19 November 1954
Supreme Court


Case number: Appeal (civil) 135 of 1951






DATE OF JUDGMENT: 19/11/1954


CITATION:  1955 AIR  170            1955 SCR  (1) 991

ACT: Bonus  -Meaning  of - Necessary conditions  for  the  demand thereof-Industrial  claim-Principles  for the grant  of  it- Social  Justice-Meaning  of--Industrial   Tribunals--Whether Tribunals   within   the  meaning  of  Art.   136   of   the Constitution.

HEADNOTE: The term bonus is applied to a cash payment made in addition to  wages. it generally represents the cash incentive  given conditionally   on  certain  standards  of  attendance   and efficiency being attained. 992 There are two conditions, which have to be satisfied  before a  demand for bonus can be justified and they are, (1)  when wages fall short of the living standard and (2) the industry makes huge profits part of which are due to the contribution which the workmen make in increasing production.  The demand for  bonus becomes an industrial claim when either  or  both these conditions are satisfied. The formula for the grant of bonus is as follows:- As both labour and capital contribute to the earnings of the industrial  concern,  it is fair that labour  should  derive some  benefit, if there is a surplus after meeting prior  or necessary  charges, The first charges on gross  profits  are (1)   provision   for   depreciation.   (2)   reserves   for rehabilitation,  (3) a return at 6 per cent. on the paid  up capital and (4) a return on the working capital at a  lesser rate  than the return on paid up capital.  The surplus  that remained  after  meeting the aforesaid deductions  would  be available for distribution as bonus. The claim for bonus can be made by the employees only if  as a result of the joint contribution of capital and labour the industrial concern has earned profits.  If in any particular year  the working of the industrial concern has resulted  in loss  there is no basis nor justification for a  demand  for bonus.   Bonus  is not a deferred wage.  If it were  so,  it would necessarily rank for precedence before dividends.  The dividends  can  only be paid out of profits and  unless  and until profits are made no occasion or question can arise for



distribution of any sum as bonus amongst the employees. Social justice is a very vague and indeterminate  expression and  no  clear-cut definition can be laid  down  which  will cover all the situations. The  concept  of social justice does not  emanate  from  the fanciful  notions of any particular adjudicator but must  be founded on a more solid foundation. Industrial  Tribunals  are Tribunals within the  meaning  of Art.  136  and  Art. 136 has vested  in  the  Supreme  Court exceptional  and  overriding  power to  interfere  where  it reaches  the  conclusion that a person has been  dealt  with arbitrarily or that a Court or Tribunal within the territory of India has not given a fair deal to a litigant. In re Eddystone Marine Insurance Co. (L.R. [1894] W.N.  30), Sutton v. Attorney-General ([19231 39 T.L.R. 294),  National Association   of   Local  Government  Officers   v.   Bolton Corporation (L.R. 1943 A.C. 166), Kenicott v. Supervisor  of Wayne  County  ([1873] 83 U.S. 452: 21 L.  Ed.  319),  Great ’Western  Garment Co. Ltd. v. Minister of  National  Revenue ([1948]  1 D.L.R. 225), Millowners’ Association,  Bombay  v. Bashtreya  Mills  Mazdoor  Sangh, Bombay  ’[1950]  2  L.L.J. 1247), Nizam Sugar Factory Ltd., Hyderabad v. Their  Workmen ([1952],  1  L.L.J. 386), Textile Mills, Madhya  Pradesh  v. Their Workmen ([1952] 2 L.L.J. 62‘), Famous Cine  Laboratory v. Their Workmen ([1953] 1 L.L.J 466) and Bharat Bank  Ltd., Delhi 993 v.   Employees  of  the  Bharat Bank  Ltd.,  Delhi,  ([1960] S.C.R. 469), referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 135 of 1951. Appeal  by  Special Leave granted by the  Supreme  Court  of India  by  its Order dated the 21st of May, 1951,  from  the Judgment  and  Order dated the 19th February, 1951,  of  the Labour Appellate Tribunal of India, Allahabad in Appeal  No. 136 of 1950. C.K. Daphtary, Solicitor-General of India (J. B. Dadachanji, Rajinder  Narain  and  Devinder Swarup, with  him)  for  the appellant. S.C. Isaacs (0.  P. Lal, with him) for the res. pondent. M.C. Setalvad, Attorney-General for India, (Rajin der Narain and Devinder Swarup, with him) for the Intervener (All India Organisation of Industrial Employers). S.C.  Isaacs (Mohan Lal Saxena and C. P. Lal, with him)  for the Intervener (State of U.P.). 1954.  November 19.  The Judgment of the Court as  delivered by BHAGWATI  J.-This  appeal  with special  leave  is  directed against  the  judgment  and order of  the  Labour  Appellate Tribunal of India in a dispute regarding the workers’  claim for bonus. During  the  year 1948 the appellant made a  profit  of  Rs. 11,97,648-11-9.  It paid 24 3 per cent. dividend on ordinary shares,  being  the  maximum that could be  paid  under  the Public Companies (Limitation of Dividend) Ordinance of  1948 and  also paid to the workers their full share of  bonus  at annas 4 in a rupee of their basic earnings.  During the year 1949 the selling rates for cloth and yarn were controlled by the  Government  and were approximately 4  per  cent.  below those obtained in 1948.  The basic wages were increased from the 1st December, 1948, by order of the Government of  Uttar Pradesh and the total wages paid were therefore higher  than



those in the previous year.  There 994 was moreover indiscipline amongst the workers and production suffered.   There was a strike in the month of  October  and the  mills  were  closed for nearly a  month.   Further  the management  were unable to secure cotton which  resulted  in the  curtailment of the working hours.  As a result  of  all these circumstances the appellant suffered a trading loss of Rs.  5,02,563-1-10.  A sum of Rs. 2,50,000 being the  excess reserve  for  taxation  was written back and a  sum  of  Rs. 10,01,871-13-5 being the amount of reserve transferred  from the  investment account was also brought in.   An  aggregate sum of Rs. 12,51,871-13-5 was thus brought into the balance- sheet by these two transfers.  The trading loss was deducted from   this   amount  leaving  a  credit  balance   of   Rs. 7,49,308-11-7  and that amount was shown as the  profit  for the  year  1949  in the balance-sheet for  that  year.   The balance  which  had been brought forward from  the  previous year was added thereto and a dividend of 243/4 per cent. was paid to the ordinary shareholders.  The appellant also  paid ex  gratia to the workmen bonus at the rate of annas  2  per rupee  of  their  basic earnings making it  clear  by  their notification  dated the 7th April, 1950, that the  directors had  sanctioned  the payment at that rate in  spite  of  the appellant having suffered a trading loss for the year,  that it  was  being  paid  entirely  at  the  discretion  of  the appellant  and  was  not related to or  connected  with  any contract of employment of any worker. On the 4th May, 1950, the Secretary of the respondent  Union petitioned to the Provincial Conciliation Officer  (Textile) that  there was more production in 1949 than in  1948,  that there was no reason to hold that the profit in 1949 was less than  in  the previous year and that the rate of  bonus  was wrongly reduced and asked that bonus for 1949 should also be paid  at  the  rate of annas 4 per  rupee.   The  industrial dispute  which  thus  arose was  referred  for  enquiry  and recording  of  an award to the Regional  Conciliation  Board (Textile),  Kanpur.   The Conciliation Board by  a  majority decision  repelled  the  contention  of  the  appellant  and awarded  the payment of bonus at annas 4 per rupee.   On  an appeal taken by the appellant to the 995 Industrial   Court  (Textiles  and  Hosiery),  Kanpur,   the Industrial  Court accepted the contention of the  appellant, allowed the appeal and set aside the award.  The  respondent thereupon  appealed to the Labour Appellate  Tribunal  which substantially agreed with the Industrial Court on  questions of fact as well as the general position in law but  imported considerations  of  social justice and treating  this  as  a special case " where social justice would demand that labour should  have  bonus for the year where for  that  very  year capital had not only a reasonable return but much in  excess of that ", allowed the appeal and directed the appellant  to pay  to the workmen bonus at the rate of annas 4  per  rupee within  six  weeks of their decision.  The  appellant  filed this  appeal against that decision after  obtaining  special leave from this Court. Both  the Industrial Court as well as the  Labour  Appellate Tribunal  found as a fact that there was a trading  loss  of Rs.  5,02,563-1-10  during the year 1949 and also  that  the dividend of 243/4 per cent. to the ordinary shareholders was distributed  after  transferring the aggregate  sum  of  Rs. 12,51,871-13-5  from  the  reserves.   The  question   which therefore arises for our consideration is mainly whether the workers  are entitled to the payment of a bonus in spite  of



the  employer  having worked at a loss during the  year  and incidentally  whether the workers have any right,  title  or interest  in the reserves and the undistributed  profits  of the previous years. The  primary meaning of the word " bonus " according to  the definition given in the New English Dictionary is:-" A  boon or gift over and above what is nominally due as remuneration to  the receiver and which is therefore something wholly  to the good ". This definition was adopted by Stirling J. in In re   Eddystone   Marine  Insurance   Co.   (1).    Webster’s International  Dictionary defines bonus as "something  given in  addition to what is ordinarily received by  or  strictly due  to  the  recipient ".  The  Oxford  Concise  Dictionary defines it as " something to the good, into the bargain (and as an example) gratuity to workmen beyond their wages". (1)  L. R. (I894) W. N. 30. 996 Corpus  Juris Secundum, Volume XI, at page 515 ascribes  the following  meanings  to  the word bonus: "  An  allowance  in addition to what is  usual  current  or stipulated  ;  a sum given or paid beyond  what  is  legally required  to  be paid to the recipient; something  given  in addition  to what is ordinarily received by or strictly  due to the recipient" and adds: It  has been said to carry the idea of  something  uncertain and  indefinite,  something  which may or may  not  be  paid depending  on  varying circumstances  and  under  particular conditions has been said to imply a benefit accruing to  him who offers it and an inducement to the offeree." This imports the conception of a boon, a gift or a  gratuity otherwise described as an ex gratia payment. The word ’bonus’ has however acquired a secondary meaning in the  sphere  of  industrial  relations.   It  is  classified amongst  the  methods  of wage payment.  It  has  been  used especially  in the United States of America to designate  an award  in addition to the contractual wage.  It  is  usually intended  as  a  stimulus  to  extra  effort  but  sometimes represents  the  desire of the employer to  share  with  his workers  the  fruits  of  their  common  enterprise.   (Vide Encyclopaedia Britannica, Volume III, page 856). The  Pocket  Part of the Corpus Juris Secundum,  Volume  XI, under the heading "As Compensation for Services" quotes  the following passage from Attorney-General v. City of Woburn(1) :- "The word ’bonus’ is commonly used to denote an increase  in salary or wages in contracts of employment.  The offer of  a bonus  is the means frequently adopted to secure  continuous service  from an employee to enhance his efficiency  and  to augment  his  loyalty  to his employer  and  the  employee’s acceptance of the offer by performing the things called  for by the offer binds employer to pay the bonus so called." It  also  gives another meaning of the  word  bonus’,  viz., "increased compensation for services already (1)  317 Mass. 465. 997 rendered gratuitously or for a prescribed compensation where there  is  neither  express or  implied  understanding  that additional compensation may be granted." This imports the conception that even though the payment  be not strictly due to the recipient nor legally enforceable by him,  a claim to the same may be laid by the employee  under certain  conditions and if such claim is entertained  either by an agreement with the employer or by adjudication  before a properly constituted Tribunal -as on an industrial dispute



arising,  the  same would ripen into a  legally  enforceable claim. This  position was recognised in Sutton v.  Attorney-General (1), where the Earl of Birkenhead observed "The term ’bonus’ may of course be properly used to describe payments  made  of  grace  and not  as  of  right.   But  it nevertheless  may  also  include,  as  here,  payments  made because  legally due but which the parties contemplate  will not  continue indefinitely", and in National Association  of Local Government Officers v. Bolton Corporation(2) "This  payment,  if made, cannot properly in my  opinion  be regarded as a mere gratuity.  Though there is an element  of bounty  in  it  the bounty, if granted, is  given  for  good reasons of national policy............ I do not see why this does not fall within the definition of trade dispute just as much as a dispute as to the rate of wages or salary." To  a  similar effect are the observations  in  Kenicott  v. Supervisors of Wayne County (1):- "But second, the meaning of the word ’bonus’ is not given to it  by  the objection.  It is thus defined by  Webster.   ’A premium  given  for a loan or a charter or  other  privilege granted  to  a company; as, the bank paid a  bonus  for  its charter;  a sum paid in addition to a stated  compensation’. It  is not a gift or gratuity, but a sum paid for  services, or upon a consideration in addition to or in excess of  that which would ordinarily be given", (1)  (1923) 39 T.L.R. 294, 297,  (3) (1873) 83 U.S. 452   21 L., Ed. 319. (2) [1943] A.C. 166, I87. 127 998 and  also in Great Western Garment Co. Ltd. v.  Minister  of National Revenue (1):- "A  bonus  may be a mere gift or gratuity as  a  gesture  of goodwill  and not enforceable, or it may be something  which an  employee is entitled to on the happening of a  condition precedent   and  is  enforceable  when  the   condition   is fulfilled.  But in both cases it is something in addition to or in excess of that which is ordinarily received." The  Textile  Labour Inquiry Committee  defined  ’bonus’  as follows :- "The  term  bonus  is  applied to a  cash  payment  made  in addition  to  wages.   It  generally  represents  the   cash incentive  given  conditionally  on  certain  standards   of attendance and efficiency being attained." There are however two conditions which have to be  satisfied before a demand for bonus can be justified and they are, (1) when  wages  fall short of the living standard and  (2)  the industry  makes  huge profits part of which are due  to  the contribution   which   the  workmen   make   in   increasing production.   The  demand for bonus  becomes  an  industrial claim when either or both these conditions are satisfied. The  principles for the grant of bonus were discussed and  a formula  was  evolved  by  the  Full  Bench  of  the  Labour Appellate  Tribunal  in Millowners’ Association,  Bombay  v. Rashtreeya  Mill Mazdoor Sangh, Bombay (2) "As  both  labour and  capital  contribute to the earnings of  the  industrial concern, it is fair that labour should derive some  benefit, if  there  is  a surplus after meeting  prior  or  necessary charges"  and  the following were prescribed  as  the  first charges on gross profits, viz., (1)  Provision for depreciation, (2)  Reserves for rehabilitation, (3)  A return at 6 per cent. on the paid up capital. (4)  A return on the working capital at a lesser



rate than the return on paid up capital. The  surplus  that  remained  after  meeting  the  aforesaid deductions would be available for distribution as bonus. (1) (1948) D.L.R. 225, 233.  (2) (1950) 2 L.L.J. 247. 999 It  is therefore clear that the claim for bonus can be  made by  the  employees  only  if  as  a  result  of  the   joint contribution  of -capital and labour the industrial  concern has  earned profits.  If in any particular year the  working of  the industrial concern has resulted in loss there is  no basis  nor justification for a demand for bonus.   Bonus  is not  a  deferred  wage.   Because if it  were  so  it  would necessarily  rank  for  precedence  before  dividends’   The dividends  can  only be paid out of profits and  unless  and until  profits  are made no occasion or  question  can  also arise  for  distribution  of any sum as  bonus  amongst  the employees.   If  the industrial concern has  resulted  in  a trading  loss, there would be no profits of  the  particular year  available  for distribution of  dividends,  much  less could  the employees claim the distribution of bonus  during that  year.   This has been clearly recognised even  in  the various  decisions of the Labour Appellate  Tribunal,  e.g., Nizam  Sugar  Factory Ltd., Hyderabad v.  Their  Workmen(1), Textile  Mills,  Madhya  Pradesh v. Their  Workmen  (2)  and Famous Cine Laboratory v. Their Workmen (3).  This was  also the basis of the demand of the respondent in the case before us, its case being that the appellant had reaped substantial profits  during the year 1949.  This case was  negatived  by the  Industrial  Court  as  well  as  the  Labour  Appellate Tribunal,  both  of  whom  held  that  the  working  of  the appellant  during  the  year 1949 had resulted  in  a  loss. Whereas   the  Industrial  Court  declined  to   grant   the respondent  any relief because the working of the  appellant during the year had resulted in a loss, the Labour Appellate Tribunal made a special case for the respondent in spite  of its  concurrence with that finding of the Industrial  Court. It  is  significant  to  observe  that  this  principle  was accepted by the Labour Appellate Tribunal itself. "As  at  present advised a claim for bonus  which  had  been rested on profits earned should ordinarily be determined  on the basis of the profits earned in the year under claim  and that the scale of bonus should be determined on the  quantum of profits earned in the (1)  (1952) I L.L.J. 386. (2)  (1952) 2 L.L.J. 625. (3) (1953) I L.L.J. 466. 1000 year.  So, it would follow that if there is trading loss  in the  year  under  claim,  bonus  should  not  ordinarily  be awarded. It however observed: "  But,  in our opinion, that should not  be  the  universal rule.    Considerations   of  social   justice   cannot   be disregarded  altogether,  in relations between  capital  and labour.   There  may be special cases, and we  consider  the case before us to be one, where social justice would  demand that  labour should have bonus for the year where  for  that very  year  capital had not only a.. reasonable  return  but much in excess of that.  " The Labour Appellate Tribunal did not accept the  contention of  the respondent that bonus should be linked to  dividends nor  did  it rest its decision on the  respondent  having  a right,   title  and  interest  in  the  reserves   and   the undistributed profits of the appellant.  Linking of bonus to dividend  would obviously create difficulties.   Because  if



that  theory  was accepted a company would not  declare  any dividends but accumulate the profits, build up reserves  and distribute  those  profits in the shape of bonus  shares  or reduce  the capital in which event the workers would not  be entitled  to  claim anything as and by way  of  bonus.   The workers not being members of the company would also not have any  right,  title  and  interest in  the  reserves  or  the undistributed profits which would form part of the assets of the company.  Even on a winding up of a company the property of  the  company  would be applied in  satisfaction  of  its liabilities   pari  passu  and,  unless  the   articles   of association   of   the  company   otherwise   provided,   in distribution  amongst the members according to their  rights and  interest  in the company.  The employees  would  in  no event be entitled to any share or interest in the assets and the capital of the company.  A transfer of moneys from these reserves  or the undistributed profits would  therefore  not enure for the benefit of the workers.  The shareholders only would  be  entitled to such benefit and the mere  fact  that dividends were declared and paid to the shareholders out  of such reserves and undistributed profits would 1001 not  entitle  the workers to demand bonus when in  fact  the working of the industrial concern during the particular year had showed a loss. It  has  also  got to be remembered that  the  labour  force employed in an industrial concern is a fluctuating body  and it cannot be predicated of the labour force in a  particular year that it represents the past and the present workers, so that  it  can claim to demand bonus out of the  reserves  or undistributed  profits  of  the  Previous  years.   On   the accounts  of each year being made up and the profits of  the industrial concern being ascertained the workers during  the particular year have their demand for bonus fully  satisfied out  of  the surplus profits and the balance of  profits  is allocated  and  carried over in the  accounts.   No  further claimed   payment  of  bonus  out  of  those   reserves   or undistributed  profits can therefore survive.  To admit  the claim  for  bonus  out of the reserves  transferred  to  the profit  and  loss  account would tantamount  to  allowing  a second  bonus  on the same profits in respect of  which  the workers  had  already  received  their  full  bonus  in  the previous year.  The labour force which earns the profits  of a  particular  year by collaborating with the  employers  is distinct  from the one which contributed to the  profits  of the  previous years and there is no continuity  between  the labour  forces which are employed in the industrial  concern during  the several years.  The ratio which applies  in  the case  of the shareholders who acquire the right,  title  and interest of their predecessorsin-interest does not apply  to the  labour force and the fact that the shareholders  get  a dividend  by  transfer  of  funds  from  the  reserves   and undistributed  profits  of  the  previous  years  would  not entitle  the workers to demand bonus out of those  funds  if the working of the industrial concern during the  particular year has resulted in a trading loss. The considerations of social justice imported by the  Labour Appellate Tribunal in arriving at the decision in favour  of the  respondent  were  not only  irrelevant  but  untenable. Social justice is a very- vague and indeterminate expression and  no  clear-cut definition can be laid  down  which  will cover all the situations. 1002 Mr.  Isaacs,  the  learned  counsel  for  the   respondent,. attempted  to  give a definition in the following  terms  :-



"social  justice connotes the balance of adjustments of  the various  interests  concerned  in the  social  and  economic structure of the State, in order to promote harmony upon  an ethical  and economic basis" and he stated that  there  were three  parties  concerned  here, viz.,  the  employers,  the labour  and the State itself, and the conception  of  social justice  had  to  be worked out in  this  context.   Without embarking  upon a discussion as to the exact connotation  of the expression "social justice" we may only observe that the concept of social justice does not emanate from the fanciful notions of any particular adjudicator but must be founded on a  more  solid  foundation.  Indeed the Full  Bench  of  the Labour  Appellate Tribunal evolved the  abovequoted  formula with a view to dispensing social justice between the various parties  concerned.   It  adopted the  following  method  of approach at page 1258 of that judgment :- "  Our  approach  to  this  problem  is  motivated  by   the requirement  that  we should ensure and  achieve  industrial peace  which is essential for the development and  expansion of  industry.   This can be achieved by having  a  contented labour  force  on  the one hand, and on the  other  hand  an investing public who would be attracted to the industry by a steady and progressive return on capital which the, industry may be able to offer.  " This  formula was reiterated in Textile Mills, M.  P.  Their Workmen(1), and Famous Cine Laboratory v. ,Their Workmen(  2 ),  and  in  the  latter case  it  deprecated  the  idea  of adjudicators  importing  considerations  of  social  justice which were not comprised in that formula :- "  And what is social justice ? Social ’justice is  not  the fancy  of  any individual adjudicator; if it  were  so  then ideas  of  social  justice might vary  from  adjudicator  to adjudicator  over  all parts of India.  In  our  Full  Bench decision  (See  1950,2  L.L.J., p.  1247),  we  care.  fully considered the question of social justice in relation (1) (1952) 2 L.L.J. 625. (2) (1953) 1 L.L.J. 466.                             1003 to bonus, and there we equated the rights and liabilities of employers  and  workmen  with a view  to  achieving  a  just formula  for  the  computation of bonus.   That  Full  Bench decision  stands, and this tribunal and all other  tribunals are bound by it.  " Without committing ourselves to the acceptance of the  above formula  in  its entirety we may point out that  the  Labour Appellate  Tribunal  did not apply its own  formula  to  the facts  of the present case.  It is also significant to  note that  even while importing considerations of social  justice the Labour Appellate Tribunal was oblivious of the fact that it was by their own acts of indiscipline and strike that the workers of the appellant company themselves contributed,  to the  trading losses incurred by the appellant and it  hardly lay  in their mouth then to contend that they were none  the less  entitled to a payment of bonus commensurate  with  the dividend  paid to the shareholders out of the  undistributed profits  of  the  previous  years.   The  Labour   Appellate Tribunal  also overlooked the fact that but for  the  Public Companies  (Limitation  of Dividend) Ordinance of  1948  the whole  of  the profits of 1948 could have  been  distributed after paying the workers bonus in that year of four annas in the rupee.    We  may before concluding refer to an argument which  was addressed  to us by Mr. Isaacs, the learned counsel for  the respondent,  that  this Court under article 136  should  not interfere with the decisions of the tribunals set up by  the



Industrial  Disputes  Act,  1947.  This  contention  can  be shortly answered by referring to our decision in Bharat Bank Ltd., Delhi v. Employees of the Bharat Bank Ltd.,  Delhi(1), where  we held that the Industrial Tribunals were  tribunals within  the meaning of article 136 and further that  article 136  has  vested in this, Court exceptional  and  overriding power  to interfere where it reaches the conclusion  that  a person  has been dealt with arbitrarily or that a  Court  or tribunal within the territory of India has not given a  fair deal to a litigant. (Vide (1)  (1950] S.C.R. 459. 1004 Dhakeswari Cotton Mills Ltd. v. Commissioner of  Income-tax, West Bengal(1). The  result  therefore is that the decision  of  the  Labour Appellate  Tribunal  appealed against must be  reversed  and that of the Industrial Court (Textiles and Hosiery), Kanpur, restored.   The  appeal  will accordingly  be  allowed  with costs. Appeal allowed.