1. Dispute over bonus payment for workmen — Reference to Industrial Tribunal under Industrial Disputes Act, 1947 — Award of bonus based on available surplus. (Para 1 , 2 , 3 , 5 , 6 )
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1959 Supreme(SC) 91
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.
The Indian Hume Pipe Co., Ltd., Appellants
Versus
Their Workmen, Respondent.
Civil Appeal No. 54 of 1958.
Hind Mazdoor Sabha, Intervener.
Advocates appeared
M. C. Setalvad, Attorney-General for India (Mr. I. N. Shroff, Advocate with him), for Appellants; M/s. N. V. Phadke, T. S. Venkataraman, K. R. Sharma and K. R. Chaudhury, Advocates, for Respondent No. 1 and Intervener.
Advocates:
I.M.SHROFF, K.R.CHAUDHARY, K.R.SHARMA, M.C.SETALVAD, N.V.PHADKE, T.S.VENKATA RAMANA
I.M.SHROFF, K.R.CHAUDHARY, K.R.SHARMA, M.C.SETALVAD, N.V.PHADKE, T.S.VENKATA RAMANA
The court affirmed the Full Bench Formula for bonus calculations, ruling that only notional normal depreciation is a prior charge, debenture redemption funds are distribution factors rather than prior charges, and bonus calculations for multi-unit companies must be conducted on an All-India basis.
Headnote:(A) Industrial Disputes Act, 1947 - Section 10(2) - Bonus calculation - Full Bench Formula - Prior charges include provision for depreciation, reserves for rehabilitation, return on paid-up capital, return on working capital, and income tax. (Paras 7, 8, 9)
(B) Depreciation - For the purpose of bonus formula, notional normal depreciation should be deducted from gross profits, rather than statutory depreciation, initial or additional depreciation allowed under tax laws. (Paras 10, 11, 12, 15)
(C) Return on Capital - Return on preference shares is limited to the actual entitlement under the terms of issue and not a flat rate prescribed by the formula. (Para 17)
(D) Debenture Redemption Fund - Provision for redemption of debentures does not constitute a prior charge in the calculation of distributable surplus, although it is a relevant consideration during the distribution of such surplus. (Para 24) (E) Calculation Basis - Bonus calculations for a company with multiple units should be conducted on an All-India basis to maintain uniformity and prevent unfair advantages. (Para 28)
Facts of the case:
Workmen demanded six months' basic wages as bonus for a specific accounting year. The Industrial Tribunal awarded 4.5 months' basic wages. The company challenged the award, contesting the determination of available surplus and the classification of certain expenditures as prior charges.
Findings of Court:
The court determined the available surplus by applying the Full Bench Formula, substituting statutory depreciation with notional normal depreciation, limiting the return on preference shares to actual entitlement, and recognizing the depreciation fund as working capital. It disallowed the rehabilitation claim due to lack of evidence and rejected the debenture redemption fund as a prior charge. The All-India basis for calculation was upheld.
Issues: Whether statutory depreciation or notional normal depreciation is the correct prior charge; whether return on preference shares is fixed at 6% or actual entitlement; whether a depreciation fund constitutes working capital; whether debenture redemption funds are prior charges; and whether bonus should be calculated on an All-India basis.
Ratio Decidendi: The Full Bench Formula provides a stable framework for balancing the interests of shareholders, the company, and workmen. Prior charges must be strictly interpreted; obligations like debenture redemption, while primary, do not qualify as prior charges but affect the final distribution of surplus. Notional normal depreciation is used to ensure a fair apportionment based on social justice.
Result: Appeal allowed; award modified to aggregate bonus of four months' basic wages.
Legal Category Hierarchy
Table of Contents
2. Workmen claimed higher bonus based on profits and living wage — Employer contended no surplus existed after providing for prior charges under the bonus formula. (Para 3 , 4 )
3. Analysis of the Full Bench Formula — Determination of prior charges including notional depreciation, return on capital, and exclusion of debenture redemption funds from prior charges. (Para 7 , 8 , 9 , 10 , 11 , 12 , 13 , 14 , 15 , 16 , 17 , 18 , 19 , 20 , 21 , 22 , 23 , 24 , 28 )
4. Bonus surplus is determined by deducting specific prior charges from gross profits; debenture redemption funds are not prior charges but factors in distributing the available surplus. (Para 9 , 24 )
5. Appeal allowed — Industrial Tribunal award modified to grant aggregate bonus of four months' basic wages. (Para 25 , 26 , 27 , 29 , 30 , 31 , 32 )
6. What type of depreciation is allowable as a prior charge for bonus calculations?
Notional normal depreciation should be deducted from gross profits, rather than the full statutory depreciation allowed by income-tax authorities. (Para 10 , 11 , 12 , 15 )
7. Is a fixed 6% return on all paid-up capital mandatory under the bonus formula?
No, the formula allows flexibility; return on preference shares is limited to the actual entitlement of the shareholders, even if the general formula suggests 6%. (Para 17 )
8. Does a provision for a debenture redemption fund constitute a prior charge in bonus calculations?
No, the Full Bench Formula does not envisage debenture redemption as a prior charge, although it is a relevant consideration when distributing the available surplus. (Para 23 , 24 )
9. Can a depreciation fund be treated as reserves used as working capital?
Yes, if the balance sheet indicates that the fund is available and used as working capital, it can be included to calculate the return on working capital. (Para 18 , 19 , 20 , 21 )
10. Should bonus calculations be based on specific factory figures or an all-India basis for a company with multiple factories?
Calculations should be made on an all-India basis to ensure uniformity and prevent workers in some factories from benefiting from settlements made in others. (Para 28 )
Judgement
N. H. BHAGWATI J. : This appeal with special leave challenges the award made by the Industrial Tribunal, Bombay in Reference (I T) No.75 of 1956 between the appellant and the respondents whereby the Industrial Tribunal awarded to the respondents 41/2 months basic wages as bonus for the year 1954-55 (year ending 30-6-1955).
2. The appellant is a subsidiary of the Premier Construction Co. Ltd., and manufactures Hume Pipes. It has factories in different parts of India, Pakistan and Ceylon. The respondents are the workers employed in the appellant s factory at Antop Hill, Wadala, Bombay.
3. In October 1955, respondent I who are workmen represented by the Engineering Mazdoor Sabha made a demand for the payment of six-months wages as bonus for the year 1954-55. The matter was also referred to the Conciliation Officer requesting him to initiate Conciliation Proceedings. The Conciliation Proceedings went on before the Conciliation Officer up to 23-3-1956 on which date both the parties arrived at and executed an Agreement to refer the matter to an Industrial Tribunal for adjudication. Accordingly, on 130-4-1956, both the parties drew up and signed a joint-application for referring the dispute for adjudication to a Tribunal and the Government of Bombay thereupon in exercise of the powers conferred by sub-s. (2) of S. 10 of the Industrial Disputes Act, 1947 by its order dated 11-6-1956 referred the following dispute to the Tribunal:
"DEMAND: Every workman (daily rated) should be paid bonus for the year 1954-55 (year ending 30th June 1955) equivalent to six-months wages without attaching any condition thereto".
Respondent No. 1 filed their statement of claim before the Tribunal on 20-6-1956. They alleged that the profits of the appellant during the year 1954-55 were higher than those during the year 1953-54 for which year the appellant had paid four months basic wages as bonus. They also alleged that the wages paid to them by the appellant fell short of the living wage and therefore the appellant should pay them six months basic wages as bonus for the relative year.
4. The appellant filed its written statement in answer on 14-8-1956. The appellant submitted that, after providing for "the prior charges" according to the formula laid down by the Labour Appellate Tribunal the profits made during the year under consideration did not leave any surplus and the respondents were not entitled to any bonus. It denied that, it had made huge profits during the year in question and submitted that the profits made were not even sufficient to provide for "the prior charges" etc.
5. The tribunal after hearing the parties came to the conclusion that even if payment of a bonus equal to 4 1/2 months basic wages were made a fair surplus would be left in the hands of the appellant to the tune of Rs. 3.30 lacs and therefore awarded the same subject to the following conditions:
(a) Any employee who has been dismissed for misconduct resulting in financial loss to the company shall not be entitled to bonus to the extent of the loss caused.
(b) Persons who are eligible for bonus but who are no longer in the service of the company on the date of the payment shall be paid the same provided that they make a written application for the same within three months of publication of this award. Such bonus shall be paid within one month of receipt of application provided that no claim can be enforced before six weeks from the date this award becomes enforceable.
6. Being aggrieved by the said award of the Tribunal, the appellant applied for and obtained from this Court special leave to appeal against the same under Art. 136 of the Constitution and hence this appeal.
7. The formula evolved by the Full Bench of the Labour Appellate Tribunal in Millowners Association, Bombay v. Rashtreeya Mill Mazdoor Sangh, Bombay , 1950-2 Lab LJ 1247 (FB), is based on this idea that "as both labour and capital contribute to the earnings of the industrial concern, it is fair that labour
