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PETITIONER: MANAGEMENT OF SHRI CHALTHAN VIBHAG KHAN UDYOG SAHAKARIMANDAL

       Vs.

RESPONDENT: B.S. BAROT MEMBER, INDUSTRIAL COURT, GUJARAT, AND ANR. ETC.

DATE OF JUDGMENT04/09/1979

BENCH: KAILASAM, P.S. BENCH: KAILASAM, P.S. FAZALALI, SYED MURTAZA SEN, A.P. (J)

CITATION:  1980 AIR   31            1980 SCR  (1) 509  1979 SCC  (4) 622  CITATOR INFO :  D          1981 SC 905  (4)

ACT:      Labour law-Dearness  allowance to workers-Its nature-If could he  given at  125% of  increase in the cost of living- Depreciation, if should be a first charge in arriving at the capacity of the industry to pay wages.

HEADNOTE:      The respondent  workmen who  were  employees  of  Sugar mills in  the State  of Gujarat  demanded grant  of dearness allowance, among  certain other  benefits, on  the basis  of revised scales  for sugar  factories in  Uttar Pradesh.  The Industrial Court,  Gujarat increased  the dearness allowance on a graded scale spread over three years.      On appeal  the High  Court set  aside the  award by the Industrial Court  in respect  of phasing  but confirmed  the award in  regard to dearness allowance and directed that the U.P. pattern  should be given full effect with retrospective effect from The date mentioned in the award.      The employers  questioned the  correctness of  the High Court’s  judgment   on  the   ground  that   (I)  grant   of neutralization of variable dearness allowance at 125% is far in excess  of what  is permissible  under the industrial law and  (2)   the  High  Court  failed  to  take  into  account depreciation in  arriving at  the financial  capacity of the industries while fixing the wage structure. ^      HELD: 1. (a) Variable dearness allowance cannot be more than 100% neutralization. [517D]      (b) The  purpose of dearness allowance is to neutralise a portion  of the increase in the cost of living due to rise in prices. Neutralization may be such as to neutralize fully the increase  in the  cost of living or may be restricted to only a  portion of the increase. Cent percent neutralization can be  achieved if  the increase  in the  cost of living is fully compensated  so that  the pay  of the  workers is  not adversely affected.  But an  award  of  more  than  100%  of increase  in   the  cost   of  living  would  be  more  than neutralization and  would  in  effect  give  the  worker  an increased wage. The result would be that the worker would be

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getting an  increased wage  packet whenever there is a price rise, a result which would not have been envisaged in making provision for grant of dearness allowance. [516D-G]      Clerks of  Calcutta Tramways  v. Calcutta  Tramways Co. Ltd., [1956]  S.C.R. 772,  Kamani Metals  and Alloys Ltd. v. Their Workmen  [1967] 2  S.C.R.  463,  Bengal  Chemical  and Pharmaceutical Works  Ltd. v.  Its Workmen, A.I.R. 1969 S.C. 360, Silk  & Art Silk Mills Association Ltd. v. Mill Mazdoor Sabha, [1973] 1 S.C.R. 277 and Killick Nixon Ltd. v. Killick JUDGMENT: followed. 510      (c) It  is not  correct to  say that  neutralization of more than  100% dearness  allowance is based on the seasonal nature  of   employment  in   the  industry.  The  retention allowance provided  to seasonal workers in sugar industry is to mitigate  the hardship  of unemployment  during  the  off season. [517A-B]      2.  (a)   Section  66(1)  of  the  Gujarat  Cooperative Societies Act  1961 requires  that  taxes  and  depreciation should be  deducted from  gross profits  for arriving at net profit. That does not mean that wages and dearness allowance could only  be determined  after the net profits are arrived at.  The  sub-section  itself  provides  that  contributions towards provident  fund and  gratuity even  of its employees should all  be deducted  from the gross profits for arriving at the net profits. The provision for deducting depreciation occurs after  providing for  contribution towards  provident fund and  gratuity. The  determination of  the  net  profits under the  section is  for different  purpose,  namely,  for appropriation of  the net  profit as provided for in tie Act and does  not in  any way  support  the  contention  of  the appellant. [518E-F]      (b) It  is settle  law that  in  fixing  far  wages  or dearness allowance or  making contribution to provident fund or providing  for gratuity  the financial  capacity  of  the industry to bear the additional burden will have to be taken into account.  On  principle  of  social  justice  with  the development of  industrial law it has now been accepted that when the  industry can bear the burden, pro vision should be made for provident fund and gratuity schemes. In determining the financial  capacity of  an industry  all relevant  facts will have  to be taken into account. The principles followed in arriving  at the  profit and  loss account for income-tax and other  purposes may  not be  conclusive. The claim of he employer to  a reasonable  profit, that  of the shareholders for a  fair dividend  the interest  of  consumer  and  other relevant factors  and circumstances  will have  to be  taken into account.  It is  necessary to take into account all the facts  and   circumstances  relating  to  the  industry  for determining the  financial capacity  of the industry to pay. [519-G]      Ahmedabad Mills owners’ Association etc. v. The Textile Labour association,  [1966 1  S.C.R. 382, Gramophone Company Ltd. v.  Its Workmen,  [1964] 2 LL.J. 131, Indian Link Chain Manufacturers Ltd. v. Their Workmen, [1972] 1 S.C.R. 790 and Bharatkhand Textile  Mfg. Co.  Ltd. and  ors. v. The Textile Labour  Association,   Ahmedabad,  [1960]   3  S.C.R.   329; followed.      (c) The  facts that  have to  be taken  into account in determining an overall picture of the financial capacity are the financial  condition of  the employer  his profit making capacity, the  profits earned  by him in the past, extent of the reserves  and the  chances of  his replenishing  them as well as the claim for capital invested by him. [521F-G]

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    Hindustan Antibiotics  Ltd. v.  The Workmen  and  ors., [1967] 1 S.C.R. 652. referred to.      (d) An employer claiming depreciation allowance is only entitled to  the actual  or  probable  depreciation  of  the machinery etc.  for the  period due  to wear  and tear.  The depreciation cannot  be computed on an actuarial basis or on the profit and loss account furnished by the company. In the instant  cases,  the  accounting  was  far  the  purpose  of minimising the profits to deprive are 511 workers their  due. Such  depreciation cannot be allowed. If the inflated  figures are  left out  of account the industry has the capacity to bear the additional burden. [524A-B, E]      (e) Even  though the  wages were fixed on industry-cum- region basis it is open to industry to plead that it has not the financial  capacity to  hear the  increased burden. When such a  plea is  specifically raised,  it is the duty of the industrial court  to determine  whether the increased burden could be borne by the particular industry. [525 F-G]

&      CIVIL APPELLATE JURISDICTION: Civil Appeal No. 146/78.      Appeal by Special Leave from the Award dated 22-2-77 of the Industrial Court, Gujarat in Ref. I.C. No. 53/75.                             AND              CIVIL APPEAL NOS. 322-324 OF 1979.      Appeals by  special leave  from the  Order dated 18-10- 1978 of the Gujarat High Court in SCA No. 1036/77.                             AND         SPECIAL LEAVE PETITION (CIVIL) NO. 2939/79.      From the  Judgment and  Order dated  30-1-1979  of  the Gujarat High Court in SCA No. 311/78.      Dr. Anand  Prakash, Laxmi  Anand Prakash, Arun B. Desai and H. K. Puri for the Appellant in CA 146/78 and 323/79.      F. S. Nariman, H. K. Puri, Arun B. Desai and Mrs. Laxmi Anand for the Appellants in CA 322/79.      A. K.  Sen, Arun  B. Desai,  V. K. Behl, H. K. Puri and Mrs. Laxmi Anand for the Appellant in CA 324/79.      M. K.  Ramamurthy and Promod Swarup for the Respondents in C.A. 146/78 and C.A. 322/79.      S.  S.   Khanduja  and  Miss  Kusum  Chowdhry  for  the Respondent in C.A. 146/78 and 323-324/79.      J. G.  Shah (CA 322) M. K. Ramamurthi (SLP. 2939 and CA 322)  and   A.  K.  Srivastava  and  Vineet  Kumar  for  the Respondents in  C.A. 322  and for  the  Petitioner  in  SLP. 2939/79.      The Judgment of the Court was delivered by      KAILASAM,  J.  All  these  appeals  and  special  leave petition are  by the  management of  five cooperative  sugar factories in Gujarat State. The demand of the workmen of the factories in Gujarat was for pay- 512 ment  of  the  U.P.  Government  revised  scales  for  sugar factories in  U.P. regarding  pay,  dearness  allowance  and other benefits.      The second  Wage Board  for the sugar industry gave its report in 1970. The Wage Board’s report was due to expire on 31st October,  1974. The Government of U.P. on 31st October, 1974, issued  the U.P.  Pattern Scales of Wages and Dearness Allowance  for  workmen  employed  in  all  sugar  factories working by  vacuum Pan  Manufacturing  Process.  The  Labour Minister gave  the award  and as  a result of that award, an order was  passed under section 3 sub-clause (b) of the U.P.

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Industrial Disputes  Act, 1947.  This order relating to U.P. Pattern  of  Pay,  Graduated  Dearness  Allowance,  Variable Dearness Allowance  came into  force from 31st October, 1974 and effect  was to be given to these pay-scales and dearness allowance from  1st October,  1974. As  the sugar  factories were seasonal  factories a retention allowance for unskilled seasonal workmen  for off-season  at the  rate of 10% of the basic  wage   and  dearness  allowance  payable  during  the crushing year  1974-75 was also provided for. The demand put forward by  the workmen  in all these appeals is for payment according to the U.P. Pattern.      The Industrial  Court, Gujarat, increased the graduated dearness allowance of the unskilled employees from Rs. 21 to Rs. 40. But this increase was not given at one stage but was spread over  in three stages, the first stage being from 1st July, 1976  to 30th  June, 1977, the second stage being from 1st July,  1977 to 30th June, 1978 and the third stage being from 1st  July, 1978  to 30th  June, 1979  and onwards.  The increased graduated  dearness allowance for the first period would be  Rs. 32 per month; for the second period Rs. 36 per month and  for the  third  period  Rs.  40  per  month.  The existing basic  wage for  the unskilled employee is Rs. 110. The variable  dearness allowance  of Rs.  151 per  month  is being paid  and the Court found that there was no dispute as raised in  demand  No.  2(c).  Regarding  variable  dearness allowance demand Nos. 3, 4 and 5 the Court revised the rates from 83  paise per  point on the rise over 301 points of All India Average  Consumer Price  Index Number  for  Industrial Workers (Base  1960-100) at Re. 1.00 per point for skilled B operatives and  for clerks drawing upto Rs. 150 per month as asked for  in demand  5(i) (b) and from Re. 0.95 to Re. 1.12 for  All  India  Average  Consumer  Price  Index  for  other employees as  per demand No. 5(i)(d). This increase was also spread over for a period of three years i.e. 7 paise for the first period from 1st July, 1976 to 30th June, 1977; 5 paise for the  second period  from 1st  July, 1977  to 30th  June, 1978; and  5 paise  for the third period from 1st July, 1978 to 30th June, 1979 and 513 onwards.  Regarding  demand  No.  7  relating  to  retaining allowance to  be paid to the unskilled seasonal employees at the rate  of 10  per cent  of the  basic wage  and  dearness allowance payable during the crushing season 1974-75 and for subsequent years,  the  Court  found  that  the  demand  was justified. The  Court gave  a retention allowance of 10%, as demanded, of  the basic  wage and dearness allowance payable during the  crushing season  1974-75 and  also for the three subsequent years.      On appeal  the High  Court  passed  an  order  on  18th October, 1978  as follows stating that reasons will be given later.           "(1) The  impugned award is hereby quashed and set                aside.            (2)  There is  no justification  for the  phasing                awarded by  the Industrial  Court and  hence,                the phasing is quashed and set aside.            (3) x      x       x     x            (4) x      x       x     x            (5)  The respective  cooperative sugar  societies                will pay  the costs  of the other side. Costs                quantified at  Rs. 300/- in each matter. Rule                is made absolute accordingly in Special Civil                Applications Nos. 1136 of 1977, 1148 of 1977,                602 of  1978 and  311 of  1978, Special Civil                Applications Nos.  1036 of  1977 and  1505 of

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              1977 are dismissed." By this  order the Court quashed the award and set it aside. It also found that there was no justification for phasing as awarded by the Industrial Court and therefore quashed it and set it  aside. It  confirmed with  retrospective effect  the award as  given by the Industrial Court. The High Court also directed that  U.P. Pattern  will be  given full effect with retrospective effect  from the  date mentioned in the award. The reasons  were given  by the  High Court  by its judgment dated 30th January, 1979.      The judgment  of the  High Court  is  assailed  on  the following grounds:-           1.    The  grant  of  neutralisation  of  variable                dearness allowance  at 125%  is far in excess                of what  is permissible  under the industrial                law.           2.    The  High Court  erred in  not  taking  into                account depreciation  of the  sugar factories                in arriving at the 514                financial capacity  of the  industry for  the                purpose of  fixing the wage structure. In any                event,  it   was  submitted   that   as   the                administration  of  the  sugar  factories  is                governed by the Gujarat Cooperative Societies                Act, 1961,  those provisions  will have to be                followed in  arriving at  the net profits and                for determining the financial capacity of the                factories to pay.           3.    It  was submitted  that the Industrial Court                and the  High Court  erred in  following  the                U.P. Pattern  on the  ground that it has been                accepted by  the other  States in  the  South                zone without taking into account the relevant                circumstances    relating    to    individual                factories.           4.    Lastly  it was contended that the High Court                after quashing the impugned award and setting                it aside erred in passing a new award. We ignore the last ground as we feel it is purely technical. Though the  High Court  may not  be right in stating that it quashed and set aside the award, the intention is clear from the subsequent  clauses of the award. We will now proceed to deal with the other three objections.      It is  strongly urged  on behalf of the appellants that the High  Court and  the Tribunal  were in error in allowing neutralisation of  variable dearness allowance of 125% which is beyond the permissible limits of the industrial law.      It is  common ground  that 100% neutralisation would be achieved by granting an increase of 83 paise for rise in one point in  the cost  of living index. By granting an increase of one rupee for increase of one point the neutralisation is by 125%.  Dearness Allowance  was primarily  intended  as  a protection of  persons whose salaries are at the subsistence level to  protect them  against the  adverse effects  of the rise in prices. The Commission on Dearness Allowance in May, 1967  stated   that  historically   dearness  allowance  was regarded as applicable to those employees whose salaries are at the  subsistence level  or at  a little above in order to enable them  to face  the increase  in dearness of essential commodities.  The   National  Commission  on  Labour,  1969, observed that  unless money  wages rise  as fast as consumer prices it  will result  in an erosion of real wages. But the extent of  its impact  will depend  on the margin of erosion available at  different levels  of  income.  The  Commission

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recommended that 95% neutralisation 515 should be  granted against  rise in  cost of living to those drawing minimum wage in non-scheduled employments.      In a  series of decisions, this Court has expressed the same  view.   It  has   been  held   that  cent   per   cent neutralisation cannot  be allowed  as it  would  lead  to  a vicious circle  and add  to the  inflationary spiral. It was observed that  there was no reason why the industrial worker should not  make sacrifices  like  all  other  citizens.  In Clerks of  Calcutta Tramways v. Calcutta Tramways Co. Ltd(1) this Court  said "We  can now  take it  as settled  that  in matters of  the grant  of dearness  allowance except  to the very lowest  class of  manual labourers whose income is just sufficient to  keep body  and soul together, it is impolitic and unwise  to neutralise  the entire  rise in  the cost  of living by  dearness allowance.  More so  in the  case of the middle  classes".   The  same  view  was  expressed  in  the Hindustan Motors’(2)  case and  was reaffirmed  in Hindustan Times Ltd.  New Delhi  v. Their  Workmen,(3)  where  it  was observed that  the whole purpose of dearness allowance being to neutralise  a portion  of the  increase in  the  cost  of living it  should ordinarily  be  on  a  sliding  scale  and provide for  an increase on rise in the cost of living and a decrease on  a fall  in the cost of living. In Kamani Metals and Alloys  Ltd. v.  Their Workmen,(4) it was held that 100% neutralisation is not advisable as it will lead to inflation and therefore dearness allowance is often a little less than one-hundred per  cent neutralisation.  In Silk  &  Art  Silk Mills Association  Ltd. v. Mill Mazdoor Sabha(6) it was laid down that  in considering  a claim for dearness allowance or revision of  dearness allowance  amongst  other  factors  it should be  borne in  mind (1)  Full  neutralisation  is  not normally  given,   except  to   the  very  lowest  class  of employees; (2)  The purpose  of dearness  allowance being to neutralise a portion of the increase in the cost of living,* should ordinarily  be on  a sliding scale and provide for an increase on the rise in the cost of living and a decrease on a fall  in the  cost of  living. In  Silk &  Art Silk  Mills Association Ltd.  v. Mill  Mazdoor Sabha(6)  a grant  by the Industrial Tribunal of 99% neutralisation of increase in the cost of living was confirmed as the workmen cannot be denied their subsistence  wage at its real level because some other comparable concern  is paying  at a  lower rate.  In Killick Nixon Ltd. v. Killick & 516 Allied  Companies   Employees  Union(1)   this  Court  after approving the propositions laid down in Bengal Chemical case (supra) proceeded  to state  at p.  467: "There is, however, one thing  which we must point out lest there should be some misconception about it and that is that so far as the lowest paid employees  at or  just above  the subsistence level are concerned, they are entitled to 100% or at any rate not less than 95%  neutralisation of  the rise  in the cost of living and hence  there should  be no ceiling on dearness allowance payable to  employees within  the slab  of  first  Rs.  100, unless it  can be  shown by  the management that the rate of neutralisation in  their case is more than 100 per cent. The decision is  authority for  the proposition that the rate of neutralisation cannot  be more than 100% even in the case of lowest paid  employees. The  proposition laid  down  in  the decision cited above were reiterated and followed in Shivraj Fine Art  Litho Works  v. State  Industrial Court,  Nagpur & Ors.(2)      The law  is  thus  clear  that  dearness  allowance  is

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intended to neutralise a portion of the increase in the cost of living. Though 100% neutralisation is not advisable as it will  lead   to  inflation,   full  neutralisation   may  be permissible  only  in  the  case  of  the  lowest  class  of employees. The  management is  entitled to  complain if  the neutralisation is more than 100%.      The purpose  of  grant  of  dearness  allowance  is  to neutralise the increase in the cost of living due to rise in prices. Neutralisation  may be  such as  to neutralise fully the increase  in cost  of living  or may  be  restricted  to neutralise only  a portion of the increase. Full or cent per cent neutralisation  can be  achieved if the increase in the cost of  living is  fully compensated so that the pay of the worker is  not adversely affected. But an award of more than 100% of an increase in the cost of living would be more than neutralisation and  would in  effect  gives  the  worker  an increased wage.  The result  would be  the worker  would  be getting an  increased wage  packet whenever there is a price rise a  result which would not have been envisaged in making provision for grant of dearness allowance.      Mr.  M.   K.  Ramamurthi   learned  counsel   for   the respondents submitted  that the  permissible limit  of  100% neutralisation is  not applicable to cases where persons are seasonally employed.  The learned  counsel pointed  out that the sugar  industry does not function for the whole year and for months  it is  closed and  the workers  are left without employment during  the off-season.  In order  to  give  some relief to such sea- 517 sonal workers  he submitted,  that the award of equalisation of more than 100% is justified. This plea cannot be accepted for the  award of  equalisation of  more than  100% in these cases is  not based  on seasonal employment. To mitigate the hardship of  unemployment during  the off-season a retention allowance has  been provided  for the  seasonal workers. The plea that  the neutralisation  of more than 100% is based on seasonal employment was not taken in the pleadings or raised before the courts below.      Demand No.  7 relates to claim for payment of retaining allowance for  the unskilled  seasonal employees in the off- season at  the rate  of 10% of their basic wage and dearness allowance payable  during the  crushing season  1974-75. The Industrial Court  as regards  demand No.7  directed that the unskilled seasonal employees be paid retaining allowance for the season  1975 at  the rate  of 10%  of the basic wage and dearness allowance  payable during the crushing season 1974- 75. The  claim regarding  the variable dearness allowance is demand No.  2(c) and  5(1) (a) (b). There is no reference in the proceedings  before the  Industrial Court  or  the  High Court that the variable dearness allowance of more than 100% equalisation was  awarded due  to the seasonal employment of the workers.  In the  result we accept the contention of the appellants that  variable dearness  allowance cannot be more than 100% neutralisation.      The  second   contention  raised   on  behalf   of  the appellants  is  that  in  fixing  fair  wages  and  dearness allowance financial  capacity of  the cooperative  societies should  be   arrived   after   taking   into   account   the depreciation. Mr. Nariman the learned counsel submitted that in order to keep an industry running it is necessary to make provision for  depreciation as  otherwise when the machinery gets worn  out the  industry would  grind  to  a  halt.  The learned counsel  submitted that  though  there  are  certain observations by  this Court  in Unichem Laboratories Ltd. v. The Workmen(1),  and Indian Link Chain Manufacturers Ltd. v.

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Workmen,(2)  that  depreciation  could  not  be  taken  into account in  fixing the  gross profits,  they do not rule out taking  into  account  the  depreciation  in  all  cases  in determining the  financial capacity  of the Industry to bear the increased burden.      Before considering  the decisions  which  bear  on  the question we  will refer  to the  plea of the appellants that financial capacity  of sugar  industry functioning under the Cooperative Societies  Act should  only be decided according to the provisions of s. 66 of the Gujarat Co- 518 operative Societies  Act, 1961, Act X of 1962. Section 66(1) runs as follows:-           "A society  earning profit,  shall  calculate  its      annual net  profits by deducting from the gross profits      for the year, all accrued interest which is overdue for      more   than    six   months,   establishment   charges,      contributions, if  any, towards  the provident fund and      gratuity fund  of its  employees, interest  payable  on      loan  and   deposits,  audit   fees,  working  expenses      including repairs,  rents, taxes  and depreciation, and      after providing for or writing off bad debts and losses      not adjusted against any fund created out of profits. A      society may,  however, add  to the  net profits for the      year, interest  accrued in  the  preceding  years,  but      actually recovered  during the  year. The  net  profits      thus arrived  at, together  with the  amount of profits      brought  forward   from  the  previous  year  shall  be      available for appropriation."      Relying on the provisions of the section which requires that taxes  and depreciation  should be  deducted from gross profits for  arriving at  net profits, it was submitted that in determining  the financial  capacity of  the industry the net profits  as prescribed  in the  section would have to be determined. We do not read the section as meaning that wages and dearness  allowance could  only be  determined after the net profits  are arrived at. The sub-section itself provides that contributions  towards provident fund and gratuity fund of its  employees should  all be  deducted  from  the  gross profits for  arriving at  the net profits. The provision for deducting   depreciation    occurs   after   providing   for contribution  towards   provident  fund  and  gratuity.  The determination of  the net profits under the section is for a different purpose,  namely  for  appropriation  of  the  net profits as  provided for  in the Act and does not in any way support the contention of the appellants.      In deciding  the financial capacity of an industry this Court has  laid down  in Ahmedabad Mills Owners’ Association etc. v.  The Textile Labour Association,(1) that "Industrial adjudication  must   take  into   account  the   problem  of additional burden  which such  wage structure  would  impose upon the  employer and  consider whether  the  employer  can reasonably be  called upon to bear such burden. .... It is a long-range plan  and in  dealing with  the problem, which is difficult  and   delicate  the  financial  position  of  the employer and  the future  prospects of  the industry and the additional burden  which may be imposed on the consumer must be carefully  examined." This  Court after  referring to the Reserve Bank  Bulletin about  the financial  position of the industry 519 and about  cotton textile  industry and other authorities on determining the  financial capacity  of an industry observed that "industrial  adjudication cannot  lean too  heavily  on such single-purpose statements or adopt any one of the tests

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evolved from  such statements,  whilst it  is attempting the task of  deciding the  financial capacity of the employer in context of  the wage problem." The financial capacity of the industry will  have to be decided in the context of the wage problems and  the methods  adopted in  determining financial capacity of  the industry  for other  purposes need  not  be followed. While  examining the  financial capacity in detail we must  ultimately base  our decision on a broad view which emerges from  a consideration  of all relevant factors, such as financial  position of the employer, the interests of the consumer etc.      The wages due to a worker are in the nature of expenses just like payment for raw materials. In this sense the wages are expenses which have to be met whether the company works, makes a  profit or not. So far as the minimum wages due to a worker are  concerned, the  law requires that they should be paid first  and if  the industry  cannot pay  them it may as well close.  The payment of dearness allowance as prescribed under the  Minimum Wages  Act should also be provided for in any event.  It is  settled law  that in fixing fair wages or dearness allowance  or for  making contribution to provident fund or providing for gratuity the financial capacity of the industry to bear the additional burden will have to be taken into account.  On  principle  of  social  justice  with  the development of  industrial law it has now been accepted that when the  industry can  bear the  burden provision should be made for  provident fund and gratuity scheme. In determining the financial  capacity of  an industry  all relevant  facts will have  to be taken into account. The principles followed in arriving  at the  profit and  loss account for income-tax and other  purposes may  not be conclusive. The claim of the employer to  a reasonable  profit, that  of the shareholders for a  fair dividend  and the interest of consumer and other relevant factors  and circumstances  will have  to be  taken into account.  It is  necessary to take into account all the facts  and   circumstances  relating  to  the  industry  for determining the financial capacity of the industry to pay.      We will  now proceed  to refer  in detail  to the three decisions of this Court which are relied on as authority for the proposition  that depreciation  should not be taken into account in  fixing the wage structure. In Gramophone Company Ltd. v. Its Workmen(1) this Court had to 520 examine  the   financial  capacity   of  the   employer  for determining whether  the industry could bear the burden of a gratuity scheme.  The court  found  on  examination  of  the financial position of the company that the profits that were made by  the company  were Rs. 7.6 lakhs in 1956-57, Rs. 7.2 lakhs in  1957-58, Rs.  1.6 lakhs in 1958-59, Rs. 1.49 lakhs in 1959-60  and Rs.  6.04 lakhs in 1960-61. On behalf of the company it  was  submitted  that  the  introduction  of  the gratuity scheme  would throw  a great burden on the industry involving an  initial fund of Rs. 33 or 34 lakhs and that if provision is  made for  income-tax payable  and  development rebate it  will be  seen that  the company  is running  at a loss. The  Court found  that the  financial position  of the industry showed  that the  burden of payment of gratuity and provident fund  can be  made without  undue  strain  on  the financial position  of the employer. The court observed that the introduction  of a  gratuity scheme  will not require an initial fund  of Rs.  33 or  34 lakhs  but only  involve  an additional burden  of Rs.  1.5 lakhs at the most. Though the introduction  of   the  gratuity   scheme  may   involve  an expenditure of  Rs. 1.50 lakhs a year the actual burden will be Rs. 60,000 as there will be a reduction of the income-tax

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payable by about 63%. Regarding the plea of the company that if the  amounts due to income-tax and development rebate are taken out,  it would  show that  the company  has suffered a loss, the  Court observed that the provisions for income-tax and reserves  must  take  a  second  place  as  compared  to provisions for  a wage structure. In declining to accept the contention that  provision for  taxation and reserves should have precedence, the Court proceeded to base its decision on the finding  that the financial capacity of the industry was such that  it could bear the burden. This Court held that if the industry  is in  a stable  condition and  the burden  of provident fund  and gratuity  does not result in loss to the employer that  burden will  have to be borne by the employer like the  burden of wage-structure in the interest of social justice.      The  statement   that  provision   for  income-tax  and development rebate  taking only  a second  place may  not be understood as  holding that  they should  on no  account  be taken into  consideration or  that a  wage increase would be permissible if  it would  result in reduction of income-tax. The decision  is based on the finding that the company is in a position  to bear  the burden  and the  observations  were incidental and  made on  the facts  of the  case. It  may be noted that  there is  no reference about taking into account of depreciation allowance. The judgment should be understood as negativing  the plea  that the income-tax and development rebate should be taken into account to the extent of showing that the industry is running at a loss. 521      The second  decision is Indian Link Chain Manufacturers Ltd. v.  Their Workmen.(1) The question arose whether in the matter of  determining surplus the Tribunal was justified in taking the figures of depreciation allowance and development rebate from  the balance  sheet and  not from the income-tax assessment orders  in which  the  figures  were  higher  and whether for  determining the  return on reserves the figures at the  end of  the year or the beginning of the year had to be taken.  It was  held by  this Court  that  there  was  no justification for  the rejection  of the company’s claim for depreciation and  development rebate and the same be allowed as per income-tax assessment. The Court allowed depreciation allowance  and   development  rebate.   In  determining  the financial position of the company the court observed that it would not  be appropriate  to approach  its capacity to bear the burden  from an  investors point  of view.  The over-all picture of  the soundness  of the undertaking and its future prospects must be taken into account.* The Court adopted the principles laid  down in  the Bharatkhand  Textile Mfg.  Co. Ltd. &  Ors. v. The Textile Labour Association, Ahmedabad(2) which are as follows:-           "It is  not disputed  that the benefit of gratuity      is in the nature of retiral benefit and there can be no      doubt  that   before  framing  a  scheme  for  gratuity      industrial  adjudication   has  to  take  into  account      several relevant  facts; the financial condition of the      employer,  his  profit  making  capacity,  the  profits      earned by  him in  the past, the extent of his reserves      and the chances of his replenishing them as well as the      claim for  capital invested  by him,  these  and  other      material considerations may have to be borne in mind in      determining  the   terms  of   the  gratuity   scheme."      (Emphasis supplied). Thus the  facts that  have  to  be  taken  into  account  in determining an overall picture of the financial capacity are the financial  condition of  the employer  his profit making

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capacity the  profits earned  by him in the past, the extent of his  reserves and the chances of his replenishing them as well as  the  claim  for  capital  invested  by  him.  After referring to  the decision in the Hindustan Antibiotics Ltd. v. The  Workmen &  Ors., (3)  at p.  809 the  Court made the following observations:-           "It is pertinent to notice that gratuity and wages      in industrial  adjudication  are  placed  on  the  same      footing and  have priority  over Income-tax  and  other      reserves, as such in consi- 522      dering the financial soudness of an undertaking for the      purposes of  introduction  of  a  gratuity  scheme  the      profits that  must be  taken  into  account  are  those      computed prior  to the  deduction of  depreciation  and      other reserves."      As already  pointed out  in Gramophone  Company’s  case there is  no reference  to deduction of depreciation. In the case under  consideration i.e.  Indian Link  Chain Ltd., the Court at  p. 807  allowed the  claim of  the company  for  a deduction on  account of depreciation and development rebate at Rs.  1,61,054 and Rs. 5,822 instead of Rs. 80,190 and Rs. 3,970. On  the facts  of the  case  it  is  found  that  the industry was in a position to bear the burden.      In Unichem  Laboratories Ltd.  v. The Workmen(1) it was found that the average gross profits of the company exceeded Rs. 40  lakhs and  the additional  financial burden  by  the revision of  the wage  structure was  Rs. 5.55 lakhs. On the facts the  court held  that the  Tribunal was  justified  in computing gross  profits without deducting tax, depreciation and development  rebate. The  court  accepted  the  plea  on behalf of  the  company  that  the  decision  in  Gramophone Company  Ltd.   had  no   occasion   to   consider   whether depreciation reserve can be deducted or not.      Scrutinising the figures given at p. 581 of the Reports the Court  found that  the average  net profit worked out to Rs. 13,84,691.00.  The depreciation that was claimed was Rs. 5,44,918 for 1965-66, Rs. 5,55,035 for 1966-67, Rs. 7,84,824 for 1967-68,  Rs. 11,11,775 for 1968-69 and Rs. 9,16,719 for 1969-70. On  the facts  the Court found that the company had the financial  capacity. The  inclusion or  exclusion of the depreciation allowance would not have made any difference to the capacity  of the industry to bear the additional burden. The  decision  may  not  be  understood  as  laying  down  a principle of  law that  in no case the depreciation could be taken into account.      It may  be remembered  that in Bharatkhand Textile Mfg. Co. Ltd.  (supra) the  guidelines that  were indicated  were that in  determining the capacity to pay by the industry the financial condition  of  the  employer,  his  profit  making capacity, the  profits earned by him in the past, the extent of his  reserves and the chances of his replenishing them as well as  the claim  for capital  invested by him*. these and other material  considerations may have to be borne in mind. Thus the  extent of the reserves the chances of replenishing them as well as the claim for capital 523 invested by  him and  as observed  in Ahmedabad  Millowners’ Association v.  Textile Workers,(1)  will have  to be  taken into  account.  The  position  of  the  industry  should  be examined in  detail and  the decision  should be  based on a broad  view  which  emerges  from  a  consideration  of  all relevant factors such as whether the employer can reasonably be called upon to bear the burden and whether the additional burden imposed  on the consumer is justified would also have

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to be  carefully examined.  As pointed  out in the Ahmedabad Millowners Association case (supra) "It is a long-range plan and in  dealing with  the problem,  which is  difficult  and delicate the  financial position  of the  employer  and  the future prospects  of the  industry and the additional burden which may  be imposed  on the  consumer  must  be  carefully examined."      It may be that for prudent management of an industry it will be  desirable to  take into  account to some extent the depreciation of  the machinery  for otherwise after lapse of years the  machinery may  get worn out and without provision for replacement  the industry  itself will  come to  a stop. Whether provision  for such  depreciation should be made and if so to what extent will depend upon the facts of the case. Depreciation allowance  to the  extent of  making out a loss need not  be accepted  but reasonable  provision  should  be made. The  three decisions  of this  Court referred  to were given on  the particular  facts of  the case  and may not be understood  as  laying  down  that  under  no  circumstances deduction for  depreciation, reserves etc. could be made. It is of utmost importance that the industry must be kept going as long  as it could pay the minimum wages. It may sometimes be necessary  for the workers to make some sacrifice to keep the industry  going. It  is not  wise to kill the goose that lays the  golden eggs.  The capacity of the industry to bear the burden will have to be taken into account in determining whether provision  could be made for fixing a wage structure including provision  for  contribution  to  provident  fund, gratuity etc. In determining the capacity of the industry to bear the  burden all  relevant facts  will have  to be taken into account  and actual  state of  affairs determined.  The procedure adopted by the industry to determine the financial capacity for  other purposes  may not be relevant. It cannot be taken  as  a  hard  and  fast  rule  that  provision  for depreciation,  provision   for   development   rebate,   tax liabilities should  never be allowed. While the preservation of the  industry is paramount the attempts of the management to show  that the  company is  running at a loss by boosting the depreciation  allowance etc. should not be permitted. In short the  real capacity  of the  industry to bear the extra burden will have to be determined. 524      An employer  claiming depreciation  allowance  is  only entitled to  the actual  or  probable  depreciation  of  the machinery, tools  etc. for  the period due to wear and tear. The depreciation cannot be computed on any notional basis or on the  profit and loss account furnished by the company. In the cases  before use  the management  has claimed by way of depreciation the cost of purchase of machinery for expansion of the  manufacturing  plant.  In  the  matter  relating  to Chalthan Sugar  Mills in the profit and loss account for the year ending  June 30, 1975 Rs. 1,07,56,523 is claimed by way of depreciation  at the end of the year. The balance brought forward on  this account  from  the  previous  year  is  Rs. 79,11,066. During  the year,  an amount  of Rs. 28,45,457 is added. In  the profit  and loss  account for the year ending June 30,  1977 the  depreciation  fund  increased  from  Rs. 1,07,56,523 to  Rs. 1,30,24,742.  In  the  profit  and  loss account for  the year  ending June 30, 1977 an amount of Rs. 22,97,553 is  added to  the depreciation  fund. The  figures furnished by  the other  sugar  factories  follow  the  same pattern. During  the  course  of  arguments  the  appellants admitted that  the amount  shown  as  depreciation  actually represented the  cost  of  purchase  of  new  machinery  and balance for  expansion of  the  manufacturing  units.  These

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amounts relate  to expansion  of the  industry and should be shown in  the capital  account  and  cannot  be  claimed  as deduction due  to depreciation.  The accounting of the sugar factories concerned  is for  the purpose  of minimising  the profits and  showing loss  for the  purpose of depriving the workers their  due. Such depreciation cannot be allowed. But as pointed out by us the actual depreciation which should be deducted in  the interest  of the industry can be taken into account. In  the cases  before us  if the  inflated  figures should be  left out of account we feel that the industry has the capacity to bear the additional burden.      The High Court after referring to the decisions of this Court in  Gramophone Co. and Indian Link Chain Manufacturers and the  Shivraj Litho  Works (supra) came to the conclusion that gross profits before allowance is made for depreciation has to  be taken into account for the purpose of considering the paying  capacity of  the industry.  The High Court added the amount  of depreciation  to the  net profits as shown in the  balance   sheet  and  found  that  large  profits  were available as  gross profits.  The High Court was of the view that the  position of  the three factories in South Gujarat, namely Gandevi,  Bardoli and  Madhi is  not at all gloomy so far as  their financial  prospects are  concerned. The  High Court found that though the price of sugarcane was fixed for delivery at  the factory,  it has  paid  the  price  to  the growers ex-sugarcane  field, thus  bearing the  charges  for cutting  sugarcane  and  for  carrying  it  to  the  factory premises from the field. This payment was unjustified 525 and was  intended for  the benefit  of the  members  of  the cooperative society  and resulted  in showing  of  a  ’Paper Loss’. We  are unable  to agree  with the  conclusion of the High Court  that this  payment is unjustified and is for the purpose of  benefiting its  own members.  It is submitted on behalf of  the factories  that the  sugar factories  pay  an extra amount  to the  growers to  induce them  to  cultivate sugarcane for  a profit  and thereby  preventing  them  from cultivating  other   crops  and   reducing  the  area  under sugarcane cultivation.  The finding  of the  High Court that this extra  payment is to benefit the members of the society itself is  also not  borne out  as there are members who are not growers  of sugarcane.  The benefits  by way  of  giving fertilizers at  a discount  etc. will not profit members who are not growers. The High Court has not estimated the likely increase in  profits due  to increase  in the price of sugar levy along  with the  increase in  expenditure  due  to  the revision of  the wage  structure which  it has  estimated at about Rs.  5 lakhs. Further as pointed out by us earlier the High Court  erred in  adding back the depreciation and other reserves  without   determining  as   to  what  extent  such allowances are permissible on the facts of the case. For the reasons stated  we feel  that the  financial capacity of the industry has  not been  determined in the manner in which it ought to have been done.      The wages  are normally fixed on the basis of industry- cum-region. The  U.P. Pattern was fixed by the Uttar Pradesh Government on an agreement between the parties under section 3(b) of  the U.P. Industrial Disputes Act, 1947(U.P. Act No. 18 of  1947). The  order under  sec. 3 (b) is provisional in character. Section 3 (d) provides for fixing the wages after proper adjudication. No such adjudication took place in U.P. after the  passing of the order under sec. 3(b). Even though normally the  wages are  fixed  on  the  industry-cum-region basis it  is open  to the  industry to plead that it has not the financial  capacity to  bear the  increased burden. When

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such a  plea is  specifically raised  it is  the duty of the Industrial Court  to determine  whether the increased burden could be  borne by the particular industry. The reason given by the Industrial Court and the High Court for following the U.P. Pattern  is that  it has been accepted by various sugar factories in  the southern region and a neighbouring factory Kodinar Sugar  Factory and  hence there is no reason for not applying the  same rates  to  the  appellant  factories.  On behalf of  the appellant  it was  pleaded  that  it  is  not admitted that all the sugar factories in the southern region have accepted  the U.P.  Pattern. It  was submitted that the case of  the Kodinar is different because it was established long time ago and is a flourishing concern. 526      In view  of the order we propose to make we do not feel called upon  to examine  in detail the financial capacity of the various factories or to remit it to the Industrial Court for that  purpose. We  have found  that  the  order  of  the Industrial  Court   and  the  High  Court  relating  to  the provision for  variable dearness allowance of more than 100% neutralisation is not sustainable in law and will have to be set aside.  Regarding the  award relating  to the  retention allowance of  the unskilled workers at 10% of the basic wage and the  dearness  allowance  payable  during  the  crushing season, it  was not  challenged before  the High  Court. The only question  therefore which is in dispute is the increase of graded  dearness allowance  from Rs.  21 to  Rs. 40  with effect from  the date of the award. We do not think that the increase in  burden under  this head  would  be  beyond  the financial capacity  of the  factories especially  as we  are satisfied  that   the  claim   for  depreciation  is  highly exaggerated. Taking  all the  circumstances relating  to the financial capacity  of the  factories we  are satisfied that the increase  in the  burden due  to  the  increase  in  the graduated dearness  allowance will be within the capacity of the industry.  We therefore find no reason for remitting the matter back  to the Industrial Court. We set aside the award relating to  the grant  of graduated  dearness allowance  at more than  100% but  direct that  it will  be confined to 83 paise for  increase of  one point  i.e. limited  to cent per cent  neutralisation.   So  far  as  the  increment  of  the graduated dearness  allowance from Rs. 21 to Rs. 40 from the date of  the award and the retention allowance at 10% of the basic  wage   and  dearness  allowance  payable  during  the crushing season to the unskilled workers is concerned, it is confirmed.      The appeals  are disposed of accordingly. The Appellant will pay costs of the respondents one set of Rs. 2000/-which will be divided amongst the respondents. N.K.A                                Appeals allowed partly. 527