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PETITIONER: THE EMPLOYERS OF AZAM JAHI MILLS LTD.

       Vs.

RESPONDENT: THE WORKMEN

DATE OF JUDGMENT: 30/01/1967

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

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

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

HEADNOTE: The  appellants  and  their  workmen  had  entered  into  an agreement  in February 1960 which provided that a claim  for bonus  would  only  arise if there should  be  an  available surplus  after making a provision for all the prior  charges including  a fair return on paid up capital and on  reserves utilised  towards the working capital in terms of  the  Full Bench formula. In  a  dispute  between the  appellants  and  their  workmen relating  to the payment of bonus for the years 1960-61  and 1961-62,  the  Industrial Tribunal found that there  was  an available  surplus  for  the first year  but  none  for  the second,  and  therefore  directed payment of  bonus  of  one week’s  wages  to  all the workmen over and  above  the  two weeks’   bonus  which  the  employees  had  agreed  to   pay irrespective of any profits made by the company. In  the  appeal before this Court it  was  contended,  inter alia, on behalf of the appellants that in the calculation of the gross profits, the entire amount in respect of  gratuity and retrenchment paid by the company durmg the year  1960-61 should  have been excluded as it had to be paid out  of  the profits  of  the company during the relevant  year  and  the Tribunal  had wrongly decided that it should be spread  over five years; that in calculating prior charges, the  Tribunal had  wrongly deducted a sum of Rs. 1.50 lakhs in respect  of idle   machinery   from  the  figure  of   notional   normal depreciation  and some of the other prior charges  were  not dealt  with  in accordance with the terms of  the  agreement

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between the parties; and that if. calculations were made  on a correct basis there would be no available surplus. HELD  :  On a recalculation of the gross profits  and  prior charges,  that  the Tribunal was not right in  finding  that there was an available surplus for calculation of bonus  for the year 1960-61. [527 A-B] Gratuity  would have to be paid year after year  to  workmen who  retire or leave the company’s service in terms  of  the scheme of gratuity and retrenchment compensation may have to be  paid in any year if there be modernisation of the  plant or  for any other reason which renders any workmen  surplus. The  Tribunal’s  decision that the amount  on  this  account should be spread over five years was therefore erroneous and the  gross  profit as calculated by the appellants  was  the correct figure. [523 A-C] Britannia Engineering Co. v. Their Workmen [1965] II  L.L.J. 144; referred to. The  depreciation  taken into account being,  in  accordance with  well settled principles, a notional amount  of  normal depreciation,  the Tribunal was not justified  in  deducting therefrom a further sum in respect of idle machiner. [523 H; 524 C-D]                             521 U.P.  Electric Supply Co. Ltd. -v.  Their Workmen [1955]  II L.L.J. 431; Surat Electricity Company’s Staff Union v. Surat Electricity  Co, Ltd. [1957] II L.L.J. 648;  The  Associated Cement Companies Ltd. v. its Workmen [1959] SC.R. 925,  960; referred to. On the facts, there was sufficient evidence to show the need for rehabilitation and there was no force in the  contention that there was no basis for calculation of the provision for rehabilitation  because no experts were examined before  the Tribunal. [526 C] M/s  Peirce  Leslie & Co. Ltd.  Kozhikode v.  Their  Workmen [1960] 3 S.C.R. 194 Aluminium Corporation of India, Ltd.  v. Their Workmen,, [1963]--H L.L.J. 629, distinguished.

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  971  and 972 of 1965. Appeals  by special leave from the Award dated  December  21 1963  of the Industrial Tribunal, Andhra Pradesh,  Hyderabad in Industrial Dispute No. 28 of 1963. A.   K.  Sen,  R.  V.   Pillai and  B.  K.  Seshu,  for  the appellant  (in C.A. No. 971 of 1965) and the respondent  (in C.A. No. 972 of 1965) M.   K.  Ramamurthi, for the respondent (in C.A. No. 971  of 1965) and the appellant (in C.A. No. 972 of 1965). The Judgment of the Court was delivered by Mitter, J. This is an appeal against an award dated December 21,  1963  in  Industrial  Dispute No. 28  of  1963  of  the Industrial  Tribunal, Andhra Pradesh, Hyderabad  on  special leave granted by this Court. The  dispute which was referred to the  Industrial  Tribunal related  to the question of payment of bonus for  the  years 1960-61  and  1961-62 demanded by the workers of  Azam  Jahi Mills,  Warrangal.   The Tribunal found that  there  was  an available  surplus  for  the first year  but  none  for  the second.  It directed payment of bonus of one week’s wages to all  the workmen over and above the two weeks’  bonus  which the employers had agreed to pay irrespective of any  profits made  by  the company.  In appeal before us  the  appellants contend that as there was no available ’Surplus, if properly

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quantified, the question of payment of bonus in addition  to that for the two weeks already agreed upon, does not  arise. It  is  to  be noted that the parties  had  entered  into  a settlement on February 22,1960 which was to be operative for a  period  of five years commencing on October 1,  1958  and ending  on September 30, 1963.  By that settlement,  it  was provided that the claim for bonus would only arise if  there should be an available surplus after making a provision  for all  the  prior charges including a fair return  on  paid-up capital,  and  on  reserves  utilised  towards  the  working capital in terms of the Full Bench formula laid down by  the Labour  Appellate  Tribunal in  Millowners’  Association  v. Rashtriya  Mills Mazdoor Sangh, Bombay.  The agreement  also provided that prior charges would include (a)     statutory depreciation and development rebate, (b) taxes, (c) 522 reserve for rehabilitation, replacement and modernisation of Block  as  calculated by the Industrial  Court  (basic  year 1947) and (d) a fair return at 6% on paid up capital in cash or  otherwise  including  bonus shares and  2%  on  reserves employed  as  working capital.  It was also a  term  or  the agreement that the amount of the total gross profits of  the mill  for  the  year  shall be  the  amount  of  profits  as disclosed in published balance sheets of the company without making a provision for depreciation and for bonus, but after deducting  from  it the amount of  extraneous  income  (like interest  from  investments, rent from  property)  which  is ’unrelated  to the efforts of the workers.  With  regard  to statutory  depreciation and development rebate, the  parties agreed that if in any year the total of these two exceed the amount  of reserve for rehabilitation, the full  ;amount  of statutory  depreciation  and  development  rebate  would  be adopted  as a prior charge and no extra provision  would  be made for rehabilitation in that year.  Further, in terms  of the  agreement, the workers would be entitled to  an  amount equivalent  to 1/24th of the basic wages if the mill had  an available  surplus of profits after providing for all  prior charges on the basis of the Full Bench formula as  described above, up to an amount equivalent to 25 % of the total basic wages earned during the year. The  contention  of  the appellants before  us  is  that  in working  out the available surplus the Tribunal went  beyond the  Full  Bench  formula and  the  settlement  between  the parties.  Our task was considerably lightened by counsel for the appellants handing over a table showing the figures  for the  working out of the Full Bench formula, as found by  the Tribunal compared to those propounded by the Management  and the  workers.  There is no dispute that the net  profits  as disclosed by the balance sheet for the year 1960-61 was  Rs. 9,03,378/-.  The only difference between the management  and the Tribunal with regard to the calculation of gross profits relates  to  the  figure Rs.  5,39,963/-  for  gratuity  and retrenchment  compensation  paid by the company  during  the year  in  question.   According to the  Tribunal,  this  sum should  be  spread over five years while according  to,  the company, this sum should not be included at all as it had to be  paid  out  of  the profits of  the  company  during  the relevant year. Mr.  Sen, counsel for the appellants, relied on s. 37(1)  of the Income-tax Act, 1961 for the purpose of showing that any expenditure  (not being expenditure of the nature  described in sections 30 to 36 and not being in the nature of  capital expenditure or personal ,expenses of the assessee) laid  out or  expended wholly and exclusively for the purpose  of  the business or profession of the assessee has to be allowed  in

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computing the income chargeable under the head ’profits  and gains  of business or profession’.  He argued that  gratuity is  to  be  paid every year to the workmen  who  retire  and retrenchment  compensation  has  to  be  paid’-as  and  when workmen are retrenched and that there could be little  doubt that                             523 these expenses were incurred exclusively for the purpose  of the business of the company.  He also drew our attention  to a  judgment  of this Court in Britannia Engineering  Co.  v. Their  Workmen( ) where it was laid down that the amount  of provident  fund contribution and gratuity payments were  not to be added back to the net profits disclosed by the balance sheet of the company for fixing the amount of gross  profits in  working  out  the  Full  Bench  formula.   The  Tribunal apparently  recognised  the force of the contention  of  the employers but observed that the amount should be distributed over a number of years which it fixed as five in this  case. This.  finding  of  the Tribunal is  erroneous  inasmuch  as gratuity will have to be paid year after year to workmen who retire  or  leave  the company’s services in  terms  of  the scheme  of gratuity and retrenchment, compensation may  have to  be  paid in any year if there be  modernisation  of  the plant,  or  for any other reason which renders  any  workmen superfluous.   It  seems to us, therefore,  that  the  gross profits as calculated by the employers at Rs. 19,05,496/- is the correct figure. Coming  next  to  the ascertainment of  prior  charges,  the material  discrepancy  between the figures  adopted  by  the company  and those by the Tribunal arises thus-we find  that the  notional normal depreciation has been taken to  be  Rs. 6,44,351/-  in  both  sets of charts but  the  Tribunal  has deducted therefrom a sum of Rs. 1,50,000/in respect of  idle machinery.   We  are  unable  to accept  this  view  of  the Tribunal.   It  is well settled  that  depreciation  allowed under  the Income-tax Act after 1948 was to consist  of  the statutory   normal   depreciation   as   well   as   initial depreciation  and additional depreciation.  The  Full  Bench formula  of  the Labour Appellate Tribunal decided  in  U.P. Electric  Supply  Co.  Ltd. v.  Their  Workmen(2)  that  the depreciation which should be deducted from the gross profits in working the formula was normal depreciation including the multiple  shift  depreciation  but  excluding  the   initial depreciation  and additional depreciation  allowable  tinder the  Income-tax Act.  This decision was followed by  another Labour  Appellate  Tribunal of India  in  Surat  Electricity Company’s Staff Union v. Surat Electricity Co. Ltd.(3).There it  was  pointed out that the deduction  allowed  under  the head  of depreciation in the early years of the use  of  the machinery  was  rather  heavy under the  provisions  of  the Indian Income-tax Act which would have the effect of  unduly lessening  the available surplus under the bonus formula  to the  prejudice of workers even in a year of  prosperity  and that  is  why  the Full Bench postulated  for  a  more  even distribution  of depreciation over a period of years.   This accounted  for  the ignoring of the initial  and  additional depreciation  in  working out the bonus  formula.   The  net result  was that the depreciation to be taken  into  account for  working out the bonus formula was a notional amount  of normal (1) [1965] II L.L.J. 144. (3) [1957] 11 L.L.J. 648. (2) [1955] 11 L.L.J. 431. 524 depreciation.  No objection can be taken to this because the

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bonus  formula  itself  is  theoretical  one.   Both   these decisions   were  referred  to  in  The  Associated   Cement Companies  Ltd. v. Its Workmen(1), and the  latter  decision was approved of by this Court (see at page 960). We  find by referring to Schedule E of the accounts  of  the company for the year 1960-61 that depreciation for the  year was calculated at Rs. 16,03,149/-.  This is also referred to in  the Director’s Report.  Deducting therefrom the  sum  of Rs.  9,58,798/- which is referred to in the profit and  loss account  for the year ended 30th September 1961  as  balance provision  for  depreciation to comply with s.  205  of  the Companies  Act of 1956, we get the figure of Rs.  6,44,351/- which  is to be found in the chart both under the  table  of figures  adopted by the management as also by the  Tribunal. The figure being a notional figure for working out the bonus formula,  the  Tribunal  was  not  justified  in   deducting therefrom  a  further sum of Rs. 1,50,0001-  in  respect  of machinery which was said to be idle. In  terms  of the agreement between the parties,  the  prior charges  must include the development rebate as well  unless the  statutory depreciation and development rebate added  up to  a  higher  figure  than  the  figure  for  reserve   and rehabilitation.   It  therefore  appears  to  us  that   the Tribunal  was not justified in excluding the amount  of  the development  rebate reserve.  There is no dispute  that  the figure  for income-tax should be Rs. 4,74,020/- or that  for the return on paid-up capital should be Rs. 4,32,000/-.  The workmen in their chart have calculated the return at 4 %  on Rs. 72 lakhs which is not justified.  Both the Tribunal  and the  company calculated return on reserves used  as  working capital  at  Rs.  49,678/-.   This,  in  our  view,  is  not justified as we find from a reference to schedule E,  (fixed assets  of the company for the year 1960-61) that a  sum  of Rs.  14,49,664/-  was spent for addition of  new  plant  and machinery.   On a reference to schedules A, B, C and  D  for the  year in question and the corresponding figures for  the previous  year,  we  find that the figure  of  reserves  and surplus in schedule A has gone down by Rs. 1,00,000/-.   The figure  for  secured loans in schedule C  remains  the  same while  the  current liabilities at shown in schedule  D  has gone  up  by  Rs.  3,50,000/- in the  year  in  question  as compared  to the previous year and loans secured from  banks show a reduction of Rs. 13,22,000/-.  Thus the liability  in respect  of the loans has been reduced approximately by  Rs. 10 lakhs.  Setting off the diminution the overall  liability was  diminished  by  Rs.  9 lakhs.   We  also  find  from  a reference  to  Schedules  F, G, H  and  1  (of  investments, current  assets  and loans by the company)  that  the  total thereof has gone down by Rs. 8 lakhs from the figure of  the previous year.  The net (1)  [1959] S. C. R. 925.                             525 result seems to be that the reduction of liability when  set off  against  the reduction in the value of the  assets  and investments gives a deficit of Rs. 1,00,000/- approximately. As  the  company has not incurred any fresh  loans  for  the purpose of buying plant and machinery we can proceed on  the basis  that Rs. 14,49,664/- and Rs. 1 lakh have come out  of the  working  capital.  Consequently, the reserves  used  as working  capital should be approximately Rs. 24,83,000/-  as shown   by  the  company  less  Rs.  15,49,664/-  i.e.   Rs. 8,34,000/-   and   the  return  thereon  at  2%   would   be approximately  Rs.  16,000/-  in  place  of  Rs.   49,678/-. Further,  we  find  that  the  Tribunal  was  not  right  in including  Rs.  1,07,992/-  as  gratuity  and   retrenchment

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compensation among its list of prior charges. On the basis of the above, it seems to us that deducting the prior  charges  from the gross profits irrespective  of  the question  of the amount to be deducted  for  rehabilitation, modernization  etc., comes to the figure arrived at  is  Rs. 80,000/- or there about only. There  was  a good deal of controversy between  the  parties with  regard  to  the  correct  amount  of  the  figure  for rehabilitation.  In this connection, our attention was drawn to the evidence on record. The Chief Engineer of the Company stated  before  the  Tribunal that the  machinery  had  been purchased in 1932, that its condition was bad due to fatigue and that it was costing more and more every year for repairs even  up  to Rs. 21 lakhs.  According to  him,  it  required replacement,  the  average life of a textile mill  being  no more than 25 years.  The witness also said that one half  of the  entire  machinery  had  been  purchased  and  installed between  1948 and 1952 and the cost in 1952 was  five  times that  of  the 1932 figure.  The other  witness  examined  on behalf  of the employers was the Secretary of the mill.   He stated  that  the  provision  for  rehabilitation  was   Rs. 93,30,000/-, the working capital being Rs. 24,83,904/-.   He gave  certain  figures  to  show  how  the  figure  of   Rs. 93,30,000/was  arrived  at.   He  stated  further  that  the company  had approached the Government for a loan of Rs.  56 lakhs for replacement of the spinning machinery and part  of the  weaving machines.  The application for loan is  not  in dispute  before  us.   As a matter  of  fact,  the  Tribunal accepted  the  evidence that the age of  the’  textile  mill machinery  was  about  25  years  and  more  than  half  the machinery had passed that age.  This justified the need  for rehabilitation.   The Tribunal referred to a letter  of  the company  to the Government dated October 10, 1963  according to which several experts had opined that the amount required for replacement of the old machinery was Rs. 56 lakhs.   The Tribunal   added  thereto  the  sum  of  Rs.  2  lakhs   for replacement  of the buildings and thus arrived at the  total figure  of rehabilitation of Rs. 58 lakhs.  In our  opinion, the figures arrived at by the Tribunal are acceptable but we have  to deduct therefrom the amount of the reserves of  the company.  According to us, as already shown, 526 the reserves which could be used as working capital were  no more than Rs. 8,34,000/-.  Thus the total for rehabilitation comes to Rs. 50 lakhs approximately.  The Tribunal  accepted the  divisior 5 to give effect to the bonus formula  on  the basis that the cost of rehabilitation should be spread  over five  years.  In our opinion. the Tribunal proceeded on  the right basis except on the figure of reserves which has to be deducted.  Dividing Rs. 50 lakhs by five, we get a figure of Rs.  10  lakhs.  In terms of the  bonus  formula  therefore, there  was  no available surplus for the  year  1960-61  but there was a deficit. We were not impressed by the argument on behalf of the  res- pondents  that  as  no  experts  were  examined  before  the Tribunal, there was no basis for calculation of the provison for  rehabilitation.  In this connection our  attention  was drawn  to a judgment of this Court in M/s Peirce Leslie  Co. Ltd.   Kohzikode v. Their Workmen (1).  It appears  that  in support  of  its claim in that case the company  produced  a number of statements prepared by witnesses who claimed to be experts   showing  the  replacement  value   of   buildings, machinery,  furniture  etc.  We were also  referred  to  the judgment  of this Court in Aluminium Corporation  of  India, Ltd. v. Their Workmen(2).  On the facts of that case, it was

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observed by this Court that as there was no evidence adduced by the employer to substantiate its claim for the amount  of rehabilitation, the same must be rejected.  In our view, the Tribunal  must consider a11 the evidence before it and  then proceed   to  ascertain  the  figure  to  ’be  adopted   for rehabilitation  purposes.  If the company had no scheme  for rehabilitation, then of -course its claim on that head  must be rejected.  Again, the claim made by the company cannot be accepted unless substantiated by evidence.  In this case, we find that half the machinery was over 25 years old, that  it required  over Rs. 2 lakhs every year for repairs  according to  the  evidence of the Chief Engineer and that  its  effi- ciency had dwindled considerably.  We also see no reason  to reject  the  evidence adduced before the Tribunal  that  the company  had  applied for a loan of Rs. 56  lakhs  from  the Government  for rebabilitation purposes and  we  accordingly are  of the view that the Tribunal proceeded on the  correct basis so far as rehabilitation ,charges are concerned. There  remains  the point about the working capital  of  the company.   No  case is here made that the  reserves  of  the company  were  being  used for any purpose  other  than  the business  of the company.  The accounts of the company  show that  its secured liability exceeded Rs.  1,16,00,000/-  and its   unsecured  loans  exceed  Rs.   28,00,000/-.    Unless therefore  there is evidence to show that the reserves  were non-existent or they were being utilised for a purpose other than (1) [1960] 3 S.C.R. 194. (2) [1963] 11 L.L.J. 629. 527 the business of the company, it is reasonable to assume that the  reserves were being utilised as working capital of  the company. In  our  view,  therefore, the Tribunal  was  not  right  in finding that there was available surplus for calculation  of bonus  for the year 1960-61 and the appeal No. 971  of  1965 must be allowed and the award set aside. The other appeal No. 972 of 1965 which is by the workmen for enhancement  of  the bonus consequently must  be  dismissed. The  first  appeal is therefore allowed with costs  and  the second  appeal  is, dismissed but, without any order  as  to costs. R.K.P.S.                 Appeal 972 of ’65 dismissed.                          Appeal 971 of ’65 allowed. 528