1. Industrial dispute regarding the demand for unconditional payment of profit bonus for employees drawing wages below a specified monthly limit. (Para 1 )
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1959 Supreme(SC) 86
SUPREME COURT OF INDIA
5th May, 1959.
S.R. Das, C.J.I., N.H. BHAGWATI, S.K. DAS, P.B. GAJENDRAGADKAR AND K.N. WANCHOO, JJ.
Tata Oil Mills Co. Ltd., . Appellant
Versus
Its Workmen, Respondents.
Civil Appeal No. 321 of 1958,
Advocates appeared
C. K. Daphtary, Solicitor-General of India (M/s. J. B. Dadachanji and S. N. Andley, Advocate of M/s. Rajinder Narain and Co., with him), for Appellant; M/s. Rajan Patel and Janardan Sharma, Advocates, for Respondent 1. .
Advocates:
C.K.DAFTARY, J.B.DADACHAN, JANARDAN SHARMA, RAJANI PATEL, RAJINDAR NARAIN, S.N.ANDLEY
C.K.DAFTARY, J.B.DADACHAN, JANARDAN SHARMA, RAJANI PATEL, RAJINDAR NARAIN, S.N.ANDLEY
Income earned in the normal course of business is not 'extraneous income' for bonus calculations, regardless of a direct link to labour's effort. Extraneous income is limited to profits not earned in the current year, fortuitous gains, or proceeds from the sale of capital assets.
Headnote:(A) Industrial Dispute - Profit Bonus - Full Bench Formula - Available Surplus - Extraneous Income - Income arising in the normal course of business is generally the result of the joint effort of capital and labour. It cannot be termed as extraneous income merely because no direct connection between the efforts of labour and the accrual of that specific income has been established. (Para 6) Extraneous income for the purpose of calculating available surplus includes: (i) profits not earned in the year for which bonus is claimed; (ii) profits arising out of fortuitous circumstances altogether unconnected with the efforts of labour; and (iii) income arising out of the sale of fixed or capital assets. (Para 6) Income from rent, light, power, estate revenue, and the sale of scrap materials or empty barrels, when earned in the normal course of business, does not constitute extraneous income. (Paras 7, 8, 9) Profit resulting from a change in the method of valuation of assets is a fortuitous circumstance, not income in the normal course of business, and must be treated as extraneous income. (Para 10)
(B) Working Capital - Return on Reserves - A return is allowable on reserves, including the depreciation reserve, if such funds are actually used as working capital during the year, as this prevents the necessity of borrowing and paying interest. (Para 11)
Facts of the case:
An employer and its workmen were in dispute over the quantum of profit bonus for a specific year. The workmen demanded a bonus equivalent to four months' wages, whereas the employer had already paid two and a half months' basic wages. The employer contended that the available surplus, calculated according to the Full Bench formula, did not justify further payment. The employer sought to exclude several items of income as "extraneous" and claimed a return on the depreciation reserve used as working capital. The Industrial Tribunal had disallowed these claims and awarded a bonus of three and a half months.
Findings of Court:
The court held that income from rent, light, power, estate revenue, and sale of scrap/barrels were earned in the normal course of business and were not extraneous. However, profits from a change in valuation method and refunds of excess provisions/taxes from previous years were correctly classified as extraneous. The court further held that the employer was entitled to a 4% return on the depreciation reserve used as working capital. Upon recalculation, the available surplus was found to be insufficient to justify any bonus beyond what had already been paid.
Issues: Whether income from rent, estate revenue, and sale of scrap constitutes extraneous income unrelated to labour's efforts; whether profit from a change in valuation method is extraneous; and whether a return on the depreciation reserve used as working capital is permissible.
Ratio Decidendi: The court ruled that a direct connection between the efforts of workmen and every specific item of profit is not necessary for that profit to be included in the available surplus, provided the income is earned in the normal course of business. Extraneous income is limited to non-current year profits, fortuitous gains, or sale of capital assets. Return on reserves used as working capital is allowed to reflect the cost of capital.
Result: Appeal allowed.
Legal Category Hierarchy
Table of Contents
2. Workmen claim bonus based on record profits and low wages — Company contends available surplus is limited and certain income is extraneous. (Para 2 )
3. Income earned in the normal course of business is generally not extraneous, whereas fortuitous gains or income from previous years are excluded. (Para 4 , 5 , 6 , 7 , 8 , 9 , 10 , 11 )
4. Extraneous income for bonus calculations includes profits not earned in the current year, fortuitous gains unconnected to labour, or proceeds from capital asset sales. (Para 6 )
5. Appeal allowed — Industrial Tribunal order set aside — claim for additional profit bonus dismissed. (Para 12 )
6. What constitutes extraneous income when calculating the available surplus for profit bonus?
Extraneous income includes profits not earned in the current year, gains arising from fortuitous circumstances unconnected with the efforts of labour, and income derived from the sale of fixed or capital assets. (Para 6 )
7. Is income from rent, light, power, or the sale of scrap materials considered extraneous income?
No, such income is earned in the normal course of business and is not extraneous, as it often reduces production costs or involves labour for maintenance and repairs. (Para 7 , 8 , 9 )
8. Does a profit resulting from a change in the method of asset valuation qualify as extraneous income?
Yes, such profit is treated as extraneous income because it arises from fortuitous circumstances and is not earned in the normal course of business through labour efforts. (Para 10 )
9. Can a return be allowed on the depreciation reserve when used as working capital for bonus calculations?
Yes, if the depreciation reserve is actually used as working capital, a return is allowed because the concern would otherwise have to borrow money and pay interest. (Para 11 )
Judgement
K. N. 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 1955-58: 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 mensem. This dispute was referred to the Industrial Tribunal by the Government of Bombay by order of dated 18-6-1957. The company already paid 2 1/2 months basic wages as bonus to its workmen and the real dispute was thus only about the remaining bonus for a month and half.
2. The case of the workmen was that the company had made record profit 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, contented 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 share-holders began to get dividends only from 1940, and, therefore, a dividend 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 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.
3. 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 31/2 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.
4. We shall first take the question of erroneous income. Six items were sought to be excluded by the company as extraneous income, and they were these:
In lacs of Rs.
(i) Income earned by way of rent, light and power ... 0.24
(ii) Estates Revenue ... 0.08
(iii) Profits 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 Tri
