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PETITIONER: THE TATA OIL MILLS CO.  LTD.

       Vs.

RESPONDENT: ITS WORKMEN AND OTHERS

DATE OF JUDGMENT: 05/05/1959

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

CITATION:  1959 AIR 1065            1960 SCR  (1)   1  CITATOR INFO :  R          1960 SC 571  (10)  R          1960 SC1346  (6)  F          1961 SC 941  (4)  RF         1968 SC 963  (32,41)  R          1972 SC 330  (10)  RF         1973 SC2394  (8,10)

ACT: Industrial  Dispute-Bonus-Gross  Profits-Extraneous   income -Profit  unrelated  to effort of  labour-Available  surplus- Prior charges-Return on depreciation reserve used as working capital.

HEADNOTE: In  resisting  the workmen’s claim for bonus  for  the  year 1955-56  the appellant contended that in  calculating  gross profits  for  the  purpose of the  Full  Bench  formula  the following items of income should be excluded :- (i)  Income earned by way of rent, light and power; (ii) estate  revenue  derived from sale of  excess  coconuts used in preparing oil grown in the appellant’s groves; (iii)     profit from sale of empty barrels; and (iv) sale  proceeds  of  tin  cans,  scraps,  logs,  planks, gunnies etc. as  they were extraneous income unrelated to the efforts  of the workmen. The  appellant  also  claimed that a profit of  Rs.  3  lacs appearing  in the accounts due to a change in the method  of valuation  was no real profit due to the efforts  of  labour and  should not be taken into account.  In  calculating  the available surplus the appellant claimed that it was entitled to  4% interest on the depreciation reserve used as  working capital. Held,  that the four items were earned by the  appellant  in the  normal course of its business and could no be  excluded from  the gross profits on the ground that it had  not  been proved  that they were the result of the direct  efforts  of labour in the bonus year.  Though there must be contribution of  the  workmen  in earning profits before  they  could  be

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entitled to profit bonus, it was not necessary to  establish direct  connection  between the efforts of the  workmen  and each  item of profit earned.  Profits earned in  the  normal course  of business were generally the result of  the  joint effort  of  capital  and labour.  Income or  profit  may  be extraneous if it either did not really arise in that year or it   arose  out  of  fortuitous   circumstances   altogether unconnected with the efforts of labour or arose out of  sale of fixed or capital assets. 2 Mill  Owners  Association,  Bombay  v.  The  Rashtriya  Mill Mazdoor  Sangh,  Bombay, (1950) L.L.J. 1247,  Shalimar  Rope Works  Mazdoor  Union Howrah v. Shalimar  Rope  Works  Ltd., Howrah, (1956) 2 L.L.J. 371, referred to. The  profit  of Rs. 3 lacs due to change in  the  method  of accounting was extraneous income and had to be excluded.  It was  not income in the normal course of business as  it  was not likely. to arise again.  It had arisen out of fortuitous circumstances  and  had nothing whatsoever to  do  with  the efforts of labour. The  appellant was entitled to a 4% return on the  deprecia- tion reserves used as working capital.  If reserves were not used for this purpose the concern would have to borrow money and pay interest thereon.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 321 of 1958. Appeal  by special leave from the Award dated the  September 27,  1957 of the Industrial Tribunal, Bombay,  in  Reference (I.T.) No. 119 of 1957. C.   K.   Daphtary,  Solicitor-General  of  India,   J.   B. Dadachanji and S. N. Andley, for the appellant. Rajani Patel and Janardan Sharma for respondent No. 1. 1959.  May 5. The Judgment of the Court was delivered by WANCHOO  J.-This is an appeal by special leave  against  the award  of  the  Industrial Tribunal, Bombay,  in  a  dispute between  the  Tata Oil Mills Co. Ltd.,  Bombay  (hereinafter referred  to as the company) and its workmen, in the  matter of  profit  bonus for the year 1955-56.  The  dispute  arose over   a   demand   made  by   the   workmen   for   payment unconditionally  as  bonus  for the year 1955-56  of  a  sum equivalent  to four months’ wages/salary for  all  employees drawing wages/salary of less than Rs. 500 per menses.   This dispute  was  referred  to the Industrial  Tribunal  by  the Government of Bombay by its order dated June 18, 1957.   The company had already paid 21 months’ basic wages as bonus  to its  workmen  and the real dispute was thus only  about  the remaining bonus for a month and half. 3 The case of the workmen was that the company had made record profits  during the year and declared a dividend of  12  per centum  free  of income-tax, the workmen were  getting  much less than the living wage and the dearness allowance was not sufficient to fill the gap, and, therefore, profit bonus  at the rate of four months’ basic wages should be granted.  The company,  on  the other hand, contended that it  was  paying graded  scale of wages with annual and  biennial  increments and had already paid profit bonus for 2-1/2 months.  It  was not possible for the company to pay more than that as bonus, as the available surplus according to the Full Bench formula did not justify it.  It was also pointed out that though the company started as far back as 1917, the shareholders  began to get dividends only from 1940, and, therefore, a  dividend

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of 12 per centum free of income-tax was in the circumstances not   high.   The  company  also  claimed  that  in   making calculations  for  the purposes of the  Full  Bench  formula certain items of extraneous income should not be taken  into account.   Next  it  claimed that a profit  of  Rs.  3  lacs appearing in the accounts due to the change in the method of valuation  was no real profit due to the efforts  of  labour and  should  not be taken into account in  arriving  at  the available  surplus.   Lastly, it also claimed  that  it  was entitled  to 4 per centum interest on the  working  capital, including the amount in the depreciation fund. The Industrial Tribunal disallowed the claim of the  company on  all  these  three  points  and  after  making   relevant calculations  came  to  the  conclusion  that  there  was  a sufficient  surplus available to permit the grant  of  bonus for  3-1/2  months calculated on basic wages  and  therefore awarded the same.  The company thereupon applied for special leave  to  appeal, which was granted; and that  is  how  the matter has now come up before us for decision. We shall first take the question of extraneous income.   Six items  were  sought  to  be  excluded  by  the  company   as extraneous income, and they were these: 4                                            In lacs                                              Rs. (i)  Income earned by way of rent, light and power.....0-24 (ii)Estate Revenue....                                 0-08 (iii) Profit on sale of empty barrels                  0-89 (iv) Excess provision for expenses in the  previous year                                         0-31 (V)  Refund of income-tax on revision of Cochin assessment of Excess Profits Tax                0-49 (vi) Sale proceeds of tin cans, scraps, logs, planks, gunnies &c.                                    2-11                                       Total            4-12 The  Tribunal rejected the claim with respect to  all  these items,  though in the judgment it mentioned only items  (i), (ii), (iii) and (vi) as those in dispute.  Apparently, items (iv) and (v) were not in dispute before it; but while making calculations,  it  seems  to have lost  sight  of  this  and disallowed  the claim with respect to these two items  also. Learned counsel for the respondents appearing before us  has stated that the claim with respect to items (iv) and (v) was conceded  by  the workmen before the Tribunal and  it  seems that by over-sight these items were not excluded by it.   He fairly  concedes that these two items may be  excluded  from consideration  in  making calculations for arriving  at  the available surplus.  We are thus left with four items,  which were  disallowed by the Tribunal.  The reason given  by  the Tribunal  for disallowing these items was that  they  formed part  of the profits earned in the course of  the  company’s business  and  there was no good reason for  deducting  them from the profits.  It further went on to say that as regards income  earned  by way of rent, light and power it  was  not disputed that expenditure in respect of buildings from which the rent was derived, such as on repairs and maintenance, is included  in the expenditure side of the account, and  taxes and  rates  for these buildings were paid  by  the  company. There was thus no reason for deducting this amount from  the profits.  It did not consider the 5 other  three items specifically and was content  to  include them on the general ground that they were profits earned  in the course of the company’s business. Mr.  Daphtary  appearing  for  the  company  has  drawn  our

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attention  to  a  number  of  cases  decided  by  industrial tribunals as well as labour appellate tribunals, where  such items  of income have been excluded on the ground that  they are  extraneous  income  unrelated to  the  efforts  of  the workmen.  We do not think it necessary to refer to all these decisions  and it is sufficient to say that these  decisions support  the contention put forward.  The main reason  given in  these  decisions  for  excluding  what,  is  termed   as extraneous income is that they are unrelated to the  efforts of workmen.  We may refer only to two of these decisions  of the  labour appellate tribunal in this connection.   In  The Mill-Owners’  Association,  Bombay  v.  The  Rashtriya  Mill Mazdoor  Sangh, Bombay (1) in which the Full  Bench  formula was evolved, the appellate tribunal remarked at page 1257: " No scheme of allocation of bonus could be complete if  the amount  out of which a bonus is to be paid is  unrelated  to employees’ efforts." The  Appellate  Tribunal reiterated this  in  Shalimar  Rope Works Mazdoor Union, Howrah v. Messrs.  Shalimar Rope  Works Ltd., Shalimar, Howah (2) by observing at page 372 that " it is  however  too late in the day to question the  view  that there are profits unrelated to workers’ efforts and referred to  as  ’extraneous profits’ and that such profits  must  be left  out of account in deciding the question whether  there is  available  surplus  in  any  particular  year."   Income received  by way of rent of quarters and by sale  of  scrap- materials has generally been treated as extraneous income by the industrial tribunals on the basis of these decisions  of the  Labour  Appellate Tribunal.  It is the  correctness  of this view which has been canvassed before as in this appeal. Reliance  has  also  been placed by some  tribunals  on  the decision of this Court in Muir Mills Co. Ltd. v. Suti  Mills Mazdoor (1) 1950 L.L.J. 1247. (2) 1956 (11) L.L.J. 371. 6 Union, Kanpur (1), in this connection.  This Court ,observed at page 998 as follows: "There are however two conditions which have to be satisfied before  a demand for bonus can be justified, and  they  are, (1) when wages fall short of the living standard and (2) the industry  makes  huge profits part of which are due  to  the contribution   which   the  workmen   make   in   increasing production." It was further observed at page 999- " It is therefore clear that the claim for bonus can be  made by  the  employees  only  if  as  a  result  of  the   joint contribution  of capital and labour the  industrial  concern has  earned profits.  If in any particular year the  working of  the industrial concern has resulted in loss there is  no basis nor justification for a demand for bonus." It is clear from these observations that this Court was  not dealing  with the question of extraneous income as  such  in the  Muir Mills Case (1).  The principles laid down in  that case show that there must be profits in the particular  year for  which  bonus  is claimed,  resulting  in  an  available surplus before profit bonus can be awarded.  It is only when profits  are made that profit bonus can be awarded,  subject to  two further conditions, namely, (1) wages fall short  of the living standard and (2) the industry makes large profits part of which are due to the contribution which the  workmen make _in production.  It is this last condition which  seems to have been relied upon by industrial tribunals in  holding that there must be direct connection between the efforts  of

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labour and the profits, and unless that direct connection is established the profits must be treated as unrelated to  the efforts of labour and thus become extraneous income.   There is  no doubt that there must be contribution of the  workmen in earning profits before they are entitled to profit bonus; but  it  was not laid down in the Muir Mills Case  (1)  that direct connection between the efforts of the workmen and the particular item of profit earned must be established  before the  profit  can be taken into account for the  purposes  of arriving at the available (1)..1955 (1) S.C.R. 991. 7 surplus.   An  industrial  concern  carries  on  a   certain business.  In carrying on that business it employs.  capital as well as labour, and generally speaking the profits earned in the normal course of business at the end of year are  the result of the joint effort of capital and labour.  Even  so, it  may  be  recognized  that  there  may  be  instances  of extraneous income for the purpose  of the Full Bench formula due (i) either to some part   of the profits not having been earned in that year, (ii)     or  to  some part  of  profits arising   out   of   fortuitous   circumstances   altogether unconnected  with the efforts of labour.  A  third  category may  be the income arising out of sale of fixed  or  capital assets.   Such  income or profit may  be  called  extraneous income  as  either it did not really arise in that  year  or though   it  has  arisen  in  that  year,  labour  has   not contributed  anything towards its accrual; it may  therefore not  be taken into account in calculations according to  the Full  Bench formula.  But apart from these cases, we  cannot see how income arising during the year in the normal  course of  business of the concern can be called extraneous  income merely  on the ground that no direct connection between  the efforts  of  labour and the accrual of the income  has  been established.   In this very case we find an instance of  the first  category  in two items relating to return  of  excess provision  for  expenses and refund of excess  profits  tax. These  two  amounts have gone to swell the profits  of  this year; but they have not arisen in this year and may,  there- fore, properly be treated as extraneous income.  An instance of  the  second kind is to be found in the profit of  Rs.  3 lacs  made  in  this  year by a  change  in  the  method  of valuation  of  the  company’s  assets,  which  is   entirely unconnected  with the efforts of labour.  But so far as  the other  four  items  are concerned, they are  earned  by  the company in the normal course Of its business and there is no reason why they should be excluded on the ground that it has not  been proved that they are the result of direct  efforts of, labour in this year. Let  us take these four items one by one.  The first is  the item of income earned by way of rent, light and 8 power.   It  is  well known that  many  industrial  concerns provide  amenities for their workmen by  building  quarters, which  are provided with light and power from the  concern’s power house.  The quarters and power-house are built out  of capital or profits earned in past years.  If they are  built out  of  capital, there is provision for a return  which  is generally  at 6 per centum on the paid-up capital.  Even  if they  are  built out of past profits, the  depreciation  and rehabilitation charges fall on the gross profits before  the available surplus is arrived at.  Besides, expenditure  with regard  to repairs and maintenance, and rates and  taxes  is all  paid out of the income of the concern before the  gross profits  are arrived at.  In other words these expenses  are

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paid out of the profits in the earning of which the  workmen have contributed their labour.  How can the company claim to exclude  the rent etc., from the profits while  meeting  the expenditure relating to such assets out of the profits, part of  which  is  attributable to the efforts of  labour  ?  In short, income by way of rent, light and power arises in  the normal  course  of business of the concern and there  is  no reason  why a direct contribution by labour during the  year in  question  must  be insisted upon in  the  case  of  such income.  The company must also be employing some labour  for purposes  of  maintenance and repairs of  the  quarters  and powerhouse,  even  though  the  labour  may  not  be  wholly allocated to this work only.  We are, therefore, of  opinion that income from rent, light and power arises in the  normal course  of  business of a concern and cannot be  treated  as extraneous income in the sense described above. The  next  item  is estate revenue.  We are  told  that  the company  has coconut groves, which produce coconuts used  in preparing  oil  which  is  one of  the  main  items  of  the company’s  business.   We are also told that  sometimes  the entire   produce  of  these  groves  is  not  used  in   the manufacture of oil and therefore some part of the produce is sold.   This income is out of this part sold in the  market. Here  again  the  income  arises in  the  normal  course  of business and the expenses for looking after and  maintaining the groves are paid                              9 by  the company and entered into its account.   The  company must also be employing labour to look after the groves.   In these circumstances. we fail to see why this income by  sale of surplus coconuts should be excluded from the profits  for the purpose of the Full Bench formula. Then we come to the profit on sale of empty barrels and sale proceeds  of  tin cans, scraps, logs, planks,  gunnies  etc. These  items  may be taken together, for the nature  of  the receipt  is  the same, though on account of  the  method  of accounting  employed, the income in the case of  barrels  is shown  as  profit while in the case of scraps  etc.,  it  is shown  as sale proceeds: It is said that this is  extraneous income because it is unrelated to the efforts of labour.  We cannot  accept this contention, for this income again is  in the  normal  course of business.  Further when  the  company buys  chemicals (for example), it pays for the chemicals  as well  as  the  containers, namely, the  barrels.   When  the chemicals  are  used  up  these  empty  barrels  are   sold. Whatever is the income from the sale of these barrels is  in reality  a reduction in the cost price of chemicals  to  the company, though by the method of accounting employed it  may appear  as profit on the sale of barrels.  We see no  reason why  the reduction in cost price of chemicals should not  be taken  into  account for the purpose of  arriving  at  gross profits  in making calculations for the Full Bench  formula. Some  scraps  are  normally  left over  in  the  process  of manufacture.   Whatever income is derived from  such  scraps also  goes  to reduce the cost price of  materials  used  in production and thus-to increase the profits.  We do not see: why  this  income  arising  in  the  normal  course  of  the company’s  business should not be taken into account on  the plea  that  labour  has not,  directly  contributed  in  its accrual.   We are, therefor, of opinion that all these  four items  were  rightly taken into account by the  Tribunal  in arriving at the gross. profits. Then we come to the profit of Rs. 3 lacs made by a change in the method of accounting.  The Tribunal did not accept  this income  as  extraneous and in so doing it fell  into  error.

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This income of Rs. 3 lacs has 10 nothing  whatsoever to do with the efforts of  labour,  even though  it  has arisen this year.  It has arisen  out  of  a fortuitous  circumstance inasmuch as this year there  was  a change in the basis of valuation of stock.  It is not income in  the normal course of business, because it is not  likely to  arise ever again.  In the circumstances this  income  of Rs. 3 lacs must be treated as extraneous income and excluded for  the  purpose of calculations based on  the  Full  Bench formula. The  last item with which we are concerned is the return  on the amount of depreciation reserve\ used as working capital. An  affidavit was made on behalf of the company that it  had used  its  reserve  funds  comprising  premium  on  ordinary shares,  general  reserve, depreciation  reserve,  workmen’s compensation  reserve, employees’ gratuity reserve, bad  and doubtful  debt  reserves  and  sales  promotion  reserve  as working capital.  The Tribunal, however, allowed return at 4 per  centum  on a working capital of Rs. 31.88  lacs.   This excluded  the  depreciation reserve but included  all  other reserves  which were claimed by the company and having  been used  for working capital.  The Tribunal gave no reason  why it  excluded  the  amount of  the  depreciation  reserve  in arriving  at  the figure of working capital.   A  return  is allowed  on  the  reserves used as working  capital  on  the ground that if these reserves are not used for this purpose, the  concern would have to borrow money and pay interest  on that.   This being the basis on which a return  on  reserves used as working capital is allowed, there is no reason  why, if  there  is in fact money available  in  the  depreciation reserve  and if that money is actually used during the  year as  working capital, a return should not be allowed on  such money  also.  Further if the money has been  converted  into such assets as stock in trade and stores etc., (i.e.,  other than  capital  or  fixed  assets),  it  will  be   obviously available  from  year  to year to  that  extent  as  working capital subject to adjustments on account of loans,  secured or otherwise.  Learned counsel for the respondents wanted to contest  that the whole amount in the  depreciation  reserve was not available for being used as working capital.  It  is enough to say that the 11 affidavit  of  the Chief Accountant filed on behalf  of  the company was not challenged before the Industrial Tribunal on behalf   of  the  respondents.   It  would,  therefore,   be impossible   for  us  now  to  over-look   that   affidavit, particularly when the Tribunal gave no reason why it treated the  working  capital  as  Rs.  31.88  lacs  only.   So  far therefore  as the present year is concerned, we must  accept the  affidavit  and hold that the working  capital  was  Rs. 139.09  lacs.  It will, however, be open to the  workmen  in future to show by proper cross-examination of the  company’s witnesses or by proper evidence that the amount shown as the depreciation  reserve was not available in whole or in  part to  be  used  as working capital and that  whatever  may  be available  was  not in fact so used in the  sense  explained above.   In the present appeal, however, we must accept  the affidavit  of the Chief Accountant.  The Tribunal allowed  4 per centum interest on the working capital and that must  be allowed on the total sum of Rs. 139-09 lacs. We now come to the calculations in accordance with the  Full Bench formula, subject to what we have said above:                                Rs. in lacs      Rs. in lacs Profit for the year.                             15-53

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Add provision for - (i) tax...                              14-51 (ii) depreciation                       119-75 (iii) bonus....                          7-76     34-02 Gross Profits.                                    49-55 Less extraneous income                             3-80               Balance....                         45-75      Less notional normal depreciation          11-12      Balance...                                   34-63      Less income-tax payable according to      Meenakshi Mills case (1) (Per Note A      Below)....                                   15-90      Balance...                                   18-73 12                                      Rs. in lacs Rs. in lacs Less dividend on paid-up                     5-54      capital Less return on Reserves used                 5-56      as working capital of Rs.      139-09 @ Rs. 4 per cent.                        11-10      Available surplus                                7-63 Less bonus actually paid                      7-90 Less rebate of income-tax at                  3-40      -/7/- in the rupee..                              4-50 Amount remaining with the Company.....                 3-13      Note A.                       Rs. in lacs Gross Profits                          49-55 Less total statutory      depreciation                      13-19       Balance......                    36-36 Income-tax at -/7/-in                  15-90      a rupee The  available surplus of profit thus works out at Rs.  7-63 lacs.   The  company has, already paid 2-1/2  months’  bonus amounting  to  Rs. 7-90 lacs to the  workmen.   The  company would  be entitled to a rebate of Rs. 3-40 lacs on this  sum and  therefore the-amount which the company has actually  to pay  is  Rs. 4-50 lacs.  This will leave a sum of  Rs.  3-13 lacs  out of the available surplus with the company for  its use.   It  will be seen that more than  half  the  available surplus  has  already gone to labour according to  what  the company has paid.  There are three sharers in the  available surplus, namely, the industry, share-holders and labour.  In the  circumstances no case has been made out for  increasing the  profit bonus beyond what the company has already  paid, particularly  when we find that the company has  claimed  no rehabilitation  charges in this year.  We, therefore,  allow the  appeal, set aside the order of the Industrial  Tribunal and dismiss the claim of the workmen for any bonus   13 beyond what has already been granted by the company.  In the particular circumstances of this case, we order the  parties to bear their own costs.                       Appeal allowed.