Mathuradas Kanji And Ors. vs Labour Appellate Tribunal And Ors. on 7 April, 1958

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

Court: supreme-court

Case Number: Not extracted

Decision Date: 7 April, 1958

Coram: B.P. Sinha, Syed Jafer Imam, K. Subba Rao

In the matter titled Mathuradas Kanji and others versus Labour Appellate Tribunal and others, the Supreme Court rendered its judgment on 7 April 1958. The opinion was authored by Justice K. Subba Rao, and the Bench consisted of Justices B. P. Sinha, Syed Jafer Imam and K. Subba Rao. The case arose on a petition for special leave to appeal against the decision and order of the Labour Appellate Tribunal of India, Bombay, dated 18 May 1955, which had modified an earlier award of the Industrial Tribunal dated 31 August 1953.

The appellants were contractors engaged by the Government to clear and transport imported food grains. They entered into three separate agreements with the Government: the first and second contractors signed on 5 February 1952, and the third contractor signed on 1 November 1951. All three contracts contained essentially the same provisions. According to the terms, when the rate of discharge from a vessel exceeded 1,500 tons in a 24-hour period and no shed demurrage was incurred, the Government would be liable to pay the contractors the agreed remuneration plus a bonus of four rupees per ton. Conversely, if the discharge rate fell below 900 tons in a 24-hour period or if shed demurrage was incurred, the Government would be liable to pay the remuneration less eight rupees per ton.

To fulfill their obligations under the contracts, the contractors hired laborers through muccadums, that is, gang leaders, on a piece-rate basis. The laborers were employed to clear, file, handle, and load food grains, flour and other foodstuffs for transport. In total, about 2,500 workers were employed for this purpose, and the work was organized in three shifts.

In March 1952 a dispute arose between the first two contractors and the workers they employed. The second and third respondents, being two unions representing the workers, demanded higher wages and also claimed the right to receive the bonus of four rupees per ton that the contractors might obtain from the Government. On 24 March 1952 a settlement was reached between the first two contractors and the workers. The settlement provided that, effective from 25 March 1952, the contractors would pay the workers wages that were considerably higher than those previously paid. Although the third contractor was not a party to the settlement, it also paid the increased wages to its workers. The settlement, however, did not address the workers’ claim for the four-rupee-per-ton bonus.

Because the issue of the bonus remained unresolved, the Central Government concluded that an industrial dispute existed between the contractors and the unions concerning the payment of the incentive bonus. The Government therefore referred the matter to an Industrial Tribunal, which consisted of Shri S. H. Naik as the sole member. The Tribunal, relying primarily on a letter issued by the Government in September 1951, held that the Government’s intention in granting the four-rupee-per-ton bonus to the contractors was that the contractors should pass the bonus on to the laborers. The Tribunal also based its decision on equitable considerations, noting that the temporary workers were not entitled to gratuity, provident fund or other benefits, and that dock workers and stevedores under the Dock Labour Board were receiving similar bonuses. On those grounds, the Tribunal directed the contractors to pay the incentive bonus referred to in Clause 7(2) of the agreements, effective from 1 November 1951, and ordered that any arrears be paid within two months of the award becoming enforceable.

The contractors appealed the Tribunal’s award to the Labour Appellate Tribunal of India. The Appellate Tribunal, after examining the materials placed before it, held that the agreements between the Government and the contractors did not contain any term requiring the contractors to pass the four-rupee-per-ton bonus on to the workers. The present appeal challenges that finding.

The Tribunal observed that the Government’s purpose in granting a bonus of Rs 4 per ton to the appellants was that the appellants should transmit that amount to the labour force. It further upheld the claim on equitable grounds, noting that the employees were all temporary workmen who were not entitled to gratuity, Provident Fund or other benefits, and therefore deserved to receive an incentive bonus, especially since dock workers employed by the Port Trust and stevedore workers under the Dock Labour Board were already receiving such a bonus. Relying on these considerations and additional reasons, the Tribunal ordered the appellants to pay the incentive bonus referred to in Clause 7(2) of the agreements to the relevant workmen, with effect from 1 November 1951. The Tribunal also directed that any arrears of the bonus be paid within two months from the date the award became enforceable.

The appellants appealed this order to the Labour Appellate Tribunal of India. After examining the material placed before it, the Appellate Tribunal held that the agreements that the Government had entered into with the appellants contained no clause requiring the appellants to pass the Rs 4-per-ton bonus on to the workmen concerned. Nevertheless, after considering all the circumstances, the Tribunal expressed the view that, irrespective of the strict legal rights of the workmen to the incentive bonus, it was an amount that justice required the appellants to share with the labour, provided that the labour had contributed to earning the bonus. The Tribunal therefore proposed that the workmen could claim forty-five per cent of the incentive bonus received by the appellants from the Government, subject to deduction of any penalties that the Government might have imposed or might impose on the contractors for which the workmen were directly responsible.

To implement the distribution of the employees’ share of the bonus, the Tribunal devised a detailed procedure. First, a notice was to be issued by advertisement inviting any workmen who claimed entitlement to the bonus to submit their claims, together with all available evidence, within three months of the date of the advertisement; such claims were to be sent to the Central Conciliation Officer at his address in Bombay. Second, the Conciliation Officer, upon receipt of the applications, was to hold a hearing of both parties, evaluate each individual claim, and determine whether the applicant was entitled to the bonus and, if so, ascertain his earnings during the relevant period for the purpose of calculating his pro-rata share of the bonus. Third, after deciding who was entitled to the bonus and establishing each person’s earnings, the Conciliation Officer was to compute the proportional amount of bonus payable to each claimant, and the contractors were required to pay the amounts determined by the Conciliation Officer. Fourth, any applications received by the Conciliation Officer after the three-month filing period were to be barred from consideration.

In this appeal the appellants questioned the correctness of the order under review. The learned Attorney-General, who appeared for the appellants, argued that the workmen could not claim any share of the bonus because the agreements that the appellants had executed with the Government did not provide for such a share. Moreover, the Attorney-General submitted that the respondents were not entitled to any bonus at all since the essential condition for a claim – namely that the business must have earned a profit – had neither been pleaded nor proved before the Tribunal. The first issue for determination, therefore, was the construction of the agreements. Although three agreements existed, they were all expressed in essentially the same terms, so the Court said it would be sufficient to examine Exhibit “A”, the agreement entered into between the Union of India and the first appellant. That agreement was a contract solely between the Union of India and the first appellant; the workmen were not parties to it. The appellants, however, had entered into separate piece-rate contracts with the workmen through muccadums. Clause 7 of the Union-India agreement dealt with remuneration and stipulated that the first appellant would be paid at specified rates per ten tons for grain arriving in bulk or loose and for grain arriving in bags. Note 2 to that clause, which gave rise to the rival contentions, read: “Bonus of 4 annas per ton will be paid to the contractors in addition to the rates given at A(i) and B(i) above if the rate of discharge on a ship exceeds 1,500 tons per 24 hours and no shed demurrage is incurred. A penalty of 8 annas per ton will be charged from them if the rate of discharge falls below 900 tons per 24 hours or shed demurrage is incurred unless the Regional Director (Food) Bombay is satisfied that the shortfall in discharge or shed demurrage was for reasons beyond the contractors’ control.”

The Court then turned to Note 3, which was considered useful for interpreting the agreement. Note 3 stated: “If the contractors have to pay a rate higher than Rs 4/2 per 10 tons to their labour for stacking of bags, the excess amount actually paid to labour for stacking over the rate of Rs 4/2 per 10 tons, up to a maximum of Rs 4/8 per 10 tons, would be paid by the Government on production of a certificate by the contractor from the Labour Conciliation Officer, Bombay, that the amount has actually been paid to labour. The contractors undertake to keep the rate within Rs 4/2 per 10 tons as far as possible.” The Court observed that a fair reading of the agreement showed that the bonus of 4 annas per ton mentioned in Note 2 was intended as an additional remuneration payable to the first appellant alone, conditional on the ship’s discharge rate exceeding 1,500 tons per 24 hours and on the absence of shed demurrage. The penalty of 8 annas per ton, likewise, was to be borne by the first appellant if the discharge rate fell below 900 tons per 24 hours or if shed demurrage occurred, unless the Regional Director found the cause to be beyond the contractors’ control. Consequently, the Court concluded that the bonus and the penalty were benefits and burdens that fell exclusively on the appellant under the terms of the contract, and not on the workmen.

According to the agreement, the first appellant was required to pay a bonus of annas four per ton whenever the rate of discharge on a ship exceeded 1,500 tons within a 24-hour period and no shed demurrage was incurred. In the same manner, the appellant was also liable to a penalty of annas eight per ton if the rate of discharge fell below 900 tons within a 24-hour period or if shed demurrage arose. Thus, when either of these two contingencies occurred, the benefit of the bonus or the burden of the penalty would fall exclusively upon the first appellant. The contractual language made clear that the bonus and the penalty were to be the appellant’s sole benefit and liability. If, however, the workmen’s argument were to be accepted, the benefit would have to pass to the employees and the corresponding burden would be borne by the employer. Unless the agreement expressly indicates a contrary intention, it must be interpreted to mean that both the bonus and the penalty are to be received or endured by the employer when either contingency occurs. The provision was drafted solely for the parties to the contract, stipulating that a higher than average discharge without demurrage would trigger a government-paid bonus to the appellant, whereas a lower than average discharge or the occurrence of demurrage would impose a penalty on the contractor. The interests of the employees do not appear to have been contemplated. This interpretation is reinforced by the fact that Note 3 of the agreement provides for a higher rate of payment for stacking bags when labour is paid a higher rate, showing that the parties explicitly addressed workers’ claims only when they chose to do so. Although the appellant’s tenders, as required by the government, listed the rates payable to the workmen—presumably to assist the government in fixing the contractors’ rates—there is no term in the agreement that obliges the appellant to pass the entire bonus of annas four per ton, or any portion of it, on to the workers. If such an intention had existed, the agreement would have contained a specific clause to that effect. The absence of any such clause indicates that the bonus was intended solely for the appellant’s benefit, to encourage efficient performance of his duties without causing a loss to the government. Moreover, practical difficulties would arise in applying the bonus clause for the workers’ benefit, since the company did not keep records of the workers’ names, identities, the specific work performed, or the remuneration received, the labour being supplied through muccadums who were paid by the contractor. In a situation where the labour force fluctuated, it would be unlikely for the parties to have agreed on a bonus scheme that would inevitably be subject to deductions for penalties and dependent on the contribution of individual labourers.

In this case the Court observed that the bonus scheme could not be inferred from the language of the agreement, and consequently the parties attempted before the Tribunal to show that the Government, after the agreement was executed, had introduced a new condition requiring the bonus to be passed on to the workmen. The Court referred to Exhibit “U 10,” a letter dated 14-2-1952 addressed by the Central Conciliation Officer to the appellants, in which the Ministry of Food and Agriculture, Government of India, informed the Officer that contractors were required to pay a bonus of four annas to labour and that the agreement should be deemed subject to that condition. The Court held that if the payment of a four-anna bonus to the workmen was not originally a term of the agreement, the mere subsequent belief of the Government that such a bonus should be given to the workmen could not, by itself, make it a contractual term unless the other contracting parties also consented to the addition. The Court noted that the appellants did not agree to any such new term. On that basis, after construing the express terms of the contract, the Court stated that it was satisfied that the four-anna bonus mentioned in Note 2 of the agreement formed part of an integrated scheme of additional remuneration intended for the appellants, conditioned upon their compliance with the contractual requirements, and that the workmen employed by the appellants possessed no entitlement to that sum. The Court further observed that the two other agreements entered into by the Central Government with the second and third appellants were of a similar character, and therefore the reasoning applied to the first agreement extended equally to those contracts. Consequently, the workmen were not entitled to the bonus under Note 2 of any of the agreements, nor to any share of it. The Court then turned to the next issue, namely whether the workmen could claim an incentive bonus outside the framework of the agreements. It recorded that the Appellate Tribunal had awarded the workmen a share of the bonus earned by the appellants under the agreement on the ground that social justice demanded that the piece-rate employees, who lacked a steady income and were not eligible for gratuity, provident fund or other benefits, should receive a portion of the incentive bonus. The Attorney-General argued that the respondents sought bonus only under the terms of the agreement between the Central Government and the appellants, and therefore the Tribunal was not authorised to grant relief on a different basis. He further contended that the workmen could not claim any bonus, whether incentive or otherwise, unless the appellants’ business had generated profits, and that in the present case there was no evidence of such profits.

In this case the Court observed that the respondents had not alleged, nor produced any proof, that the appellants earned profits during the years under consideration. The Court recalled the definition of “bonus” articulated in the earlier decision of Muir Mills Co. Ltd. v. Suti Mills Mazdoor Union, Kanpur, where the term was explained as a cash payment made in addition to wages intended to stimulate extra work and efficiency on the part of labour. The Court further noted that the same judgment laid down two essential conditions for the payment of a bonus: first, that wages fall short of a reasonable standard of living; and second, that the industry makes substantial profits, part of which are attributable to the contribution of the workmen in increasing production. In the words of Justice Bhagwati, a demand for bonus becomes an industrial claim when either or both of these conditions are satisfied. The Court emphasized that although bonus schemes differ according to the circumstances prevailing in different industries, a bonus remains a cash addition to wages and is no longer regarded as an ex gratia payment. When a claim for bonus is raised it acquires the character of an industrial dispute, and any award made in that dispute is binding on both employer and employee. One category of bonus described by the Court is the “incentive bonus,” the name itself indicating that it is intended as a cash incentive for greater effort by the labour. Nevertheless, the Court stressed that the essential requirement for the payment of an incentive bonus, like any other bonus, is that the concerned industry must have earned profits, part of which must be due to the workers’ contribution to increased production. The Court then turned to the first question whether workmen engaged on a piece-rate basis could be awarded an incentive bonus. It noted that when wages are fixed and paid according to piece-rate, the workers already receive higher earnings for greater output, and consequently it may be argued that it would be neither just nor equitable to grant any further incentive bonus to such workers. Although the incentive to work may be implicit in a piece-rate system, the Court recognized that other devices or incidental aids could be devised and implemented to accelerate work pace and induce extra effort. The Court refrained from expressing an opinion on that broader issue, observing that even if payment of an incentive bonus were legally permissible, workmen on piece-rate contracts would be entitled to it only if the appellants had actually made profits in the business. However, in the present case the contesting respondents did not claim an incentive bonus in connection with any profit, and there was no allegation at any stage of the proceedings that the appellants earned profits owing to the contribution of the workmen.

In this case the Court observed that the appellants had not demonstrated that any profit had been earned as a result of the workmen’s alleged contribution to an increase in production. The record showed that no documentary or testimonial evidence had been submitted before the Labour Appellate Tribunal, nor had any such evidence been placed before the Supreme Court, to establish that the business of the appellants had yielded a surplus attributable to the labour of the employees. Because the existence of profit was a required condition for the payment of an incentive bonus, the absence of proof of profit meant that the workmen could not lawfully claim the bonus they sought. Accordingly, the Court concluded that the workmen were not entitled to the incentive bonus that formed the subject of their petition. The decision reaffirmed that an incentive scheme linked to profitability cannot be imposed where the employer has not shown a surplus, and that the burden of proof lies with the party seeking the bonus. The Court thus emphasized the principle that monetary awards based on profit sharing are contingent upon demonstrable earnings and cannot be presumed. Having reached this conclusion, the Court allowed the appeal filed by the appellants, thereby setting aside the order of the Tribunal that had favoured the workmen. The Court further specified that the parties would bear their own costs, and that no costs would be awarded against either side.