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PETITIONER: THE ASSOCIATED CEMENT COMPANIES LTD.,DWARKA CEMENT WORKS, DW

       Vs.

RESPONDENT: ITS WORKMEN & ANOTHER

DATE OF JUDGMENT: 05/05/1959

BENCH: GAJENDRAGADKAR, P.B. BENCH: GAJENDRAGADKAR, P.B. DAS, SUDHI RANJAN (CJ) BHAGWATI, NATWARLAL H. DAS, S.K. WANCHOO, K.N.

CITATION:  1959 AIR  967            1959 SCR  Supl. (2) 925  CITATOR INFO :  R          1959 SC1081  (12)  F          1959 SC1089  (9)  R          1959 SC1114  (6,8,9)  F          1959 SC1276  (5,8)  F          1959 SC1317  (3)  F          1960 SC  12  (23)  R          1960 SC 571  (5,6)  R          1960 SC 826  (10)  R          1960 SC1003  (5)  F          1960 SC1025  (8)  F          1960 SC1346  (5)  F          1961 SC 867  (2,4,7,9)  R          1961 SC 941  (2,7,9)  RF         1961 SC 977  (7,9)  RF         1961 SC1165  (2,5,6)  R          1961 SC1191  (3)  RF         1961 SC1200  (13)  R          1962 SC1221  (4)  R          1962 SC1255  (1,5,7)  R          1963 SC 474  (4)  R          1963 SC1007  (6,12,13)  RF         1963 SC1710  (5)  R          1964 SC1766  (13)  RF         1967 SC 691  (7,11,22)  R          1967 SC1222  (5)  R          1967 SC1450  (5)  R          1968 SC 538  (2,10,12,25,32)  R          1968 SC 963  (2,3,11,12,25,26,28,29,30,31)  RF         1969 SC 530  (8)  RF         1969 SC 612  (23)  RF         1969 SC 976  (13)  R          1971 SC2521  (8,16,18)  RF         1971 SC2567  (1)  RF         1972 SC  70  (15,21)  R          1972 SC 330  (7,18)  RF         1972 SC1954  (15,23)  RF         1973 SC 353  (22)

ACT: Industrial Dispute-Bonus-Available surplus-Determination of- Full Bench formula-Basis-Applicability-Revision if  required

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-Prior    Charges-Mode   of    calculation-Gross    Profits, ascertainment  of-Rehabilitation  charges,  how  determined- Gratuity  fund,  whether  can be claimed  as  Prior  charge- Distribution  of surplus--Overtime Payment, if can be  taken into consideration in awarding bonus.

HEADNOTE: For  the  year  1953-54, the employers  paid  bonus  to  the workmen  equal  to  three months’  wages,  but  the  workmen demanded  bonus  equivalent to seven months and  six  months basic   wages  with  dearness  allowance.    The   employers contended that after making deductions for the prior charges from  the  gross  profits in  accordance  with  the  formula evolved  by the Full Bench of the Labour Appellate  Tribunal in  Mill Owners Association, Bombay v. The  -Rashtriya  Mill Mazdoor  Sangh, (1950) L.L.J. 1247, there was  no  available surplus left and consequently the 926 workmen  could claim no bonus.  The workmen  countered  that the formula required revision as the employers were becoming increasingly   more  rehabilitation  conscious   and   their appetite  for  the  provision for  rehabilitation  was  fast growing  with the result that in most cases, after  allowing for  rehabilitation,  there  was no  surplus  left  for  the payment of bonus and the main object of the formula was thus frustrated.  The workmen further contended that the whole of the  rehabilitation expenses should not be provided for  out of  trading  profits and that the claim  for  rehabilitation should  be  fixed at a reasonable amount  and  the  industry should be required to find the balance from other sources: Held,  that though there may be some force in the plea  made for  the  revision of the Full Bench  formula,  the  problem raised  by the said plea is of such a character that it  can be   appropriately   considered  only  by   a   high-powered commission  and not by this Court while hearing the  present group of appeals.  Besides the Full Bench formula had on the whole  worked  fairly satisfactorily in a  large  number  of industries  all  over the country, and the claim  for  bonus should be decided by Tribunals on the basis of this  formula without  attempting to revise it.  The formula  was  elastic enough  to  meet reasonably the claims of the  industry  and labour  for fair play and justice.  If the content  of  each item specified in the formula was determined objectively  in the light of all relevant and material facts, the  Tribunals would   generally  find  it  possible  to  make   reasonable adjustments between the rival claims and provide for a  fair distribution of the available surplus. Muir  Mills  Co. Ltd. v. Suti Mills Mazdoor  Union,  Kanpur, [1955]  1  S.C.R. 991, Baroda Borough  Municipality  v.  Its Workmen,  [1957]  S.C.R. 33, Sree Meenakshi  Mills  Ltd.  v. Their Workmen, [1958] S.C.R. 878 and The State of Mysore  v. The Workers of Kolar Gold Mines, [1959] S.C.R. 895, referred to. The  formula  was based on two considerations:  first,  that labour was entitled to claim a share in the trading  profits of the industry, because it had partially contributed to the same; and second, that labour was entitled to claim that the gap  between  its actual wage and the  living  wage  should, within reasonable limits, be filled up.  In dealing with the claims  for  bonus, the two-fold basis of the  formula  must always be kept in mind.  Further, it was not necessary  that the  workmen must actually manufacture or produce the  goods before they become entitled to claim any bonus.

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Burma Shell Oil Storage & Distributing Co. of India Ltd.  v. Their Workmen, (1953) 2 L.L.J. 246, applied. The  working of the formula begins with the figure of  gross profits,  taken from the profit and loss account, which  are arrived at after payment of wages and dearness allowance  to employees 927 and other items of admissible expenditure.  It would be open to  the  Tribunal to examine the accounts  and  to  disallow deliberate  and mala fide debit entries made to  reduce  the amount  of gross profits.  It would likewise be open to  the parties to claim the exclusion of items, credit or debit, on the ground that they were patently and obviously  extraneous and  entirely unrelated to the trading profits of the  year. But  the Tribunal must resist the temptation  of  dissecting the balance-sheet too minutely or attempting to  reconstruct it. J.f. K. Cottton Manufacturers Ltd., Kanpur v. Their Workmen, (1954) L.A.C. 716, applied. The  formula  deals with the claims for bonus on  the  basis that  the  relevant year is a self-sufficient unit  and  the appropriate  accounts have to be made on the notional  basis in  respect of the said year.  Hence, the refund  of  excess profits   and   the  adjustment  of  the   previous   year’s depreciation  and  losses cannot be made against  the  bonus year’s profits. Model  Mills  etc.  Textile Mills, Nagpur v.  The  Rashtriya Mills Mazdoor Sangh (1955) 1 L.L.J. 534; Bennett Coleman and Co. Ltd. v.    Their  Workmen, (1955) 2 L.L.J. 60,  referred to. After  ascertaining the amount of gross profits,  the  first item  of deduction therefrom relates to  depreciation.   The depreciation which has to be deducted from the gross profits should  be the notional normal depreciation as explained  in the case of Surat Electricity Co. Ltd., (1957) 2 L.L.J. 648, and   should   not  include  the  initial   and   additional depreciation allowable under the Income-tax Act. U.P. Electric Supply Co. Ltd. v. Their Workmen, (1955)  2 L.L.J.  431; Surat Electricity Co’s.  Staff Union  v.  Surat Electricity Co.  Ltd., (1957) 2 L.L.J. 648, referred to. The  second item of deduction is on account  of  income-tax. On  the  balance obtained after deducting  the  depreciation from  the  gross profits the tribunal has to  calculate  the amount of income-tax payable for the bonus year.  In  making this  calculation  it would not be reasonable to  allow  the employer to claim under the item of income-tax an additional amount in respect of the two further depreciations which are expressly  authorised under s. 10(2)(vi) of  the  Income-tax Act.   Therefore  the  two concessions  thus  given  by  the Income-tax   Act  should  not  be  taken  into  account   in determining the amount of income-tax under the formula. Sree  Meenakshi Mills Ltd. v. Their Workmen,  [1958]  S.C.R. 878, explained and followed. The third item of deduction under the formula relates to the return  on paid up capital as well as working capital.   The formula provides generally for the payment of interest at 6% 118 928 per  annum  on  the paid up capital and  at  2%  on  working capital.   These  rates  are not inflexible  and  will  vary according to the circumstances of each case. Workmen of Assam Co. Ltd. v. Assaam Co. Ltd., [1959]  S.C.R. 327  ;  Rustom  and Hoynsby (India) Ltd.  v.  Their  Workmen (1955):I L.L.J. 73, Mill Owners Association, Bombay  v.  The Rashtriya  Mill Mazdoor Sangh, (1952) 1 L.L.J. 518, Tea  and

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Coffee Workers Union v. Brooke Bond (India) (Private)  Ltd., (1956) 1 L.L.J. 645, U. P. Elcctric Supply Co. Ltd. v. Their Workmen, (1955) 2 L.L.J. 4I3, referred to. The fourth item of deduction is on account of rehabilitation which   includes  replacement  and  modernisation  but   not expansion.   Rehabilitation  has to be  calculated  for  the plant and machinery as well as the buildings.  The whole  of the  rehabilitation charges have to come out of the  trading profits  as this guarantees the continuance of the  industry to  the  benefit  both  of the  employer  and  labour.   The Tribunal has to estimate the probable cost of replacement of plant and machinery at the time when such replacement  would become  due.  In determining such cost, the Tribunal has  to project the price level into the future, determined not only in the light of the prices prevailing during the bonus year, but  also of subsequent price levels.  The decision  on  the question  of the probable cost of rehabilitation  is  always reached by adopting a suitable multiplier.  This  multiplier is  based on the ratio between the cost price of  the  plant and  machinery and the probable price which may have  to  be paid  for its rehabilitation, replacement or  modernisation. As  there  has  been  a continuous  rise  in  the  price  of industrial  plant and machinery, the older the  plant  which needs rehabilitation, the higher is the multiplier.  If  the employer  has  deliberately  or  mala  fide  refrained  from rehabilitating  his  old machinery with a view  to  claim  a higher multiplier, his conduct may be taken into account  in determining the multiplier and the amount of  rehabilitation payable  to him.  Once a proper multiplier is  adopted,  the probable cost of rehabilitation can be easily determined  by multiplying  the original cost by the multiplier.   At  this stage  the divisor steps in.  The total amount required  for rehabilitation  has to be divided by a suitable  divisor  in order to ascertain the annual requirement of the employer in that behalf year by year. Before   awarding  an  appropriate  amount  in  respect   of rehabilitation  for  the bonus year, deductions have  to  be made, first on account of the break-down value of the  plant and machinery which is usually calculated at the rate Of  5% Of  the  cost price, secondly the depreciation  and  general liquid resources available to the employer other than  those earmarked   for   specific   purposes,   thirdly   all   the rehabilitation  amounts which may have been allowed  to  the employers in the previous years, but had remained unused  in the meanwhile. 929 It is only after all the prior charges have thus been deter- mined and deducted from the gross profits that the available surplus  can  be  ascertained for  payment  of  bonus.   The procedure  adopted by some Tribunals of  nationally  working out  the amount of bonus and then giving it priority in  the calculations  before  the determination  of  the  income-tax payable    inevitably    lessens   the   amount    of    tax proportionately,  and should be deprecated.   Rehabilitation cannot  be given priority before the income-tax  payable  is ascertained and deducted from the gross profits. No addition should be made to the list of prior charges  re- cognised  by the formula even with respect to the  employers claim for deductions on account of gratuity fund created for the benefit of the workmen.  But the Tribunal ought to, when the available surplus is determined, take into account  such a  claim  and  reasonable  amount  of  allowance  should  be definitely  borne  in mind in finally fixing the  amount  of bonus. M/s.   Metro Motors v. Their Workmen, (1952) 2  L.L.J.  205,

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referred to. When  the  available  surplus has  been  ascertained,  three parties  are  entitled to claim shares  therein  :  labour’s claim  for  bonus, the industry’s claim for the  purpose  of expansion  and other needs and the share-holders’ claim  for additional  return  on the capital invested  by  them.   The ratio  of  distribution would obviously  depend  on  several factors:  such as the gap between the actual wages  and  the living  wages, the setting apart of a gratuity fund  by  the employer and the amount thereof, the extent of the available surplus,  the  dividends actually paid by the  employer  and those  paid  by comparable concerns,  the  probabilities  of expansion,  the general financial condition of the  employer and his necessity to meet urgent liabilities. It would be wrong on principle to take overtime payment into account  in calculating the bonus payable to  each  workman. Once the total amount payable as bonus is determined on  the principles  as indicated, the question of  overtime  payment being taken into account can no longer be a dispute  between the  employer  and his workmen but one between  the  workmen inter se.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 459 and 460 of 1957. Appeals  by special leave from the judgment and order  dated the 30th November, 1956, of the Industrial Tribunal, Bombay, in Reference 1. T. Nos. 10 and 13 of 1956. R.H.  Kolah,  Dadachanji  and  S.  N.  Andley,  for   the appellant. 930 C.L.  Dudhia and I. N. Shroff, for the respondents in  C. A. No. 459 of 1957. A.S. R. Chari and 1. N. Shroff, for the respondents in C. A. No. 460 of 1957. 1959.  May 5. The Judgment of the Court was delivered by GAJENDRAGADKAR  J.-These two appeals arise out of  a  demand for  bonus made against the appellants by their workmen  for the  year  1953-54.  The Associated Cement  Companies  Ltd., Bombay,  the Cement Marketing Company of India Ltd.,  Bombay and  the Concrete Association of India, Bombay,  were  faced with a demand of their workmen employed in their offices  at Bombay  for  bonus equivalent to seven months’  basic  wages with dearness allowance.  The industrial dispute arising out of this demand was referred by the Government of Bombay  for adjudication  before the Industrial Tribunal, Bombay,  under s. 10 of the Industrial Disputes Act and it was numbered  I. T.  No. 10 of 1956.  The Associated Cement  Companies  Ltd., Dwarka  Cement  Works, Dwarka, was similarly  faced  with  a demand  of its workmen for bonus equivalent to 50% of  total earnings  or six months’ total earnings.  This  dispute  was referred to the same tribunal and was numbered 1. T. No.  13 of  1956.   By consent of parties both the  references  were heard  together  and  evidence was  recorded  and  documents tendered in the first reference.  By its award delivered  on November  30, 1956, the tribunal directed the  companies  to pay their workmen drawing a basic pay or wages up to Rs. 500 per  month bonus equivalent to 1/3 of their basic  wages  or pay  (less bonus already paid for the year 1953-54)  subject to  the  conditions specified in the award.  It  is  against this award that the respective companies have preferred  the two  appeals  by special leave.  In this judgment  the  said companies  will hereafter be described as the appellant  and

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their workmen as respondents. The  A.  C.  C. is the principal company  concerned  in  the dispute.  The Cement Marketing Company of 931 India  Ltd.,  (hereafter  -called the C.  M.  I.)  has  been separately  registered under the Indian Companies Act  as  a Joint  Stock  Company;  but  it  is  a  hundred  per   cent. subsidiary  of  the  A. C. C. The C. M.  I.  are  the  Sales Managers  of the A. C. C. while the Concrete Association  of India (hereafter called the C. A. I.) is merely a department of the C. M. 1. As a result of the agreement which came into operation  from’ August 1, 1953, all financial  transactions of the C. M. 1. in relation to sales now find a place in the accounts  of the A. C. C. Similarly all of its fixed  assets have been taken over and appear in the balance-sheets of the A.  C.  C.  All the three concerns have a  common  staff  in Bombay.   The  A. C. C. had already paid  to  its  employees bonus  equivalent to three months’ basic wages for the  year 1953-54 and so had the C. M. I. to its workmen.  It  appears that the C. M. I., including the C. A. I., undertakes to pay to  its employees the same amount of bonus as has been  paid or awarded to the employees of the A. C. C. There is no dispute that the A. C. C. is the biggest amongst the companies in India which manufacture cement.  It owns 15 cement  factories  at  different places in India  and  2  in Pakistan.  Out of the total quantity of cement despatched by all  the cement factories in India in 1953-54 the A.  C.  C. despatched 55.46 %. The A. C. C. came into existence in 1936 as  a  result  of the merger of  four  important  groups  of companies engaged in the manufacture of cement.  These  were F. E. Dinshaw, Tatas, Killick Nixon and Khatau, groups.   It appears that 11 companies in all merged with the A. C. C. Before  the tribunal the case for the respondents  was  that the  appellant  held a position of monopoly  in  the  cement industry  and  was  easily in a position to  pay  the  bonus claimed  by them.  Their allegation was that  the  appellant had  inflated the capital invested by the merging  companies while taking them over in 1936; it had set up new  factories out  of  the  profits earned by  it  without  raising  fresh capital  and  thereby had used profits for  the  purpose  of expansion.  In the year 195354 the appellant had capitalised the full amount 932 standing to the credit of the premium-on-shares account  and had  transferred a part of the reserves for taxation to  the capital account thus increasing the aggregate capital.   The emoluments  of the workers were inadequate and so they  were entitled  to the bonus claimed by them in order to  fill  up the gap between the actual wage paid to them and the  living wage  due to them.  The respondents also contended that  the claim   made  by  the  appellant  for   rehabilitation   and replacement in the dispute for the year 195152 included  not only the amount required for rehabilitation and  replacement but also expansion; and so, according to them, the appellant was  not entitled to any amount for rehabilitation  purposes in  the  year  in  dispute.   They  also  alleged  that  the appellant  was not entitled to claim. interest at more  than 4% on paid-up capital and 2 % on working capital.  Thus  the respondents  urged that if all the relevant facts are  taken into account it would be found that the claim for bonus made by  them  in  the two respective  references  was  just  and proper.   In  support of their case  the  respondents  filed several statements which, they claimed, had been prepared in accordance with the Full Bench formula, and they also cross- examined  Mr. Tongaonkar who gave evidence on behalf of  the

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appellant. This  claim was resisted by the appellant.  It was urged  on its behalf that the points raised by the respondents in  the present references bad been heard and finally decided in the previous  adjudication (Ref.  I. T. No. 115 of  1953)  which dealt with their claim for bonus for the preceding year; and it was alleged that the respondents were barred from raising the  same questions over again in the present  adjudication. The cement machinery, though heavy, is subject to rigours of extremely  tough and heavy duties and the machinery  has  to run  ceaselessly  day and night throughout  the  year.   The appellant  contended  that,  having regard  to  the  special features  of  the cement industry, the machinery had  to  be kept  on  the highest standards of  maintenance  and  needed frequent  replacement and rehabilitation.  A cement  factory is  a very expensive industrial proposition.  The  appellant denied that 933 it  was  in  a monopolistic position and  pleaded  that  its object  was to deliver cement as cheaply as possible to  the consumers.   The  respondents’ allegation that there  was  " puffing  up  of block capital at the time of the  merger  in 1936  " was denied by the appellant and it was not  admitted that  ever  since its inception it had  steadily  made  huge profits.   The appellant also denied the allegation  of  the respondents that the profits, coming out of the business had been  used  in  expanding its factories.  It  had  used  all available resources including premium on issue of shares and depreciation   fund  for  replacement,  rehabilitation   and modernisation.  It was not true that the appellant had built huge  reserves and that the wages paid by the  appellant  to its employees were inadequate; on the contrary they compared very  favourably with those in other comparable  industries. The  appellant denied the statement of the respondents  that no plant reinstatement reserve over and above the  deprecia- tion  allowance  was necessary in the current  year  and  it urged that the calculations made by the respondents  alleged to be in terms of the Labour Appellate Tribunal formula were inaccurate.  In its turn the appellant claimed more than  6% interest  on  paid-up capital and more than 4%  interest  on working capital.  The appellant also emphasised that it  had already  paid  to  the respondents bonus  for  three  months though the strict working out of the formula would show that there was no available surplus for the relevant year and  so the respondents would not be entitled to any bonus at all. In  support  of its case the appellant examined  Mr.  G.  R. Tongaonkar, its controller of planning and development,  and produced a statement (Ex.  C-2) showing the original cost of the  blocks to be replaced and the  approximate  replacement cost.  It also produced amongst other documents a  statement (Ex.   C-10) showing the cost of the assets of  the  merging companies  on July 31, 1936, as taken over by the  appellant and   the   statement  (Ex.   C-29)  showing   the   capital expenditure   from   1936-37  to   1953-54   on   expansion, modernisation,  rehabilitation, replacement, sundry  capital jobs, etc. 934 In addition a statement was filed by the appellant (Ex.   C- 23) showing that the calculations made under the Full  Bench formula  would  show a substantial deficit  and  that  would support its case that there was no available surplus for the relevant  year from which any bonus could be claimed by  the respondents. Ex.  C-2 is a statement prepared by Mr.  Tongaonkar  showing the  original  cost  of the block to  be  replaced  and  the

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approximate  replacement  cost.   This  statement  has  been prepared  on  the  basis that the approximate  cost  to  the merging  companies of their assets as on 31-7-1936 was  5.73 crores.   It  is  admitted that this  statement  has  lumped together all the properties of the appellant including plant and  machinery,  as well as buildings,  roads,  bridges  and railway-sidings   and   has  classified   them   into   four categories.   The statement contains 9 columns.   The  first column  gives  the year or years of purchase  of  machinery. This  could  classifies the four categories  of  the  blocks according to their respective years of purchase.  The  first category consists of blocks purchased up to 1939, the second purchased between 1940-44, the third purchased between 1945- 47  and the last purchased between 1949-54.  Column 2  gives the  original cost of the said categories as  on  31-7-1954. Column 3 gives particulars of such portions of the blocks as have  been discarded, scrapped or sold.  In this column  the years  in which the blocks were discarded, scrapped or  sold are indicated and their original cost is me 935 figures mentioned in col. 5 for 1939 and 1940-44 blocks have been arrived at by reducing the corresponding figures  given in  col. 4 by 20%.  Column 6 gives the  approximate  present life of the machinery and plant mentioned in col. 4; col.  7 sets out the breakdown value of the machinery referred to in col.  4,  whilst  col.  8  gives  the  approximate  cost  of rehabilitation  of  machinery  as  shown  in  col.  5   less breakdown  value as shown in col. 7. The last  column  works out  the annual requirements of the appellant in respect  of the  rehabilatation of the four categories of  blocks.   The figures  in  this  column are arrived  at  by  dividing  the amounts  mentioned  in  col. 8 by  the  respective  divisors mentioned  in  col. 6. The total annual requirement  of  the appellant  in respect of rehabilitation is shown as  of  the order of Rs. 3,29,61,752. Ex.  C-23 is a statement prepared by Mr. Tongaonkar to  show the  deficiency  in  profits  in  relation  to  payment   of additional   bonus  claimed  by  the  respondents  for   the accounting  year 1953-54.  This statement has been  prepared alternatively   on  the  basis  of  statutory   depreciation allowable by income-tax authorities and also on the basis of straight  computation at ordinary rates.  The  first  method results in a deficit of Its. 107.20 lakhs, while the  second in  a deficit of 97.86 lakhs.  In working out the  provision for   rehabilitation,   this  statement  first   takes   the replacement  cost of block up to 1939 as per Ex.  C-2 to  be Rs. 1601.19 lakhs.  From this amount the available  reserves as on 1-8-1953 which are of tile order of Rs. 311 lakhs  are deducted, leaving a balance of Rs. 1290.19 lakhs.  Then  the replacement  costs  of  the three  remaining  categories  of blocks  are taken into account and all the said amounts  are divided  by the appropriate divisors mentioned in col. 6  of Ex.   C-2.  The result is the sum of Rs. 284.48  lakhs,  and that  is  claimed  by the appellant  as  the  provision  for rehabilitation under the formula. In his evidence Mr. Tongaonkar has given reasons in  support of the respective multipliers and divisors adopted by him in making his calculations in Ex.  C-2. 119 119 936 He  has also given several details on all the  relevant  and material   points  in  support  of  the  appellant’s   case. Naturally the respondents have cross-examined him at length. One  of the questions in controversy between the parties  in the  present appeals centres round the appreciation  of  Mr.

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Tongaonkar’s  evidence and the value to be attached  to  the statements prepared by him. On  the  contentions  raised by the parties  before  it  the tribunal framed ten issues for determination and it has made its  findings on them in the light of the  evidence  adduced before it.  It has held that the appellant had not  inflated the  capital invested by the merging companies while  taking them over in 1936.  It has allowed 6% interest on the entire paid-up capital of Rs. 1267.59 lakhs, and 4% interest on the working  capital.  In regard to the claim  for  depreciation the  tribunal  has  held that  it  was  normal  depreciation calculated  according  to  the straight  line  method  which should  be  allowed.   On the question  of  income-tax,  the tribunal  has  allowed the same at 83.4 pies in a  rupee  as claimed  by  the  appellant on its  net  profits.   It  has, however, rejected the appellant’s case that the income  from investments  in shares and securities received by it  should be  excluded for the purpose of bonus; while it has  allowed the sum of Rs. 10 lakhs provided by the appellant as  annual contribution  to  the  reserve for  gratuity,  as  also  the expenditure   on   the  cost   of   dismantling   buildings, prospecting   expenses,   etc.   It  did  not   accept   the respondents’  case that the bonus paid by the  appellant  to its officers should be reduced or wholly disallowed for  the purpose  of  calculations  under the formula;  and,  on  the question  as to whether overtime payment should be  included in  the  payment of bonus, it has  upheld  the  respondents’ contention and allowed the inclusion of the said payment. Having disposed of these minor issues, the tribunal examined at  length the claim made by the appellant in regard to  the provision for rehabilitation, replacement and modernisation. Indeed  this  was  the  most  controversial  and  the   most important issue raised 937 before  it.   The  tribunal examined  the  evidence  of  Mr. Tongaonkar as well as Ex.  C-2 and other documents  produced by him, and came to the conclusion that " Ex.  C-2  presents an  incorrect  and  exaggerated  picture  of  the   A.C.C.’s requirements  of rehabilitation and replacement" and  so  it cannot  be  relied  upon.  According  to  the  tribunal  the multiplier  4.28  adopted by Mr. Tongaonkar  was  itself  an inflationary  figure; and it thought that " the  consequence of  applying  it  not  to the  original  price  but  to  its increased  price  paid by the A.C.C. would be to  obtain  an inflationary  result.   It  appears that  the  tribunal  wag inclined to hold that 2.7 was a fair multiplier representing the price increase over the pre-war base.  The tribunal  was also not satisfied with Mr. Tongaonkar’s evidence in  regard to the life of plant and machinery ; and so it held that the period  of  life  given  in col. 6 of  Ex.   C-2  cannot  be accepted as correct.  While dealing with the question  about the rise in prices, the tribunal has held that it was  usual to  take the average level of prices prevailing in a  period of  about five years in preference to the prices  prevailing in  a  particular year as was done by Mr.  Tongaonkar.   The tribunal subjected Mr. Tongaonkar’s evidence on the question of replacement, rehabilitation and modernisation to a  close examination  and  held  that  the  method  adopted  by   Mr. Tongaonkar  in  distinguishing  between  modernisation   and expansion  was of a purely subjective estimate " which  does not  bear the scrutiny of an objective test ". On the  whole the  tribunal  was not prepared to accept  Mr.  Tongaonkar’s evidence at its face value and it was not prepared to  treat Ex.   C-2  and consequently Ex.  C-23 as  reliable.   It  is relevant  to point out at this stage that the  tribunal  has

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not made any finding about the life of the machinery nor has it recorded any conclusion as to a proper divisor.  In  fact it has completely left out of consideration Exs.  C-2 and C- 23 while determining the amount which should be allowed  for the appellant’s claim for rehabilitation for the relevant year. The tribunal then examined the principle underlying the Full Bench formula and held that, it was not 938 intended  to be worked out as a rigid mathematical  formula. "  We  must make it ", says the tribunal, " as  flexible  as possible  so as to do justice to everybody concerned in  the earning  of  profits".  The general question, which  it  has considered in this connection, is how far and to what extent profits  of a concern should contribute to the  satisfaction of  the claims of industry for  replacement;  rehabilitation and  modernisation.  It was impressed by the argument  that, where  the requirements under these items are so huge as  to be  out  of tune with the profits, it would be  open  to  an industrial adjudicator to allow only a reasonable  provision to  be made out of the profits for the said items and  leave the industry concerned to tap other resources to make up the balance.   In support of this conclusion it has referred  to the observations made by F.R.M. de Paula in his  "Principles of Auditing", the report of the Taxation Enquiry  Commission and  of the working party for the Cotton  Textile  Industry. It has also relied on a part of the speech delivered by  Mr. J. R.D. Tata in addressing the annual general meeting of the shareholders  of the Tata Iron and Steel Company  in  August 1950. In   this   connection  the  tribunal  has   expressed   its apprehension that if all the money required for a continuous process of modernisation and expansion is to come out of the profits  made by the concern, labour will rarely see  a  day when  they will enjoy bonus granted to them out of  profits; though it has hastened to add that it was far from its  mind that  a progressive concern like the A.C.C. should not  keep pace  with  time and modernise its machinery;  but  it  only wished that it should give a fair deal to the workers in the distribution  of  the  profits.  Having hold  that,  if  the claims  for  rehabilitation turn out to be huge and  out  of tune with the profits made by the industry, it would be open to  the tribunal to grant the claim of the industry in  that behalf only to the extent that it deems to be reasonable and fair,  it proceeded to consider how far and to  what  extent the  appellant’s  claim  should be allowed  in  the  present proceedings. It is necessary to mention that in dealing with this 939 question  the  tribunal was considerably influenced  by  the past  conduct  of  the  appellant.   It  thought  that   for rehabilitation  the appellant had claimed no more  than  Rs. 192  or 193 lakhs in the previous  adjudication  proceedings where the dispute for bonus had reference to the year  1951- 52.   If  the claim then made by the appellant was  no  more than  Rs.  192 or 193 lakhs, the present claim for  Rs.  284 lakhs,  the  tribunal thought,’ was obviously  inflated  and unreal.  Similarly the tribunal emphasised the fact that the programme  earlier submitted by the appellant to the  Tariff Commission  was in turn more modest than the claim  made  in the  said adjudication proceedings.  It appears that in  the said  programme  the appellant had made out a case  for  the estimated expenditure of Rs. 18.36 crores to be spread  over a  period of ten years from 1-8-1952 to 31-7-1962  and  that works  out approximately at the figure of Rs. 184 lakhs  per

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year.   It was on these facts that the tribunal held that  " if   the  A.C.C.  estimated  its  annual   requirements   of rehabilitation,  replacement  and modernisation at  Rs.  192 lakhs  per  year during the period of ten  years  commencing from  1-8-1952, 1 do not think that it should be allowed  to depart  from  it  now".   In  substance,  according  to  the tribunal, the present claim for rehabilitation was very much inflated,  it  had  no relation to  realities,  and  so  the appellant should not be allowed to make such a claim.   That is  why it did not think it necessary to record any  finding as to the proper divisor, and to determine, in the light  of Mr.  Tongaonkar’s  evidence, what approximately would  be  a fair  or  reasonable  amount for  rehabilitation  under  the formula. It  is thus clear that in making its final calculations  the tribunal  has assumed that the claim made by  the  appellant for  rehabilitation, replacement and modernisation  must  be taken  to be no more than Rs. 192 or 193 lakhs, and on  that assumption it has considered to what extent the claim should be allowed.  Ultimately the tribunal came to the  conclusion that  in the circumstances of the case it would be  fair  to allow  the  appellant about Rs. 165 to 170 lakhs  as  annual provision for the said items.  In support of this conclusion 940 the  tribunal has relied on the fact that for the two  years 1952-53 and 1953-54 the appellant had spent about Rs. 339.76 lakhs  for the purpose of rehabilitation,  replacement  land modernisation and that works at the average of Rs. 170 lakhs per year.  The tribunal has then taken into account the fact that the appellant had a plant reinstatement reserve of  Rs. 235  lakhs  and  a general reserve of Rs. 76  lakhs  in  the beginning of the year 1953-54.  If these amounts which would be available for rehabilitation are spread over the ten year period of the tentative programme planned by the  appellant, the  annual  figure  would come to Rs. 31  lakhs;  and  this amount  would have to be deducted from Rs. 165  lakhs  which the  tribunal  was  inclined  to grant  in  respect  of  the relevant  item.   That  is how the  tribunal  has  made  the appropriate  calculations under the formula, and  has  shown that, even after the payment of one month’s additional bonus as directed by it, the appellant would still be left with  a surplus of Rs. 23.48 lakhs.  That in brief is the nature and effect of the findings made by the tribunal. Before dealing with the merits of the points raised in these appeals  it would be convenient to refer to the genesis  and the terms of the formula which has been evolved by the  Full Bench  of the Labour Appellate Tribunal in the case  of  The Mill  Owners  Association,  Bombay  v.  The  Rashtriya  Mill Mazdoor  Sangh,  Bombay (1) in 1950.  It appears  that  from 1940  A.  D.  onwards  the claims  for  bonus  made  by  the employees  against their employers in  different  industries were  dealt  with  on an ad-hoe basis  from  case  to  case. Sometimes  the  employers voluntarily paid  bonus  to  their workmen;  and where disputes arose they were decided by  the tribunals  in  the light of the circumstances of  each  case without  relying  on any broad consideration  of  policy  or without  attempting to lay down any general principles.   In 1948   a  bonus  dispute  arose  between  the  Mill   Owners Association,  Bombay and its employees, and it was  referred for  adjudication to the Industrial Court.   In  considering this dispute the Industrial Court went (1)(1950) L.L.J. 1247. 941 elaborately  into the matter, laid down  certain  principles and awarded to the workmen bonus equivalent in amount to 3/8

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of  the  total  basic earnings of each  workman  subject  to certain conditions.      In the subsequent year a similar dispute arose  between the  same  parties;  and  it  was  again  referred  to   the Industrial Court for adjudication.  The Court made its award on  July 7, 1950, directing 55 mills of the  Association  to pay to their workmen, whether permanent or temporary, 1/6 of the basic earnings of each of them as bonus.  This award was challenged  by the Association before the  Labour  Appellate Tribunal.   It was urged on behalf of the  Association  that the wage structure in the textile industry had been  settled by  standardisation  and  so bonus must  be  regarded  as  a gratuitous payment; and it was argued that at any rate grant of  bonus  cannot be made for the purpose of making  up  the deficiency  between  the  actual and  living  wages.   These contentions  were rejected by the Labour Appellate  Tribunal and the question about the grant of bonus was considered  on general  principles on the basis of which a formula,,  often described  as the First Full Bench Formula,  was  ultimately evolved.   "As  both capital and labour  contribute  to  the earnings of the industrial concern ", observed the appellate tribunal,  "  it  is fair that  labour  should  derive  some benefit  if  there  is  a surplus  after  meeting  prior  or necessary charges ". The appellate tribunal was also of  the view that where the goal of living wages had been  attained, bonus, like profit sharing, would represent more as the cash incentive to better efficiency and production; but where the industry  had  not the capacity to pay a living  wage  bonus must be looked upon as the temporary satisfaction wholly  or in  part  of  the needs of the employee.   In  other  words, according to this decision, the award of bonus is based on a two-fold  consideration.  It is made in recognition  of  the fact  that labour has made some contribution to  the  profit earned  by  the industry, and so it is entitled to  claim  a share  in  it;  and it is also intended to  help  labour  to bridge  or narrow down the gap, as far as may be  reasonably possible,  between  the  living  wage  to  which  labour  is entitled and the actual wage received by it. 942 Dealing  with  the  problem  from this  point  of  view  the appellate  tribunal  conceded  that  investment  necessarily implies the legitimate expectation of the investor to secure recurring  returns  on  the money invested  by  him  in  the industrial undertaking, and so it held that it was essential that the plant and machinery should be kept continuously  in good working order for the purpose of ensuring that  return. Such   maintenance   of  the  plant  and   machinery   would necessarily be to the advantage of labour because the better the  machinery the larger the earnings and the brighter  the chance  of securing a good bonus.  On this consideration  it was  held that the amount of money that would  be  necessary for  rehabilitation,  replacement and modernisation  of  the machinery  would be a prior charge on the gross  profits  of the year.  Since the depreciation allowed by the  income-tax authorities  is only a percentage on the written-down  value the  depreciation fund set apart on that basis would not  be sufficient  for the purposes of rehabilitation and an  extra amount would have to be annually set apart nationally  under the  heading  of ’reserves’ to make up  the  deficit.   This position was apparently not disputed by the employees. The  claim  made by the industry that a fair return  on  the paid-up  capital  must  be secured and  that  ordinarily  it should  be  paid at the rate of 6% per annum  was  also  not disputed.   The employees, however, challenged the claim  of the  industry  that  reserves employed  as  working  capital

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should carry any interest; but their objection was overruled and it was held that working capital also would be  entitled to  interest  though at a much lower rate than that  on  the paid-up capital.  Then the question of taxes was  considered and it was agreed that a provision had to be made for  taxes which  would  be  payable on  the  amount  determined  after deducting depreciation from the gross profits less any bonus which may be awarded.  In the result the appellate  tribunal laid  down  the  manner and method in  which  the  available surplus  should be determined.  The notional accounting  for this  purpose  starts with the figure of the  gross  profits which are 943 arrived at after payment of wages and dearness allowance, to the employees and other relevant items of expenditure.  Then a  deduction for depreciation is made, and on  the  notional balance  thus  derived  a provision  for  taxes  payable  is allowed.   Then  follow  the  provisions  for  reserves  for rehabilitation,  return  on paid-up capital  and  return  on reserves employed as working capital.  That gives the amount of  surplus if’ any.  Whenever the working of  this  formula leaves  an  amount  of available surplus,  labour  was  held entitled  to claim a reasonable share in this amount by  way of  bonus  for the current year.  This formula is  based  on considerations of social justice and is intended to  satisfy the legitimate claims of both capital and labour in  respect of  the profits made by the industry in a  particular  year. It  takes the particular year’ as a unit and makes  all  its notional  calculations  on the basis of  the  gross  profits usually  taken  from the profit and loss  account;  in  this particular  case  the available surplus  determined  by  the application of the formula was found to be 2.61 crores;  and out  of  this surplus 0.30 crores were awarded as  bonus  to clerks and other staff and 1.86 crores was awarded as  bonus to  the  employees leaving a net notional  balance  of  0.45 crores. This Court had occasion to consider the said formula in Muir Mills Co. Ltd. v. Suti Mills Mazdoor Union, Kanpur (1).  The judgment  in  that case indicates  that  without  committing itself  to  the acceptance of the formula in  its  entirety, this Court in general accepted as sound the view that  since labour  and capital both contribute to the earnings  of  the industrial  concern,  it is fair that labour  should  derive some  benefit if there is a surplus after meeting  the  four prior or necessary charges specified in the formula.  It  is relevant  to add that in dealing with the concept  of  bonus this Court ruled that bonus is neither a gratuitous  payment made  by the employer to his workmen nor can it be  regarded as a deferred wage.  According to this decision, where wages fall short of the living (1) [1955] S.C.R. 991 120 944 standard and the industry makes profit part of which is  due to  the  contribution of labour, a claim for  bonus  can  be legitimately  made.  However, neither the propriety nor  the order  of  priority as between the four  prior  charges  and their relative importance nor their content was examined  by this  Court  in  that  case;  and  though  the  formula  has subsequently  been  generally  accepted  by  this  Court  in several  reported decisions (Baroda Borough Municipality  v. Its Workmen (1), Sree Meenakshi Mills, Ltd. v. Their Workmen (2)  and  The State of Mysore v. The Workers of  Kolar  Gold Mines  (3) ) the question about the adequacy, propriety,  or validity of its provisions has not been examined nor has the

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general  problem  as  to  whether  the  formula  needs   any variation,  change or addition been argued  and  considered. It  is  for the first time since 1950 that, in  the  present appeals, we are called upon to examine the formula carefully and  express  our  decision on the merits  of  its  specific provisions.   As we have already indicated, in dealing  with the  present dispute the tribunal has held that, in  working out  the formula, it could relax its provisions even  though the proposed relaxation may mean a material variation of the formula  itself.  On behalf of the appellant Mr.  Kolah  has taken  strong  exception to this approach.   He  has  argued that,  in  the last eight years and more, on the  whole  the formula  has  worked  fairly well in the  interest  of  both capital and labour, and so the tribunal was not justified in departing  from  it  in the  present  case.   This  argument undoubtedly raises a question of considerable importance. Before examining this argument, however, it is necessary  to consider  one preliminary point: Was the tribunal  justified in holding that the appellant could not be allowed to add to its previous claim for rehabilitation ? The decision of  the tribunal  on this point seems to indicate that the  tribunal thought that the appellant was estopped from making any such claim; and the correctness of this conclusion is  challenged by the appellant. (1)[1957] S.C.R. 33, 39. (2) [1958] S.C.R. 878, 884. (3) [1959] S.C.R. 895. 945 It  is true that, in the report submitted by  the  appellant before  the Tariff Commission in April 1953, it had set  out the  details  of  its ten  year  programme  which  included, besides   replacement,  rehabilitation,  modernisation   and expansion, mechanisation of quarries as well as construction and improvement of houses for its labour staff.  The  report of the Tariff Commission (p. 30) shows that the cost of  the programme was’ estimated at Rs. 18.36 crores, excluding  the cost  of a new plant at Sindri, or about Rs. 184  lakhs  per annum.   Subsequently in January 1954, when  Mr.  Tongaonkar gave  evidence in the previous adjudication proceedings,  he produced  a  statement  (Ex.  U-8) according  to  which  the appellant’s annual requirements for rehabilitation would  be of the order of Rs. 192 or 193 lakhs, whereas in the present proceedings the said claim is made at Rs. 284 lakhs.  A bare statement  of  these  facts prima facie  suggests  that  the appellant’s  present  claim  for  rehabilitation  has   been growing  from stage to stage, and in its present form it  is very  much inflated; and that is what the tribunal has  also assumed.   In  our  opinion this assumption  is  not  wholly correct.  Mr. Tongaonkar’s evidence shows that in the report of the jobs submitted to the Tariff Commission the appellant had  not  included  all relevant  items  of  rehabilitation, replacement  and  modernisation.  The report merely  gave  a list  of  the  jobs  which the  appellant  had  proposed  to undertake  during the ten year period ending July 31,  1962. It  was  in  no  sense an  exhaustive  statement  about  the appellant’s requirements in regard to the rehabilitation  of all  its blocks.  In fact, having regard to the  nature  and scope  of  the  enquiry before the  Tariff  Commission,  the report  made  by the appellant had to be restricted  to  the urgent  jobs which it wanted to undertake during the  execu- tion  of  its  ten year programme; and so it  would  not  be reasonable to hold that the figure of annual  rehabilitation expenses  which can be deduced from the said report has  any relation  to  the  claim  for  rehabilitation  made  by  the appellant in terms of the working of the formula.

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Then again the appellant’s claim for rehabilitation 946 in  the  earlier proceedings has  also  been  satisfactorily explained  by Mr. Tongaonkar.  The respondents  have  placed considerable   reliance  on  the  statement  filed  by   Mr. Tongaonkar  in  the  said  proceedings  (Ex.   U-8).    This document has been produced by the respondents in support  of their  contention that it purports to make a claim  for  Rs. 192  lakhs per year ’for rehabilitation.  That no  doubt  is true  ;  but  in terms the document  purports  to  show  the estimated  expenditure required during the ten  year  period there  specified; and as Mr. Tongaonkar has stated, it  does not  include a full statement of the claim in regard to  the rehabilitation of all the blocks belonging to the appellant. In  considering the respondents’ argument on this point,  it is necessary to bear in mind that in the earlier proceedings the  appellant  had filed a separate statement  showing  the amount  to  which it was entitled by way  of  rehabilitation under  the formula; this statement was Ex.  C-3 and  it  has been produced in the present case and exhibited as U-5.   It appears that in the earlier proceedings the tribunal did not attach  any  importance to the said document  and  virtually ignored it because, like the present tribunal, it held  that "  it does not appear to be necessary to plan further  ahead than  ten years and it is desirable to base calculations  of rehabilitation  on  realities  "(1).   Even  so  the  Labour Appellate  Tribunal  found that the  appellant’s  contention that  its workmen were not entitled to any additional  bonus was  not well-founded even if its claim  for  rehabilitation was  confined  to Rs. 192 or Rs. 193  lakhs.   Besides,  Mr. Tongaonkar  has stated on oath that Ex.  U-8 was  not  among the  documents originally submitted by the appellant to  the tribunal in 1954. it was in fact prepared and submitted at a later stage at the instance of the tribunal itself.  It  is, therefore, clear that Ex.  U-8 was not intended to, and  did not  supply,  the  basis of the  appellant’s  claim  in  the earlier proceedings in accordance with the formula. A study of the items contained in Ex.  U-8 also supports the same conclusion.  Mr. Tongaonkar has (1)  (1955) 1 L.L.J. 588,592. 947 stated  that the total amount of the  estimated  expenditure shown in this document included only a small portion of  the expenditure  required for rehabilitation of the  post-  1944 block.   It is true that Mr. Tongaonkar’s statement that  in the  said  total amount nearly Rs. 50  lakhs  represent  the amount for replacement or rehabilitation of post-1944  block is inaccurate.  The Chaibasa Cement Factory and the  Sevalia Cement Factory for the rehabilitation of which Rs. 64.98 and 85.15  lakhs  have been claimed in Ex. U-8  are  undoubtedly parts  of  the post 1944 block and the amounts  claimed  for them  are  very  much  more  than  Rs.  50  lakhs.   It   is nevertheless  clear  that  ’the items in  Ex.   U-8  do  not include a claim for rehabilitation for all the blocks of the appellant, and it is not surprising either, because a  claim for the rehabilitation of all the blocks had been separately made  by the appellant in the earlier proceedings under  Ex. C-3.   Thus  there can be no doubt that neither  the  report submitted by the appellant before the Tariff Commission  nor the  estimate  given  by Ex.  U-8  was  prepared  under  the formula; and so any disparity in the amounts claimed in  the two  earlier  documents  cannot be  seriously  pressed  into service against the appellant when it seeks to make a  claim for rehabilitation strictly in accordance with the  formula. We  must, therefore, hold that the tribunal was in error  in

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coming  to  the conclusion that by reason  of  its  previous conduct  the  appellant could not be allowed  to  place  its claim  for  rehabilitation at a figure higher than  Rs.  192 lakhs in the relevant year.  In this connection it would  be pertinent  to remember that in dealing with  the  employer’s claim  for  rehabilitation the tribunal is  called  upon  to assess   respective  values  of  the  relevant  factors   on hypothetical  and  empirical considerations, and so  it  may generally  not be useful or wise to take recourse to  strict legalistic   principles  like  estoppel  in  deciding   this question  and  indeed all material questions  in  industrial adjudications. Does  the  formula  need to be revised,  and  should  it  be revised and reconstructed ? That is the question 948 which we must now consider.  It appears that some  tribunals have  taken the view that the rigid working of  the  formula may  defeat its object of recognising the social justice  of labour’s  claim  for bonus and so they  have  made  suitable adjustments in its operation.  It is this approach which has raised the larger issue of principle in the group of appeals which have been placed for disposal before the  Constitution Bench.   So  we  must examine this  question  in  its  broad aspects  and if we decide not to change the formula we  must state  what, in our opinion is the content of the  different items  mentioned  in  the formula and  how  they  should  be calculated and mutually adjusted. Let  us  first  set out the case as it  has  been  made  for changing the formula.  It is ’urged that though the  formula purports  to  recognise the principle of social  justice  on which labour’s claim for bonus is based, it does not  accord to  the  said claim the high priority it  deserves.   Social justice  has been given a place of pride in the preamble  to the Constitution and it has been enshrined in the  Directive Principles  under Arts. 38 and 43.  Since 1950, ideas  about social  and  economic  justice  have  made  an   appreciable progress  and  they require the readjustment  of  priorities prescribed by the formula in favour of the claim for bonus. It   is  also  contended  that  experience   in   industrial adjudication during the last eight years and more shows that employers  are  becoming increasingly  more  rehabilitation- conscious   and   their  appetite  for  the   provision   of rehabilitation  is fast growing from year to year.   In  the present case, for instance, though the appellant occupies  a dominant  position in its line of trade and though it  makes large   profits,  it  has  made  such  a  tall   claim   for rehabilitation that if the said claim is allowed the working of the formula leaves no available surplus from which  bonus can  be granted to labour.  The appellant has no doubt  paid bonus for three months and it is unlikely that the appellant would depart from its practice of paying the said bonus even in future; but that does not affect the 949 position  that  in the light of the  appellant’s  claim  for rehabilitation the working of the formula would not  justify the  grant  of  any bonus to labour.  This  shows  that  the notional claim for rehabilitation which an employer can make under  the formula tends to be completely divorced from  the reality or actuality of the need of rehabilitation; and that needs to be corrected. Besides,  it  is  said, that the  theory  that  the  trading profits  of the industry must provide for the whole  of  the rehabilitation  expenses  is  not  universall  accepted   by enlightened and progressive businessmen and economists.   In this connection reliance is placed on the observations of F.

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R. M. de Paula in his " Principles of Auditing " that "  the object  of  depreciation  is  the  replacement  of  original investment capital and that an increase in replacement  cost is an important matter and means that additional capital  is required in order to maintain the original earning  capacity ".  It is also pointed out that the Institute  of  Chartered Accountants  in  England and Wales, in  its  recommendations made  in  1949 under the heading " Rising  price  levels  in relation  to  accounts  " has pointed out  that  "  the  gap between historical and replacement costs might be too big to be bridged by a provision made for replacement spread over a period   of  years  either  by  way  of  supplementing   the depreciation   charges   or  by  setting  up  in   lieu   of depreciation  a  provision for renewals based  on  estimated replacement  costs  ".  It is therefore  suggested  that  in revising the formula the claims for rehabilitation should be fixed at a reasonable amount and industry should be required to find the balance from other sources and if necessary from its share in the available surplus. In  this connection it is pointed out that when  the  Labour Appellate  Tribunal  evolved  the  formula  it  was  dealing directly  with the needs of the textile industry  and  there was  no dispute that the plant and machinery of the  textile industry had become old and obsolescent and needed immediate replacement,   rehabilitation  and  modernisation.   It   is doubtful  whether,  in  giving priority  to  the  claim  for rehabilitation in the 950 context of the needs of the textile industry with which  the appellate  tribunal was concerned, it really  intended  that rehabilitation  should  be  claimed ’by  every  industry  on theoretical considerations whether or not the said claim was justified   by   its   actual   or   practical   need    for rehabilitation. In  substance  the argument is that the Full  Bench  of  the Labour Appellate Tribunal evolved its formula in order  that labour  may get a reasonable share in the available  surplus and  may  thereby receive assistance in filling up  the  gap between  its actual wage and the living wage which it  looks forward  to receive in due course; and if it is found  that, in working out the items which are treated as prior charges, in  a  majority  of cases the formula  leaves  no  available surplus, then its main object is frustrated and that is  the justification   for   revising  it   and   readjusting   its priorities. In support of this view reliance has also been placed on the recommendations of the Committee on ’Profit-sharing’.   This Committee   had  been  appointed  in  1948  to  advise   the Government  of India " on the principles to be followed  for the  determination  of (a) fair wages to  labour,  (b)  fair return  to capital employed in the industry, (e)  reasonable reserves   for   the  maintenance  and  expansion   of   the undertaking, and (d) labour’s share of the surplus  profits, calculated   on  a  sliding  scale  normally  varying   with production,  after provision has been made for (b)  and  (c) above  ".  The Committee viewed its problem from  three  im- portant  angles, viz., " profit-sharing as an  incentive  to production,   profit-sharing   as  a  method   of   securing industrial  peace,  and  profit-sharing as  a  step  in  the participation  of  labour  in management  ".  The  Committee recognised  that putting back profits into the  industry  is one of the most useful forms of capital investment and  this should be encouraged and it recommended that a figure of 20% for  reserves  should  be  generally  aimed  at,  though  it considered  that, as a first charge, 10% of the net  profits

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should be compulsorily set aside for reserves, leaving it to the good sense of the management to allocate the balance  or more out of their own share of surplus profits.  In regard 951 to the labour’s share in the surplus profits, the  Committee stated that, having due regard to the conditions  prevailing in  the  industry  selected for  an  experiment  in  profit- sharing,  it had come to the conclusion that labour’s  share should  be 50% of the surplus profits of  the  undertakings. It  is a matter of common knowledge that so  far  Government have  not  thought it desirable, expedient  or  possible  to legislate in this matter in the light of the recommendations made  by  this  Committee; but it is  suggested  that  these recommendations  afford a rational basis for  reconstructing the formula. It  may be conceded that there is some force in some of  the arguments  urged  in support of the plea  that  the  formula should  be revised and its priorities should  be  readjusted and redefined; but, on the other hand, we cannot ignore  the fact that on the whole the formula has worked satisfactorily in  a  large  number of industries  all  over  the  country. Except  for a few cases, particularly in Bombay, where  some of  the  tribunals have taken the view that,  in  its  rigid form,  the formula has become unworkable from the  point  of view  of labour, in a majority of cases industrial  disputes arising  between  employers and their workmen in  regard  to bonus  have been settled by tribunals on the basis  of  this formula;  and it would not be unreasonable or inaccurate  to say  that  by and large labour’s claim for  bonus  has  been fairly  and satisfactorily dealt with.  The main  source  of contest  in  the working of the formula  centres  round  the industry’s  claim  for  rehabilitation;  but,  as  we  shall presently point out, if this claim is carefully  scrutinised and examined in the light of evidence which the employer has to  produce in support of his claim, even the settlement  of this  item would, as it is intended to, invest the  tribunal with  sufficient  discretion  to make  the  working  of  the formula elastic enough to meet its two-fold object of  doing justice both to industry and labour. It  is  true that in the working of  the  formula  employers sometimes make an attempt to add items to the list of  prior claims.  In The State of Mysore v. The 121 952 workers  of Kolar Gold Mines (1), it was urged  before  this Court by the industry that it was a wasting industry and  as such  it needed special consideration.  The  contention  was that  for  the prosperity and longevity of  the  industry  a special  provision for the prospecting of new ore has to  be made  and that should be added as an additional item in  the list of prior charges.  This argument was, however, rejected and  it was held that the special features of  the  industry would be taken into account in determining the amount  which could  be  reasonably claimed  under  rehabilitation.   This decision  shows the reluctance of this court to vary or  add to the formula which oil the whole has so far worked  fairly satisfactorily. The theory that the whole of the rehabilitation charges need not come out of the trading profits of the industry does not appear  to be generally accepted.  As has been  observed  by Paula himself: " In the past the accepted principle has been that  the main object of providing for the  depreciation  of wasting assets is to recoup the original capital invested in the purchase of such assets.  As part of the capital of  the concern  has been invested in the purchase of these  assets,

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therefore,  when  their working life comes to  an  end,  the earning  capacity  of these assets ceases.  Thus  they  will become  valueless for the purposes of the business, and  the original  capital sunk in their acquisition, less any  scrap value,  will  have been lost.  Hence, in order to  keep  the original  capital of a business intact, if any part  thereof is invested in the purchase of’ wasting assets, revenue must be held back by means of depreciation charges to profit  and loss account, in order to replace the capital that is  being lost by reason of the fact that it is represented by  assets that  are  being  consumed or exhausted  in  the  course  of trading  or seeking to earn income It is also stated by  the same  author  that " in all cases where One  of  the  direct causes  of  earning revenue is gradually  to  consume  fixed assets  of wasting nature, the depreciation of  such  assets should be provided for out of revenue " (3).  It is true (1)  [1959] S C.R. 895. (2)  F.R.M.  de Paula’s  Principles of Auditing’,  1957,  P. 136. (3)  Ibid, p. 138. 953 that  the  author  recognises  that  "  owing  to  the  very considerable   increase  in  the  price  level   since   the termination  of  the 1939-45 war, industry  is  finding  its original money capital insufficient for its needs.  Thus the cost  of replacement of fixed assets has  greatly  increased and  in  addition, further working capital is  required   to finance  a  given volume of  production.   Many  economists, industrialists,  and  accountants  contend  that   provision should  be made, in arriving at profits, for this  increased capital  requirement ". Having noticed this view the  author adds  that  " at the time of writing this  matter  is  still being debated and final decisions have not yet been  reached ",  and he concludes that " until a final solution  of  this complex  problem is reached it would be inadvisable for  the auditor to act on any principle other than that  recommended by the Institute "(1); and that principle appears to be that depreciation   should  be  provided  for  out  of   revenue. Besides,  it  must be borne in mind that, in  adjusting  the claims  of industry and labour to share in the profits on  a notional basis, it would be difficult to repel the claim  of the  industry  that  a  provision should  be  made  for  the rehabilitation  of its plant and machinery from the  trading profits.   On  principle the guaranteed continuance  of  the industry  is as much for the benefit of the employer as  for that  of  labour; and so reasonable provision made  in  that behalf must be regarded as justified. The recommendations made by the Committee on Profit-sharing’ cannot be of much assistance because they raise questions of policy   and   principle   which   Legislature   can    more appropriately  consider.  If the Legislature feels that  the claims for social and economic justice made by labour should be redefined on a clearer basis it can step in and legislate in  that  behalf.   It  may also be  possible  to  have  the question   comprehensively  considered  by  a   high-powered commission  which may be asked to examine the pros and  cons of  the problem in all its aspects by taking  evidence  from all industries and all bodies of workmen.  The plea for  the revision of the formula raises an issue (1)F.R.M.  de Paula’s  Principles of Auditing’,  1957,  P- 80. 954 which affects all industries; and before any change is  made in  it,  all industries and their workmen would have  to  be heard  and their pleas carefully considered.  It is  obvious

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that  while  dealing with the present group  of  appeals  it would be difficult, unreasonable and inexpedient to  attempt such  a task.  That is why we think that labour’s claim  for bonus  should  be decided by tribunals on the basis  of  the formula without attempting to revise it. Whilst  we are not prepared to accede to the  argument  that the formula should be revised, we wish to emphasise that the formula  is elastic enough to meet reasonably the claims  of the  industry and labour for fairplay and justice.   In  its broad features it recognises the claims of the industry  and tabulates  them under different items as prior charges,  and then  provides  for the distribution  of  available  surplus between the labour, the industry and the shareholders.   The items specified in the formula have to be worked out notion- ally  on theoretical grounds; in determining the content  of each  one  of  the  items  it  is  therefore  essential   to scrutinise and weigh carefully all the relevant and material facts.    If  the  content  of  each  item   is   determined objectively in the light of all relevant and material facts, the  tribunals  would  generally find it  possible  to  make reasonable adjustments between the rival claims and  provide for  a fair distribution of the available surplus.  In  this sense  it is necessary to treat the formula as  elastic  and not rigid in working out detailed calculations under it. We  have no doubt that if the industry and labour  genuinely desire  to  settle  the disputes as  to  bonus  without  the intervention  of  the conciliator or  the  adjudicator,  the formula   would  help  them  to  arrive  at   a   reasonable settlement.   If  the  employer  does  not  make  an  unduly inflated  claim under the items which  safeguard  industry’s interests, and if workmen do not make an exaggerated  demand for bonus, it would normally not be beyond the  co-operative effort of the parties to arrive at a reasonable figure which should be paid to labour by way of bonus from year to  year. It is unnecessary to emphasise that industrial disputes 955 settled  amicably  are in the interest of both  capital  and labour.   Amicable  settlements of such  disputes  lead  to’ peace,  harmony and co-operation between capital and  labour and that invariably helps more production which is a  matter of great national importance at present. But  unfortunately,  in many cases, both  the  industry  and labour  do  not  appear to be too keen  on  settling’  these disputes  amicably,  with the result that claims  for  bonus give  rise  to disputes year after year and  inevitably  the machinery  under  the  Industrial Disputes  Act  is  set  in motion.   Conciliation  efforts  are made but  they  do  not succeed;  then reference is made under s. 10 of the Act  and the  dispute  is taken before the tribunal; since  both  the parties  are  not in a mood to co-operate with  each  other, over-statements are made on both sides, allegations are  met by  counter-allegations and they are sought to be  supported by evidence.  In such a case the tribunals must examine  the rival contentions and scrutinise the evidence adduced by the parties  objectively  and in a judicial manner.   If  proper evidence  is led and it is judicially weighed, the  tribunal would be able to work the formula in a reasonable manner and arrive   at  a  result  which  would  be  substantially   in conformity  with the object underlying the formula.   It  is obvious that, in making the relevant calculations under  the items  of  prior  charges  specified  in  the  formula,  the tribunals should have a clear idea as to the content of each one  of  the said prior charges; and so it is  necessary  to examine carefully this aspect of the matter. We have already noticed that the formula for awarding  bonus

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to workmen is based on two considerations; first that labour is entitled to claim a share in the’ trading profits of  the industry  because it has partially contributed to the  same; and  second  that labour is entitled to claim that  the  gap between  its actual wage and the living wage  should  within reasonable  limits  be filled up.  The concept  of  labour’s contribution to the profits of the industry has reference to the contribution made by the employer and the workmen  taken together as a class; and so it would 956      not be relevant to, inquire which sectionof  labour has  contributed  to what share  of the profits.The  board idea underlying this concept is that the capital invested by the  employer  and  labour contributed  by  workmen  jointly produce   the  profits  of  an  industry.  This    does   not necessarily mean that, in theindustry  in question,  labour must  actually manufacture or produce goods, though, in  the case of manufacture and,production of goods contribution  of labour.  is  patent  and obvious.  In the  Burma  Shell  Oil Storage  and  Distributing  Co.,  of  India  Pd.  v.  Their, Workmen(1)  the  Labour  Appellate  Tribunal  rejected   the employers’  claim that, since workmen employed by  them  did not  manufacture  or produce any goods but  merely  assisted them in the distribution Of oil, they were not. entitled  to claim  any bonus under the formula.  It is wrong to  say  ", observed  the labour Appellate, Tribunal, that  because  the employees of these oil companies merely market the oil  they have not earned the right to any bonus". It was also Pointed out  that  the  workmen had to perform  :duties  of  various intensity for marketing an article of public. utility,.  and in  that sense they contribute to, production  according  to the concept of economists". So were the clerks held entitled to  bonus for,their duties in the, general business  of  the concern though, they had nothing to do with the physical act of  marketing the commodity it was also emphasised that  the other  object of granting the bonus was to help the  workmen to fill up the gap between their actual wages and the living wage.   Thus  in dealing with the claim for  bonus  made  by workmen  the  two-fold basis of the formula must  always  be kept in mind. The  working of the formula begins with the figure of  gross profits  taken  from the profit and loss account  which  are arrived at after,payment of wages and dearness allowance  to the employees and other items of expenditure.  As a  general rule  the  amount  of gross  profits  thus  ascertained  is. accepted without submitting the statement of the’ profit and loss ’account to a close scrutiny.  If, however, it  appears that (1)(1953) 11, L.L.J. 246. 957 entries have, been made on the debit side, deliberately  and mala fide to reduce the amount of gross profits, it would be open  to the tribunal to examine the question and if  it  is satisfied that the impugned entries have been made mala fide it may disallow them.  This principle has been recognised by the   Labour  Appellate  Tribunal  when  it  observed,   for instance, in M/s.  J. K. Cotton Manufacturers Ltd.,   Kanpur v.  Their Workmen (1) that if managing  agents  deliberately divert profits to the selling, agents with a view to deprive labour  of  their bonus and pay commission to  the  selling. agents at high rates then certainly the matter must be taken into consideration in the determination of available surplus balance " It would likewise be open to the parties to  claim the exclusion of items either on the credit or on the  debit side  on  the  ground that the impugned  items  are.  wholly

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extraneous and entirely unrelated to the trading profits  of the  year.   In considering such a plea  the  tribunal  must resist  the temptation of dissecting the  balance-sheet  too minutely  or of attempting to reconstruct it in any  manner. It  is  only glaring cases, where the impugned item  may  be plently  and  obviously  extraneous  that  a  plea  for  its exclusion  should be entertained.  Where the employer  makes profits in the course of carrying on his trade or  business, it would be unreasonable to inquire whether each one of the, items of the said profit is related to the contribution made by  labour.   In  such matters, the tribunal  must  take  an overall,  practical  and commonsense view.  Thus  it  ma  be stated  that  as a rule the gross profits appearing  at  the foot of the statement of the profit, and loss account should be taken a,% the basic figure while working out the formula. In,  working out the formula the other important fact  which should not be ignored is, that the formula proceed’s to deal with  the  labour’s claim for bonus on the  basis  that  the relevant  year  for  which  bonus  is  claimed  is  a  self- sufficient  unit and the appropriate accounts  have, to.  be made  on  the notional basis in respect of the said,  It  is substantially because (1)[1954]  L.A.C.  716, 745. (Also vide [1952]  L.A.C.  420, 421.) 958 of this basic assumption that if an employer receives during the  bonus year a refund with respect to the excess  profits tax  paid by him in a previous year the amount of refund  is not  included  on  the credit side.  In  Model  Mills  etc.’ Textile  Mills, Nagpur v. The Rashtriya Mill  Mazdoor  Sangh (1) the Labour Appellate Tribunal observed that according to the.  formula, the income-tax is to be deducted as  a  prior charge  on trading results of the year just as much  as  the bonus  is to be ascertained upon the trading results of  the year.  The concession made by the income-tax authorities  in making  a refund of the excess profits tax already  paid  by the employer is intended to aid a concern on account of past losses  and so it has nothing to do with the  formula.   The same principle governs cases where owing to a loss  incurred in  the previous year or years the employer is  entitled  to claim  allowance  for  adjustment under s.  24  (2)  of  the Income-tax Act during the bonus year; and so it is held that the  allowance  for  adjustment which  the  employer  claims cannot  be taken into account in determining the  amount  of income-tax  payable on the profits of the bonus  year  under the  formula.   In Bennett Coleman and co.,  Ltd.  v.  Their Workmen  (2)  the  Labour Appellate  Tribunal  rejected  the contention  raised by labour that since under s. 24 (2)  the employer  would  not be liable to pay tax during  the  bonus year  no  provision  for payment of tax should  be  made  in working  out  the formula.  The  Labour  Appellate  Tribunal pointed out that the fact that the employer was not required to  pay  tax  during the bonus year was the  result  of  the adjustment  of the previous year’s  unabsorbed  depreciation and  losses against current year’s profit, and that  had  no relevance  in  determining the available  surplus  from  the trading  profits of the bonus year.  The same view has  been taken  in  several  other  decisions  to  which  the  Labour Appellate Tribunal has referred.  In our opinion, once it is realised  that in working out the formula the bonus year  is taken as a unit self-sufficient by itself, the decisions  of the Labour Appellate Tribunal in regard (1) (1955) I  J. 534, 540. (2) (1955)  I J. 60. 959

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to  the refund of excess profits tax and the  adjustment  of the  previous  year’s depreciation and  losses  against  the bonus year’s profits must be treated as logical and sound. Having  ascertained the amount of gross profits,  the  first item of deduction relates to depreciation.  The propriety of this   deduction  was  not  questioned  before  the   Labour Appellate  Tribunal  which  evolved  the  formula;  but  the content  of  the  item of depreciation became  a  matter  of controversy subsequent to 1950.  After 1948, s. 10 (2)  (vi) of   the  Income-tax  Act  has  provided  for  initial   and additional  depreciation besides the statutory  depreciation which was already admissible.  In other words,  depreciation allowed under the Income-tax Act now consists of what may be called the statutory normal depreciation calculated under r. 8   as   well  as  initial   depreciation   and   additional depreciation.   The allowance of these depreciations  is  an exception  to  the general rule that the income  has  to  be taxed  without reference to the diminution in the  value  of the capital.  Under the amended provision of s. 10 (2)  (vi) of the Income-tax Act the employers began to claim that from the gross profits all the depreciations admissible under the Income-tax Act should be debited; and this claim was  upheld by some tribunals and rejected by others.  This conflict  of decisions  led  to  confusion; and so a Full  Bench  of  the Labour Appellate Tribunal was constituted to decide this and other  points in the case of the U. P. Electric Supply  Co., Ltd.,   etc.   Electricity  Supply  Undertakings  v.   Their Workmen(1).   The  Full Bench held that "  the  depreciation which  should be deducted from the gross profits in  working the  formula  is  annual depreciation  allowable  under  the provisions  of  the Income-tax Act  including  the  multiple shift   depreciation;   it  also  held  that   the   initial depreciation  and  additional depreciation which  were  also allowed  under the Income-tax Act are abnormal additions  to the  income-tax  depreciation designed  to  meet  particular contingencies and for a limited period; (1) (1955) II  J. 431. 122 960 and  so it would not be fair to the workmen that  these  two depreciations  should be rated as prior charges  before  the available  surplus is ascertained ". Apparently  some  doubt arose  as to what exactly was allowed to be  deducted  under this Full Bench decision; and two of the members of the Full Bench  took  occasion  to  clarify  the  position  in  Surat Electricity Co.’s Staff Union v. Surat Electricity Co., Ltd. (1).  This decision shows that what the Full Bench  intended to treat as depreciation for the purpose of the formula  was a notional amount of normal depreciation; in order to  avoid any future doubt or confusion, the judgment in the case  has set   out   the  manner  in  which  this   notional   normal depreciation has to be worked out.  Since this decision  was pronounced  it is the notional normal depreciation  that  is deducted from the gross profits in working the formula.   It seems to us that the view taken by the Full Bench is  wholly consistent  with the basic idea of social justice  on  which the original formula is founded.  The relevant provisions of the  Income-tax Act allowing further depreciation are  based on  considerations which have no relevance to  the  original formula;  indeed, as the Full Bench has pointed out, if  the said  two items of depreciations are allowed to be  deducted from  the  gross  profits it would in a  majority  of  cases defeat   the  object  of  the  formula  itself.   We   would accordingly  hold  that  the depreciation which  has  to  be deducted  from  the  gross profits should  be  the  notional

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normal  depreciation  as  explained in  the  case  of  Surat Electric Co., Ltd. (1). The  balance obtained after deducting depreciation from  the gross  profits  is  then  taken  as  the  amount  on   which calculations  have to be made about the  income-tax  payable for  the bonus year.  This item gives rise to a  controversy between the parties.  It is urged for the employers that  in determining the amount payable by way of income-tax on  this balance  the  tribunal should not  take  into  consideration allowances  which are made under the relevant provisions  of the  Income-tax Act.  There is no doubt that in  taxing  the employer for the bonus year the Income-tax Act would (1)(1957) II L. L. J. 648.             961 make allowance not only for the normal depreciation but also for  the  initial  and  additional  depreciations;  but  the argument  is  that  the  income-tax  should  be   determined nationally  without  reference to the said  allowances.   In support of this argument it is further urged that though the employer may obtain credit for the two further depreciations for  some  years, later on the said allowances will  not  be made and his liability’ to pay tax would be  correspondingly increased.   It is but fair, so the argument runs, that  the employer  should be allowed to create a fund  of  income-tax reserve  from  which  he  would be  able  to  bear  his  tax liability in future as and when it is bound to increase. On the other hand it is contended on behalf of workmen  that while  determining the amount of tax payable for  the  bonus year the tribunal cannot ignore the concession given to  the employer  by the Income-tax Act by making the  allowance  of two further depreciations.  What the employer claims is  not the  amount  of tax payable during the bonus year  but  much more  in  addition in order to build up a reserve  and  this notion  of  building up a tax reserve  for  meeting  future, though  certain, increased tax liability is foreign  to  the basic  idea of the formula.  For making  calculations  under the formula the bonus year is taken as a unit and all  items specified in the formula should be worked out on that basis. That is why the refund of the excess profits tax received in the bonus year is excluded from consideration and the  right of  the  employer to adjust his previous year’s  losses  and depreciation  against the trading profits of the bonus  year is likewise ignored.  So too the fact that the employer  may have to pay increased taxes in future years must be  treated as irrelevant.  That in brief is the case for workmen. In  our opinion, having regard to the basis of  the  formula and  the manner in which the other items of the formula  are required  to  be worked out, it would not be  reasonable  to allow the employer to claim under the item of income-tax  an additional   amount   is   respect  of   the   two   further depreciations  which are expressly allowed to him  under  s. 10(2)(vi) of the Income-tax 962 Act.  It is clear that the amount determined under this item would  not  represent the actual tax  which  the  income-tax department will recover from the employer.  In that sense it would always be a notional amount ; but in calculating  even this notional amount it would be unfair and unjust to ignore the  concessions  allowed to the employer by  s.  10(2)(vi). The creation of a fund of income-tax reserve may conceivably lead to unnecessary complications.  Besides, if on principle the further depreciations allowed by the Income-tax Act  are treated  as  inadmissible  under  the  formula  and  so  are excluded  from  consideration,  it  would  be  substantially inconsistent with the object of such exclusion to allow  the

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employer to claim tax in respect of the said amounts of  the two  depreciations.  It is clear that even if the amount  of income-tax  is  determined  after taking  into  account  the concession  given to the employer by s. 10(2)(vi)  it  would work no hardship to the employer, for the simple reason that in future years when these concessions cease to be operative and his liability to pay the tax correspondingly  increases, he would be entitled to claim the amount of income-tax which would  then be payable by him.  This method  of  calculating income  tax  is  thus fair to both the parties  and  it  has besides  the  merit  of  being  consistent  with  the  basic character  of  the formula.  It would be  relevant  in  this connection   to  remember  that,  though  in  most  of   the industries  workmen  continue to be employed  from  year  to year, nationally and on principle, the claim for bonus for a particular year is made on behalf of workmen employed during the said year; and in that sense, the relevant  calculations have to be made with the bonus year as a unit.  That is  why considerations  of future tax liability of the employer  are foreign  to  the calculation under the formula.   We  would, therefore,  bold  that  in calculating  the  amount  of  tax payable  for  the bonus year the tribunals should  not  take into account the concessions given by the Income-tax Act  to the employers under the two more depreciations allowed under s.   10(2)(vi) of the Income-tax Act. This point has been  considered by this Court in 963 Sree  Meenakshi Mills, Ltd. v. Their Workmen (1)  where  has upheld the view taken by the Full Bench the Labour Appellate Tribunal  in  the case of the U. Electric Co.,  Ltd.,  etc., Electricity Supply Undertakings (2) and has directed that in determining  amount of income-tax payable during  the  bonus yea the further depreciations permissible under the  income- tax Act should be taken into account.  We would only like to add  that in that case this Court had  occasion to say  what exactly the normal depreciation meant; but it is clear  that the  normal depreciation mentioned in the judgment  was  not intended  to  mean anything other than the  notional  normal depreciation  as explained by the Labour Appellate  Tribunal in the case of the Surat Electric Co., Ltd. (3 ). The amount income-tax thus determined has then to be deduct( as a prior charge. The  next step in the working of the formula related to  the deduction of an appropriate amount in respect of the  return on  paid-up  capital as well as working  capital.   We  have already noticed that the formula provides generally for  the payment  of interest at 69 per annum on the paid-up  capital and  at 2% on worldling capital.  Subsequent decisions  show that  the  tribunals  do  not  regard  the  said  rates   as inflexible and they have suitably modified them in the light of  the relevant circumstances in each case.  We think  that this  is a correct approach and that it is necessary to  fix the  rates of interest on the two items of  paid-up  capital and  working capital according to the circumstances of  each case.   In this connection it may be added  that  ordinarily industrial  tribunals awards interest at the rate of 6%  per annum on paid-up capital. In Workmen of Assam Co., Ltd. v. Assam Co., Ltd. this  Court held  that interest allowed by the tribunal a 7% on  paid-up capital  and confirmed by the Labour Appellate Tribunal  was justified  because " an industry connected with  agriculture like  the tea industry is exposed to greater risks than  any other industry such (1)  [1958] S.C.R. 878. (3)  (1957) 11 L.L.J. 648.

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(2)  (1955) II L.L.J.- 431. (4)  [1959] S.C.R. 327] 964 weather,  pests in the plants and gradual  deterioration  of the soil ". On the other hand, in Ruston and ornsby  (India) Ltd.  v.  Their Workmen (1) the  Labour  appellate  Tribunal allowed  only  4%  return  on the  art  of  paid-up  capital represented  by  bonus  shares for the year  in  which  such shares  were issued and ,)served that ,for subsequent  years no   distinction  between  it  and  other  paid-up   capital represented  by paid-up shares should be made ".  Similarly, in regard  reserves or depreciation used as working  capital interest  has been allowed either at 4% or at 3% or ,Ten  at 2%  according  to the relevant circumstances.  in  the  Mill Owners  Association,  Bombay v. The Rashtriya  Mill  Mazdoor Sangh (2) the Labour Appellate Tribunal has observed that  " as  we  have said before, there is no fixed rule as  to  the rates of such return (on capital) and each case must  depend on its individual acts.  We have in appropriate cases  given as  high  as % but in case of the mills the Full  Bench  has considered that the equivalent of 2% would be reasonable  nd we propose to retain it at that level for the present ".  In Tea  and  Coffee  Workers  Union  v.  Brooke  Bond   (India) (Private) Ltd. (3) the Industrial Tribunal as considered the previous decisions on the question of the return on  working capital and held that, in the case before it, it would be an adequate  return  on the working capital if 3%  interest  is allowed  because there were no special reasons existing  for allowing a higher ate. In dealing with this aspect of the matter it is relevant  to point  out  that no distinction has been made  )y  tribunals between  reserves used as working capital  and  depreciation fund similarly used.  In the Mill Owners Association, Bombay v.  The  Rashtriya Mill Mazdoor Sangh (2)  (page  523)  when labour objected to the depreciation fund earning any  return even  if  it was utilised in or about the  business  of  the year, the labour Appellate Tribunal overruled the  objection and  observed that " no essential difference could  be  made between the depreciation fund and any other (1) (1955) 1 L.L.J. 73.     (2) (1952) 1 L.L.J. 518. 522. (3)(1958) 1 L.L.J. 645. 965 fund belonging to the company which could be invested so  as to  earn a return ". It is thus clear that what is  material is not the origin of the fund.  It is the fact that the fund in the hands of the concern has been used as working capital that justifies the claim for art adequate return on it.   We think it is commonsense that if the concern utilises  liquid funds available in its hands for the purpose of meeting  its working expenses rather than borrow the necessary amounts it is  entitled  to claim some reasonable return on  the  funds thus used.  It is of course necessary that the employer must show that the amount under the depreciation fund was in fact available  and  that it has actually been  used  as  working capital  during  the relevant year.  What return  should  be allowed on such funds must inevitably be a question of  fact to be decided by the tribunal in its discretion in each case in  the light of the relevant circumstances.  It would  thus be  noticed  that in working out these two items  under  the formula  there is no fixed or rigid rule about the  rate  of interest which can be claimed and awarded. It is also  clear that if any fund is used by the employer for the purpose  of expanding  his  business  he is not entitled  to  claim  any return  on such fund under those items.  In the case of  the U.  P.  Electric Supply Co., Ltd. etc.   Electricity  Supply

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Undertakings  (1)  the Full Bench of  the  Labour  Appellate Tribunal  held that " considering all the factors  presented to them they did not think that a case had been made out for giving a special prior charge in the shape of return on  the reserves   utilised  for  expansion  ".  When  the   amounts awardable  to  the  employer  under  these  two  items   are determined  they have to be treated as prior charges in  the calculation of available surplus under the formula. The original formula referred to replacement, rehabilitation and  modernisation of the plant and machinery.   Soon  after the  formula was evolved a dispute arose as to  whether  the industry  was  entitled  to  claim  rehabilitation  for  its buildings  as  well  and  it was held that  "  a  claim  for rehabilitation for buildings had to (1)  (1955) II L.L.J. 431. 966 be  treated  as a prior charge just like the claim  for  the rehabilitation of plant and machinery " (1). :This  position is not disputed before us, and we think rightly. That  takes us to the item of rehabilitation and it is  this item which poses a very difficult problem.  We have  already noticed that the object of providing depreciation of wasting assets  in commercial accounting is to recoup  the  original capital  invested  in the purchase of such assets;  but  the amount  of depreciation which is allowed under  the  formula can hardly cover the probable cost of replacement.  That  is why  the  formula has recognised the  industry’s  claim  for rehabilitation  in addition to the admissible  depreciation. Since  the Second World War prices of industrial  plant  and machinery  have registered a continuous upward rise and  its inevitable consequence has been a proportionate rise in  the claim  for  rehabilitation.  In considering  the  claim  for rehabilitation  it is first necessary to divide  the  blocks into  plant and machinery on the one hand and  other  assets like buildings, roads, railway-sidings, etc., on the  other. Then the cost of these separate blocks has to be ascertained and  their probable future life has to be  estimated.   Once this  estimate  is made it becomes  possible  to  anticipate approximately  the  year when the plant or  machinery  would need  replacement;  and  it is the probable  price  of  such replacement  on  a future date that ultimately  decides  the amount  to  which  the  employer  is  entitled  by  way   of replacement cost.  This problem can be considered item  wise where the industry does not own too many factories and  item wise  study  of  the  plant  and  machinery  is   reasonably possible; but if the industry owns several factories and the number  of  plants and machines is very large  it  would  be difficult  to  make a study of the replacement  costs  item- wise, and in such a case the study has to be blockwise.   In either  case  what  the  tribunal has  to  estimate  is  the probable  cost of replacement of plant and machinery at  the time  when such replacement would become due.  It  would  be clear  that the decision of this question  would  inevitably depend upon several uncertain (11) (1952) 1 L.L.J. 518, 522. 967 factors.  The estimate about the probable life of the  plant and  machinery  is itself to some extent a matter  of  guess work and any anticipation, however intelligently made, about the  probable trend of prices during the intervening  period would  be  nothing  but  a  guess.   That  is  how,  in  the determination  of this problem, several  imponderables  face the tribunals. One  of  the  points which raises  a  controversy  in  this’ connection  is:  What level of prices  should  the  tribunal

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consider in making its calculations about the probable  cost of  replacement  ? Would it be the  price  level  prevailing during  the bonus year or that prevailing at the  time  when the tribunal holds its enquiry ?  Prima facie it may  appear that it is the price level prevailing in the bonus year that should  be treated as relevant; but if the relevance of  the evidence about the price level is limited only to the  bonus year,  it  may  hinder rather than help  the  process  of  a satisfactory   determination   of  the  probable   cost   of replacement.   What  the tribunal has to do  in  determining such cost is to project the price level into the future  and this  can  be more satisfactorily done if  the  price  level which has to be projected into the future is determined  not only in the light of the prices prevailing during the  bonus year  but also in the light of subsequent price levels.   It seems to us that in order to enable the tribunal to make  an estimate in this matter as near actualities or realities  as possible  it is necessary that the tribunal should be  given full  discretion  to admit all relevant evidence  about  the trend  in  price levels.  The price level during  the  bonus year would no doubt be admissible; but that alone should not be taken as the basis for decision.  That is the view  which the  tribunals have taken in a majority of cases in  dealing with the question of rehabilitation and we do not think that there is any justification for disturbing the usual practice in that behalf. The problem of determining the probable cost of  replacement itself is very difficult; but the difficulty is immeasurably increased   when  it  is  remembered  that  the  claim   for rehabilitation covers not only cases of 123 968 replacement  pure  and  simple  but  of  rehabilitation  and modernisation.   In  the context rehabilitation  is  distin- guished  from  ordinary repairs which go  into  the  working expenses  of  the industry.  It is also  distinguished  from replacement.  It is quite conceivable that certain parts  of machines  which constitute a block may  need  rehabilitation though the block itself can carry on for a number of  years; and this process of rehabilitation is in a sense a continual process.   Unlike  replacement, its date  cannot  always  be fixed or anticipated.  So with modernisation; and all  these three  items are included in the claim  for  rehabilitation. That  is  why we think it is necessary  that  the  tribunals should  exercise their discretion in admitting all  relevant evidence  which  would enable them to determine  this  vexed question satisfactorily. At  this  stage it is relevant to remember  that  the  claim under  this item is confined to rehabilitation,  replacement and  modernisation.  It is common ground that  expansion  of the plant and machinery is not included in this item; but in several  cases  it  is  not  easy  to  distinguish   between modernisation of the plant and machinery and its  expansion. It  is urged that an expert can, if he so chooses,  make  an attempt to include expansion within what he may describe  as modernisation by clever use of technical words and details,- and that it is precisely this aspect of the matter which has to  be  carefully examined by the  tribunal.   The  industry sometimes claims that a plant may become obsolescent because it has become out of date and has to be substituted by a new modern  plant.  Is the introduction of the new modern  plant in  such circumstances an item of expansion or mere  modern- isation  ?  It is difficult to lay down  any  general  tests which  would  govern the decision of this question.   If  it appears fairly on the evidence that the introduction of  the

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modern plant or machine is in substance an item of expansion of the industry, expenses incurred in that behalf have to be excluded.   On  the  other  hand, if  the  employer  had  to introduce  the new plant essentially because the use of  the old  plant though capable of giving  service-was  uneconomic and other- 969 wise wholly inexpedient, it may be a case of  modernisation. Similarly,  if  by  the introduction of a  modern  plant  or machine   the  production  capacity  of  the  industry   has appreciably increased, it would be relevant for the tribunal to  consider  in  an appropriate case whether  it  would  be possible  to  apportion expenses on the basis that it  is  a case  of partial modernisation and partial  expansion.   If, however,  the increased production is not of  a  significant order  it  may be regarded as incidental to  replacement  or modernisation  and  the question of  apportionment  may  not arise.   We  have set out these considerations in  order  to emphasise  the  fact  that in dealing with  the  problem  of rehabilitation  the  tribunal  must  carefully  examine  the evidence  and  consider  the employer’s  claim  in  all  its aspects  before  determining  the  amount  which  should  be allowed  by way of rehabilitation as a prior charge  in  the relevant year. The  decision  on  the  question of  the  probable  cost  of rehabilitation  is  always reached by  adopting  a  suitable multiplier.   This multiplier is based on the ratio  between the  cost price of the plant and machinery and the  probable price  which  may have to be paid  for  its  rehabilitation, replacement  or  modernisation.   Since  there  has  been  a continuous  rise  in  the prices  of  industrial  plant  and machinery the older the plant which needs rehabilitation the higher  is  the multiplier.  That is why there is  always  a competition  between  industry and workmen  on  this  point. Industry  is  sometimes tempted to keep its  old  pre-  1939 block  alive with a view to claim a higher multiplier  which gives  it  a larger amount  of  rehabilitation  expenditure; whereas  workmen urge that the old pre-1939 block  has  been nominally  kept alive as a device and so press for  a  lower multiplier which would reduce the claim for  rehabilitation. Once  a proper multiplier is adopted in respect of each  one of  the  blocks the first step in determining  the  probable cost of rehabilitation can be easily taken.  It then becomes a matter of mere arithmetical calculation. At  this  stage  the divisor steps  in.   The  total  amount required for rehabilitation which is determined by the 970 application  of  a suitable multiplier in respect.  of  each block has to be divided by a suitable divisor in respect  of each  block in order to ascertain the annual requirement  of the  employer in that behalf year by year.  In the  case  of the  divisor the employer seeks for a lower divisor  whereas workmen  claim a higher divisor and this contest has  to  be decided by the tribunal by reaching a fair conclusion on the evidence  before  it about the probable future life  of  the block  in  question.   It would thus  be  noticed  that  the adoption  of a suitable multiplier and divisor plays a  very important  part in the decision of the vexed question  about the employer’s rehabilitation claim. Before actually awarding an appropriate amount in respect of rehabilitation for the bonus year certain deductions have to be  made.   The first deduction is made on  account  of  the breakdown value of the plant and machinery which is  usually calculated at the rate of 5% of the cost price of the  block in  question.   Then  the depreciation  and  general  liquid

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reserves  available  to  the  employer  are  deducted.   The reserves  which have already been reasonably  earmarked  for specific  purposes of the industry are, however,  not  taken into   account  in  this  connection.   Last  of   all   the rehabilitation  amount  which may have been allowed  to  the employer in previous years would also have to be deducted if it appears that the amount was available at the time when it was  awarded in the past and that it had not been  used  for rehabilitation  purposes  in the meanwhile.  These  are  the broad  features  of  the steps which have  to  be  taken  in deciding  the employer’s claim for rehabilitation under  the working of the formula.  " It would thus be clear that the decision of this major  item in  the working of the formula presents  many  difficulties; and  in the last analysis its decision depends upon  several hypothetical   and   empirical   considerations.    It   is, therefore, not surprising that in the case of Metal Box  Co. of  India,  Ltd.  v. Its Workmen (1)  the  Labour  Appellate Tribunal  has observed that " It is unfortunately  too  true that all (1)  [1952] L.A.C. 315, 321. 971 our  calculations as to rehabilitation may be  disproved  by subsequent events; it is impossible to say what the trend of world  prices  would be in the next fifteen years  or  which circumstances  will  intervene before that period  to  upset such calculations one way or the other, and no  calculations of this kind are capable of mathematical accuracy.  We  have to  take  a commonsense view of these matters  and  make  an allowance’ for rehabilitation to the best of our ability and in accordance with our formula ". It has also been  observed by  the  Labour Appellate Tribunal that  if  an  appropriate multiplier  and divisor are determined " they are  generally used   because  the  tribunals  take  the  view   that   the reconsideration  of the said multiplier and  divisor  should not be hastily undertaken and could be justified only on the basis  of  a  substantial  change  of  a  stable   character extending  or likely to extend over a sufficient  number  of years so as to make a definite and appreciable difference in the   cost  of  replacement  ".  (Vide:  The   Mill   Owners Association Bombay v. The Rashtriya Mill Mazdoor Sangh (1) In  dealing  with the employer’s  claim  for  rehabilitation tribunals  have  always  placed the onus  of  proof  on  the employer.   He  has  to prove the price  of  the  plant  and machinery,  its  age, the period during  which  it  requires replacement, the cost of replacement, the amount standing in the  depreciation and reserve fund, and to what  extent  the funds  at his disposal would meet the cost  of  replacement. If the employer fails to lead satisfactory evidence on these points  tribunals  have on occasions  totally  rejected  his claim  for  rehabilitation. (Vide: Ganesh  Flour  Mills  Co. Ltd., Kanpur v. Ganesh Flour Mills Staff Union, Kanpur  (2); Bombay  Gas  Co.  Ltd. v. Their  Workmen  (3);  Dharangadhra Chemical  Works Ltd. v. Its Workmen (4)).  If the  tribunals are satisfied that the employer is deliberately and  without a  sufficient  cause not taking any steps  to  rehabilitate, replace   or   modernise  his  machinery  even   though   an appropriate  allowance is made in that behalf from  year  to year, they may take into (1)(1952) 1 L.L.J. 518. (3)(1955) 11 L.L.J. 152. (2)  [1952] L.C. 172 (4)  (1956) 1 L.L.J. 475. 972 account  this  conduct  in determining the  extent  of  such

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allowance  in the bonus year in question.  Similarly  if  it appears  that  the employer has deliberately  or  mala  fide refrained from rehabilitating or replacing his old machinery with a view to claim a higher multiplier in calculating  the rehabilitating  amount, the tribunals may take  his  conduct into   account  in  determining  the  actual  allowance   of rehabilitation to him. The  main  difficulty  in  deciding  questions  about  reha- bilitation  arises from the fact that satisfactory  evidence is  not always placed before the tribunals and it  is  urged that  the  evidence  given  by  the  employers’  experts  is interested and the workmen with their limited resources  are not able to test the said evidence by adequate or  effective cross-examination.   In such a case the tribunal may, if  it so  desires and if it is possible, secure the assistance  of assessors  (vide s. 38 of the Industrial Disputes Act).   It is therefore necessary that the tribunal should require  the employer  to give clear and satisfactory evidence about  all the  relevant  facts  on which it  can  make  the  requisite estimate.  The questions which the tribunal has to  consider under  this item are essentially questions of fact  and  its final decision on them is bound to be hypothetical, since it would be based on a fair evaluation of several circumstances which are by no means certain and which cannot be predicated with any amount of precision or even definiteness.  That  is why  it  is of the utmost importance that all  relevant  and material  evidence should be adduced by the employer and  it should  be properly tested by cross-examination.  When  that is  done the tribunal must do its best to consider the  said evidence  objectively  and  reach its final  decision  in  a judicial manner. Once  the  amount of rehabilitation is thus  determined  the available surplus for the bonus year is ascertained and  the final  stage  is  reached  when the  tribunal  has  to  give directions  for  the  distribution  of  the  said  available surplus.   It is not seriously disputed that  three  parties are  entitled  to claim a share in this  available  surplus; labour claims bonus from it, the industry claims a share for the purpose of its expansion 973 and  other needs, and share-holders claim a share by way  of additional  return on the capital invested by them.  In  the case  of the Mill Owners Association, Bombay (1)  where  the formula  was  evolved, out of the available surplus  of  Rs. 2.61  crores  2.16 crores was distributed by  way  of  bonus leaving a balance of 0.45 crores with the industry.  In  the Trichinopoly  Mills Ltd. v. National Cotton  Mills  Workers’ Union  (2) the available surplus was found to be Rs.  34,660 and  out of it Rs. 30,000 was ordered to be  distributed  as bonus  to  the  workmen.  These two and  other  similar  in- stances,  however,  cannot be pressed into service  for  the purpose  of  evolving any general rule as to  the  ratio  or proportion   in  which  the  available  surplus  should   be distributed.   The  ratio of  distribution  would  obviously depend  upon several facts: What are the wages paid  to  the workmen  and what is the extent of the gap between the  same and a living wage?  Has the employer set apart any  gratuity fund ? If yes, what is the amount that should be allowed for the bonus year ? What is the extent of the available surplus ?  What are the dividends actually paid by the employer  and what are the probabilities of the industry entering upon  an immediate  programme  of  expansion?   What  dividends   are usually  paid by comparable concerns ? What is  the  general financial  position  of the employer?  Has the  employer  to meet  any urgent liability such as redemption  of  debenture

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bonds  ?  These and similar  considerations  will  naturally determine  the actual mode of distribution of the  available surplus.   In this connection labour’s claim to fill up  the gap between the wage actually paid to it and the living wage has  an  important bearing on the decision  of  this  point. Industry’s claim for paying additional return on capital and for  making  additional provision for expansion  would  also have to be considered.  The fact that the employer would  be entitled  to a rebate of income-tax on the amount  of  bonus paid to his workmen has to be taken into account and in many cases it plays a significant part in the final distribution. Therefore, in our opinion once the (1) (1952) 1 L.L.J. 518.     (2) (1953) 11 L.L.J. 361. 974 available surplus is determined, the tribunal should, in the light  of  all relevant circumstances, proceed  to  make  an award  directing  the payment of a fair and just  amount  to labour  by  way  of bonus.  If the formula  is  thus  worked reasonably it would in a large majority of cases succeed  in achieving  its  principal object of doing  justice  both  to labour and industry. Before  we part with the question of working the formula  it is  necessary to observe that the practice adopted  by  some tribunals  in giving the amount of bonus a priority  in  the calculations  is not justified.  Logically it is only  after all the prior charges have been determined and deducted from the gross profits that available surplus can be ascertained; and  it is only after the available surplus  is  ascertained that the question of awarding bonus can be considered.  Some tribunals  seem to work out nationally the amount  of  bonus which they think can be awarded and place that amount higher up in the process of making calculations before the  income- tax  payable is determined.  The inevitable  consequence  of this procedure is to make the amount of tax  proportionately less.   We wish to make it clear that this procedure  should not  be  followed.   As  we have  already  pointed  out,  in directing  the  distribution of the  available  surplus  the tribunal  has to take into account the rebate of  income-tax to  which  the employer is entitled on the amount  of  bonus paid to his workmen but that on principle is different  from placing  the amount of bonus immediately after  depreciation in the working of the formula. It  has  been urged before us by the  respondents  that  the amount   of  rehabilitation  as  well  as  the   amount   of depreciation  should  be  deducted from  the  gross  profits before   income-tax   payable  is  ascertained.    In   this connection  reliance  is  placed on the  fact  that  in  its judgment  which  evolved the formula  the  Labour  Appellate Tribunal  has at one place described rehabilitation  as  the first charge in priorities.  Having regard to the context in which  the said statement is made it is clear that all  that the  Labour Appellate Tribunal wanted to emphasise was  that the textile industry 975 with which it was directly concerned in the said case needed rehabilitation  very urgently.  The final calculations  made in  the  judgment  give a clear indication  as  to  how  the formula has to be worked out.  We are, therefore,  satisfied that  rehabilitation  cannot  be  given  the  high  priority claimed for it by the respondents, We  must  now  consider whether the tribunal  was  right  in directing  that overtime payment should be’ included in  the calculation of the bonus which it has directed the appellant to  pay.  Mr. Kolah contends that the direction  to  include overtime wages is contrary to the usual practice followed by

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industrial  tribunals and it is also unsound  on  principle. This dispute arises between the employer and the workmen  in this  acute  form because the total amount of bonus  is  not determined   logically  after  ascertaining  the   available surplus.   If  the said amount is  logically  determined  as indicated  by us, then the question as to  whether  overtime wages should be included or not would really be a matter  of dispute between workmen inter se because once the amount  of bonus  is determined, how it should be  distributed  between workmen  inter  se  would cease to be  a  matter  of  direct concern  to  the employer.  Therefore we  think  that  there would be no occasion for such a dispute between the employer and  his workmen if the tribunals follow the logical  method of  determining the amount of bonus in the manner  indicated by us. On principle we do not think it would be fair to the workmen as  a whole that overtime should be included in  calculating the bonus which each workman should receive.  Workmen who do overtime  get additional payment for such overwork.   If  in addition  to  such payment they are allowed to  include  the said  payment in their wages in calculating bonus  to  which they  are entitled, obviously the gap between  their  actual wage  and  the living wage would be filled up  to  a  larger extent than in the case of other workmen who do not  receive such  additional overtime payment.  Besides, if the  payment of bonus proceeds on the broad consideration that it is  due to  the  workmen for their contribution to  the  profits  it would be unreasonable to make 124 976 a distinction between workmen and workmen on the ground that some  have contributed more to the profit than  others;  and that  is exactly what would follow if overtime  workers  are allowed  to claim a larger amount of bonus than their  other colleagues.  That is why we think that the tribunal was  not justified in directing that the calculations of bonus should be  made on the basis that overtime payments  constituted  a part of the basic wages of the employees. The next point to consider relates to the return on  paid-up capital  to which the appellant is entitled.   The  tribunal has  awarded  to the appellant return at the rate of  6%  on paid-up  capital  and  at 4% on the  working  capital.   The appellant  claims  a  return at a  higher  rate  on  paid-up capital  whereas  the respondents contend  that  the  return should  be paid on the paid-up capital at a lower rate.   In support  of its claim for a higher return the appellant  has relied  on the fact that it has consistently paid  dividends at  a reasonably low rate and it did not seek to make  undue profits  even during the years of war.  In  this  connection Mr. Kolah has invited our attention to a statement, Ex.   C- 1, showing the percentage of dividend to paid-up capital and invested capital for the eighteen financial years 1936-37 to 1953-54  and  he has asked us to contrast the low  rates  of dividend  evidenced  by  it with  dividends  paid  by  other companies  as shown by another document Ex.  C-12.   He  has also  asked  us  to take into account the  highest  and  the lowest  quotation  for the company’s shares  in  the  Bombay Stock Exchange during the period 1949-55.  On the other hand Mr.  Dudhia  has  urged that during the  relevant  year  the appellant  has capitalised Rs. 35.85 lakhs from the  reserve fund  and  175.45 lakhs from Premium-on  Shares  Account  by issuing  one bonus share for every five shares held  by  the shareholders;  and he argues that the tribunal was in  error in allowing 6% on the paidup capital during the bonus  year. Incidentally  Mr. Dudhia also relied, though  halfheartedly,

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on  the finding of the tribunal that the appellant had  paid an  inflated price for the pre-1939 block.  It is true  that in one place the tribunal has made an observation to 977 this  effect ; but it is clear that the said observation  is inconsistent  with its definite finding recorded earlier  in the course of its judgment that it was not prepared to  hold that  the A. C. C. had inflated the capital invested by  the merging  companies by taking them over in  1936.   Therefore this  part  of  Mr. Dudhia’s argument is  invalid..  In  our opinion, the question as to what return should be allowed to paid-up  capital  in’  a  given case  must  be  left  to  be determined  by the tribunal in its discretion having  regard to  all the relevant facts; and if the tribunal has  in  its discretion awarded 6% interest on the paid-up capital we see no  reason to interfere with its decisions It is clear  that no question of principle or law is involved in the matter. There  is  one more point which we must consider  before  we proceed  to deal with the facts in the present  case.   This point relates to the employer’s claim to treat the amount in the gratuity fund as a prior charge; and this claim has been allowed  by  the tribunal.  It appears that in  M/S.   Metro Motors  v. Their Workmen (1) the Labour  Appellate  Tribunal observed  that  it was desirable in all cases  to  create  a separate  reserve  fund for the payment of gratuity  and  it directed  that the modest fund claimed by the  employer  for the  year  in  question  was a  proper  deduction  from  its profits.   The question which we have to decide  is  whether the  allowance on this account should be treated as a  prior charge in making the calculations under the formula.   There can  be  no  doubt that, in a sense, the  gratuity  fund  is created  for the benefit of workmen and there should  be  no difficulty  in  recognising the appellant’s  claim  for  the deduction  of an appropriate amount on this account; but  we think  on principle it is desirable that no addition  should be  made  to  the list of prior charges  recognised  by  the formula.   Even so when the available surplus is  determined the tribunal ought to take into account the employer’s claim on  account of the gratuity fund created for the benefit  of his workmen and the amount which the tribunal may regard  as a reasonable (1)(1952) II L.L.J. 205. 978 allowance in that behalf should be definitely borne in  mind in  finally deciding the amount which should be paid to  the workmen  by  way  of  bonus.   This  method  will  meet  the employer’s  claim adequately without making any addition  to the list of priorities specified in the formula.  Mr. Dudhia contended  that the tribunal should not have allowed Rs.  10 lakhs  under  this  item but we do not think  there  is  any substance in this contention. Incidentally Mr. Dudhia has pointed out that in dealing with the  appellant’s claim for a return on working  capital  the tribunal  has made a mistake by including a further  sum  of 0.66 lakhs as return on investments.  Mr. Kolah has conceded that  this  is a mistake and so the return  on  the  working capital would stand at 26.10 lakhs only. It  is  now  necessary  to  consider  the  evidence  of  Mr. Tongaonkar  and decide the most controversial point of  fact in  dispute  between  the  parties  about  the   appellant’s requirements  for rehabilitation.  Mr. Tongaonkar holds  the Degree of Bachelor of Science of the London University,  and he  is  also  a  Member of  the  Institution  of  Electrical Engineers,  London.   He joined the  appellant  in  November 1934,  but before that he had nearly three years’  practical

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experience  in England in various engineering firms; and  on his  return  to India, he had joined the  Dinshaw  group  of cement factories.  He continued to work with the said  group until  its  merger with the appellant in 1936, when  he  was appointed by the appellant.  Mr. Tongaonkar is in charge  of the  department  which deals with the  construction  of  new cement   factories,  modernisation  and  extension  of   the existing cement factories, design and manufacture of  cement machinery  for A. C. C., and major engineering  problems  of the  A.C.C.  Since  April 1956 he  has  been  appointed  the Controller  of Planning and Development of the A. C.  C.  He visits the A. C. C. factories very frequently and claims  to be acquainted with the condition of the plant and  machinery at  all the A. C. C. factories.  There is no doubt that  Mr. Tongaonkar  is qualified to give evidence on  the  technical points which are relevant in 979 dealing  with the question of rehabilitation.  Even  so,  in appreciating ’his evidence, it would not be unreasonable  to bear in mind the fact that he is an officer employed by  the appellant,  and  as such he is likely to  be  interested  in supporting the claim for rehabilitation which the  appellant has decided to make. According to Mr. Tongaonkar, the average future life of  the plant and machinery existing in 1939 would’ be approximately seven  years  from  1-8-1954.   Similarly,  the  approximate future life of the three other categories of blocks would be 13,  15  and 20 years respectively.  He has stated  that  in calculating  the life of machinery, it is necessary to  take into  consideration, first the mechanical condition  of  the machinery,  second  whether  it is  efficient  or  has  been rendered  obsolete  because new machinery of  modern  design with  a  considerably better efficiency has  come  into  the market.   In  other words, the probable useful life  of  the machinery may be prematurely determined by the emergence  of more  efficient machinery.  In support of this statement  he has  given  some instances where the  appellant’s  plant  or machinery had to be changed mainly for the reason that a new corresponding plant or machinery was more efficient and gave more satisfactory results.  However, stated generally,in the opinion  of the witness, the average life of a cement  plant taken  as a whole would be 25 years if it is properly  main- tained. Mr.  Tongaonkar then gave evidence about the rise in  prices of plant and machinery and he produced Ex.  C-36 which is  a statement  showing the progressive increase in  prices  from pre-war days up to 1955-56 of major items of machinery, gear boxes, motors and power plant used in cement factories.   He has stated that the said statement had been prepared on  the basis  of actual quotations which he had in his  possession. His  evidence  shows that between 1951-54 there has  been  a rise  of 11%, whereas between 1954-56 there has been a  rise of 7% in the prices of the relevant items of machinery.   He then sought to corroborate his evidence on this point by the expenditure actually incurred by the appellant while putting into commission 980 a  new  cement  factory  at  Sindri  in  about  1955.    The calculations  made by him in this behalf show that the  cost of construction of a new factory is approximately 4.3  times the cost of construction of similar factory in 1939. In  regard to the life of buildings, Mr.  Tongaonkar  stated that first-class buildings lived approximately for 40  years provided they are properly maintained and provided they  are not in earthquake zone; but he added, that for the main unit

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of  the  cement  plant  it is usual  to  take  the  life  of buildings  at 25 years.  He also stated that in  many  cases the  existing buildings have got to be either demolished  or considerably modified when the main machinery whose life  is 25 years has to be replaced by modern machinery which is  of a  different  design and which would require  buildings  and foundations  of  different size and type.   Thus,  for  this special  circumstance also, he was not prepared to give  the buildings  of the appellant an average life longer  than  25 years. In  regard  to  the increase in  the  cost  of  constructing buildings, he produced two statements, C-6 and C-14.  Ex. C- 6  shows the increase in prices of building materials  since 1938-1954,   whereas   Ex.   C-14  shows   the   continually increasing  amount of expenditure incurred by the  appellant for construction of labour quarters, etc. It  is on this evidence that Mr. Tongaonkar has adopted  the respective  multipliers  and  divisors in  arriving  at  the figure  of  the amount required for rehabilitation.   As  we have  already  pointed out, for the pre-1939  block  he  has taken  4.28  as  the  multiplier,  whereas  for  the   block purchased   between  1940-44  he  has  taken  2.8   as   the multiplier.  He has explained that the multiplier of 4.28 is really  made up of two multipliers.  Certain portion of  the plant  and  equipment  which  is  obtained  from  abroad  is estimated  at 60% of the total cost and the  expenditure  on the  remaining items is estimated at 40% of the total  cost. The multipliers of these two groups are estimated at 4.8 and 3.5  respectively, and by calculations it has  been  noticed that the average ratio comes to 4.28. This is the 981 genesis of, and the justification for, the adoption of  4.28 as the multiplier.  He has also added that the proportion of 60%  and  40%  which  he had  mentioned  was  based  on  his experience  of building a number of cement factories and  of carrying out extension and modernisation of existing  cement factories.   The multiplier was based, said the witness,  on the state, of comparative quotations of plant and  machinery received   in  1939  and  quotations  received  of   similar machinery recently.  It would thus be clear that in devising the  multiplier and divisor, Mr. Tongaonkar has  drawn  very largely on his experience and has drawn inferences which  he thought  were  reasonable.  Besides in making  the  relevant calculations  he has not dealt with the plant and  machinery and  the  buildings  and other assets  separately,  but  has lumped them together under the respective blocks. The  approximate  cost  of the merging  companies  of  their assets as on July 31, 1936, was 5.73 crores of rupees.   Ex. C-3   which  is  a  certificate  issued  by  the   Chartered Accountants  shows  that  " according  to  the  blocks,  the original  cost  of  the  block  of  fixed  assets  excluding goodwill  and purchase of rights and land as at  31st  July, 1954,  of  the  appellant  under  the  groups  of  years  of acquisition", amounted to Rs. 19,41,38, 100.  Similarly, Ex. C-28  which  is also a certificate issued by  the  Chartered Accountants, shows that the original cost of such portion of fixed  assets excluding goodwill and purchase of rights  and lands  as have been discarded, scrapped or sold as  on  July 31,  1954,  of the appellant companies under the  groups  of years  of acquisition noted in the certificate, amounted  to Rs.  1,70,91,  296.  The  figures  supplied  by  these   two certificates are mentioned in cols. 2 and 3 respectively  in Ex.   C-2.  Under the method adopted by Mr.  Tongaonkar  the cost  of discards is shown in the respective years when  the portions of blocks were discarded; and the amounts spent  on

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rehabilitation  from year to year have gone with the  blocks of the said respective years shown in col. 2. The amount  of rehabilitation  has thus been calculated by the adoption  of the multiplier and divisor selected by Mr. Tongaonkar.   The question 982 which calls for our decision is whether the multipliers  and divisors  adopted  by  Mr.  Tongaonkar can  be  said  to  be appropriate.   As  we  have already  mentioned,  it  is  the multipliers  and divisors that play a decisive part  in  the determination of the employer’s claim for rehabilitation  in all bonus proceedings, Mr.  Tongaonkar’s evidence has been severely  criticised  by the respondents and in fact, the tribunal does not appear to have  been favourably impressed by it.  Before dealing  with the  criticism  made  against  his  evidence,  it  would  be pertinent  to observe that the witness has given  exhaustive details  on the points put to him  in  examination-in-chief, and  his  evidence, read as a whole, does make  an  imposing reading.   But  sometimes  the wealth of  details  given  by experts  is Apt to complicate the narrow points  of  dispute between  the parties and to create doubt and confusion;  the large  number  of technical details expressed  in  technical language  may,  in  some cases, tend to  cloud  rather  than clarify  the points which the tribunal has to consider.   We feel  inclined  to hold that is what has  happened  to  some extent  in  the  present case.  But that  by  itself  cannot obviously be said to introduce any infirmity in the evidence given  by  the expert or affect its  credibility.   It  only means  the tribunal has to analyse his  statements,  examine them  carefully  in the light of his  cross-examination  and decide how far it would be justified in acting on them. It  has  been urged before us by the  respondents  that  the claim made by Mr. Tongaonkar in regard to the rehabilitation of the pre-1939 block should be rejected.  The contention is that,  this block must have been completely replaced  before 1953 and no claim for its rehabilitation can be entertained. This argument was based substantially on the assumption that a  part of Rs. 997.42 lakhs must have been utilised for  the purpose  of  replacing the said block.  Mr.  Tongaonkar  has stated  that  prior to 1-8-1954 the total  amount  spent  on modernisation,  replacement  and  rehabilitation  and  other sundry jobs, but excluding’ expansion, was approximately Rs. 9.97"crores,  and in support of this ’statement he  produced Ex.  C-29, 983 which shows the said expenditure year by year.  According to this  statement 78 lakhs had been spent on the  construction of  Rohri Works and Kistna Works, and Rs. 622-13  lakhs  had been  spent  on the expansion during  the  post-war  period. This  gives the figure of Rs. 700.13 lakhs.  Deducting  this amount from the total expenditure of Rs. 1697-55 lakhs,  the balance  of,  Rs. 997.42 lakhs is shown  as  expenditure  on modernisation, rehabilitation, replacement and other  sundry capital jobs.  It is in respect of this amount of Rs. 997.42 lakhs  that Mr. Tongaonkar was severely cross-examined.   In cross-examination he stated that he was not in a position to say whether out of the total expenditure of Rs. 997.42 lakhs shown  in  Ex.   C-29  a major portion  had  been  spent  on rehabilitation  and  replacement of the pre-1939  block  and 1940-44  block.  He admitted that the figures in  Ex.   C-29 had  been  prepared  by the  Accounts  Department  from  the Financial Books so far as year to year total expenditure was concerned  and he also stated that it was not  possible  for him  to  give  details about the  said  expenditure.   These

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answers  indicated that the amount of Rs. 997.42  lakhs  had been  ascertained mechanically by deducting from  the  total expenditure of Rs. 1697.55 lakhs incurred on all jobs up  to 31-7-1954  the  estimated expenditure of  Rs.  700.13  lakhs which  was treated as expenditure for expansion  during  the said period.  It is on these statements that the respondents placed reliance in support of their argument that the amount of  Rs. 997.42 lakhs must have been utilised for  completely replacing the pre- 1939 block.  Thus presented, the argument no doubt appeared very plausible, and so we asked Mr.  Kolah to  give  us a satisfactory explanation about the  items  of this  expenditure.   Accordingly  Mr.  Kolah  has  filed   a statement, Ex.  I which gives a rough classification of  the total capital expenditure of about Rs. 997 lakhs incurred up to  31-7-1954 on modernisation, replacement,  rehabilitation and other sundry and miscellaneous jobs.  The several  items of this expenditure are broadly indicated under eight heads, the last of which covering an 125 984 amount  of Rs. 160 lakhs has in its turn been split up  into five  separate items by the statement 1(a).  There was  some dispute  before  us about the admissibility of some  of  the said items under cl. 5 of this document 1(a).  But Mr. Kolah contends, and it is not disputed by the respondents  either, that  even if the whole of the disputed item 5 is  excluded, the  remaining  items on Ex. 1 give  a  fairly  satisfactory explanation  about the work of  rehabilitation,  replacement and modernisation on which the bulk of Rs. 997.42 lakhs must have  been  spent.  In view of this statement we  must  hold that  the assumption made by the respondents that  the  said amount  of  Rs.  997.42 lakhs must have  been  utilised  for replacing the pre-1939 block is not well-founded. It  is  then contended that there is  no  justification  for keeping  the  pre-1939  block still alive  in  view  of  the estimate made by Mr. Tongaonkar about the life of the cement plant  and  machinery.  The suggestion is  that  the  oldest block  is  deliberately kept alive in order  to  enable  the appellant  to claim a higher multiplier in  calculating  the rehabilitation  amount.  It cannot be said that there is  no force  at  all in this criticism.  In  fact  Mr.  Tongaonkar himself  has  admitted that a given portion  of  this  block could have been discarded earlier, but he added, that a part of it had been rehabilitated as a temporary measure in order to  carry  on. That is why that particular  portion  of  the block  had not been discarded so far.  According to him  the pre-1939  block  contains  a portion whose  useful  life  is already over, but the appellant would have to carry on  with it  until  finances  could be  found  for  modernisation  or reconstruction or entire replacement of the said block.   In our  opinion, this explanation cannot be said to  be  wholly satisfactory.   If  the useful life of the whole  block  had really  expired,  the appellant would have easily  found  it possible to replace the said block in due time having regard to its general financial position. The next criticism made against Mr. Tongaonkar’s evidence is that  admittedly he has not calculated the average  life  of the said block.  He stated that he had assessed the pre-1939 block by his personal visits to 985 the  factory  by  observing  to  what  extent  it  had  been rehabilitated as a temporary measure and by considering what its  present  condition was.  It is possible that  with  his knowledge and experience Mr. Tongaonkar may be able to  form a  proper assessment about the life of the machinery in  the

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manner  deposed  to by him.   But  unfortunately,  effective cross-examination  on  this point has been stifled  to  some extent  because’  we  find  that  on  some  material  points questions  put to the witness were objected to by Mr.  Kolah and  the objection was upheld by the tribunal.  The  witness was  asked whether he could tell the tribunal with his  wide experience,  how  many years on the average 1939  block  had spent prior to 1939.  This question was clearly relevant and from  the respondents’ point of view it was  important.   If the  witness was able to predicate about the  future  useful life of the machinery from his examination of the plant,  it was  suggested to him that it should be possible for him  to give  an estimate about the life already spent by it by  the same process.  The object of this question obviously was  to show  that the machinery in question had lived  much  longer than its estimated life as deposed to by the witness.   This question   having  been  disallowed,  any   further   cross- examination  to test the claim of the witness that from  the inspection and examination of the machinery he can predicate the period of its future useful life became impossible.  The witness  was  further  asked to state whether  it  would  be correct  to  assume that the said pre-1939 block had  on  an average spent more than 15 years of its life.  This question also  was disallowed, and the respondents naturally  make  a serious grievance that they were not given an opportunity to show  that Mr. Tongaonkar’s estimate about the life  of  the plant and machinery was a gross under statement. The  respondents  have  then objected to  the  inclusion  of several  items  in the approximate  cost  of  rehabilitation mentioned in col. 8 of Ex.  C-2.  The new additional packing machine  in regard to the factory at Banmore as well as  the crane storage are, it is urged, not items of rehabilitation, but of expansion.  Similar 986 criticism  is made in regard to the  dust-collector  plants, coal-handling plants, items in regard to the  fluidification system, diesel engine shunting locomotive and similar  other items.   The  respondents’ grievance is  that  by  including these  items  which  are really matters  of  expansion,  the amount of approximate cost of rehabilitation has been unduly increased.   We  are  unable  to say  if  the  grievance  is justified. In  regard to the multiplier adopted by Mr. Tongaonkar,  the criticism is that it is based on hypothetical considerations determined  by  him  in a subjective  manner.   It  is  also pointed out that the failure of the witness to take out  the present day replacement cost of individual items of the pre- 1939   block  has  introduced  an  additional   element   of uncertainty in the final calculations made by him in  regard to the multiplier.  No doubt, the witness has stated that he has used the multiplier of 4.8 on a comparative study of the quotations  received between 1939 and the present  day,  but dealing   with  the  machinery  blockwise  is  not  a   very satisfactory  way  of  determining such  a  multiplier.   In support   of  this  argument,  reference  is  made  to   the statements  made by the witness to the cost of 180-ton  per- day  kiln, if manufactured by the appellant, would be  lower than  that of a 300-ton-a-day kiln.  The witness then  added that  the  appellant does not  manufacture  a  180-ton-a-day kiln,  and if such a kiln is imported from abroad  its  cost would  be somewhat higher than that of a 300-ton-a-day  kiln manufactured by the appellant under present day  conditions. He  was then asked whether he had got a quotation of a  180- ton-a-day  kiln, and he admitted that he had none, and  that he had estimated it approximately at Rs. 11 1/2 lakhs.   The

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respondents  urged that this estimate about the cost  of  an imported  180-ton-a-day kiln is purely notional and  is  not based on any material at all.  This part of the criticism is justified. The  next argument urged against the statements prepared  by Mr. Tongaonkar is that he appears to have taken into account the prices prevailing in 1956 and has completely ignored the prices  as  they obtained in the previous  years.   We  have already observed that 987 in deciding the amount of rehabilitation by the adoption  of an  appropriate  multiplier, the tribunal should  take  into account  all relevant facts and these would not be  confined to  the price level prevailing in any one  particular  year. When deciding the hypothetical question as to what would  be the price in future when the plant and machinery would  have to be replaced or rehabilitated, the tribunal has to take an overall picture of prices into account, and the argument  is that  concentration  on the price level of  1956  alone  has introduced  an  infirmity in the calculations  made  by  the witness. There  is another infirmity in these calculations which  has been  criticised  by the respondents.   Mr.  Tongaonkar  has lumped together the plant and machinery as well as buildings and other properties belonging to the appellant in col. 2 of Ex.   C-2.  The more scientific and satisfactory  method  of dealing with the question of rehabilitation is to treat  the plant and machinery separately from the buildings and  other assets that need rehabilitation.  In fact we asked Mr. Kolah to  give  us a statement showing the cost of the  plant  and machinery  and the buildings and other assets separately  in order  to  enable  us to have a clearer  picture  about  the extent of the rehabilitation needs of the appellant.  He has accordingly filed a statement, Ex. F (a). There  is  yet  another  point  on  which  Mr.  Tongaonkar’s evidence  has  been criticised by the  respondents.   It  is argued  that this evidence shows that under his  concept  of modernisation  several items of expansion can  be  included. Mr. Tongaonkar has stated that by ’ modernisation’ he  meant ’a  composite scheme comprising replacement of the  part  of the   old  machinery  by  new  machinery,  installation   of additional  machinery  because the layout of  the  composite modernisation  scheme is different from the previous  layout and  rehabilitation  of the remaining machinery as  a  short term measure’.  By ’ rehabilitation’ he ment ’alterations to a  machine  or  machinery, installation  for  improving  its mechanical  performance,  its  technical  efficiency  or  to extend its life by a further span’.  This would also 988 include  what he compendiously describes as the  removal  of weak links.  According to him expansion can be divided  into two groups, viz., Group No.-1 construction of the completely new factory solely for obtaining additional production;  and Group  No.  2 would cover the specific  additional  machines which are installed not for modernisation purposes as  such, but   with  the  primary  object  of  obtaining   additional production.   He concedes that in the ’modernisation  of  an existing  factory’ expansion is only a part of  the  scheme. This means that in the  modernisation scheme’ there would be an element of’ expansion’.  It would thus be clear that  the very broad and wide description of  modernisation’ given  by the  witness would justifiably give rise to an  apprehension in  the minds of workmen that under the heading of  ’modern- isation’ items of  expansion ’ pure and simple are likely to creep  in.   That is why evidence given by experts  in  such

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proceedings  needs to be scrutinised carefully, with a  view to exclude items of ’expansion’ properly so called from  the relevant calculations. Mr.  Tongaonkar has stated that when plant or  machinery  is rehabilitated  or  replaced  it  may  lead  to  increase  in production.   But  such an in Crease is  purely  incidental. But  what would be the position where, for instance, a  180- ton-a-day kiln is substituted by a 300-ton-a-day kiln by way of rehabilitation or replacement ?  The employer is entitled to say that the first category of kilns is not available  in the  market  or  that the later category of  kilns  is  more profitable Ind economically more useful.  That being so,  if the  first  kiln  is discarded and  is  substituted  by  the latter, that is an item of rehabilitation or replacement and not of expansion.  On the other hand, by the substitution of the latter kiln there would be such an appreciable  increase in  production that the workmen may be entitled  to  contend that   some   apportionment   should   be   made   and   the rehabilitation  part  of the machinery should  be  separated from   the   expansion  part  which  has  crept   into   the transaction.  We confess that it would be- very difficult to undertake the task of making any such apportionment. 989 Even  so, tribunals may have to consider the workmen’s  plea if  they are satisfied that the steps taken by the  employer by  way of rehabilitation have led to a very large  increase in  production.   In this connection  the  respondents  have relied  on  Ex.  H. 0. C-2 which, according to  them,  shows considerable increase in production, and that, it is  urged, is the result of expansion and not of rehabilitation. Mr. Tongaonkar has suggested in his evidence that it is  the intention of the employer that decides the character of  the transaction.  If the employer wants to instal new  machinery solely  with the object of expanding his business,  that  is expansion;  but if he purchases new machinery  for  business reasons  and not for the purposes of expansion, it would  be rehabilitation   notwithstanding  the  fact  that  the   new machinery   gives  rise  to  increased   production.    This approach,  in  our opinion, gives undue  importance  to  the intention  of  the employer and we think that, on  a  proper occasion,  the  question may have to be  considered  by  the application of some objective tests.  In this connection  it would  be relevant to bear in mind the fact that  the  steps taken  by  the appellant for  rehabilitating,  replacing  or modernising  its  machinery  are  a  part  of  its  plan  of expanding its business so as to meet the growing demand  for cement in our country. In  deciding  the  question  as  to  whether  the  claim  as disclosed  by the statements prepared by Mr.  Tongaonkar  is inflated  or not, the respondents have asked us to  consider the  estimate  made  by the  appellant’s  Chairman  in  that behalf.  In his speech delivered on January 24, 1951, at the Fourteenth Annual General Meeting of the appellant  company, the Chairman stated that most of the company’s pre-war plant would  be due for replacement in the course of the next  ten years  and  he  added that " at the  present  price  levels, replacement will cost on an average 2 1/2 times the original cost.   This  will  involve an expenditure of  about  Rs.  8 crores  over  and  above  the  provision  already  made  for depreciation  ". The contention is that, considered  in  the light   of   this   estimate,   the   pre,sent   claim   for rehabilitation is very much inflated. 990 When Mr. Tongaonkar was asked about this estimate he  stated that  the Chairman had not consulted him while drafting  the

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annual report or while drafting the portion of the speech in regard to ’rehabilitation’ and he also added that he did not agree  with the figures given by the Chairman regarding  the replacement cost of plant and machinery in his report  dated January  24,  1951.   This  explanation  may  not  be   very satisfactory.   But we cannot ignore the fact that when  the Chairman made his statement he did not purport to  calculate the claim for rehabilitation in terms of the formula and  so it would not be fair to test the evidence of the witness  in the  light  of  the estimate given by the  Chairman  in  his speech. We have so far considered the broad arguments urged  against Mr. Tongaonkar’s evidence.  Unfortunately, the tribunal  has contented  itself  merely  with  the  observation  that  the multiplier  of  2.7 would be adequate; and it has  given  no finding as to the suitable divisor.  That is why we must now proceed  to  adopt  a suitable multiplier  and  divisor  for deciding  the question of rehabilitation.  We  have  already stated our conclusions in regard to some of the  infirmities in  the  evidence  of  Mr.  Tongaonkar  and  the  statements prepared  by him.  He has lumped together all assets of  the appellant  that  need  rehabilitation.  He  has  taken  into account  the  prices  prevailing only in 1956,  and  in  the selection  of  an average multiplier he  has  probably  been slightly generous to the appellant.  His estimate about  the life  of the plant and machinery has not been allowed to  be sufficiently  tested in crossexamination and, on the  whole, it  appears  to  err  a little too much on  the  side  of  a conservative  estimate ; and if that is so his  divisor  may need  revision;  it  is  also probable  that  in  the  items included by him under rehabilitation may have been  included some  which  are  more of the character  of  expansion  than rehabilitation,  replacement or modernisation.  Besides,  it is  not  unlikely  that the steps  taken  by  the  appellant ostensibly for rehabilitation, replacement and modernisation of the machinery have appreciably increased its  production, and that may partly be due to the fact that the 991 general plan of expansion adopted by the appellant has  been in  operation  for some time past.  It is in  the  light  of these  facts that we have to examine the  appellant’s  claim for  rehabilitation.  In doing so, we have taken  Ex.   C-2, Ex.   C-23 and Ex.  F (a) as a basis for  our  calculations. It  is  somewhat unfortunate that in making  its  claim  for rehabilitation  Mr.  Tongaonkar did  not  make  calculations separately  in  respect of plant and machinery  as  distinct from  buildings, roads, bridges and railway sidings.  It  is true  that at our instance a statement Ex.  F (a)  has  been filed  before  us; but if such a statement  had  been  filed before the tribunal, the respondents would have had a better opportunity of testing the accuracy of the calculations made in it and the basis on which the respective multipliers  and divisors  are  sought  to be deduced  from  it.   We  would, therefore, like to make it clear that the calculations which we   now  propose  to  make  in  regard  to  the   item   of rehabilitation  should  not be ,taken to be binding  on  the parties  in  subsequent  years.  If, in  the  light  of  our decision  on  the principal points raised before us  in  the present appeals, the parties decide to settle their disputes about bonus for subsequent years there would be no  occasion for  the  tribunal  to deal with them on  the  merits.   If, however, these disputes have to be, settled by the tribunal, it would be open to the parties to lead evidence in  support of their respective contentions.  The tribunal also would be at liberty to consider the matter afresh and come to its own

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conclusion on the merits. Let  us now proceed to make the relevant calculations.   The first step to take is to correct the figures in Ex.  C-2  by excluding  the  cost  of  buildings,  roads,  ,bridges   and railway-sidings from the total cost mentioned in it  against the  several blocks.  This cost has been supplied to  us  by the  appellant in Ex.  F (a).  This is how  the  corrections work out.  In our calculations all figures are expressed  in ’lakhs’: 126 992                   Chart I.  Period       Original cost     Less cost of    Balance        of block        buildings etc. (1)                 (2)      (3)                (4) Up to 1939         486.89    132.98            353.91 1940-44             59.91       22.38              37.53 1945-47            208.93       68.15             140.78 1948-54           1144.81      333.47             811.34 In Ex.  F (a) the appellant has shown the respective average ratios in col. 5 in regard to items of property mentioned in col.  2. We think, in making our calculations, it  would  on the  whole be fair to adopt 3.5 as a suitable multiplier  up to  1939, 2 from 1940.47 and 1 from 1948-54 (as in C-2)  for replacement by part A.C.C. machinery.  We have not disturbed the  divisors taken by C-2 though we feel inclined  to  hold that Mr. Tongaonkar has underestimated the probable life  of machinery.    The   amount   of   yearly   requirement   for rehabilitation  for the total block minus  buildings,  etc., would  then work out at Rs. 229.39. This does not take  into account  the available reserves; that aspect  is  considered later on:                Chart II. Period Original cost of  Multiplier Total  Less Balance Life   Yearly                           break-        of   require-                          down as machi-    ment                        in Ex. C-2     nery                                     (in Yrs.) (1)       (2)    (3)   (4)     (5)       (6)     (7)    (8)         (approx.) UP to 1939 353.91 x3.5  1238.68  65.921172.767   167.54 1940-44  37.53   x2    75.06    4.66     70.40135.41 1945-47  140.78  x2    281.56  11.19   270.371518.02 1948-54  811.34  x1   811.34   42.84     768.502038.42                                            ..........                                  Total         229.39                                            .......... Then  we would deal with the buildings, roads,  bridges  and railway-sidings.,  These may be given an average life of  30 years for all blocks in order to compensate for cases  where they  have  to be demolished on  account  of  modernisation. According  to the previous statements of the  appellant  the life of factory buildings was about 35 years and residential 993 areas 50 years.  Even so we propose to take the average life of  30 years in making our calculations in respect of  these blocks.   The multipliers may be taken as 2.25 for  pre-1939 blocks,  1.5 for 1940-47 blocks, 1 for 1948-54 blocks.   The Bombay block has been taken as in Ex.  C-2:           Chart III. Period  Cost   Multi- Total   Less Balancelife  Yearly         plier            break down    require-                           valued at 5%   ment                             of cost

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(1)        (2)      (3)    (4)     (5)    (6)   (7)   (8) UP to 1939  132.98  X 2.25   299.20  6.65  292.55 20   144.63 1940-44    22.38  x 1.5    33.57   1.12  32.45  25    1.29 1945-47    68.15  x 1.5    102.22  3.40  98.82  25    3.95 1948-54     333.47 x 1       333.47  16.67 316.80 30   10.56 Bombay office     40.83            50.28     .73  49.55  69     .71 block                                        .............                                         Total  31.14                                        ............. Thus the total yearly requirement for rehabilitation of this block would come to 31.14 lakhs. The   appellant’s  claim  for  rehabilitation  can  now   be calculated  on  the basis of Ex.  C-23 as corrected  in  the light  of  the  three  charts  prepared  by  us.   As,   the calculations  in  the  chart show, we would  hold  that  the appellant  is entitled to an allowance of 216.10  lakhs  for rehabilitation in the relevant year:              Chart IV. Replacement of pre-1939 block: Cost of machinery (Chart II)          1172.76 Deduct reserves      311.00 Balance              861.76  divided by 7:  123.11 Add for buildings (Chart III)                                     14.63                                      .............. Total                                          137.74 Replacement cost of 1940-44  block Including buildings etc. (5.41 plus 1.29) ...    6.70      do    for 1945-47  (18.02 plus 3.95) ...   21.97      do    for 1948-54 (38.42 plus 10.56) ...   48.98      do       for Bombay Office           ...     .71                                   .................                           total    ...  216.10 994 Having  decided  that  the total  claim  for  rehabilitation admissible to the appellant is 216.10 lakhs for the relevant year,  we  must  now proceed to  determine  whether  on  the working of the formula any surplus profit is available.   We have  made  the following calculations in the light  of  the principles laid down by us in this judgment:                        Chart V. Total profit excluding Bhupendra factory                                         428.71 Less notional normal depreciation (p. 428, Pt. 1)                       100.22 Less income-tax payable @ 7 as. in the Rupee as per Note A below                          115.16 Less 6% on paid-up capital             76.06 Less 4% on working capital             26.10                                        .............                        Total...317.54    317.54                               Balance..  111.17 Less provision for rehabilitation..             115.88**                                        .............                                  Balance...4.71 This is how we have calculated theincome-tax  payable   for the relevant year:                    Note A. Gross profits                       428.71 Less statutory depreciation                        165.49

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                      ------------------ Balance                             263.22 Income-tax @ 7 as. in the Rupee                        115.16 **Provision for rehabilitation (vide Chart V): Total from Chart IV.                216.10 Less notional normal depreciation...                     100.22                         ---------------- Balance...                        **115.88                        ----------------- 995 We  ought to add that in our calculations we have not  taken into  account  the Bhupendra Factory  because  the  relevant material  for  working  out the figures in  regard  to  this factory is not adequate or satisfactory.  However from  such material as is available it appears that if the profits made by  the  said factory are included in the  calculations  and rehabilitation  required by it is worked out, it  would  not materially  affect  the’  figure  of  rehabilitation  amount determined by us. The result is that there is no available surplus from  which the  respondents can claim any bonus for the relevant  year. It  is  true  that  the  appellant  has  already  paid   the respondents 20.65 lakhs as bonus for the relevant year,  and it  is likely that it may continue to do so in future ;  but that is a matter which is not governed by the formula. In  view of the fact that the working of the formula  leaves no  available  surplus the appeal must be  allowed  and  the award  made by the tribunal set aside.  Since the  appellant had  come to this Court for the decision of the  larger  and more  important question about the revision of the  formula, we would direct that there should be no order as to costs. Appeal allowed.