Messrs. Ispahani Ltd. Calcutta vs Ispahani Employees Union

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 473 and 474 of 1957

Decision Date: 6 May 1959

Coram: K.N. Wanchoo, Bhuvneshwar P. Sinha, P.B. Gajendragadkar

In this matter, the Supreme Court of India delivered its judgment on 6 May 1959. The case was titled Messrs Ispahani Ltd., Calcutta versus Ispahani Employees Union. The opinion was written by Justice K.N. Wanchoo, and the bench was composed of Justice K.N. Wanchoo, Justice Bhuvneshwar P. Sinha, and Justice P.B. Gajendragadkar. The petitioner was Messrs Ispahani Ltd., Calcutta and the respondent was the Ispahani Employees Union. The judgment is reported in 1959 AIR 1147 and 1960 SCR (1) 24, with subsequent citations including R 1959 SC1151 (5, 6), RF 1961 SC 867 (8), RF 1962 SC1340 (6), R 1963 SC474 (4, 7), C 1963 SC1007 (27), R 1963 SC1474 (9), R 1964 SC1770 (2), RF 1969 SC998 (9, 11, 12, 15), R 1972 SC70 (9), and R 1976 SC1455 (19). The operative statute concerned an industrial dispute relating to a puja bonus, an implied agreement, and the question of whether workmen were entitled to benefits arising from service rendered to the employer’s predecessors.

The factual background disclosed that the workmen had originally been employed by M/s M.M. Ispahani Ltd., which, shortly before the Partition of India, moved its registered office from Calcutta to Chittagong. Subsequently, a new company, Messrs Ispahani Ltd., was incorporated on 5 September 1947. The new company acquired the goodwill, trading rights, stock-in-trade, properties and all other assets of M/s M.M. Ispahani Ltd. The majority of the shares of the newly formed company were held by M/s M.M. Ispahani Ltd., and the business of the appellant continued to be of the same nature, conducted in the same premises, employing the same workmen on the same terms of remuneration. When the original firm transferred its operations to Chittagong, a question arose as to whether those workmen who refused to relocate should be retrenched. The appellant agreed to employ those workers who chose to remain, and the workmen apparently consented to terminate their services with the original firm. After receiving their provident fund amounts and salary arrears, the workmen were re-appointed by the appellant. Historically, M/s M.M. Ispahani Ltd. had paid a puja bonus to its workmen at the rate of one month’s wages, and the appellant continued this practice from 1948 through 1952, even in years when the company incurred losses. The appellant, however, failed to pay the puja bonus for the year 1953, which gave rise to a dispute that was referred for adjudication under Section 25. In addition, the workmen claimed that they were entitled to benefits from the appellant for the period they had served under M/s M.M. Ispahani Ltd. The Court held that the workmen were entitled to a puja bonus equal to one month’s wages because the bonus constituted an implied term of their employment. The Court explained that puja is a major festival in Bengal and that it had become customary for many firms there to grant a bonus before the festival. A claim for a puja bonus could be based either on an implied agreement or on a customary practice. An implied agreement could be inferred when three circumstances were established: (i) the payment was unbroken; (ii) the payment had been made for a sufficiently long period; and (iii) the payment was not made out of bounty. The payment need not necessarily be

In this case the Tribunal was required to determine the amount of the puja bonus for a particular year by considering the payments that had been made in earlier years, provided that the bonus had been paid at a uniform rate. The Court observed that in the present circumstances the bonus had been paid without interruption and that it had not been given as a bounty, because it continued to be paid even during years when the company incurred losses. The Court stated that whether the period of payment was sufficiently long to create an entitlement depended on the facts of each case, and that here the appellant had been paying the bonus since its inception. The Court cited the decision in Mahalaxmi Cotton Mills Ltd., Calcutta v. Mahalaxmi Cotton Mills Workers Union, 1953 L.A.C. 370 as authority approving that view. The Court further held that the workmen were not entitled to any benefits that might arise from their employment with Messrs. M. M. Ispahani Ltd. The Court explained that the workmen had accepted the termination of their service with that earlier company, and that the appellant had given neither an express nor an implied promise that their service would continue when they were employed by the new company.

The judgment concerned civil appeals numbered 473 and 474 of 1957, which were filed by special leave against the order dated 27 July 1955 of the Labour Appellate Tribunal of India at Calcutta in Appeal No. Cal. 257 of 1954. The appellant, Messrs. Ispahani Ltd., was represented by counsel for the Attorney-General for India, while the respondents, the workmen represented by the Ispahani Employees’ Union, were represented by counsel for the respondents. The judgment was delivered on 6 May 1959 by Justice Wanchoo.

The Court noted that the two appeals were connected and would be decided together. The dispute involved several questions that had been referred by the Government of West Bengal to the Second Industrial Tribunal on 17 December 1953. Of the many issues originally raised, only two remained for determination: first, whether the workmen were entitled to a puja bonus for the year 1953; and second, whether the workmen could claim any benefits from the company for the period during which they had been employed by Messrs. M. M. Ispahani Ltd. The Court provided some background, explaining that Messrs. M. M. Ispahani Ltd. had been operating in Calcutta since December 1934. Shortly before the Partition of India, that company moved its registered head office to Chittagong, which after August 1947 became part of Pakistan, thereby becoming a Pakistani company. Nevertheless, it retained property in India and continued limited business in Calcutta. A new company was incorporated on 15 September 1947, which took over the goodwill, trading rights, stock, properties and assets of the earlier firm.

The successor company took over the goodwill and trading rights of Messrs M M Ispahani Ltd. and also purchased that firm’s stock-in-trade, properties and other assets. Although most of the shares of the new company were still held by Messrs M M Ispahani Ltd., the business continued in exactly the same manner, being carried on in the same premises, under the same telegraphic address and with the same workmen receiving the same remuneration. The new company paid a puja bonus equal to one month’s wages for each year from 1948 through 1952. When no such bonus was paid for the year 1953, a dispute arose between the employer and the workmen, and the matter was referred for adjudication together with other issues. The Industrial Tribunal examined the claim and held that the evidence did not show that the puja bonus had been paid at the uniform rate of one month’s wages for a sufficiently long and unbroken period; consequently, the Tribunal rejected the workmen’s claim for a puja bonus for 1953. The Tribunal also addressed the question of whether the workmen were entitled to any benefits from the company for the period of service they had rendered while employed by Messrs M M Ispahani Ltd. It held that the workmen could take that earlier service into account when determining the benefits due under the law for the period they served under the new company. This award gave rise to two separate appeals: one by the company challenging the Tribunal’s decision on benefits arising from the earlier service, and another by the workmen challenging the denial of the puja bonus for 1953. The Labour Appellate Tribunal allowed both appeals. Regarding the bonus issue, it found that the puja bonus had become a term of employment and therefore the workmen were entitled to receive a bonus equal to one month’s wages for the year 1953. Concerning the benefits from earlier service, the Appellate Tribunal concluded that the workmen’s employment terminated when Messrs M M Ispahani Ltd. migrated to Pakistan, and that the employment with the new company constituted fresh employment; consequently, the workmen were not entitled to any benefits arising from their prior employment with the original firm. Both the company and the workmen then applied for special leave to appeal to this Court against the Appellate Tribunal’s decisions as they affected them. The applications for leave were granted, bringing the matter before this Court. The Court first considered the company’s appeal concerning the puja bonus for 1953. The company raised two points: first, that the Appellate Tribunal lacked jurisdiction to interfere with the Industrial Tribunal’s factual finding; and second, that even assuming jurisdiction, the Tribunal’s decision was legally erroneous. Puja is a special festival.

In Bengal it has become customary for many firms to give a bonus to their workmen before the Puja festival. The question of such a Puja bonus was examined by the Appellate Tribunal in the case of Mahalaxmi Cotton Mills Ltd., Calcutta v. Mahalaxmi Cotton Mills Workers' Union. In that case the workers claimed that the bonus was a matter of right payable by the employer at a special season of the year, namely at the time of the annual Durga Puja. The Tribunal explained that this right did not arise from the general principle that labour and capital should share surplus profits after meeting prior charges. Instead the right rested on an agreement between the employer and the employees, and that agreement might be either express or implied. Where the agreement was not express, the Tribunal said that the surrounding circumstances might lead it to infer an implied agreement. The Tribunal laid down three circumstances that were material for inferring an implied agreement: first, the payment must be unbroken; second, it must be for a sufficiently long period; and third, the circumstances of the payment must be such as to exclude the view that it was paid merely out of bounty. The Tribunal further observed that it was not possible to prescribe a fixed length of time that would automatically justify an inference of an implied agreement, because the appropriate period would depend on the facts of each case. It also noted that a payment made in a year of loss would be an important factor suggesting that the payment was not a gratuitous bounty but was undertaken as an obligation based on an implied agreement. Regarding the quantum of the bonus, the Tribunal held that even if the payment was not made at a uniform rate throughout the period, an implied agreement to pay something could still be inferred, and it would then be for the Tribunal to determine a reasonable amount to be paid as Puja bonus. The tests laid down in that case have since been followed by many Industrial Tribunals and the Labour Appellate Tribunal, and it is not necessary to refer to all those subsequent cases. It may now be taken as well settled that Puja bonus in Bengal stands on a different footing from the profit bonus based on the Full Bench formula evolved in The Millowners' Association, Bombay v. The Rashtriya Mill Mazdoor Sangh, Bombay. The claim for Puja bonus in Bengal is based on either of two grounds. It may be a matter of implied agreement between employers and employees creating a term of employment for payment of Puja bonus, or, even though no implied agreement can be inferred, it may be payable as a customary bonus. In the present case the Court is concerned with the first category, namely the claim based on an implied agreement that creates a term of employment between the employer and the employees.

In this case the Court confined its analysis to the category of puja bonus that arises from an implied agreement creating a term of employment between the employer and the employees. The Court observed that this type of bonus had been examined by the Appellate Tribunal in the Mahalaxmi Cotton Mills case (2). The Court affirmed that the tests laid down in that case for inferring the existence of an implied agreement are correct and that all of those tests must be satisfied before a bonus of this nature can be granted. This brings the discussion to the two questions that were raised on behalf of the company. The first question, namely whether the Appellate Tribunal possessed jurisdiction to interfere with the finding of the Industrial Tribunal that concerned a question of fact, could be disposed of easily. The Court held that the decision as to whether an implied term of employment exists is a mixed question of fact and law, not a pure question of fact. The Court likened this mixed question to determinations such as whether a custom has been established, whether adverse possession has been proved, or whether a Hindu family has ceased to be joint as a matter of law after accepting the proved facts. Consequently, the Court concluded that the Appellate Tribunal had jurisdiction to consider, on the basis of the facts proved before the Industrial Tribunal, whether an inference in law could be drawn that an implied term of employment for the grant of puja bonus had been established. Thus the jurisdictional objection was rejected.

The second question concerned whether, in law, the Appellate Tribunal’s inference of an implied term of employment was correct. The Court noted the undisputed facts: the workmen, when employed by Messrs M. M. Ispahani Ltd., always received a puja bonus equal to one month’s wages, a claim set out in their written statement and not denied by the company. The company’s reply merely asserted that the practice prevalent at the time of Messrs M. M. Ispahani Ltd. and the bonus paid by that firm were immaterial and did not bind the successor firm. This response implicitly admitted that Messrs M. M. Ispahani Ltd. had indeed paid the puja bonus as alleged by the respondents. After taking over the business, the appellant paid the same bonus continuously from its inception in 1948 through 1952 without any interruption and at the rate of one month’s wages, even in years when the company incurred losses. In these circumstances, the Court found that (1) the payment was unbroken and (2) it was not made out of surplus profits, since it continued in loss-making years. The only remaining question, as identified by the Court, was whether the bonus had been paid for a sufficiently long period to justify the inference of an implied term of employment.

The Court held that the length of time a practice has been observed must be examined in light of the facts of each case, because a period that is too short to imply a term of employment in one situation may be sufficiently long to create such a term in another situation. In the present matter, the appellant had paid a puja bonus continuously from the inception of the company. Accordingly, the Court agreed with the Appellate Tribunal that the uninterrupted payment of a bonus equal to one month’s wages each year supported the inference that the payment had become an implied term of the employees’ contracts of employment. Consequently, the appeal filed by the company was dismissed. Turning to the workmen’s appeal concerning the benefit claim, the Court expressed the same view that the Appellate Tribunal’s decision on that issue was correct. The Court noted that the company had effectively taken over the business of Messrs M M Ispahani Ltd. When Messrs M M Ispahani Ltd. moved its head office from Calcutta to Chittagong, the question arose of whether to retrench employees who were unwilling to relocate because of the impending partition of India. In response, the newly formed company, which began operations in September 1947, agreed to employ those employees whose services were likely to be terminated. Those employees apparently consented to the termination of their services with Messrs M M Ispahani Ltd., received settlement of their provident-fund claims and all arrears of salary, and were subsequently re-appointed by the new company after withdrawing from the former provident fund. The Court observed that the new company gave neither an express nor an implied assurance of continuity of service, and that the employees entered the company’s provident fund as new members. On these facts, the Court affirmed the Appellate Tribunal’s finding and dismissed the workmen’s appeal as well. Accordingly, both appeals were dismissed and each party was ordered to bear its own costs of this Court.