Anil Starch Products Limited vs Ahmedabad Chemical Workers' Union

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

Court: supreme-court

Case Number: Appeal (civil) 684 of 1957

Decision Date: 05/05/1959

Coram: N.H. Bhagwati, S.K. Das, P.B. Gajendragadkar, K.N. Wanchoo

In the matter titled Anil Starch Products Limited versus Ahmedabad Chemical Workers’ Union and others, the Supreme Court considered an appeal by special leave against the award of the Bombay industrial tribunal. The appeal is recorded as civil appeal number 684 of 1957, with the judgment delivered on 5 May 1959. The bench hearing the case comprised Chief Justice S.R. Das, Justice N.H. Bhagwati, Justice S.K. Das, Justice P.B. Gajendragadkar, and Justice K.N. Wanchoo, and the judgment is reported in AIR 1960 SC 1346. The dispute involved the company, Anil Starch Products Limited of Ahmedabad, hereinafter referred to as the company, and its workmen, and concerned the calculation of a profit bonus for the fiscal year 1953.

The workmen alleged that they were entitled to a profit bonus equal to six months’ basic wages for the year in question. They argued that the company had earned considerable profits during that period, while the wages-cum-dearness allowance paid to them was low, creating a gap between the actual wages and a living wage. Consequently, they claimed that a bonus equal to six months’ wages should be granted to bridge that shortfall. The company, on the other hand, maintained that it already paid a profit bonus of one month’s basic wages and that the wages it provided were comparatively high. It submitted that there was no justification for any further bonus because, using the Full Bench formula, the surplus available after accounting for all statutory deductions was insufficient to support an additional payment.

The industrial tribunal identified three principal points of disagreement for determination: first, the method of calculating depreciation for the purpose of applying the Full Bench formula; second, whether any return should be allowed on the money withdrawn from the depreciation reserve fund when such funds were employed as working capital, and if so, the rate of such a return; and third, the appropriate amount to be set aside for rehabilitation of the workmen. In reaching its decision, the tribunal adopted the total statutory depreciation in its computations, despite this approach being contrary to the ruling of the Labour Appellate Tribunal in the case of U.P. Electricity Supply Co., Ltd. and others v. Their workmen, reported in 1955 (2) LLJ 431. The tribunal also refused to allow any return on the depreciation fund even where portions of that fund had been utilized as working capital. Finally, it reduced the rehabilitation claim from Rs 5.16 lacs to Rs 2 lacs.

Using these assumptions, the tribunal performed the required calculations and concluded that a surplus existed sufficient to grant a profit bonus equal to two months’ basic wages. For reference, a bonus equal to one month’s basic wage would amount to Rs … (the precise figure was noted in the tribunal’s award but is not reproduced here). The company subsequently sought special leave to appeal this award, which was granted, bringing the matter before the Supreme Court for final determination on the issues raised.

In this case, the company sought special leave to appeal, which was granted, and consequently the matter reached this Court for determination. The three issues that the industrial tribunal had examined were again raised before this Court. The first issue concerns the computation of depreciation. The Court has previously addressed this question in the judgment of The Associated Cement Companies Ltd., Bombay v. Its workmen (1959 (1) LLJ 644), which is announced today. Applying the principle articulated in those appeals, the Court holds that depreciation must be measured by the concept of “notional normal depreciation.” For the purpose of income-tax, the taxable amount must be reduced by the full statutory depreciation, meaning that the entire amount prescribed by law is to be taken into account when assessing tax liability. This approach is consistent with the Court’s earlier decision in The Meenakshi Mills, Madurai v. The Commissioner of Income-tax, Madras ([1956] SCR 691). The calculations adopted in the present appeal follow this method, whereby the statutory depreciation is allowed in full and the corresponding notional normal depreciation is used to determine the workers’ entitlement.

The second issue relates to whether any interest or return should be permitted on the depreciation reserve when that reserve has been employed as working capital. The tribunal, in the Court’s view, erred by refusing any such return. The tribunal’s justification is considered untenable and unsatisfactory. The method of accounting adopted by the employer bears no relevance to the question of whether a return is due on the portion of the depreciation reserve that has actually been made available and utilized as working capital. The Court cannot accept the proposition that, merely because depreciation is provided for each year, the accumulated reserve should be excluded from earning a return when it is used in the ordinary course of business. The Court has examined this point extensively in the appeal Tata Oil Mills Company Ltd. v. Its workmen (1959 (2) LLJ 250), the judgment of which is delivered today. On the basis of the reasoning set out in that case, the Court is of the opinion that if money exists in the depreciation reserve and is genuinely employed as working capital, a return must be allowed on that amount. Counsel for the respondents contested the contention that the sum of Rs 14 lacs shown in the depreciation reserve was actually available for working-capital purposes. It is sufficient to note that the company’s manager filed an affidavit stating that all of the company’s reserves, including the depreciation fund, had been used as working capital. The manager testified before the tribunal, affirmed the truth of his affidavit, and was cross-examined on various matters, including the amount required for rehabilitation, but was not questioned about the completeness of his statement regarding the use of the entire depreciation reserve as working capital.

In the affidavit filed by the manager, he also stated the amount required for rehabilitation. However, during the hearing no question was put to him to challenge his declaration that the entire depreciation reserve had been applied as working capital. The tribunal further refrained from examining whether any funds actually remained in the depreciation reserve and whether those funds had indeed been utilized as working capital. Instead, the tribunal dismissed the claim for a return on the depreciation reserve on grounds that were unrelated to the issue of the reserve’s availability. Given these circumstances, the Court found it appropriate to accept the contents of the affidavit as relating to the present financial year and to deem the working capital to be Rs 34 lacs. The Court indicated that the workmen may, in future proceedings, attempt to demonstrate through proper cross-examination of the company’s witnesses or by presenting other evidence that the amount recorded as depreciation reserve was either wholly or partially unavailable for use as working capital, or that any portion that was available was not actually employed for that purpose. For the purpose of the present appeal, the Court ordered that interest at a rate of four percent be awarded on the working capital amount of Rs 34 lacs. Regarding the rehabilitation amount, the Court considered it unnecessary to examine that issue in the present appeal because, even if the tribunal-assigned sum of Rs 71 lacs for rehabilitation were accepted, no surplus would remain that could justify the payment of any additional profit bonus beyond the bonus already provided by the company. The Court noted that the question of rehabilitation could be revisited in any future adjudication that might arise.

The Court then proceeded to apply the Full Bench formula to the figures, subject to the observations made above. The gross profit for the year was recorded as Rs 5.68 lacs. From this amount, a notional normal depreciation of Rs 1.29 lacs was deducted, leaving a balance of Rs 4.39 lacs. Income tax of Rs 1.80 lacs, calculated at the rate shown in Note A, was then subtracted, resulting in a remaining balance of Rs 2.59 lacs. Note A further explains that the total statutory deductions amounted to Rs 5.68 lacs, from which a six percent return on depreciation of Rs 1.57 lacs was taken, and the paid-up capital of Rs 0.60 lacs was deducted, leaving a balance of Rs 4.11 lacs. After further deductions, the balance stood at Rs 1.99 lacs. From this amount, a four percent return on the working capital of Rs 34 lacs, amounting to Rs 1.80 lacs, was subtracted, leaving Rs 1.36 lacs. After accounting for the rehabilitation charge of Rs 0.71 lacs, the final balance became a negative Rs 0.08 lacs. Consequently, there was no surplus available even to pay a one-month bonus. In view of this calculation, the Court concluded that the tribunal had erred in permitting any further bonus beyond what had already been paid by the company. Accordingly, the Court allowed the appeal, set aside the tribunal’s order that had authorized additional bonus payments, and directed that each party bear its own costs in these particular circumstances.