1. Dispute over payment of bonus — challenge to the validity of the Payment of Bonus Act, 1965, specifically regarding minimum bonus and retrospective application. (Para 1 , 2 , 3 )
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1966 Supreme(SC) 340
SUPREME COURT OF INDIA
V. RAMASWAMI, S. M. SIKRI, M. HIDAYATULLAH, K. N. WANCHOO, J. C. SHAH, JJ.
JALAN TRADING CO. (PRIVATE LTD.) - Appellant
Versus
MILL MAZDOOR UNION - Respondent
Civil Appeal No. 187 of 1996 and Writ Petns. Nos. 3 and 32 of 1966
Decided on : 05-08-1966
The court upheld the statutory requirement for minimum bonus regardless of profit but struck down provisions applying the Act retrospectively to pending disputes and those freezing bonus ratios based on a base year, ruling them arbitrary and discriminatory under Article 14.
Headnote:(A) Payment of Bonus Act, 1965 - Sections 10, 32, 33, 34(2), 36, and 37 - Constitution - Articles 14, 19(1)(g), and 31(1) - Minimum bonus regardless of profit - Retrospective application to pending disputes - Base year ratio - Delegation of legislative power - Provision for payment of minimum bonus regardless of whether the establishment made a profit is not discriminatory as it is an integral part of a scheme to maintain industrial peace and ensure a reasonable degree of uniformity in bonus payments (Paras 28-31) - Power of the government to exempt establishments based on financial position and public interest constitutes conditional legislation and is not an impermissible delegation of legislative authority (Para 23) - Power conferred upon the executive to remove doubts or difficulties in giving effect to the provisions of the Act by order amounts to an impermissible delegation of legislative power (Para 24).
(B) Payment of Bonus Act, 1965 - Section 33 - Retrospective application to pending disputes - Imposing an onerous statutory liability based solely on the fortuitous circumstance that a dispute was pending immediately before the Act's commencement is arbitrary and creates an unreasonable classification, thereby violating Article 14 (Paras 38-40).
(C) Payment of Bonus Act, 1965 - Section 34(2) - Base year ratio - A scheme that freezes a bonus ratio derived from a base year without considering special circumstances governing that year is arbitrary and unreasonable, infringing Article 14 (Paras 45-48).
Facts of the case:
An employer challenged the validity of the Payment of Bonus Act, 1965, after an industrial court directed the payment of minimum bonus for a year in which the establishment had suffered a loss. The challenge focused on the statutory obligation to pay minimum bonus regardless of profit, the retrospective application of the Act to pending disputes, and the mechanism for determining bonus based on a base year ratio.
Findings of Court:
Section 10, which mandates minimum bonus, is valid as it serves the object of industrial peace. Section 36 is valid as conditional legislation. However, Section 37 is invalid for delegating legislative power to the executive. Section 33 is invalid as it is patently discriminatory in its application to pending disputes. Section 34(2) is invalid for imposing an arbitrary ratio based on a base year.
Issues: Whether the requirement to pay minimum bonus regardless of profit is discriminatory; whether the power to remove difficulties is an excessive delegation of legislative power; and whether the retrospective application to pending disputes and the use of a base year ratio are arbitrary and violate Article 14.
Ratio Decidendi: The court reasoned that while Parliament can mandate a minimum bonus to ensure industrial harmony, it cannot create classifications based on the mere pendency of a dispute or freeze a bonus ratio from a base year, as these are arbitrary and lack a rational nexus to the object of the Act. Additionally, the power to remove "difficulties" by executive order allows the government to effectively alter the law, which is a legislative function that cannot be delegated.
Result: Appeal allowed; Writ petitions allowed in part. Sections 33, 34(2), and 37 declared ultra vires.
Legal Category Hierarchy
- constitutional law
- labour and industrial law
Table of Contents
2. Employers contend that minimum bonus regardless of profit and retrospective application to pending disputes are discriminatory, infringe fundamental rights, and constitute a fraud on the Constitution. (Para 16 , 21 , 25 , 27 , 69 )
3. The court analyzed the transition of bonus from voluntary to statutory, evaluating the rationality of minimum bonus and the arbitrary nature of pendency-based retrospective application. (Para 15 , 22 , 23 , 24 , 28 , 29 , 30 , 31 , 38 , 39 , 40 , 48 )
4. Minimum bonus is valid for industrial peace; however, retrospective application based on fortuitous pendency and freezing ratios from base years are arbitrary and violate Article 14. (Para 31 , 39 , 40 , 48 )
5. Appeal allowed; Sections 33, 34(2), and 37 of the Payment of Bonus Act, 1965 declared ultra vires for violating Article 14 and impermissibly delegating legislative power. (Para 50 , 95 )
6. Is the statutory requirement to pay a minimum bonus regardless of profit constitutional?
Yes. It is a measure designed to maintain industrial peace and move toward need-based wages. It does not violate Article 14 as it applies a uniform standard to all establishments unable to pay bonus based on profits, which is a rational classification. (Para 28 , 29 , 30 , 31 )
7. Is the retrospective application of the Bonus Act to pending disputes under Section 33 valid?
No. Imposing onerous statutory liabilities based solely on the fortuitous circumstance that a dispute was pending before specific authorities, while excluding others, is patently discriminatory and lacks a rational nexus to the object of the Act. (Para 38 , 39 , 40 )
8. Is the freezing of the bonus ratio based on a base year under Section 34(2) constitutional?
No. Perpetuating a ratio derived from a base year without considering special circumstances that influenced that year's payment is arbitrary and unreasonable, thereby infringing the right to equal protection under Article 14. (Para 45 , 46 , 48 )
9. Does the power to remove doubts or difficulties under Section 37 constitute impermissible delegation of legislative power?
Yes. Authorizing the executive to determine the purposes of the Act and alter provisions to remove difficulties is an exercise of legislative authority that cannot be delegated to an executive body. (Para 24 )
10. Is the power of the government to exempt certain establishments under Section 36 valid?
Yes. Section 36 constitutes conditional legislation. Parliament provided adequate guidance and principles for the exercise of this power, meaning it does not amount to an impermissible delegation of legislative authority. (Para 23 )
JUDGMENT :
J.C. SHAH, J.
1. During the pendency, before the Industrial Court, Bombay, of a reference under s. 73A of the BOMBAY INDUSTRIAL RELATIONS ACT , 1946, which arose out of a demand for payment of bonus for the years 1961 and 1962, the Payment of Bonus Ordinance 3 of 1965 was promulgated by the President on May 29, 1965, with immediate effect. The representatives of the workmen claimed that even if the plea of the employers that the profit and loss account of the establishment for the years in question disclosed a loss, was correct, the Ordinance governed the dispute and that the employees were entitled to receive bonus at the minimum rate of 4% of the salary or wages or Rs. 40/- whichever is higher. The Industrial Court upheld the plea of the workmen and directed the employers subject to the provisions of the Bonus Ordinance, 1965, to pay to each employee bonus for the year 1962 equivalent to 15 days of the salary or wages or Rs. 40/- whichever is higher.
2. With special leave, the employers have appealed to this Court and they challenge the validity of the Payment of Bonus Act, 1965, which replaced Ordinance 3 of 1965, and especially of the provisions under which bonus at minimum rate is made payable under the Act.
3. Writ Petitions Nos. 3 of 1966 and 32 of 1966 are filed by two public limited companies. They challenge diverse provisions of the Act and contend that they are not liable to pay bonus under the machinery prescribed by the Act.
4. A synopsis of the development in the industrial law which led to the enactment of the Payment of Bonus Act, 1965 will facilitate appreciation of the questions argued at the Bar. Claims to receive bonus, it appears, were made by industrial employees for the first time in India in the towns of Bombay and Ahmedabad, after the commencement of the First World War when as a result of inflationary trends there arose considerable disparity between the living wage and the contractual remuneration earned by workmen in the textile industry. The employers paid to the workmen increase in wages, initially called "war bonus" and later called "special allowance". A Committee appointed by the Government of Bombay in 1922 to consider, inter alia, "the nature and basis" of this bonus payments, reported that the workmen had a just claim against the employers to receive bonus, but the claim was not "customary, legal or equitable". During the Second World War the employers in the textile industry granted cash bonus equivalent to a fraction of actual wages (not including dearness allowance) but even this was a voluntary payment made with a view to keep labour contented.
5. In the dispute for payment of bonus for the years 1948 and 1949 in the textile industry in Bombay, the Industrial Court expressed the view that since labour as well as capital employed in the industry contribute to the profits of the industry, both are entitled to claim a legitimate return out of profits of an establishment, and evolved a formula for charging certain prior liabilities on the gross profits of the accounting year, and awarding a percentage of the balance as bonus to the workmen. In adjudicating upon the claim for bonus, the Industrial Court excluded establishments which had suffered loss in the year under consideration from the liability to pay bonus. In appeals against the award relating to the year 1949, the Labour Appellate Tribunal broadly approved of the method for computing bonus as a fraction of surplus profit.
6. According to the formula which came to be known as the "Full Bench Formula", surplus available for distribution had to be determined by debiting the following prior charges against gross profits :
(1) Provision for depreciation;
(2) Reserve for rehabilitation;
(3) Return of 6% on the paid-up capital;
(4) Return on the working capital at a lower rate than the return on paid-up capital;
and from the balance called "available surplus" the workmen were to be awarded a reasonable share by way of bonus for the year.
