Muir Mills Co., Ltd vs Suti Mills Mazdoor Union, Kanpur

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 135 of 1951

Decision Date: 19 November 1954

Coram: Natwarlal H. Bhagwati, Mehar Chand Mahajan

In the matter of Muir Mills Co Ltd versus Suti Mills Mazdoor Union, Kanpur, decided on 19 November 1954, the Supreme Court of India issued its judgment. The opinion was authored by Justice Natwarlal H Bhagwati and was delivered by a bench comprising Justice Natwarlal H Bhagwati, Justice Mehar Chand Mahajan, Chief Justice Das, Justice Sudhi Ranjan Aiyyar, and Justice T L Venkatarama. The petitioner was Muir Mills Co Ltd and the respondent was Suti Mills Mazdoor Union, Kanpur. The judgment is reported in 1955 AIR 170 and in the Supreme Court Reports at 1955 SCR (1) 991. The Court examined the statutory provisions relating to the concept of “bonus,” the necessary conditions for claiming a bonus, the characterization of a bonus claim as an industrial claim, the principles governing the grant of a bonus, the meaning of social justice, the nature of industrial tribunals, and the scope of tribunals under Article 136 of the Constitution.

The Court explained that the term bonus denotes a cash payment made in addition to wages and that it generally functions as an incentive payable only when workers satisfy prescribed standards of attendance and efficiency. The Court identified two essential conditions that must be satisfied before a valid demand for bonus can arise. First, wages must be insufficient to meet the prevailing standard of living; second, the industrial undertaking must have earned substantial profits, a portion of which must be attributable to the workers’ contribution to increased production. When either or both of these conditions are met, the demand for bonus assumes the character of an industrial claim.

The Court then set out the formula for determining the amount of bonus. Recognizing that both labour and capital contribute to the earnings of an industrial concern, the Court held that it is equitable for labour to receive a share of any surplus that remains after fulfilling certain prior charges. The Court listed the first deductions to be made from gross profits as follows: a provision for depreciation, reserves for rehabilitation, a return of six per cent on the paid‑up capital, and a return on working capital at a rate lower than that applicable to paid‑up capital. The amount that remains after these deductions constitutes the surplus available for distribution as bonus.

The Court emphasized that employees may claim a bonus only when the joint contribution of capital and labour has generated profits for the undertaking. In any fiscal year in which the enterprise incurs a loss, there is no legal basis or justification for a bonus claim. The Court further clarified that a bonus is not a deferred wage; if it were, it would necessarily rank before dividends. Since dividends can be paid only out of profits, no occasion arises for the distribution of a bonus unless profits exist.

Regarding the concept of social justice, the Court observed that the expression is vague and indeterminate, making it difficult to provide a single definition that would cover every situation. The Court stressed that the notion of social justice does not arise from the whimsical ideas of any individual adjudicator but must rest on a solid and objective foundation. Finally, the Court held that industrial tribunals fall within the meaning of “tribunals” under Article 136, and that Article 136 confers upon the Supreme Court an exceptional and overriding power to intervene when a tribunal or any court in India has dealt with a person arbitrarily or denied a fair hearing.

In the judgment the Court observed that it may intervene when it reaches the conclusion that a person has been dealt with arbitrarily or that a Court or Tribunal within the territory of India has not given a fair deal to a litigant. The Court referred to a series of earlier authorities that illustrate this principle, namely In re Eddystone Marine Insurance Co. (L.R. [1894] W.N. 30), Sutton v. Attorney‑General ([19231 39 T.L.R. 294), National Association of Local Government Officers v. Bolton Corporation (L.R. 1943 A.C. 166), Kenicott v. Supervisor of Wayne County ([1873] 83 U.S. 452: 21 L. Ed. 319), Great ‘Western Garment Co. Ltd. v. Minister of National Revenue ([1948] 1 D.L.R. 225), Millowners’ Association, Bombay v. Bashtreya Mills Mazdoor Sangh, Bombay ‘[1950] 2 L.L.J. 1247), Nizam Sugar Factory Ltd., Hyderabad v. Their Workmen ([1952] 1 L.L.J. 386), Textile Mills, Madhya Pradesh v. Their Workmen ([1952] 2 L.L.J. 62`), Famous Cine Laboratory v. Their Workmen ([1953] 1 L.L.J 466) and Bharat Bank Ltd., Delhi v. Employees of the Bharat Bank Ltd., Delhi, ([1960] S.C.R. 469). The matter before the Court was a civil appeal numbered 135 of 1951. Special leave to appeal had been granted by the Supreme Court of India by an order dated the 21st of May 1951. The appeal arose from the judgment and order dated the 19th February 1951 of the Labour Appellate Tribunal of India at Allahabad in appeal No. 136 of 1950. For the appellant the Solicitor‑General of India, C.K. Daphtary, appeared with J. B. Dadachanji, Rajinder Narain and Devinder Swarup. For the res. pondent counsel was S.C. Isaacs with O. P. Lal. The All India Organisation of Industrial Employers intervened through the Attorney‑General for India, M.C. Setalvad, assisted by Rajin der Narain and Devinder Swarup. The State of U.P. also intervened, counsel being S.C. Isaacs with Mohan Lal Saxena and C. P. Lal. The judgment was delivered on 19 November 1954 by Justice Bhagwati. The appeal, entertained by special leave, was directed against the decision of the Labour Appellate Tribunal concerning the workers’ claim for bonus.

During the financial year 1948 the appellant recorded a profit of Rs 11,97,648‑11‑9. It declared a dividend of 24 ⅓ per cent on its ordinary shares, which was the maximum rate allowed under the Public Companies (Limitation of Dividend) Ordinance of 1948, and it also paid the workers their full share of bonus at annas four in a rupee of their basic earnings. In the following year, 1949, the Government fixed the selling rates for cloth and yarn at levels approximately four per cent lower than those obtained in 1948. By order of the Government of Uttar Pradesh the basic wages were raised effective 1 December 1948, so that the total wages paid in 1949 exceeded those of the preceding year. The enterprise further suffered from indiscipline among the workers, which adversely affected production. A strike occurred in the month of October, resulting in the mills being closed for nearly a month. In addition the management could not obtain sufficient cotton, leading to a reduction in working hours. As a consequence of these combined circumstances the appellant incurred a trading loss of Rs 5,02,563‑1‑10. A sum

The appellant recorded a reversal of Rs 2,50,000, which represented the excess reserve that had previously been set aside for taxation, and also transferred an amount of Rs 10,01,871‑13‑5 from its investment account. By adding these two amounts together, the balance sheet was increased by a total of Rs 12,51,871‑13‑5. From this aggregated sum the trading loss of Rs 5,02,563‑1‑10 incurred during the year 1949 was deducted, leaving a net credit balance of Rs 7,49,308‑11‑7. This net figure was presented in the balance‑sheet as the profit for the year 1949. The balance that had been carried forward from the preceding year was then added to this profit, and a dividend of 24 3⁄4 per cent. was declared and paid to the ordinary shareholders.

In addition to the dividend, the appellant paid an ex gratia bonus to the workmen at the rate of annas 2 per rupee of their basic earnings. By a notice dated 7 April 1950, the directors of the appellant disclosed that they had authorised this payment despite the company having suffered a trading loss for the year. The notice emphasized that the bonus was being paid wholly at the discretion of the appellant, that it was not linked to any contract of employment, and that it was not a statutory entitlement of the workers.

On 4 May 1950, the Secretary of the respondent union filed a petition before the Provincial Conciliation Officer (Textile). The union claimed that production in 1949 had exceeded that of 1948, that there was therefore no basis for concluding that the profit for 1949 was less than the profit for the previous year, and that the rate of bonus had been wrongly reduced. The union requested that the bonus for 1949 also be paid at the rate of annas 4 per rupee. The industrial dispute that arose from this petition was referred to the Regional Conciliation Board (Textile), Kanpur, for inquiry and for the recording of an award.

The Regional Conciliation Board, by a majority decision, rejected the appellant’s position and ordered that the bonus be paid at the rate of annas 4 per rupee. The appellant appealed this award to the Industrial Court (Textiles and Hosiery), Kanpur. The Industrial Court accepted the appellant’s arguments, allowed the appeal and set aside the award of the Conciliation Board.

Subsequently, the respondent union appealed to the Labour Appellate Tribunal. The Tribunal largely concurred with the Industrial Court on the factual findings, including the existence of a trading loss of Rs 5,02,563‑1‑10 for the year 1949, and also agreed with the general legal position. However, the Tribunal introduced considerations of social justice, describing the case as a special situation “where social justice would demand that labour should have bonus for the year where for that very year capital had not only a reasonable return but much in excess of that.” Accordingly, the Tribunal allowed the appeal, set aside the Industrial Court’s decision and directed the appellant to pay the workmen a bonus at the rate of annas 4 per rupee, to be complied with within six weeks of the Tribunal’s decision.

The appellant obtained special leave from this Court and filed an appeal against the Tribunal’s order. Both the Industrial Court and the Labour Appellate Tribunal had found as a fact that a trading loss of Rs 5,02,563‑1‑10 had been incurred during 1949 and that a dividend of 24 3⁄4 per cent. had been paid to the ordinary shareholders after the transfer of the aggregate sum of Rs 12,51,871‑13‑5 from the reserves.

In this matter the Court considered two principal questions: first, whether the workmen were entitled to receive a bonus although the employer had recorded a loss for the relevant financial year; and second, whether the workmen possessed any right, title or interest in the company’s reserves or in the undistributed profits of preceding years. To address the first issue the Court began by examining the meaning of the term “bonus” as set out in several authoritative dictionaries. The New English Dictionary defines a bonus as “a boon or gift over and above what is nominally due as remuneration to the receiver and which is therefore something wholly to the good.” This definition had previously been adopted by Justice Stirling in the case In re Eddystone Marine Insurance Co. (1). Webster’s International Dictionary describes a bonus as “something given in addition to what is ordinarily received by or strictly due to the recipient.” Likewise, the Oxford Concise Dictionary explains it as “something to the good, into the bargain…a gratuity to workmen beyond their wages.” The legal compendium Corpus Juris Secundum, volume XI, page 515, summarizes the term as “an allowance in addition to what is usual, current or stipulated; a sum given or paid beyond what is legally required to be paid to the recipient; something given in addition to what is ordinarily received by or strictly due to the recipient.” It further observes that a bonus may be viewed as an uncertain or indefinite benefit that may or may not be paid depending on varying circumstances, and that it can function as an inducement to the offeree, thereby carrying the idea of a gratuitous gift. The Court noted that although this primary meaning emphasizes a gratuitous or ex‑gratia character, the word “bonus” has acquired a secondary significance in industrial relations. It is now classified among the methods of wage payment and is especially prevalent in the United States, where it denotes an award in addition to the contractual wage. Such an award is ordinarily intended as a stimulus for extra effort, but it may also reflect an employer’s desire to share the fruits of the joint enterprise with the employees, as described in the Encyclopaedia Britannica, volume III, page 856. The Pocket Part of Corpus Juris Secundum, volume XI, under the heading “As Compensation for Services,” quotes the decision Attorney‑General v. City of Woburn (1), stating that the word “bonus” is commonly used to denote an increase in salary or wages in employment contracts. The quote further explains that the offer of a bonus is frequently employed to secure continuous service, enhance efficiency, and augment loyalty, and that the employee’s acceptance of the conditions attached to the offer binds the employer to pay the promised bonus. The Court also referred to the related meaning of the term as “increased compensation for services already rendered gratuitously or for a prescribed compensation where there is neither express nor implied understanding that additional compensation may be granted.” This view suggests that, although a bonus may not be strictly due or legally enforceable, an employee may nonetheless lay a claim to it under certain conditions, either by agreement with the employer or by adjudication before a properly constituted tribunal. Such a claim can mature into a legally enforceable right when the dispute is raised before an industrial tribunal. This position was affirmed in Sutton v. Attorney‑General (1), where the Earl of Birkenhead observed that the term “bonus” may properly describe payments made of grace and not as of right, yet it may also include payments that are legally due but which the parties contemplate will not continue indefinitely. The Court further cited National Association of Local Government Officers v. Bolton Corporation (2) in support of this interpretation.

In the judgment, the Court explained that the term “bonus” signified “increased compensation for services already rendered gratuitously or for a prescribed compensation where there is neither express nor implied understanding that additional compensation may be granted.” This description introduced the idea that, although such a payment might not be strictly due to the employee nor legally enforceable at the outset, an employee could nevertheless claim it under certain circumstances. The Court observed that if the claim were entertained either through an agreement with the employer or by adjudication before a properly constituted tribunal in an industrial dispute, the claim would become a legally enforceable right. The Court cited Sutton v. Attorney‑General (1), where the Earl of Birkenhead stated that a bonus could be a payment made by grace and not as of right, yet it could also include payments that were legally due but intended not to continue indefinitely. The Court also referred to National Association of Local Government Officers v. Bolton Corporation (2), in which it was held that such a payment could not be regarded merely as a gratuity and that it fell within the definition of a trade dispute as much as a dispute over wages or salary. Similar observations were noted in Kenicott v. Supervisors of Wayne County (1) and in Great Western Garment Co. Ltd. v. Minister of National Revenue (1), where the Court explained that a bonus might be a mere gift or gratuity, not enforceable, or it could be an amount that an employee became entitled to upon satisfaction of a condition precedent and thus enforceable when that condition was fulfilled; in either case it was an amount in addition to or exceeding the ordinary wage.

The Court then quoted the definition given by the Textile Labour Inquiry Committee, which described a bonus as a cash payment made in addition to wages, generally representing a cash incentive given conditionally on meeting certain standards of attendance and efficiency. The Court identified two conditions that must be satisfied before a demand for bonus could be justified: first, wages must fall short of the living standard; second, the industry must earn substantial profits, part of which must be attributable to the workers’ contribution in increasing production. When either or both of these conditions were satisfied, the demand for bonus became an industrial claim. The Court noted that the Full Bench of the Labour Appellate Tribunal, in Millowners’ Association, Bombay v. Rashtreeya Mill Mazdoor Sangh, Bombay (2), formulated principles and a formula for granting bonus, holding that since both labour and capital contributed to the earnings of the industrial concern, it was fair that labour should derive some benefit if there was a surplus after meeting necessary charges. The tribunal prescribed the first deductions from gross profits as (1) provision for depreciation, (2) reserves for rehabilitation, (3) a return of six per cent on paid‑up capital, and (4) a return on working capital at a rate lower than that on paid‑up capital. The remaining surplus after these deductions could be distributed as bonus. The Court concluded that a claim for bonus could be made by employees only when the joint contribution of capital and labour resulted in profit for the industrial concern. In any year where the concern incurred a loss, there was no basis or justification for demanding a bonus. The Court emphasized that a bonus was not a deferred wage; if it were, it would have to take precedence over dividends, which can be paid only out of profits.

In the judgment, the Court explained that a bonus could be granted to employees only when there was a surplus after meeting certain mandatory charges on gross profits. The charges prescribed as the first deductions from gross profits were: (1) provision for depreciation, (2) reserves for rehabilitation, (3) a return of six per cent on the paid‑up capital, and (4) a return on working capital at a lower rate than the return on paid‑up capital. The amount that remained after these deductions formed the surplus that could be distributed as bonus. The Court cited earlier authorities, namely (1) (1948) D.L.R. 225, 233 and (2) (1950) 2 L.L.J. 247, to show that a claim for bonus was viable only when the joint contribution of capital and labour resulted in profits for the industrial concern. The Court stressed that if the industrial concern incurred a loss in a particular year, there was no legal basis for a bonus demand, because bonus was not a deferred wage that would take precedence over dividends. Dividends themselves could be paid only out of profits; therefore, in a year of trading loss, neither dividends nor bonus could be distributed.

The Court noted that this principle had been reaffirmed in several decisions of the Labour Appellate Tribunal, including Nizam Sugar Factory Ltd., Hyderabad v. Their Workmen (1), Textile Mills, Madhya Pradesh v. Their Workmen (2) and Famous Cine Laboratory v. Their Workmen (3). The respondent in the present case had argued that the appellant had earned substantial profits in 1949 and therefore was liable to pay bonus. Both the Industrial Court and the Labour Appellate Tribunal had, however, held that the appellant’s operations in 1949 had resulted in a loss. The Industrial Court declined to grant any relief because of that loss. Although the Labour Appellate Tribunal agreed with the finding of loss, it nonetheless made a special order for the respondent. The Court observed that the Tribunal itself had accepted the principle that a bonus claim resting on profits should ordinarily be assessed on the basis of the profits earned in the year for which the claim was made, and that the scale of bonus should be determined by the quantum of profits of that year. Consequently, the Tribunal concluded that a trading loss in the year of claim ordinarily precluded the award of bonus, but it added: “But, in our opinion, that …”.

The Court observed that the proposition that bonus should never be awarded in a year of loss could not be applied as an absolute rule. It held that considerations of social justice could not be entirely ignored in the relationship between capital and labour. The Court recognized that there might be exceptional situations and concluded that the present case fell within such an exception, because social justice required that the workers receive a bonus for a year in which the capital not only obtained a reasonable return but actually earned a surplus far beyond that reasonable return. The Court noted that the Labour Appellate Tribunal had rejected the respondent’s argument that a bonus ought to be linked to dividends and had also refused to base its decision on any claim by the respondent to a right, title or interest in the appellant’s reserves or undistributed profits. The Court explained that tying a bonus to dividend distribution would create serious difficulties. If the theory that bonuses must be paid out of dividends were accepted, a company could simply refrain from declaring any dividends, retain its profits, build up reserves and either distribute those reserves in the form of bonus shares or reduce its capital, thereby depriving the workers of any entitlement to a bonus. Since the workers were not shareholders of the company, they did not possess any right, title or interest in the reserves or undistributed profits that formed part of the company’s assets. The Court further explained that, even in the event of a winding‑up, the company’s property would be applied to satisfy its debts on a pari‑passu basis and, unless the articles of association provided otherwise, any remaining assets would be distributed among the members according to their respective rights and interests. Consequently, employees would never acquire any share or interest in the company’s assets or capital. A transfer of money from the reserves or undistributed profits would therefore not benefit the workers, as only shareholders were entitled to such benefits. Moreover, the mere fact that dividends were declared and paid to shareholders out of those reserves did not give the workers a basis to claim a bonus, especially when the industrial concern’s operations in that particular year had resulted in a loss. The Court also emphasized that the labour force in an industrial undertaking was a fluctuating body, and it could not be assumed that the workers employed in a given year represented those who had worked in previous years, thereby justifying a claim on the basis of earlier reserves or undistributed profits. According to the Court, each year’s accounts were prepared separately and the profits of the industrial concern were determined for that year; consequently, the workers of that year could satisfy their demand for a bonus solely from the surplus profits of that year. The remaining profits were then allocated and carried forward in the accounts, and no further claim for bonus could be sustained out of those reserves or undistributed profits. To allow such a claim would amount to granting a second bonus on the same profits for which the workers had already received their full entitlement in the preceding year.

In this case the Court explained that allowing a bonus to be paid out of the same profits on which the workers had already received their full bonus in the preceding year would amount to granting a second bonus on those profits. The Court observed that the labour force which generates the profits of a particular year by working together with the employer is not the same group of workers who contributed to the profits of earlier years, and therefore there is no continuity of the workforce across the different years of operation. Consequently, the principle that applies to shareholders, who acquire the right, title and interest of their predecessors, cannot be extended to the labour force. The Court further noted that although shareholders may receive a dividend by transferring amounts from reserves and undistributed profits of earlier years, such a transfer does not give workers the right to claim a bonus from those same reserves when the industrial concern incurs a trading loss in the year under consideration. The Court then turned to the argument of social justice raised by the Labour Appellate Tribunal in support of the respondent. It held that the Tribunal’s reliance on considerations of social justice was both irrelevant and untenable. The Court described the expression “social justice” as vague and indeterminate, and stated that no single definition could encompass every possible situation. The counsel for the respondent attempted to define social justice as “the balance of adjustments of the various interests concerned in the social and economic structure of the State, in order to promote harmony upon an ethical and economic basis,” and identified three concerned parties: the employers, the labour and the State. Without engaging in an exhaustive discussion of the precise meaning of the term, the Court observed that the concept of social justice does not arise from the fanciful ideas of any individual adjudicator but must rest on a more solid foundation. The Court pointed out that the Full Bench of the Labour Appellate Tribunal had formulated a specific approach to dispense social justice among the parties, as set out on page 1258 of its judgment: “Our approach to this problem is motivated by the requirement that we should ensure and achieve industrial peace which is essential for the development and expansion of industry. This can be achieved by having a contented labour force on the one hand, and on the other hand an investing public who would be attracted to the industry by a steady and progressive return on capital which the industry may be able to offer.” The Court noted that this formula was later reiterated in Textile Mills, M. P. Their Workmen (1) and Famous Cine Laboratory v. Their Workmen (2), and that in the latter case the tribunal rejected the notion that adjudicators could introduce notions of social justice that were not contained in that formula, stating: “And what is social justice? Social justice is not the fancy of …”.

The Court observed that allowing each adjudicator to determine the meaning of social justice on an individual basis would cause the concept to differ from one adjudicator to another across the country. Referring to the Full Bench decision reported in 1950, 2 L.L.J. at page 1247, the Court noted that in that case it had examined exhaustively the problem of social justice in relation to the computation of bonus, as discussed in the authorities cited as (1) (1952) 2 L.L.J. 625 and (2) (1953) 1 L.L.J. 466. In that earlier judgment the rights and obligations of employers and workmen were balanced so as to create a just formula for calculating bonus. The Court affirmed that the Full Bench decision remains valid and that all tribunals, including the present one, are bound by its principles. While the Court did not adopt the entire formula articulated in the Full Bench decision, it pointed out that the Labour Appellate Tribunal in the present matter failed to apply its own formula to the facts before it.

The Court further noted that the Tribunal, in attempting to incorporate considerations of social justice, ignored the fact that the workers of the appellant company had themselves contributed to the company’s trading losses through acts of indiscipline and strike. Consequently, it was unreasonable for the Tribunal to hold that the workers were nevertheless entitled to a bonus that matched the dividend paid to shareholders out of undistributed profits of earlier years. The Tribunal also overlooked the effect of the Public Companies (Limitation of Dividend) Ordinance of 1948, which meant that, but for that Ordinance, the entire profit of 1948 could have been distributed after paying a workers’ bonus of four annas per rupee. The Court then addressed an argument raised by counsel for the respondent, who contended that under Article 136 the Supreme Court should not interfere with decisions of tribunals created under the Industrial Disputes Act, 1947. The Court rejected that contention by referring to its earlier ruling in Bharat Bank Ltd., Delhi v. Employees of Bharat Bank Ltd., Delhi, (1950) S.C.R. 459, where it held that Industrial Tribunals are indeed tribunals within the meaning of Article 136 and that the Supreme Court possesses an exceptional and overriding power to intervene where an arbitrary decision or denial of a fair trial is found. The Court also cited Dhakeswari Cotton Mills Ltd. v. Commissioner of Income‑Tax, West Bengal for support. On these bases, the Court concluded that the decision of the Labour Appellate Tribunal must be set aside and the earlier decision of the Industrial Court (Textiles and Hosiery), Kanpur restored. Accordingly, the appeal was allowed with costs.