calculating
the available surplus, a sum of Rs. 5.17 lacs minus Rs. 2.16
lacs Rs. 3.01 lacs only will be deducted as extraneous
income which was earned without any contribution from the
workmen and which cannot therefore, be taken into account
when calculating available surplus.
On the basis of these decisions, we have worked out
Charts bowing the amount of annual rehabilitation provision
which
(1) [1960] 1 S.C.R. 1. (2) [1961] 3 S.CR. 167.
LISupCl/688
350(a)
CHART
Year Original Cost Discarded Price Replace-
and Factor ment Cost written or Multi- off from plier books 1 2 3 4 5 1942-43 to 1946-47 2.17 .. 2.80 6.08 1947-48 89.75 0.35 2.80 250.32 1948-49 44.77 .. 2.50 111.93 1949-50 37.60 .. 2.30 86.48 1950-51 5.29 .. 2.40 12.70 1951-52 14.63 .. 2.70 39.50 1952-53 11.06 0.39 2.50 26.68 1953-54 9.09 .. 1.50 13.64 1954-55 38.65 24.33 1.90 27.23 1955-56 30.05 8-01 1.80 39.69 1956-57 34.47 5.95 1.60 45-63 -1957-58 75.32 7.79 2.00 135.06 ]958-59 53.74 .. 1.25 67.17 1959-60 140.15 .. 1.15 161.17 1960-61 98.52 .. 1.10 108.37 350(b) (All figures in lacs of rupees)
Less 5 % Balance Deduct Balance Resi- Annual
Cost deprecia- require- duary Rehabili-
tion & other ment Age tation
reserve require-
available ment
6 7 8 9 10 11
0. 11 5.97 364.99 Nil Immaterial ..
4.47 245.85 359.02 Nil " ..
2.24 169.69 113.17 Nil " ..
1.88 84-60 3.48 81.12 3 27.04
0.27 12.43 12.43 3 4.14
0-45 13.19 .. 13.19 5 2.64
0-72 26.51 26.51 6 4.42
1.43 44.20 44.20 7 6.31
3.37 131.69 .. 131.69 8 16.46
2.69 64.48 64-48 9 7.16
7.01 154.16 154.16 9 17.13
4.93 103.44 103.44 10 10.34
-----
116.70
351
CHART II
(All figures in lacs of rupees)
———————————————————–
Annual Requirement for Rehabilitation for all
the Machinery 116.07
Less Depreciation Provision for the Year of
Bonus 1960-61 63.07
Net Requirement for Rehabilitation of Machinery
in the Year 1960-61 53.00
Requirement for Rehabilitation of Buildings 11.97
Total Rehabilitation Requirement 64,97
CHART III
(All figures in lacs of rupees)
Profit as per Profit&Loss Account 249’71
Add :
Provision for Depreciation 63.07 Reserve for Development Rebate 36.00 Charity and Donation 0.35 Expenses pertaining to previous years (Sales tax) 0,01 --------- 99-43 99,43 349,14 Less: Income pertaining to previous years and Provisions no longer required 5.70 Surplus on Sale of Fixed Assets 0,09 Home Delivery Commission 1.03 Interest on Fixed Deposits 3,01 Normal Notional Depreciation 69,26 Income-tax Liability for the year 112,37*
6% Return on Ordinary Share Capital 29,77*
8.57% Return on Preference Share
Capital 27,55
4%Return on Working Capital 4,83
Provision for Rehabilitation 64,97
———
318.58 ———
318,58
———
Net Surplus Available for Payment of Bonus 30.56
——–
*These figures have been corrected by us. In the
statement filed by the Company they were wrongly entered as
12.18 lacs and 129′ 89 lacs respectively.
359.
must be allowed to the Company and, taking that into
account, the amount of surplus available out of the profits
for distribution as bonus. Chart 1 shows the annual
rehabilitation requirement for machinery which works out at
Rs. 116.07 lacs. Chart II gives the calculation, on the
basis of this figure, of the net amount required for
rehabilitation during the year of bonus for the machinery
and buildings, after taking into account the depreciation
provision for the year of bonus. This net amount is Rs.
64.97 lacs. Chart 111, based on these figures and on other
figures arrived at by us in our judgment, shows that a net
amount of Rs. 30.56, lacs would be available as surplus for
payment of bonus during this year. The Tribunal was,
therefore, not right in arriving at its decision that this
Company was not in a position to pay bonus at all.
As we have indicated earlier, the workmen have claimed
bonus equivalent to 6 months’ wages which would amount to a
sum of Rs. 24 lacs. We do not find any justification for
granting bonus at such a high rate. Though the Company has
earned a large amount of profit during the year of bonus, it
is to be noticed that, for quite a large number of years,
the Company has been running at a loss. The Company has an
expanding business and the total amount of surplus available
for allocation between the capital and the labour is Rs.
30.56 lacs. In all these circumstances, we consider it just
and proper that bonus should be paid to the workmen. 20%
of their annual wages, so that a total sum of Rs. 9.60 lacs
out of this surplus will be paid out as bonus, leaving the
balance of Rs. 21.03 lacs with the Company for being
utilised for other purposes.
The appeal is, consequently, allowed, the decision of
the Tribunal is set aside and it is hereby ordered that the
Company shall pay to the workmen a total amount of Rs. 9.60
lacs as bonus, representing 20% of the annual wage of the
workmen. In the circumstances of this case, we direct
parties to bear their own costs of this appeal.
G.C. Appeal allowed.
353