The Associated Cement Companies Ltd., Dwarka Cement Works, D.W. vs. Its Workmen and Another

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 5 May 1959

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

In this case, the Supreme Court of India delivered its judgment on 5 May 1959 in the matter titled The Associated Cement Companies Ltd., Dwarka Cement Works, Dw versus its workmen and another. The opinion was authored by Justice P.B. Gajendragadkar and was delivered by a bench consisting of Justices P.B. Gajendragadkar, Natwarlal H. Bhagwati, S.K. Das and K.N. Wanchoo. The citation of the decision appears as 1959 AIR 967, 1959 SCR Supplement (2) 925 and is reported in several law reports including R 1959 SC1081, F 1959 SC1089, R 1959 SC1114, F 1959 SC1276, F 1959 SC1317, F 1960 SC12, R 1960 SC571, R 1960 SC826, R 1960 SC1003, F 1960 SC1025, F 1960 SC1346, F 1961 SC867, R 1961 SC941, RF 1961 SC977, RF 1961 SC1165, R 1961 SC1191, RF 1961 SC1200, R 1962 SC1221, R 1962 SC1255, R 1963 SC474, R 1963 SC1007, RF 1963 SC1710, R 1964 SC1766, RF 1967 SC691, R 1967 SC1222, R 1967 SC1450, R 1968 SC538, R 1968 SC963, RF 1969 SC530, RF 1969 SC612, RF 1969 SC976, R 1971 SC2521, RF 1971 SC2567, RF 1972 SC70, R 1972 SC330, RF 1972 SC1954, RF 1973 SC353.

The factual controversy concerned the computation of bonus for workmen for the year 1953-54. The employer had paid each workman a bonus equal to three months’ wages, whereas the workmen claimed a larger amount, specifically a bonus equivalent to seven months’ wages together with six months of basic wages and dearness allowance. The employer argued that after deducting prior charges from gross profits in accordance with the formula devised by the Full Bench of the Labour Appellate Tribunal in the case Mill Owners Association, Bombay v. Rashtriya Mill Mazdoor Sangh (1950) L.L.J. 1247, there was no surplus left, and therefore the workmen could not claim any additional bonus. The workmen contended that the formula required revision because the employers were increasingly allocating larger amounts for rehabilitation, which reduced the surplus available for bonus payment and thereby frustrated the purpose of the formula. They further submitted that rehabilitation expenses should not be entirely borne out of trading profits; rather, a reasonable amount should be fixed for rehabilitation and any shortfall should be met from other sources.

The dispute also raised issues concerning the determination of industrial-dispute bonus, the applicability of the Full Bench formula, the calculation of prior charges including gross profits, the treatment of rehabilitation charges, the status of the gratuity fund as a prior charge, the distribution of any surplus, and whether overtime payments could be considered in computing the bonus. The Court recorded these arguments and factual positions as the background for its analysis and subsequent holding.

The Court held that, although the contention urging a revision of the Full Bench formula possessed some merit, the question raised by that contention was of such a character that it could appropriately be examined only by a high-powered commission and not by this Court while hearing the present group of appeals. The Court further observed that, on the whole, the Full Bench formula had worked fairly satisfactorily in a large number of industries throughout the country, and that claims for bonus should therefore be decided by the appropriate Tribunals on the basis of that formula without attempting to amend it. It was noted that the formula was sufficiently elastic to meet, in a reasonable manner, the competing demands of industry and labour for fairness and justice. The Court explained that if each component of the formula were determined objectively, having regard to all relevant and material facts, the Tribunals would generally be able to make reasonable adjustments between the rival claims and to achieve a fair distribution of the surplus that remained. The Court referred to the decisions in Muir Mills Co. Ltd. v. Suti Mills Mazdoor Union, Kanpur, [1955] 1 S.C.R. 991; Baroda Borough Municipality v. Its Workmen, [1957] S.C.R. 33; Sree Meenakshi Mills Ltd. v. Their Workmen, [1958] S.C.R. 878; and The State of Mysore v. The Workers of Kolar Gold Mines, [1959] S.C.R. 895. It explained that the formula rested on two considerations: first, that labour was entitled to a share of the trading profits of the industry because it had contributed partially to those profits; and second, that labour was entitled to have the gap between its actual wage and a living wage filled, within reasonable limits. The Court stressed that these twofold foundations must always be kept in mind when dealing with bonus claims. Moreover, the Court held that it was not necessary for the workmen to actually manufacture or produce the goods before they became entitled to claim any bonus, referring to Burma Shell Oil Storage & Distributing Co. of India Ltd. v. Their Workmen, (1953) 2 L.L.J. 246. The Court described the operation of the formula as beginning with the figure of gross profits taken from the profit and loss account, which is arrived at after payment of wages, dearness allowance to employees and other admissible expenditures. The Court said that the Tribunal would be empowered to examine the accounts and to disallow any deliberate or mala fide debit entries made to reduce the gross profit figure. Likewise, the parties could seek the exclusion of any credit or debit items on the ground that they were patently extraneous and unrelated to the trading profits of the year. However, the Court warned that the Tribunal must resist the temptation to dissect the balance-sheet overly minutely or to attempt a reconstruction of it, applying the principle set out in J. F. K. Cottton Manufacturers Ltd., Kanpur v. Their Workmen, (1954) L.A.C. 716. Finally, the Court noted that the formula treats the relevant year as a self-sufficient unit, requiring the appropriate accounts to be prepared on a notional basis with respect to that year.

In this case, the Court explained that the year for which the bonus was sought had to be treated as a self-sufficient unit, so that any refund of excess profits and any adjustment of depreciation or losses from the previous year could not be set off against the profits of the bonus year. The Court referred to the authorities of Model Mills etc. Textile Mills, Nagpur v. The Rashtriya Mills Mazdoor Sangh (1955) 1 L.L.J. 534 and Bennett Coleman and Co. Ltd. v. Their Workmen (1955) 2 L.L.J. 60 to support this principle. After the gross profits were ascertained, the first deduction required under the formula was depreciation. The Court held that the depreciation to be deducted must be the notional normal depreciation explained in the case of Surat Electricity Co. Ltd. (1957) 2 L.L.J. 648 and must not include the initial and additional depreciation permitted under the Income-Tax Act, as noted in U.P. Electric Supply Co. Ltd. v. Their Workmen (1955) 2 L.L.J. 431 and Surat Electricity Co.’s Staff Union v. Surat Electricity Co. Ltd. (1957) 2 L.L.J. 648. The second deduction concerned income-tax. Once depreciation had been deducted from gross profits, the tribunal was required to compute the amount of income-tax payable for the bonus year. In doing so, it would not be reasonable to allow the employer to claim, under the heading of income-tax, an additional amount for the two further depreciations expressly authorised by section 10(2)(vi) of the Income-Tax Act. Consequently, the two concessions granted by the Income-Tax Act were to be excluded from the calculation of income-tax under the formula, a point explained and followed in Sree Meenakshi Mills Ltd. v. Their Workmen [1958] S.C.R. 878. The third item of deduction related to a return on paid-up capital as well as working capital. The formula generally prescribed interest at six per cent per annum on paid-up capital and at two per cent on working capital, although these rates were not rigid and could vary according to the circumstances of each case, as indicated in Workmen of Assam Co. Ltd. v. Assam Co. Ltd. [1959] S.C.R. 327; Rustom and Hoynsby (India) Ltd. v. Their Workmen (1955) 1 L.L.J. 73; Mill Owners Association, Bombay v. The Rashtriya Mill Mazdoor Sangh (1952) 1 L.L.J. 518; Tea and Coffee Workers Union v. Brooke Bond (India) (Private) Ltd. (1956) 1 L.L.J. 645; and U.P. Electric Supply Co. Ltd. v. Their Workmen (1955) 2 L.L.J. 413. The fourth deduction addressed rehabilitation, which encompassed replacement and modernisation but excluded expansion. Rehabilitation had to be calculated for plant, machinery and buildings, and the entire rehabilitation charge was required to be deducted from trading profits to guarantee the continued operation of the industry for the benefit of both employer and labour. The tribunal was instructed to estimate the probable cost of replacing plant and machinery at the time such replacement became due, projecting future price levels not only on the basis of prices prevailing during the bonus year but also on expected subsequent price movements.

In determining the probable cost of rehabilitation, the Tribunal must consider not only the prices that were prevailing during the year for which the bonus is calculated but also the price levels that are expected to occur after that year. The assessment of the likely rehabilitation cost is reached by applying a suitable multiplier. This multiplier is derived from the ratio between the original cost price of the plant and machinery and the price that may have to be paid for its rehabilitation, replacement, or modernisation. Because the price of industrial plant and machinery has been rising continuously, the older the plant that requires rehabilitation, the larger the multiplier that must be applied. Where an employer has intentionally or dishonestly avoided rehabilitating old machinery with the purpose of obtaining a higher multiplier, such conduct may be taken into account when fixing the multiplier and the amount of rehabilitation that is payable to the employer. Once an appropriate multiplier has been selected, the probable rehabilitation cost can be calculated simply by multiplying the original cost by that multiplier. At this stage a divisor is introduced. The total sum required for rehabilitation must be divided by a suitable divisor so that the annual requirement of the employer for each successive year can be ascertained. Before an amount for rehabilitation is awarded for the bonus year, certain deductions must be made. First, a deduction is made for the break-down value of the plant and machinery, which is usually computed at five per cent of the cost price. Second, deductions are allowed for depreciation and for general liquid resources that the employer has available apart from those set aside for specific purposes. Third, any rehabilitation sums that were permitted to the employer in earlier years but have remained unused must also be deducted. Only after all of these prior charges have been determined and subtracted from the gross profits can the surplus that is available for payment of bonus be identified. The practice of some Tribunals of first computing the bonus amount and then giving it priority in the calculation before determining the income-tax payable reduces the tax liability proportionately and should be discouraged. Rehabilitation expenses must not be given priority over the calculation of income-tax, which must be ascertained and deducted from gross profits first. No additional items should be added to the list of prior charges recognised by the formula, even with respect to an employer’s claim for deductions on account of a gratuity fund created for the benefit of the workmen. However, when the available surplus is finally determined, the Tribunal should take such a claim into account and keep a reasonable allowance in mind while fixing the final bonus amount. When the surplus has been ascertained, three groups are entitled to claim shares of it: the labour force for bonus, the industry for expansion and other needs, and the shareholders for an additional return on the capital they have invested.

The Court observed that the amount of bonus payable to workmen necessarily depends on a variety of considerations. These include the difference between the actual wages earned by the workers and the prevailing living-wage rates, the amount that the employer has set aside in a gratuity fund for the benefit of the employees, the size of the surplus that remains after meeting the employer’s expenses, the dividends that the employer has actually distributed and the dividends paid by other enterprises in the same industry, the likelihood of future expansion, the overall financial health of the employer and the employer’s need to satisfy any urgent liabilities. The Court further held that, as a matter of principle, overtime earnings must not be taken into account when calculating the bonus that each workman is entitled to receive. Once the total sum that is payable as bonus has been fixed on the basis of the principles just enumerated, any question as to whether overtime remuneration should be included ceases to be a dispute between the employer and the workmen and becomes a matter to be adjudicated among the workmen themselves.

The matter before the Court arose from two appeals filed under special leave against an award of the Industrial Tribunal, Bombay, dated 30 November 1956. The appeals, numbered Civil Appeals Nos. 459 and 460 of 1957, were heard in the Civil Appellate Jurisdiction. The judgment dated 5 May 1959 was delivered by Justice Gajendragadkar. The first appeal concerned a demand for bonus made by workmen employed in the offices of The Associated Cement Companies Ltd., Bombay; the Cement Marketing Company of India Ltd., Bombay; and the Concrete Association of India, Bombay, for the fiscal year 1953-54. The workmen sought a bonus equivalent to seven months’ basic wages together with dearness allowance. The Government of Bombay referred the industrial dispute to the Industrial Tribunal under section 10 of the Industrial Disputes Act, assigning it reference I.T. No. 10 of 1956.

The second appeal related to a similar claim made by workmen of The Associated Cement Companies Ltd., Dwarka Cement Works, Dwarka. Those workmen demanded a bonus equal to fifty percent of their total earnings, or alternatively, six months’ total earnings, for the same year. This dispute was also referred to the Industrial Tribunal and recorded as reference I.T. No. 13 of 1956. By mutual agreement of the parties, both references were heard together, evidence was recorded and documents were tendered in the first reference. The Tribunal, by its award dated 30 November 1956, directed each of the companies to pay workmen whose basic pay did not exceed Rs 500 per month a bonus equal to one-third of their basic wages, after deducting any bonus already paid for the year 1953-54, subject to the conditions specified in the award. The companies, now described as the appellant, challenged the award by filing the two appeals, and the claim for bonus was opposed by the appellant.

The appellant argued that the issues raised by the respondents in the present references had already been fully heard and finally decided in the earlier adjudication identified as Reference I.T. No. 115 of 1953, which dealt with the respondents’ claim for bonus for the preceding year. It was further alleged that, because of that earlier decision, the respondents were prohibited from raising the same questions again in the current adjudication.

The cement machinery involved in the appellant’s operations, although heavy, is subjected to extremely tough and demanding duties and is required to operate continuously, day and night, throughout the year. The appellant contended that, given the special characteristics of the cement industry, the machinery must be maintained at the highest standards and requires frequent replacement and rehabilitation. It emphasized that a cement factory represents a very expensive industrial undertaking. The appellant denied that it occupied a monopolistic position in the market and asserted that its primary objective was to supply cement to consumers at the lowest possible cost.

The respondents submitted an allegation that calculations performed under the Full Bench formula would reveal a substantial deficit, thereby supporting their contention that there was no surplus available in the relevant year from which any bonus could be claimed. Exhibit C-2, prepared by Mr Tongaonkar, was cited to show the original cost of the block of assets to be replaced together with the approximate replacement cost. This statement was based on the premise that the approximate cost of the merging companies’ assets as of 31-July-1936 amounted to Rs 5.73 crores. It was admitted that the statement aggregated all the appellant’s properties, including plant and machinery, buildings, roads, bridges, and railway sidings, and classified them into four distinct categories.

The document comprised nine columns. The first column recorded the year or years in which the machinery was purchased, thereby classifying the four categories of blocks according to their purchase periods. The first category consisted of blocks purchased up to 1939, the second category covered purchases made between 1940 and 1944, the third category included purchases made between 1945 and 1947, and the fourth category comprised purchases made between 1949 and 1954. Column 2 presented the original cost of each of these categories as of 31-July-1954. Column 3 detailed the portions of the blocks that had been discarded, scrapped, or sold, indicating the years in which such disposals occurred and the original cost of the disposed items.

The figures shown in column 5 for the 1939 and 1940-44 blocks were derived by reducing the corresponding figures given in column 4 by twenty percent. Column 6 indicated the approximate present life of the machinery and plant listed in column 4. Column 7 set out the breakdown value of the machinery referenced in column 4, while column 8 gave the approximate cost of rehabilitation of the machinery, calculated as the amount shown in column 5 less the breakdown value shown in column 7. The final column computed the annual requirement of the appellant for the rehabilitation of the four categories of blocks, arriving at the figure by dividing the amounts in column 8 by the respective divisors indicated in column 6.

In calculating the annual requirement for rehabilitation of the four categories of blocks, the Court explained that the amounts shown in the last column were derived by dividing the figures in column 8 by the respective divisors listed in column 6, resulting in a total annual requirement of approximately Rs 3,29,61,752. The document identified as Ex. C-23 was a statement prepared by Mr Tongaonkar to demonstrate the deficiency in profits arising from the payment of an additional bonus claimed by the respondents for the accounting year 1953-54. This statement was prepared on two alternative bases: one based on statutory depreciation permitted by the income-tax authorities, and the other based on a straight-line computation at ordinary rates. Under the statutory depreciation method, the statement showed a deficit of Rs 107.20 lakhs, while the straight-line method indicated a deficit of Rs 97.86 lakhs.

When assessing the provision for rehabilitation, the statement first took the replacement cost of the blocks purchased up to 1939, as shown in Ex. C-2, amounting to Rs 1601.19 lakhs. From this amount the Court noted that the available reserves as of 1-8-1953, amounting to approximately Rs 311 lakhs, were deducted, leaving a balance of Rs 1290.19 lakhs. Subsequently, the replacement costs of the three remaining categories of blocks were added, and the aggregate of all these amounts was divided by the appropriate divisors indicated in column 6 of Ex. C-2. The calculated result was Rs 284.48 lakhs, which the appellant claimed as the provision for rehabilitation under the prescribed formula.

Mr Tongaonkar, in his evidence, provided reasons supporting the multipliers and divisors he employed in the calculations set out in Ex. C-2, and he furnished numerous details on all material points to bolster the appellant’s case. The respondents cross-examined him extensively. A central question in controversy between the parties concerned the weight to be given to Mr Tongaonkar’s evidence and the value of the statements he prepared. The tribunal, after hearing the parties, framed ten issues for determination and rendered findings based on the evidence presented. It held that the appellant had not inflated the capital invested by the merging companies when they were taken over in 1936, and it allowed an interest rate of six per cent on the entire paid-up capital of Rs 1267.59 lakhs and four per cent on the working capital. Regarding depreciation, the tribunal concluded that normal depreciation calculated by the straight-line method should be permitted. On the income-tax matter, it allowed the appellant’s claim of a rate of 83.4 pies in a rupee on its net profits, but it rejected the appellant’s contention that income from investments in shares and securities should be excluded for the purpose of calculating the bonus. The tribunal also accepted the appellant’s contribution of Rs 10 lakhs as an annual amount to the reserve for gratuity.

The tribunal approved the amounts that the appellant had set aside for the reserve for gratuity, and also permitted the inclusion of expenditures incurred for dismantling buildings, prospecting expenses and similar costs. It rejected the respondents’ contention that the bonus paid by the appellant to its officers should either be reduced or completely excluded for the purpose of the bonus calculation formula. Conversely, the tribunal accepted the respondents’ argument that overtime payments should be counted as part of the bonus and accordingly allowed their inclusion. After disposing of these relatively minor points, the tribunal turned its attention to the appellant’s claim for provision for rehabilitation, replacement and modernisation, which it identified as the most contentious and significant issue before it. In examining this claim, the tribunal considered the testimony of Mr Tongaonkar together with Exhibit C-2 and other documents that he produced. The tribunal concluded that Exhibit C-2 presented an inaccurate and exaggerated depiction of the Associated Cement Companies’ requirements for rehabilitation and replacement, and therefore could not be relied upon. The tribunal observed that the multiplier of 4.28 used by Mr Tongaonkar was itself an inflationary figure, and that applying this multiplier to the increased price actually paid by the appellant would yield an inflated result. The tribunal was inclined to regard a multiplier of 2.7 as a fair figure that reflected the price increase over the pre-war base. Moreover, the tribunal was not persuaded by Mr Tongaonkar’s evidence concerning the useful life of plant and machinery; consequently it held that the period of life indicated in column 6 of Exhibit C-2 could not be accepted as correct. Regarding the question of price escalation, the tribunal noted that it is customary to use the average level of prices prevailing over a period of about five years rather than the prices of a single year, as Mr Tongaonkar had done. The tribunal further scrutinised Mr Tongaonkar’s methodology for distinguishing between modernisation and expansion and found that his approach was based purely on subjective estimation and did not withstand an objective test. In sum, the tribunal was not prepared to accept Mr Tongaonkar’s evidence at face value and declined to treat Exhibit C-2 and, by extension, Exhibit C-23 as reliable. It is noteworthy that the tribunal did not make any determination concerning the life of the machinery nor did it record any conclusion as to an appropriate divisor. Instead, it wholly omitted consideration of Exhibits C-2 and C-23 when calculating the amount that should be allowed for the appellant’s rehabilitation claim for the relevant year. Finally, the tribunal examined the underlying principle of the Full Bench formula and held that it was not intended to be applied as a rigid mathematical formula.

In its reasoning, the tribunal observed that the formula for determining the amount to be allowed for replacement, rehabilitation and modernisation should not be applied as a rigid mathematical calculation. It declared that the formula must be made as flexible as possible so that it could achieve justice for all parties concerned with the earning of profits. The tribunal then addressed the general issue of the extent to which the profits of an industrial concern should be used to satisfy the claims of industry for replacement, rehabilitation and modernisation. It accepted the argument that when the requirements for these items were so large that they were out of step with the profits, an industrial adjudicator could allow only a reasonable portion of the profits to be applied to those items and require the industry to obtain the remaining balance from other sources. To support this view, the tribunal referred to observations made by F. R. M. de Paula in his Principles of Auditing, to the report of the Taxation Enquiry Commission and to the report of the working party for the Cotton Textile Industry. It also relied on a passage from a speech delivered by Mr. J. R. D. Tata at the annual general meeting of the shareholders of the Tata Iron and Steel Company in August 1950. In the same connection the tribunal expressed concern that if all the money needed for a continuous programme of modernisation and expansion were required to come solely from the concern’s profits, labour would rarely, if ever, receive the bonus that is funded from those profits. Nevertheless, the tribunal stressed that it was not its intention to prevent a progressive concern such as the Associated Cement Companies from keeping pace with the times and modernising its machinery; rather, it wished to ensure that a fair share of the profits was allocated to the workers. After holding that, where the rehabilitation claims were excessive and not in harmony with the industry’s profits, the tribunal could grant the industry's claim only to the extent it deemed reasonable and fair, the tribunal proceeded to examine the degree to which the appellant’s claim should be allowed in the present proceedings. In doing so, it noted that the appellant’s past conduct considerably influenced its assessment. The tribunal observed that in the earlier adjudication proceedings, which dealt with the bonus dispute for the year 1951-52, the appellant had claimed no more than Rs 192 or 193 lakhs for rehabilitation. Consequently, the present claim of Rs 284 lakhs appeared, in the tribunal’s view, inflated and unrealistic. The tribunal also emphasized that the programme previously submitted by the appellant to the Tariff Commission was more modest than the claim that had been made in the earlier adjudication proceedings.

In the programme submitted by the appellant, an estimated expenditure of Rs 18.36 crores was projected to be incurred over a ten-year period running from 1 August 1952 to 31 July 1962, which corresponded to an average annual outlay of roughly Rs 184 lakhs. On the basis of these figures, the tribunal held that because the Associated Cement Companies had previously estimated its annual requirements for rehabilitation, replacement and modernisation at Rs 192 lakhs per year for the same ten-year span beginning on 1 August 1952, it should not be permitted to deviate from that earlier estimate now. The tribunal therefore concluded that the present claim for rehabilitation was substantially inflated, bore no connection to the actual circumstances, and consequently should not be allowed. Accordingly, the tribunal saw no need to record any finding on the appropriate divisor or, in light of the evidence of Mr Tongaonkar, to calculate what might be a fair or reasonable amount for rehabilitation using the prescribed formula.

The tribunal’s final calculations were based on the assumption that the appellant’s claim for rehabilitation, replacement and modernisation could not exceed Rs 192 or 193 lakhs annually. Working from that premise, the tribunal assessed the extent to which the claim should be permitted and arrived at the determination that, given the facts of the case, it would be equitable to allow the appellant an annual provision of between Rs 165 lakhs and Rs 170 lakhs for the said items. To substantiate this conclusion, the tribunal relied on the appellant’s expenditures for the two fiscal years 1952-53 and 1953-54, during which approximately Rs 339.76 lakhs had been spent on rehabilitation, replacement and modernisation, averaging about Rs 170 lakhs per year. The tribunal also considered that, at the start of the 1953-54 year, the appellant possessed a plant reinstatement reserve of Rs 235 lakhs and a general reserve of Rs 76 lakhs. If these reserves, which were available for rehabilitation, were distributed evenly over the ten-year tentative programme, they would yield an annual amount of Rs 31 lakhs. This amount was to be deducted from the Rs 165 lakhs that the tribunal was inclined to grant for the relevant item.

Thus, after making the appropriate adjustments under the formula, the tribunal demonstrated that even after the appellant received an additional one-month bonus as directed, a surplus of Rs 23.48 lakhs would remain. This summary captures the nature and effect of the tribunal’s findings. Before addressing the merits of the issues raised in the appeals, it was deemed convenient to refer to the origin and the terms of the formula that had been developed by the Full Bench of the Labour Appellate Tribunal in the case of The Mill Owners Association, Bombay v. The Rashtriya Mill Mazdoor Sangh, Bombay (1) in 1950.

The Labour Appellate Tribunal, sitting as a bench, examined the matter known as The Mill Owners Association, Bombay v. The Rashtriya Mill Mazdoor Sangh, Bombay, reported in 1950. The Tribunal observed that from the year 1940 onward, claims for bonus made by employees against their employers in various industries were resolved on an ad-hoc basis, each case being decided individually. At times employers voluntarily paid a bonus to their workmen, and when disputes arose the tribunals settled them by looking at the specific facts of each case, without referring to any overarching policy or attempting to formulate general principles. In 1948 a dispute concerning bonus payments arose between the Mill Owners Association of Bombay and its employees, and the matter was referred to the Industrial Court for adjudication. While considering that dispute the Industrial Court, as reported in (1)(1950) L.L.J. 1247, examined the issues in detail, laid down certain principles, and awarded each workman a bonus equal to three-eighths of his total basic earnings, subject to specified conditions. The following year a similar controversy emerged between the same parties, and again the dispute was referred to the Industrial Court. On 7 July 1950 the Court issued an award directing fifty-five mills belonging to the Association to pay all of their workmen, whether permanent or temporary, a bonus equal to one-sixth of each workman’s basic earnings. The Association challenged this award before the Labour Appellate Tribunal. It argued that the wage structure in the textile trade had already been settled by standardisation, and therefore any bonus should be treated as a gratuitous payment; it further contended that a bonus could not be granted for the purpose of compensating the shortfall between actual wages and living wages. The Tribunal rejected these submissions and proceeded to consider the question of granting bonus on the basis of general principles. From those principles the Tribunal eventually formulated what became known as the First Full Bench Formula. The Tribunal observed that both capital and labour contribute to the earnings of an industrial concern, and therefore it is equitable that labour should receive a share of any surplus that remains after meeting prior or necessary charges. The Tribunal also held that where the objective of a living wage had already been achieved, a bonus—similar to profit-sharing—would function primarily as a cash incentive to promote greater efficiency and higher production. Conversely, where an industry lacked the capacity to pay a living wage, a bonus should be regarded as a temporary means of satisfying, wholly or in part, the employee’s needs. In sum, the Tribunal’s decision explained that the award of bonus is founded on a two-fold consideration: first, it recognises that labour has contributed to the profit earned by the industry and is therefore entitled to a share of that profit; second, it is intended to

In order to assist labour in narrowing the distance between the living wage to which it is legally entitled and the actual remuneration actually received, the tribunal emphasized the need for a practical mechanism. Viewing the issue through this lens, the appellate tribunal acknowledged that an investment inherently creates a legitimate expectation for the investor to obtain a regular return on the capital placed in the industrial undertaking. Consequently, the tribunal held that it was essential to keep plant and machinery in continuous good working order so that such returns could be realised. The tribunal explained that maintaining equipment in good condition necessarily benefits labour because improved machinery leads to higher earnings for the concern and consequently raises the probability of paying a substantial bonus to employees.

On the basis of this reasoning, the tribunal determined that any sum required for the rehabilitation, replacement, or modernisation of machinery must be treated as a prior charge against the gross profits of the relevant financial year. The tribunal observed that depreciation permitted by the income-tax authorities is calculated only as a percentage of the written-down value, and therefore the depreciation fund created on that basis would be insufficient to meet the rehabilitation needs. Accordingly, the tribunal required that an additional amount be set aside each year under the heading of “reserves” to bridge the shortfall. This requirement was apparently not contested by the employees.

The tribunal also noted that the industry’s claim that a fair return on paid-up capital should be secured, ordinarily at a rate of six per cent per annum, was not disputed by the workers. However, the employees challenged the industry’s assertion that reserves employed as working capital should bear any interest. The tribunal overruled that objection and held that working-capital reserves are indeed entitled to interest, although at a rate considerably lower than that applicable to paid-up capital.

When the question of taxation arose, the tribunal agreed that a provision must be made for taxes payable on the amount that remains after depreciation is deducted from gross profits and after any bonus that may be awarded is subtracted. In the final analysis, the appellate tribunal set out the procedure for determining the available surplus. The notional accounting process begins with the figure of gross profits arrived at after payment of wages, dearness allowance, and other pertinent expenditures. From this figure a deduction for depreciation is made, after which a provision for taxes payable is allowed on the resulting balance. Subsequent deductions include provisions for reserves for rehabilitation, the return on paid-up capital, and the return on reserves employed as working capital. The balance that remains, if any, constitutes the surplus. Whenever the application of this formula yields a surplus, the tribunal held that labour is entitled to claim a reasonable share of that surplus in the form of a bonus for the current year. The tribunal explained that this formula rests on considerations of social justice and is intended to equitably satisfy the legitimate claims of both capital and labour.

The formula was described as a mechanism intended to satisfy the legitimate claims of both capital and labour with respect to the profits generated by the industry in a particular year. It treats the individual year as a single unit and performs all notional calculations on the basis of the gross profits normally derived from the profit and loss account. In the present matter, applying the formula yielded an available surplus of 2.61 crores. From this surplus, an amount of 0.30 crores was awarded as bonus to clerks and other staff, while 1.86 crores was awarded as bonus to the employees, leaving a net notional balance of 0.45 crores.

The Court previously examined the same formula in Muir Mills Co. Ltd. v. Suti Mills Mazdoor Union, Kanpur (1). The judgment therein indicated that, without adopting the formula in its entirety, the Court generally accepted the view that, because both labour and capital contribute to the earnings of an industrial concern, it is equitable for labour to obtain some benefit when a surplus remains after meeting the four prior or necessary charges specified in the formula. The Court also clarified the nature of bonus, holding that it is neither a gratuitous payment by the employer nor a deferred wage. Accordingly, where ordinary wages fall short of the living standard (1) [1955] S.C.R. 991 and the industry generates profit partly due to labour’s contribution, a claim for bonus may be legitimately made.

Nevertheless, the Court did not investigate the propriety, the order of priority, or the relative importance of the four prior charges, nor did it examine their substantive content. Although the formula has subsequently been generally accepted in several reported decisions—Baroda Borough Municipality v. Its Workmen (1), Sree Meenakshi Mills Ltd. v. Their Workmen (2) and The State of Mysore v. The Workers of Kolar Gold Mines (3)—the adequacy, propriety, or validity of its provisions has not been scrutinised, and the broader issue of whether the formula requires any variation, amendment, or addition has not been argued or considered.

For the first time since 1950, the present appeals call upon the Court to examine the formula carefully and to decide on the merits of its specific provisions. The tribunal, in the course of adjudicating the present dispute, held that it could relax the formula’s provisions even though such relaxation might constitute a material variation of the formula itself. On behalf of the appellant, counsel Mr. Kolah strongly objected to this approach, arguing that over the past eight years or more the formula, on the whole, had functioned fairly well in the interests of both capital and labour, and therefore the tribunal was not justified in departing from it in the present case.

The appellant argued that the formula had generally served the interests of both capital and labour well over the past eight years and therefore the tribunal was not justified in deviating from it in the present case. This contention raises a matter of substantial importance. Before addressing it, the Court first considered a preliminary issue: whether the tribunal was correct in holding that the appellant could not add to its earlier claim for rehabilitation. The tribunal’s decision on this point appeared to rest on the view that the appellant was estopped from making any further claim, a conclusion that the appellant challenged. In the appellant’s report to the Tariff Commission dated April 1953, it outlined a ten-year programme that included replacement, rehabilitation, modernisation, expansion, mechanisation of quarries and the construction and improvement of housing for its workers. The Tariff Commission’s report (page 30) estimated the cost of this programme at Rs 18.36 crores, excluding a new plant at Sindri, which corresponds to roughly Rs 184 lakhs per year. Later, in January 1954, Mr Tongaonkar testified in the earlier adjudication proceedings and produced a statement (Exhibit U-8) indicating that the appellant’s annual rehabilitation requirement was about Rs 192-193 lakhs, whereas in the present proceedings the claim was placed at Rs 284 lakhs. At first glance, these figures seem to show a progressive increase in the appellant’s rehabilitation claim, suggesting that the present claim is substantially inflated, an inference that the tribunal also adopted. However, the Court found this assumption to be not entirely correct. The evidence of Mr Tongaonkar demonstrated that the earlier report to the Tariff Commission had not enumerated all items of rehabilitation, replacement and modernisation. That report merely listed the jobs the appellant intended to undertake during the ten-year period ending 31 July 1962 and was not intended to be an exhaustive statement of the appellant’s total rehabilitation requirements. Given the limited scope of the inquiry before the Tariff Commission, the appellant’s report was confined to urgent jobs to be executed under the ten-year programme, and therefore it would be unreasonable to conclude that the annual rehabilitation expense derived from that report bears any direct relationship to the claim made under the formula. In addition, the appellant’s earlier rehabilitation claim had been fully explained by Mr Tongaonkar, and the respondents’ reliance on the statement filed by him (Exhibit U-8) does not alter this assessment.

In the proceedings the respondents introduced a document prepared by Mr Tongaonkar, identified as Exhibit U-8, to support their assertion that the appellant claimed an annual rehabilitation amount of Rs 192 lakhs. While it is correct that the document mentions that figure, its purpose was to present the estimated expenditure required over the ten-year period specified, and, as Mr Tongaonkar explained, it does not contain a comprehensive statement of the claim concerning rehabilitation of all the appellant’s blocks. To understand the respondents’ argument, it is necessary to note that in the earlier proceedings the appellant had filed a separate statement, Exhibit C-3, detailing the amount to which it claimed entitlement under the formula; this statement was reproduced in the present case as Exhibit U-5. The tribunal hearing the earlier case gave little weight to Exhibit U-8, essentially disregarding it because, like the present tribunal, it held that planning beyond a ten-year horizon was unnecessary and that rehabilitation calculations should be based on actual realities (1). Nevertheless, the Labour Appellate Tribunal concluded that the appellant’s contention that its workmen were not entitled to any additional bonus was not well-founded, even if the rehabilitation claim were limited to Rs 192 or Rs 193 lakhs. Moreover, Mr Tongaonkar testified under oath that Exhibit U-8 was not among the documents originally submitted by the appellant to the tribunal in 1954; rather, it was prepared and submitted later at the tribunal’s request. Consequently, Exhibit U-8 was neither intended to nor did it provide the basis of the appellant’s claim in the earlier proceedings under the formula. An examination of the items listed in Exhibit U-8 confirms this view. Mr Tongaonkar stated that the total estimated expenditure shown in the document covered only a small portion of the rehabilitation required for the post-1944 block, and he further asserted that nearly Rs 50 lakhs of that total represented the amount for replacement or rehabilitation of the post-1944 block. That assertion is inaccurate, as the amounts claimed for the Chaibasa Cement Factory and the Sevalia Cement Factory—both parts of the post-1944 block—are Rs 64.98 lakhs and Rs 85.15 lakhs respectively, which exceed Rs 50 lakhs. Nevertheless, the items in Exhibit U-8 do not encompass a claim for rehabilitation of all the appellant’s blocks, a fact that is unsurprising because a comprehensive claim for all blocks had already been made by the appellant in the earlier proceedings through Exhibit C-3.

It is clear that neither the report that the appellant submitted to the Tariff Commission nor the estimate shown in Exhibit U-8 was prepared by applying the statutory formula. Consequently, any difference between the amounts claimed in those two earlier documents cannot be used in a serious way against the appellant when the appellant seeks a rehabilitation claim that is strictly calculated in accordance with the formula. Because of this, the Court must hold that the tribunal erred in concluding that, on account of the appellant’s earlier conduct, the appellant could not be permitted to place its rehabilitation claim at an amount that exceeds Rs 192 lakhs for the year in question.

In reaching a decision on an employer’s rehabilitation claim, the tribunal is required to evaluate the values of the relevant factors on the basis of hypothetical and empirical considerations. Accordingly, it is generally neither useful nor advisable to rely on rigid legal doctrines such as estoppel when deciding this issue or any other material question that arises in industrial adjudication. The Court must now consider whether the formula itself requires revision, and if so, whether it should be reconstructed. Some tribunals have expressed the view that the strict operation of the formula can defeat its purpose of recognising the social-justice claim of labour for a bonus, and therefore they have introduced suitable adjustments in its application. That approach has raised a broader principle-based issue among the appeals now before the Constitution Bench. The Court therefore needs to examine the matter in its full dimensions. If the decision is to retain the formula, the Court must set out, in its opinion, what each component of the formula means, how each component should be calculated, and how the components should be mutually adjusted.

The petitioners argue for a change to the formula on the ground that, although the formula claims to embody the principle of social justice that underlies labour’s entitlement to a bonus, it does not give that claim the priority it deserves. Social justice is prominently featured in the Preamble to the Constitution and is enshrined in the Directive Principles of State Policy under Articles 38 and 43. Since 1950, concepts of social and economic justice have progressed considerably, and those developments, the petitioners say, require a readjustment of the priorities set by the formula in favour of the bonus claim. It is further contended that experience in industrial adjudication over the past eight or more years shows that employers are becoming increasingly conscious of rehabilitation and that their appetite for providing rehabilitation is growing year by year. In the present dispute, for example, the appellant, despite occupying a dominant position in its trade and earning substantial profits, has lodged an exceptionally large rehabilitation claim.

In this case, it was observed that if a claim for rehabilitation were permitted, the operation of the formula would leave no surplus from which any bonus could be granted to the workers. The appellant undeniably paid bonus for three months, and it appeared unlikely that the appellant would cease this practice in the future; however, that fact did not alter the conclusion that, given the appellant’s rehabilitation claim, the formula could not justify awarding any bonus to labour. This observation indicated that the notional rehabilitation claim which an employer could assert under the formula was often completely disconnected from the actual need for rehabilitation, and that this disconnect required correction.

It was further noted that the proposition that an industry’s trading profits must cover the entirety of rehabilitation expenses was not universally accepted by progressive businessmen and economists. In support of this view, reference was made to the observations of F. R. M. de Paula in his work Principles of Auditing, where he stated that the purpose of depreciation is to replace the original investment capital and that an increase in replacement cost signifies the need for additional capital to preserve the original earning capacity. It was also highlighted that the Institute of Chartered Accountants in England and Wales, in its 1949 recommendations under the heading Rising price levels in relation to accounts, observed that the gap between historical and replacement costs might be too large to be bridged by a provision spread over several years, whether by augmenting depreciation charges or by creating a renewal provision based on estimated replacement costs.

Consequently, it was suggested that, in revising the formula, rehabilitation claims should be fixed at a reasonable amount and that industry should be required to obtain the balance from other sources, including, if necessary, its share of any available surplus. It was pointed out that when the Labour Appellate Tribunal originally formulated the rule, it was addressing the specific needs of the textile industry, where there was no dispute that the plant and machinery had become old, obsolete, and in urgent need of replacement, rehabilitation and modernisation. Doubts were expressed as to whether, in giving priority to rehabilitation within the context of the textile industry, the Tribunal truly intended that every industry should claim rehabilitation on purely theoretical grounds, irrespective of whether such a claim was justified by an actual practical need. In substance, the argument asserted that the Full Bench of the Labour Appellate Tribunal devised its formula to ensure that labour received a reasonable share of the available surplus and thereby obtained assistance.

The argument presented was that when the wage gap between a worker’s actual earnings and the living wage that the worker expects to obtain in the future is examined, it may happen that, after the items classified as prior charges are computed, the formula in most cases yields no surplus at all. In such a situation the principal purpose of the formula would be defeated, and that failure would provide a reason for revising the formula and readjusting the priorities that it assigns. To support this line of reasoning, reliance was placed on the recommendations made by the Committee on “Profit-sharing.” The Committee had been constituted in 1948 with the task of advising the Government of India on the principles that should govern the determination of (a) fair wages for labour, (b) a fair return on capital employed in the industry, (c) reasonable reserves for the maintenance and expansion of the undertaking, and (d) the share of surplus profits that should be allocated to labour, the latter to be calculated on a sliding scale that normally varies with the level of production after the provisions for (b) and (c) have been satisfied. The Committee examined the problem from three important perspectives: profit-sharing as an incentive to production, profit-sharing as a means of securing industrial peace, and profit-sharing as a step toward labour participation in management. It recognized that reinvesting profits back into the industry constitutes one of the most effective forms of capital investment and therefore should be encouraged. Accordingly, the Committee recommended that a general target of twenty per cent of profits be set aside as reserves, while also suggesting that, as an initial charge, ten per cent of net profits should be compulsorily retained for reserves, leaving the remainder to be allocated at the discretion of management from their own share of surplus profits. Regarding the labour share of surplus profits, the Committee observed that, taking into account the conditions prevailing in the industry selected for a profit-sharing experiment, labour’s share should be fifty per cent of the surplus profits of the undertakings. It is widely known that, to date, the Government has not deemed it desirable, expedient or possible to enact legislation based on the Committee’s recommendations; nevertheless, it was suggested that these recommendations provide a rational foundation for reconstructing the existing formula.

It may be acknowledged that several points raised in favour of revising the formula and redefining its priorities possess some merit. However, it is equally important not to overlook the overall performance of the formula, which has, on the whole, operated satisfactorily in a large number of industries throughout the country. Apart from a few instances, notably in Bombay, where certain tribunals have expressed the view that the formula, in its rigid application, has become unworkable from the labour perspective, the majority of industrial disputes that have arisen between employers and their workmen concerning bonus have been settled by tribunals on the basis of this formula. Consequently, it would not be unreasonable to state that, in general, the claim for bonus by labour has been dealt with fairly and satisfactorily through the application of the established formula.

The tribunals have resolved industrial disputes on the basis of the established bonus formula, and it would be neither unreasonable nor inaccurate to observe that, by and large, the claim for bonus advanced by labour has been addressed in a fair and satisfactory manner. The principal source of controversy surrounding the operation of the formula centres on the industry’s demand for rehabilitation charges. However, as will be explained, if the industry’s claim for rehabilitation is examined closely and the evidence produced by the employer in support of that claim is carefully scrutinised, the settlement of this component can, as intended, give the tribunal sufficient discretion to render the formula flexible enough to achieve its dual purpose of dispensing justice to both industry and labour. It is true that, in the course of applying the formula, employers sometimes attempt to insert additional items into the list of prior claims. In the case of The State of Mysore v. The workers of Kolar Gold Mines (1), the industry argued before the Court that the mining operation was a wasting industry and therefore required special consideration. The industry contended that, for the prosperity and longevity of the mining enterprise, a special provision for the prospecting of new ore should be made and that this provision ought to be added as an additional item among the prior charges. The Court rejected that argument and held that the special characteristics of the industry would be taken into account when determining the amount that could be reasonably claimed under rehabilitation. This decision demonstrates the Court’s reluctance to vary or enlarge the formula, which, although it has been applied fairly satisfactorily in the majority of cases, has thus far remained essentially unchanged. The notion that the entire quantum of rehabilitation charges need not be deducted from the trading profits of the industry does not appear to enjoy general acceptance. As observed by de Paula, “In the past the accepted principle has been that the main object of providing for the depreciation of wasting assets is to recoup the original capital invested in the purchase of such assets. As part of the capital of the concern has been invested in the purchase of these assets, therefore, when their working life comes to an end, the earning capacity of these assets ceases. Thus they will become valueless for the purposes of the business, and the original capital sunk in their acquisition, less any scrap value, will have been lost. Hence, in order to keep the original capital of a business intact, if any part thereof is invested in the purchase of wasting assets, revenue must be held back by means of depreciation charges to the profit and loss account, in order to replace the capital that is being lost by reason of the fact that it is represented by assets that are being consumed or exhausted in the course of trading or seeking to earn income.” The same author further states that “in all cases where one of the …”

In this case, the Court noted that when the direct causes of earning revenue gradually consume fixed assets of a wasting nature, depreciation of those assets must be charged out of revenue (3). The Court accepted the authority cited in (1) [1959] S C·R 895, (2) F.R.M. de Paula’s Principles of Auditing, 1957, p. 136, and (3) Ibid., p. 138, which recognizes that “owing to the very considerable increase in the price level since the termination of the 1939-45 war, industry is finding its original money capital insufficient for its needs. Thus the cost of replacement of fixed assets has greatly increased and, in addition, further working capital is required to finance a given volume of production. Many economists, industrialists, and accountants contend that provision should be made, in arriving at profits, for this increased capital requirement.” The Court further observed that the author of the cited work added that “at the time of writing this matter is still being debated and final decisions have not yet been reached,” and concluded that “until a final solution of this complex problem is reached it would be inadvisable for the auditor to act on any principle other than that recommended by the Institute” (1). The principle recommended by the Institute, as the Court explained, is that depreciation should be provided for out of revenue. In addition, the Court emphasized that when adjusting the claims of industry and labour to share profits on a notional basis, it would be difficult to reject the industry’s claim that a provision should be made for the rehabilitation of its plant and machinery from trading profits. The Court held that, on principle, the guaranteed continuance of the industry benefits both the employer and labour, and therefore a reasonable provision made for that purpose must be regarded as justified. The Court observed that the recommendations of the Committee on Profit-sharing could not be of much assistance because they raise questions of policy and principle that are more appropriately considered by the Legislature. If the Legislature believes that the claims for social and economic justice made by labour should be redefined on a clearer basis, it may legislate accordingly. The Court also suggested that a high-powered commission could be asked to examine the problem comprehensively, taking evidence from all industries and all bodies of workmen. The Court noted that the plea for revision of the formula raises an issue (1) F.R.M. de Paula’s Principles of Auditing, 1957, p. 80, which affects all industries, and that before any change is made, all industries and their workmen would have to be heard and their pleas carefully considered. Consequently, while dealing with the present group of appeals, the Court found it would be difficult, unreasonable, and inexpedient to attempt such a task. For this reason, the Court thought that labour’s claim for bonus should be decided by tribunals on the basis of the existing formula without attempting to revise it.

The Court declined to accept the submission that the established formula for calculating bonus should be altered, and it stressed that the formula possessed sufficient flexibility to accommodate the legitimate expectations of both industry and labour with regard to fairness and justice. In its essential structure the formula recognised the claims of the industry and arranged them into distinct categories identified as prior charges; subsequently it provided a mechanism for allocating any surplus that remained after the prior charges among the workers, the enterprise itself, and the shareholders. The individual elements enumerated in the formula were required to be interpreted in a theoretical manner, and in order to ascertain the precise content of each element it was necessary to examine and balance carefully all facts that were relevant and material to the matter. When each element was determined in an objective fashion, taking into account the full spectrum of pertinent facts, the tribunals were generally able to make reasonable adjustments among the competing claims and to achieve an equitable distribution of the surplus that was available. Accordingly, the Court regarded the formula as inherently elastic rather than as a rigid computational device, and it urged that the tribunals should treat it with this elasticity when performing the detailed calculations required under its provisions.

The Court observed that, should the employer and the workforce sincerely wish to resolve any controversy concerning bonus without resorting to the intervention of a conciliator or an adjudicator, the formula would serve as a practical tool to facilitate a mutually acceptable settlement. Provided that the employer refrained from presenting an unduly exaggerated claim under the items that safeguarded the interests of the industry, and that the workers likewise avoided an excessive demand for bonus, the parties could, through cooperative effort, arrive at a reasonable figure that would be payable to the labour force on an annual basis. The Court noted that it was unnecessary to emphasize that disputes settled amicably were advantageous to both capital and labour, as such settlements fostered peace, harmony and cooperation between the two sides, thereby contributing to greater industrial production—a matter of considerable national importance at the time. Nevertheless, the Court remarked with regret that, in many instances, neither the industry nor the labour force appeared inclined to settle these disputes amicably, resulting in repeated bonus claims giving rise to fresh disputes each year and consequently activating the machinery provided under the Industrial Disputes Act. Initial attempts at conciliation often failed, leading to a reference under section ten of the Act and the matter being brought before a tribunal. In such circumstances, when both parties were unwilling to cooperate, each side tended to make inflated statements, exchange counter-allegations and seek to substantiate them with evidence. The Court held that, in these situations, tribunals were obliged to examine the opposing contentions and to scrutinise the evidence presented by the parties in an objective and judicial manner. When proper evidence was adduced and duly weighed, the tribunal could apply the formula in a reasonable way and reach a conclusion that was substantially consistent with the underlying purpose of the formula.

In applying the statutory formula for granting a bonus, it is clear that tribunals must understand precisely what each prior-charge item included in the formula represents, and therefore they must examine that aspect of the matter with great care. The Court has already observed that the formula rests on two distinct considerations. First, labour is entitled to a share of the industry’s trading profits because workmen, together with the employer, have collectively contributed to the generation of those profits. Second, labour is entitled to have the shortfall between its actual wage and a living wage reduced, within reasonable limits. The notion of labour’s contribution is viewed in a collective sense, referring to the joint effort of the employer’s capital and the workmen’s labour as a class, and it is therefore unnecessary to dissect precisely how much each individual segment of labour contributed to the profit pool. The underlying principle is that the capital invested by the employer and the labour supplied by the workmen together create the profits of an enterprise; this principle does not require that the labour in the particular industry be directly involved in manufacturing or producing goods, although in manufacturing contexts the contribution of labour is obvious. The Court cited the decision in Burma Shell Oil Storage and Distributing Co. of India Ltd. v. Their Workmen, where the Labour Appellate Tribunal rejected the employer’s contention that employees engaged only in the distribution of oil, and not in the manufacturing of oil, could be excluded from receiving a bonus. The Tribunal held that it was incorrect to say that merely marketing oil deprived employees of any right to bonus. It further noted that the workmen performed duties of varying intensity in marketing a public-utility article and, in the economic sense, contributed to production. Likewise, clerical staff were held to be eligible for bonus for performing duties in the general business of the concern, even though they were not directly involved in the physical act of marketing the commodity. The Tribunal also emphasized that a further purpose of the bonus scheme is to bridge the gap between workers’ actual wages and a living wage, reinforcing that both components of the formula must always be kept in mind when adjudicating bonus claims.

The practical application of the formula begins with the figure of gross profit derived from the profit-and-loss account after deducting wages, dearness allowance and other expenditure items. As a general rule, the gross-profit amount thus calculated is accepted without the necessity of submitting the profit-and-loss statement for detailed scrutiny, unless there is a reason to challenge the accuracy of the entries. This approach reflects the principle that once the gross profit figure is established in accordance with the statutory requirements, the tribunal may rely on it as the basis for calculating the bonus, provided the computation respects the two-fold rationale of sharing trading profits and addressing the wage-living-wage gap.

If the tribunal discovers that entries recorded on the debit side of the profit and loss account have been entered deliberately and in bad faith with the intention of reducing the reported gross profit, the tribunal may examine those entries. Upon being satisfied that such entries were made mala fide, the tribunal is empowered to disallow them. This principle was endorsed by the Labour Appellate Tribunal, which observed, for example, in M/s J K Cotton Manufacturers Ltd., Kanpur v. Their Workmen (1) (1953) 11 L.L.J. 246, that where managing agents intentionally divert profits to selling agents so as to deprive labour of its bonus and pay the selling agents commissions at excessive rates, the tribunal must take such manipulation into account when determining the available surplus balance. Likewise, either party may seek to exclude items appearing on either the credit or debit side of the account on the ground that those items are wholly extraneous and have no connection with the trading profits of the year. In considering such a request, the tribunal must resist the urge to dissect the balance sheet in excessive detail or to attempt a reconstruction of the accounts. Only in clear-cut situations, where the contested item is plainly and obviously unrelated, should a plea for exclusion be entertained. Where the employer earns profits in the ordinary course of his trade or business, it would be unreasonable for the tribunal to inquire into whether each individual profit component is directly linked to labour’s contribution. In such matters the tribunal is required to adopt an overall, practical and commonsense approach.

Consequently, as a general rule, the gross profit shown at the foot of the profit and loss statement is to be taken as the basic figure for computing the bonus under the statutory formula. While applying the formula, it must also be borne in mind that the calculation is based on the premise that the year for which the bonus is claimed constitutes a self-sufficient unit, and the relevant accounts are to be prepared on a notional basis for that specific year. Because of this underlying assumption, if an employer receives during the bonus year a refund of excess profits tax that was paid in an earlier year, the refunded amount is not to be recorded on the credit side of the profit and loss account. The Labour Appellate Tribunal reiterated this approach in Model Mills (Textile) Mills, Nagpur v. Rashtriya Mill Mazdoor Sangh (1) [1954] L.A.C. 716, 745 (also see [1952] L.A.C. 420, 421), observing that income-tax is to be deducted as a prior charge on the trading results of the year in the same manner that the bonus is determined on those trading results. Accordingly, any concession made by the income-tax authorities in refunding excess profits tax is excluded from the surplus balance used for bonus calculation.

The Court observed that tax which has already been paid by the employer is intended to alleviate a concern that has incurred losses in earlier years, and consequently that tax cannot be included in the formula for computing the bonus. The same principle was applied to situations where a loss incurred in one or more preceding years gave the employer a right to claim an allowance for adjustment under section 24(2) of the Income-tax Act during the bonus year. Accordingly, the Court held that any allowance for adjustment claimed by the employer under that provision must not be taken into account when determining the amount of income-tax payable on the profits of the bonus year under the formula. In the case of Bennett Coleman and Co. Ltd. v. Their Workmen (2), the Labour Appellate Tribunal rejected the argument raised by labour that, because section 24(2) relieved the employer of tax liability in the bonus year, no provision for tax payment should be made while working out the formula. The Tribunal explained that the employer’s exemption from tax in the bonus year arose only because the unabsorbed depreciation and losses of the previous year were adjusted against the current year’s profit, and that this circumstance had no bearing on the calculation of the surplus available from the trading profits of the bonus year. The same view has been adopted in several other decisions cited by the Tribunal. In the present opinion, the Court noted that once it is accepted that the bonus year is treated as a self-sufficient unit for the purpose of the formula, the decisions of the Labour Appellate Tribunal concerning the refund of excess profits tax and the adjustment of the previous year’s depreciation and losses against the bonus-year profits are logically sound. After determining the gross profits, the first deduction allowed under the formula relates to depreciation. The legitimacy of this deduction was not contested before the Tribunal that formulated the rule; however, the composition of the depreciation item became controversial after 1950. Following the amendment of the Income-tax Act in 1948, section 10(2)(vi) introduced the concepts of initial depreciation and additional depreciation in addition to the existing statutory depreciation. In effect, depreciation permissible under the Act now comprises the statutory normal depreciation computed under rule 8, together with the initial and additional depreciation. These allowances constitute an exception to the general principle that income must be taxed without reference to the reduction in the value of capital. Under the amended provision of section 10(2)(vi), employers began to argue that all depreciations admissible under the Income-tax Act should be debited from gross profits; some tribunals upheld this claim while others rejected it, resulting in a conflict of decisions that created considerable confusion.

The Labour Appellate Tribunal was set up to resolve this issue together with other matters that arose in the case of the Uttar Pradesh Electric Supply Company Limited and others, titled Electricity Supply Undertakings v. Their Workmen (1955) II J. 431. The Full Bench of the Tribunal pronounced that the depreciation to be subtracted from gross profits when applying the established formula must be the annual depreciation that is permissible under the Income-tax Act, and this includes the multiple-shift depreciation. The Bench further observed that the initial depreciation and the additional depreciation, although also provided for in the Income-tax Act, are abnormal supplements to the ordinary income-tax depreciation. These supplements are intended only to meet special contingencies and are meant to operate for a limited duration. Consequently, the Bench held that it would be inequitable to the workmen to treat these two special depreciations as prior charges before the surplus that is actually available is determined.

Subsequent doubt emerged concerning the exact scope of deduction authorized by the Full Bench’s pronouncement. To clarify the position, two members of the Full Bench took the opportunity to address the issue in the case of Surat Electricity Company’s Staff Union v. Surat Electricity Company Limited (1955) II J. 431. That decision demonstrated that the Full Bench intended, for the purpose of the formula, to treat depreciation as a notional amount representing normal depreciation only. To prevent any future uncertainty, the judgment expressly set out the method by which this notional normal depreciation should be calculated. From the time that judgment was issued, the practice has been to deduct only this notional normal depreciation from gross profits in the application of the formula.

The Court considered that the approach adopted by the Full Bench aligns completely with the fundamental principle of social justice upon which the original formula was based. The provisions of the Income-tax Act that authorize further depreciation are founded on considerations that bear no relevance to the original formula. As the Full Bench pointed out, permitting the two additional depreciations to be deducted from gross profits would, in most cases, defeat the very purpose of the formula. Accordingly, the Court held that the depreciation to be deducted from gross profits must be the notional normal depreciation as explained in the Surat Electricity case.

After deducting this notional normal depreciation, the remaining balance is taken as the figure on which the calculation of income-tax payable for the bonus year must be based. This aspect has become a point of controversy between the parties. The employers contend that, in determining the income-tax liability on this balance, the Tribunal should disregard any allowances provided under the relevant provisions of the Income-tax Act. While it is undeniable that, for the bonus year, the Income-tax Act provides for allowances not only for normal depreciation but also for the initial and additional depreciations (as noted in the 1957 decision II L. L. J. 648), the employers argue that such allowances should not be taken into account when computing the tax payable on the balance remaining after the notional normal depreciation has been deducted.

In this case, the employer advanced the contention that the income-tax payable for the bonus year ought to be calculated on a national basis without taking into account the allowances that are made under the provisions of the Income-tax Act. Relying on this position, the employer further submitted that although he may be allowed to claim credit for the two additional depreciations for a number of years, eventually those allowances will cease and his tax liability will consequently rise. On that basis, the employer maintained that it would be equitable to permit him to set aside a fund of income-tax reserve, from which he could meet the increased tax burden in future years when the allowance of the additional depreciations is no longer available. The employer’s argument therefore sought not merely the tax amount that would be payable for the bonus year but also an extra sum intended to build a reserve for anticipated future tax obligations.

The workmen, on the other hand, argued that the tribunal could not disregard the concession granted to the employer by the Income-tax Act when determining the tax payable for the bonus year. According to the workmen’s submission, the employer’s claim did not pertain to the tax liability for the bonus year itself but was instead an attempt to accumulate a reserve for future, although certain, higher tax demands. The workmen emphasized that such a notion of creating a tax reserve for meeting future tax liabilities was alien to the fundamental purpose of the formula used to compute the bonus. They explained that, for the purpose of the formula, the bonus year is treated as a single unit and every component specified in the formula must be calculated on that basis. Consequently, items such as the refund of excess profits tax received in the bonus year are excluded, and the employer’s right to set off losses and depreciation from previous years against the trading profits of the bonus year is likewise disregarded. By the same reasoning, the possibility that the employer may have to pay higher taxes in subsequent years should be considered irrelevant to the calculation for the bonus year.

The Court, after examining the basis of the formula and the manner in which the other items of the formula are to be worked out, held that it would not be reasonable to allow the employer to claim an additional amount under the income-tax item in respect of the two further depreciations that are expressly permitted to him by section 10(2)(vi) of the Income-tax Act. The Court observed that the amount determined under this item would not correspond to the actual tax that the tax department would recover from the employer; it would, in effect, be a notional figure. Nevertheless, even when dealing with a notional amount, the Court found it would be unfair and unjust to ignore the concessions granted to the employer by section 10(2)(vi). The Court further warned that permitting the creation of an income-tax reserve could lead to unnecessary complications. Moreover, the Court noted that if, on principle, the additional depreciations allowed by the Income-tax Act are deemed inadmissible under the formula, it would be inconsistent with the purpose of such exclusion to then allow the employer to claim tax based on those very amounts. Consequently, the Court concluded that the employer could not be permitted to add an extra tax amount for the two further depreciations when computing the income-tax component of the bonus formula.

The Court observed that if the amount of income-tax is determined after taking into account the concession granted to the employer by section 10(2)(vi), the employer would suffer no hardship. The Court explained that in later years, when those concessions cease to operate and the employer’s tax liability consequently rises, the employer will be entitled to claim the income-tax that then becomes payable. Accordingly, the Court said that this method of calculating income-tax is fair to both parties and it is consistent with the basic character of the formula. The Court further noted that, although in many industries workmen remain employed from one year to the next, the claim for bonus for any particular year is made on behalf of the workmen who were employed during that specific year. Therefore, calculations must be performed with the bonus year treated as a single unit, and considerations of the employer’s future tax liability are irrelevant to the formula’s computation. The Court therefore held that, for the purpose of calculating the tax payable for the bonus year, tribunals should not include the concessions provided under the Income-tax Act for the two additional depreciations allowed by section 10(2)(vi). The Court referred to its earlier decision in Sree Meenakshi Mills Ltd. v. Their Workmen (1), where it upheld the view of the Full Bench of the Labour Appellate Tribunal in the case of U. Electric Co., Ltd., etc., Electricity Supply Undertakings (2) and directed that the further depreciations permissible under the Income-tax Act should be taken into account when determining the amount of income-tax payable during the bonus year. The Court added that, in that earlier case, it had clarified the meaning of “normal depreciation,” but it was clear that the term referred only to the notional normal depreciation explained by the Labour Appellate Tribunal in the case of Surat Electric Co., Ltd. (3). The Court stated that the income-tax thus determined must be deducted as a prior charge. The next step in the formula involves deducting an appropriate amount for the return on paid-up capital as well as on working capital. The Court observed that the formula generally provides for interest at six-nine per cent per annum on paid-up capital and at two per cent on working capital. However, subsequent decisions indicate that tribunals do not treat these rates as rigid and have appropriately modified them according to the circumstances of each case. The Court concluded that this flexible approach is correct and that the rates of interest on both paid-up capital and working capital should be fixed based on the specific facts of each case.

It may be added that, as a general practice, industrial tribunals ordinarily award interest at the rate of six per cent per annum on the amount of paid-up capital. In the case of Workmen of Assam Co., Ltd. v. Assam Co., Ltd., the Supreme Court held that the interest allowed by the tribunal at seven per cent on paid-up capital and subsequently confirmed by the Labour Appellate Tribunal was justified because an industry that is connected with agriculture, such as the tea industry, is exposed to greater risks than any other industry, including risks from weather, pests in the plants and the gradual deterioration of the soil. The Court supported this view by referring to earlier authorities, namely [1958] S.C.R. 878, (1957) 11 L.L.J. 648, (1955) II L.L.J. 431 and [1959] S.C.R. 327. By contrast, in Ruston and Hornby (India) Ltd. v. Their Workmen the Labour Appellate Tribunal allowed only a four per cent return on the portion of paid-up capital represented by bonus shares for the year in which those shares were issued, and it further observed that for subsequent years no distinction should be drawn between that portion and other paid-up capital represented by ordinary shares. In similar matters concerning reserves or depreciation funds that are employed as working capital, tribunals have permitted interest at varying rates of four per cent, three per cent or even two per cent, depending on the particular circumstances of each case. For example, in Mill Owners Association, Bombay v. The Rashtriya Mill Mazdoor Sangh the Labour Appellate Tribunal stated that there is no fixed rule regarding the rate of return on capital and that each case must be decided on its own facts; the Tribunal noted that in appropriate cases it has awarded rates as high as five per cent, but for the mills the Full Bench considered that an equivalent of two per cent would be reasonable and proposed to retain that level for the present. In Tea and Coffee Workers Union v. Brooke Bond (India) (Private) Ltd., the Industrial Tribunal examined earlier decisions on the question of return on working capital and concluded that, in the case before it, a three per cent interest would constitute an adequate return because there were no special reasons to justify a higher rate. It is also significant to point out that tribunals have not drawn any distinction between reserves used as working capital and depreciation funds used in a similar manner. In the earlier Mill Owners Association, Bombay case (page 523), when labour objected to a depreciation fund earning any return even though it was utilised in the business during the year, the Labour Appellate Tribunal overruled the objection and observed that no essential difference could be made between the depreciation fund and any other fund belonging to the company which could be invested so as to earn a return, citing authorities such as (1955) 1 L.L.J. 73, (1952) 1 L.L.J. 518, 522 and (1958) 1 L.L.J. 645. Thus, the material consideration is not the origin of the fund but the fact that the fund has been employed as working capital, which justifies the claim for an adequate return on it.

The Court observed that the fund held by the concern had been employed as working capital, and that usage justified a claim for an adequate return on the fund. It explained that it was reasonable to expect a return when a concern used liquid funds in its possession to meet its day-to-day expenses instead of borrowing the necessary amounts. However, the Court stressed that the employer was required to demonstrate that the amount held in the depreciation fund was actually available and had indeed been applied as working capital during the year in question. The appropriate rate of return on such funds, the Court said, was a factual matter that had to be determined by the tribunal exercising its discretion, taking into account the particular circumstances of each case. Accordingly, the Court noted that there was no fixed or rigid rule prescribing the rate of interest that could be claimed or awarded when calculating the two relevant items under the formula. The Court further clarified that where a fund was used by the employer for the purpose of expanding the business, the employer could not claim any return on that fund under those items. Referring to the decision of the Full Bench of the Labour Appellate Tribunal in the case of U. P. Electric Supply Co., Ltd. etc. Electricity Supply Undertakings (1), the Court reproduced the Tribunal’s finding that “considering all the factors presented to them they did not think that a case had been made out for giving a special prior charge in the shape of return on the reserves utilised for expansion.” When the amounts payable to the employer under the two items were finally quantified, the Court held that those amounts had to be treated as prior charges in the computation of the surplus available under the formula.

The Court then turned to the original formula, which related to replacement, rehabilitation and modernisation of plant and machinery. It recorded that shortly after the formula had been formulated a dispute arose concerning whether the industry could also claim rehabilitation for its buildings. The Court cited the decision that a claim for rehabilitation of buildings “had to be treated as a prior charge just like the claim for the rehabilitation of plant and machinery” (1). The Court affirmed that this position was not contested before it and that it was correct. The discussion then moved to the item of rehabilitation, which the Court described as presenting a very difficult problem. It pointed out that the purpose of providing depreciation for wasting assets in commercial accounting was to recoup the original capital invested in acquiring those assets, yet the depreciation amount allowed under the formula could hardly cover the probable cost of replacement. For this reason, the formula recognized the industry’s claim for rehabilitation in addition to the admissible depreciation. The Court observed that since the Second World War, the prices of industrial plant and machinery had risen continuously, and that this upward trend inevitably resulted in a proportionate increase in the claim for rehabilitation. In

In order to assess a claim for rehabilitation, the tribunal must first separate the employer’s assets into two distinct categories. One category comprises plant and machinery, while the other includes assets such as buildings, roads, railway-sidings and similar installations. After this division, the tribunal is required to determine the cost associated with each separate block and to estimate the probable future life of each block. Once these estimates have been made, the tribunal can roughly anticipate the year in which the plant or machinery will need to be replaced. The amount that the employer is entitled to receive as a replacement cost is ultimately dictated by the probable price of such replacement at that future date. When an industry possesses only a few factories, the tribunal can examine each item of plant and machinery individually, and an item-wise study is feasible. However, where the industry controls many factories and the number of plants and machines is very large, an item-wise analysis becomes impractical, and the tribunal must instead conduct a block-wise study. Regardless of whether the analysis is item-wise or block-wise, the tribunal’s essential task remains the same: it must estimate the probable cost of replacing plant and machinery at the time when replacement becomes due. It is evident that the decision on this question will inevitably rest on a number of uncertain factors, and the estimate of the probable life of the plant and machinery is, to some extent, a matter of conjecture. Any attempt to forecast the future trend of prices during the intervening period, however intelligently made, remains a guess, and numerous imponderables therefore confront the tribunals in this determination.

One of the issues that gives rise to controversy concerns the level of prices that the tribunal should employ when calculating the probable cost of replacement. The tribunal must decide whether to base its calculations on the price level that prevailed during the bonus year or on the price level that exists at the time of the tribunal’s enquiry. At first glance, it may appear appropriate to treat the price level of the bonus year as the relevant figure. Yet, if the relevance of price-level evidence is confined solely to the bonus year, such a limitation may actually impede rather than facilitate an accurate determination of the probable replacement cost. The tribunal’s duty is to project the price level into the future, and this projection can be performed more satisfactorily if the price level to be projected is derived not only from the prices prevailing in the bonus year but also from subsequent price developments. Consequently, the tribunal should be granted full discretion to admit all evidence that is pertinent to the trend in price levels, thereby enabling the tribunal to make an estimate that is as close as possible to actual realities. (11) (1952) 1 L.L.J. 518, 522.

In this case, the Court explained that the price level prevailing during the bonus year was certainly admissible evidence, but it could not, by itself, serve as the sole basis for the tribunal’s decision. The Court noted that this approach reflected the view taken by tribunals in the majority of earlier cases dealing with rehabilitation, and it expressed no justification for departing from that established practice. The Court observed that determining the probable cost of replacement was already a very difficult task, and the difficulty became far greater when the claim for rehabilitation was understood to cover not only straightforward replacement but also rehabilitation and modernisation.

The Court described rehabilitation as distinct from ordinary repairs that form part of the regular working expenses of an industry, and also separate from outright replacement. It was noted that it was quite conceivable that certain components of a machine block might require rehabilitation even though the whole block could continue to operate for several more years, and that such rehabilitation was, in effect, a continual process. Unlike replacement, the timing of rehabilitation could not always be precisely fixed or anticipated. The Court further explained that modernisation, together with rehabilitation and replacement, constituted the three elements included in a claim for rehabilitation.

Because of these complexities, the Court considered it necessary for tribunals to exercise their discretion to admit all relevant evidence that would enable them to resolve this challenging question satisfactorily. At this stage, the Court reminded that the claim under the relevant provision was confined to rehabilitation, replacement and modernisation. It was accepted as common ground that expansion of plant and machinery was not part of this claim, yet the Court recognized that several cases demonstrated the difficulty of distinguishing modernisation from expansion. The Court addressed the argument that an expert could, if he chose, attempt to subsume expansion within the label of modernisation by using technical terminology, and stressed that this aspect required careful scrutiny by the tribunal.

The Court also considered the industry’s contention that a plant might become obsolete because it was out of date and therefore needed to be substituted by a new, modern plant. It posed the question of whether the introduction of such a new plant represented an item of expansion or merely modernisation. The Court stated that no universal test could be laid down to resolve this issue. If, on the balance of evidence, the introduction of the new plant was essentially an expansion of the industry, the expenses incurred for that purpose had to be excluded from the rehabilitation claim. Conversely, if the employer introduced the new plant because the old plant, although still capable of service, had become uneconomic and wholly inexpedient to operate, the expenditure could be treated as modernisation. Finally, the Court observed that where the new plant or machine substantially increased the production capacity of the industry, that fact would be relevant in determining the appropriate classification of the expense.

The tribunal may, in a suitable case, examine whether it is feasible to split the expenses on the ground that the situation involves both partial modernisation and partial expansion. However, when the increase in production is not material, the extra output may be treated merely as an incidental result of replacement or modernisation, and the issue of apportionment would then be unnecessary. The Court outlined these observations to underline that, in addressing the rehabilitation problem, the tribunal is required to scrutinise the whole evidence and to look at every aspect of the employer’s claim before fixing the amount that can be allowed as a rehabilitation charge for the relevant financial year. The determination of the probable cost of rehabilitation is always made by applying an appropriate multiplier. This multiplier is calculated from the relationship between the original cost price of the plant or machinery and the estimated amount that might have to be paid for its rehabilitation, replacement or modernisation. Because the prices of industrial plant and machinery have been rising continuously, the older a plant that needs rehabilitation, the larger the multiplier that must be applied. This dynamic creates a constant contest between industry and workmen. Employers sometimes try to keep an old pre-1939 block in operation solely to obtain a higher multiplier, which would increase the rehabilitation sum they can claim. Conversely, workmen argue that the old pre-1939 block is being kept alive only as a device, and they press for a lower multiplier so that the rehabilitation claim is reduced. Once the tribunal selects a correct multiplier for each block, the first step in estimating the probable rehabilitation cost becomes a straightforward arithmetic exercise.

The next element in the calculation is the divisor. The total rehabilitation amount arrived at by applying the suitable multiplier to each block must be divided by a divisor appropriate to each block in order to determine the employer’s yearly requirement for rehabilitation. In disputes over the divisor, employers generally favour a lower divisor, while workmen advocate a higher one, and the tribunal must resolve this conflict by reaching a fair conclusion based on the evidence concerning the likely remaining useful life of the block in question. It is therefore evident that choosing the correct multiplier and divisor plays a crucial role in resolving the complex issue of the employer’s rehabilitation claim. Before the tribunal can finally award an appropriate rehabilitation sum for the bonus year, certain deductions have to be made. The first deduction relates to the breakdown value of the plant and machinery, which is ordinarily computed at five per cent of the cost price of the relevant block. Subsequently, deductions are made for depreciation and for the general liquid reserves that the employer holds.

The tribunal must first deduct from the amount claimed any reserves that are presently available to the employer. However, reserves that have already been reasonably set aside for specific purposes within the industry are excluded from this deduction. In addition, any rehabilitation allowance that may have been granted to the employer in earlier years must also be subtracted, but only if it can be shown that the allowance was actually available at the time it was awarded and that it has not been applied to rehabilitation activities up to the present. These steps constitute the general framework that must be followed when evaluating an employer’s claim for rehabilitation under the prescribed formula.

It follows that the determination of this principal component of the formula is fraught with difficulty, because the outcome ultimately rests on a number of hypothetical and empirical factors. Consequently, it is understandable that, in the decision of Metal Box Co. of India, Ltd. v. Its Workmen, the Labour Appellate Tribunal observed that “It is unfortunately too true that all our calculations as to rehabilitation may be disproved by subsequent events; it is impossible to say what the trend of world prices would be in the next fifteen years or which circumstances will intervene before that period to upset such calculations one way or the other, and no calculations of this kind are capable of mathematical accuracy. We have to take a commonsense view of these matters and make an allowance for rehabilitation to the best of our ability and in accordance with our formula.” The Tribunal further noted that when a suitable multiplier and divisor are fixed, they are generally retained because tribunals believe that revisiting these figures should not be done hastily. A revision is justified only where there has been a substantial and stable change that is likely to persist over a sufficient number of years so as to produce a clear and appreciable impact on the cost of replacement, as reflected in the decision of The Mill Owners Association Bombay v. The Rashtriya Mill Mazdoor Sangh.

In the context of an employer’s rehabilitation claim, the burden of proof has consistently been placed on the employer. The employer is required to establish, with satisfactory evidence, the price of the plant and machinery, the age of the equipment, the period during which replacement will be necessary, the cost of such replacement, the amount existing in the depreciation and reserve fund, and the extent to which the available funds will cover the replacement cost. Where the employer is unable to present satisfactory proof on any of these points, tribunals have on several occasions wholly rejected the rehabilitation claim, as illustrated in Ganesh Flour Mills Co. Ltd., Kanpur v. Ganesh Flour Mills Staff Union, Kanpur; Bombay Gas Co. Ltd. v. Their Workmen; and Dharangadhra Chemical Works Ltd. v. Its Workmen.

In the circumstance where an employer, without any sufficient cause, failed to take any steps to rehabilitate, replace or modernise his machinery even though an appropriate allowance for such work was made each year, the tribunal could take that conduct into account when determining the extent of the allowance for the bonus year that was under consideration. The same principle applied where the employer, deliberately or mala fide, refrained from rehabilitating or replacing old machinery with the intention of securing a higher multiplier in the calculation of the rehabilitation amount; in such cases the tribunal was also permitted to consider the employer’s conduct in deciding the actual allowance of rehabilitation to be granted. The principal difficulty in resolving questions of rehabilitation lay in the fact that satisfactory evidence was not always placed before the tribunals, and it was contended that the evidence furnished by the employer’s experts was interested, while the workmen, having limited resources, could not test that evidence through adequate or effective cross-examination. In these situations the tribunal, if it so desired and if it was feasible, could secure the assistance of assessors, as provided by section 38 of the Industrial Disputes Act. Consequently it was essential for the tribunal to require the employer to produce clear and satisfactory evidence concerning all the relevant facts upon which it could make the necessary estimate. The questions that the tribunal had to consider under this head were essentially factual, and its final decision on them was inevitably hypothetical, being based on a fair evaluation of several circumstances that were by no means certain and could not be predicted with precision or definiteness. For this reason it was of the utmost importance that the employer adduce all relevant and material evidence and that such evidence be properly tested by cross-examination. Once that was accomplished, the tribunal was obliged to consider the evidence objectively and to reach its final decision in a judicial manner. After the amount of rehabilitation had been thus determined, the surplus available for the bonus year was ascertained, and the tribunal then proceeded to give directions for the distribution of that surplus. It was not seriously disputed that three categories of persons were entitled to claim a share of the available surplus: the labour force, which claimed a bonus; the industry, which claimed a share for the purpose of expansion and other needs; and the shareholders, who claimed a share as an additional return on the capital they had invested. In the case of Mill Owners Association, Bombay (1)(1952) 1 L.L.J. 518, where the formula was evolved, out of an available surplus of Rs 2.61 crores Rs 2.16 crores were distributed as bonus, leaving a balance of Rs 0.45 crores with the industry. In Trichinopoly Mills Ltd. v. National Cotton Mills Workers’ Union (2) the available surplus was found to be Rs 34,660 and out of it Rs 30,000 was ordered to be distributed as bonus to the workmen (3)(1955) 11 L.L.J. 152; (2) [1952] L.C. 172; (4)(1956) 1 L.L.J. 475.

In that case, the tribunal ordered that Rs 30,000 of the surplus be paid to the workmen as bonus. The Court observed that the two cited decisions and other similar rulings cannot be used to create a universal rule governing the proportion in which the surplus must be divided. The appropriate share, the Court explained, will vary according to many factual circumstances. It listed several relevant factors: the amount of wages actually paid to the workmen and the size of the shortfall between those wages and a living wage; whether the employer has set aside any gratuity fund and, if so, the portion of that fund that may be applied to the bonus year; the total amount of surplus that is available; the dividends that the employer has actually paid and the likelihood that the industry will embark on an immediate programme of expansion; the dividend practices of comparable enterprises; the overall financial condition of the employer; and whether the employer must satisfy any urgent obligations such as the redemption of debenture bonds. The Court held that these and similar considerations will naturally determine how the surplus should be distributed.

The Court further noted that the labour claim to close the gap between the wages actually paid and a living wage is an important element in reaching a decision on the distribution. It added that the industry's claim for an additional return on capital and for extra provision for expansion must also be taken into account. The Court pointed out that the employer is entitled to a rebate of income-tax on the amount of bonus paid to the workmen, and that this rebate often plays a significant role in the final distribution.

Consequently, the Court expressed the view that once the available surplus is measured—citing the decisions reported in (1) (1952) 1 L.L.J. 518 and (2) (1953) 11 L.L.J. 361— the tribunal, after considering all relevant circumstances, should make an award directing the payment of a fair and just bonus to the labour force. The Court stated that if the formula is applied reasonably, it will in most cases achieve its main purpose of doing justice to both labour and industry.

Before addressing the mechanics of the formula, the Court observed that certain tribunals have placed the amount of bonus at a priority stage in their calculations, a practice the Court found unjustified. Logically, the Court argued, the prior charges must first be identified and deducted from gross profits before the available surplus can be ascertained; only after the surplus is known can the question of awarding a bonus be considered. Some tribunals, the Court said, first calculate a national estimate of the bonus amount and insert that figure early in the computation, before determining the income tax payable. The Court warned that this approach inevitably reduces the amount of tax proportionally. The Court concluded by stating that this procedure should not be followed.

The Court observed that the procedure of placing the bonus amount immediately after depreciation in the formula should not be followed, because the tribunal, while distributing the available surplus, must consider the income-tax rebate to which the employer is entitled on the bonus paid, a treatment that differs in principle from the contested placement. The respondents argued that both rehabilitation expenses and depreciation should be deducted from the gross profits before determining the income-tax payable, relying on a passage in the Labour Appellate Tribunal’s judgment that described rehabilitation as the first charge in the order of priorities. The Court examined the context of that passage and concluded that the Tribunal’s intention was merely to highlight the urgent need for rehabilitation in the textile industry that was directly involved in that case, not to assign rehabilitation a supreme priority in the general bonus formula. The final calculations set out in that judgment, the Court noted, clearly indicate how the formula is to be applied, and consequently the Court was satisfied that rehabilitation cannot be given the high priority claimed by the respondents. The Court then turned to the question of whether the tribunal was correct in directing that overtime payments be included in the calculation of the bonus that the appellant was ordered to pay. The respondent, identified as Mr Kolah, contended that such a direction contradicted the usual practice of industrial tribunals and was unsound in principle. The dispute, the Court explained, arose in a sharp form because the total bonus amount had not been logically ascertained after the available surplus was identified. The Court held that if the surplus is determined logically, as it has outlined, the issue of whether overtime wages should be counted becomes a matter of dispute only among the workmen themselves, since the distribution among workmen would no longer be a direct concern of the employer. Accordingly, the Court reasoned that no conflict between the employer and his workmen would arise if tribunals adopted the logical method of calculating the bonus prescribed by the Court. On principle, the Court found it unfair to the workmen as a whole to include overtime payments in the bonus calculation. Workers who perform overtime already receive additional compensation for the extra work; allowing them to count that compensation as part of their basic wages for bonus purposes would widen the gap between their actual earnings and the living wage to a greater extent than for those who do not receive overtime pay, thereby creating an inequitable advantage.

In addition, the Court observed that if a bonus is to be paid on the general principle that it is a reward for the workmen’s contribution to the employer’s profits, it would be unreasonable to differentiate among the workmen on the basis that some individuals have apparently contributed more to the profit than others. The Court explained that such a differentiation would inevitably arise if workers who performed overtime were permitted to claim a larger share of the bonus than their colleagues who did not work overtime. Accordingly, the Court concluded that the tribunal was not justified in directing that overtime payments be treated as part of the basic wages for the purpose of calculating the bonus. The Court further stated that any allowance made on that basis must be kept in mind when finally determining the amount of bonus that should be paid to the workmen, but it should not be added as a separate priority in the statutory formula. The Court indicated that this approach would satisfy the employer’s claim without altering the list of priorities prescribed in the formula.

Mr. Dudhia argued that the tribunal should not have allowed an amount of ten lakh rupees under that item, but the Court found no merit in his contention. Mr. Dudhia also pointed out that, in assessing the appellant’s claim for a return on working capital, the tribunal had erred by including an additional sum of six-point-six lakh rupees as a return on investments. The Court noted that Mr. Kolah conceded this mistake, and consequently the correct figure for the return on working capital would be twenty-six point-ten lakh rupees only.

The Court then turned to the evidence of Mr. Tongaonkar, describing him as the most contested factual witness regarding the appellant’s rehabilitation requirements. The Court recorded that Mr. Tongaonkar possessed a Bachelor of Science degree from London University and was a member of the Institution of Electrical Engineers, London. He had joined the appellant in November 1934 after acquiring nearly three years of practical experience in various engineering firms in England. Upon returning to India, he had been employed by the Dinshaw group of cement factories, remaining with that group until its merger with the appellant in 1936, when he was appointed by the appellant. The Court noted that Mr. Tongaonkar headed the department responsible for the construction of new cement factories, the modernization and extension of existing factories, the design and manufacture of cement machinery for A.C.C., and the resolution of major engineering problems of A.C.C. Since April 1956, he had served as the Controller of Planning and Development of A.C.C. The Court observed that he visited A.C.C. factories frequently and claimed personal familiarity with the condition of plant and machinery at all such factories. The Court affirmed that there was no doubt about Mr. Tongaonkar’s qualification to give evidence on the technical issues relevant to the question of rehabilitation, while also cautioning that, in weighing his evidence, it would be reasonable to consider that he was an officer employed by the appellant and therefore might have an interest in supporting the appellant’s rehabilitation claim.

The Court observed that Mr. Tongaonkar was an officer of the appellant and therefore had a natural interest in supporting the appellant’s claim for rehabilitation. According to his testimony, the average remaining useful life of the plant and machinery that existed in 1939 would be about seven years as of 18 August 1954. He further estimated that the approximate remaining useful lives of three other categories of plant blocks would be thirteen, fifteen and twenty years respectively. In explaining how he arrived at these figures, he stated that the calculation of machinery life must first consider the mechanical condition of the equipment and secondly assess whether the machinery remains efficient or has become obsolete because newer, more efficient designs have entered the market. In other words, the advent of more efficient machinery can cause the useful life of existing equipment to be curtailed prematurely. To illustrate this point, he cited several instances in which the appellant’s plant or machinery had been replaced principally because a newer model offered greater efficiency and more satisfactory performance. Nonetheless, he expressed a general opinion that, if properly maintained, the average life of an entire cement plant would be twenty-five years. Turning to the price of plant and machinery, Mr. Tongaonkar produced Exhibit C-36, a statement showing the progressive increase in prices of major items such as machinery, gear boxes, motors and power plant from the pre-war period up to 1955-56. He explained that this statement was prepared on the basis of actual quotations that he possessed. His evidence indicated that between 1951 and 1954 there had been an eleven percent increase in the prices of the relevant items, while between 1954 and 1956 there was a further seven percent rise. He sought to corroborate this price escalation by referring to the actual expenditure incurred by the appellant in commissioning a new cement factory at Sindri around 1955. His calculations showed that the cost of constructing the new factory was approximately four point three times the cost of constructing a similar factory in 1939. Regarding the lifespan of buildings, Mr. Tongaonkar said that first-class buildings, if properly maintained and situated outside earthquake zones, typically endure for about forty years. However, for the main unit of a cement plant it is customary to assume a building life of twenty-five years. He added that, in many cases, existing buildings must either be demolished or substantially altered when the main machinery—whose expected life is twenty-five years—is replaced by modern equipment of a different design that requires buildings and foundations of different size and type. Consequently, for this special circumstance, he was not prepared to assign an average life to the appellant’s buildings that exceeded twenty-five years.

In this case, the expert witness explained that the useful life of the appellant's buildings could not exceed twenty-five years. Regarding the rise in construction costs, he introduced two statements labelled C-6 and C-14 as part of his analysis. Exhibit C-6 displayed the increase in prices of building materials between 1938 and 1954, while Exhibit C-14 illustrated the continuously growing expenditure incurred by the appellant for constructing labour quarters and similar facilities. On the basis of this evidence, the witness applied the appropriate multipliers and divisors to calculate the amount required for rehabilitation. As noted earlier, for the block of assets acquired before 1939 he employed a multiplier of 4.28, whereas for the block purchased between 1940 and 1944 he used a multiplier of 2.8. He clarified that the multiplier of 4.28 was not arbitrary but was derived from two separate multipliers representing different cost components. He estimated that sixty percent of the plant and equipment cost originated from foreign sources and the remaining forty percent from domestic sources. The foreign-sourced portion was assigned a multiplier of 4.8, while the domestic portion received a multiplier of 3.5; the arithmetic average of these two figures produced the overall multiplier of 4.28. The witness further stated that the sixty-forty split was based on his experience in constructing several cement factories and in extending or modernising existing plants. He added that the multiplier was also founded on a comparison of quotations for plant and machinery received in 1939 with quotations for similar machinery obtained in recent times. Consequently, it was evident that the witness derived the multiplier and divisor primarily from his professional experience and from inferences he regarded as reasonable. Moreover, in performing the relevant calculations, he did not treat plant and machinery separately from buildings and other assets; instead, he aggregated them under the respective asset blocks. The approximate cost of the merging companies' assets as of 31 July 1936 was rupees five point seven three crores. Exhibit C-3, a certificate issued by chartered accountants, recorded that, according to the asset blocks, the original cost of fixed assets excluding goodwill, purchase of rights and land as of 31 July 1954 amounted to rupees nineteen crore forty-one lakh thirty-eight thousand one hundred. Similarly, Exhibit C-28, another chartered accountant’s certificate, showed that the original cost of the portion of fixed assets, again excluding goodwill, purchase of rights and land that had been discarded, scrapped or sold by 31 July 1954, totaled rupees one crore seventy lakh ninety-one thousand two hundred ninety-six. These two figures appear in columns two and three respectively of Exhibit C-2. Under the method adopted by Mr. Tongaonkar the cost of discards is

In this case the Court observed that the amounts shown for the years in which portions of the asset blocks were discarded, together with the yearly rehabilitation expenditures, had been recorded in column 2 of the schedule. The total rehabilitation cost had therefore been derived by applying the multiplier and divisor chosen by the expert, Mr Tongaonkar. The principal issue for determination was whether those multipliers and divisors could be regarded as appropriate. As previously noted, the multipliers and divisors are critical because they ultimately decide the employer’s claim for rehabilitation in all bonus matters. The respondents had severely criticised Mr Tongaonkar’s evidence, and the tribunal had not been favourably impressed by it. Before addressing the criticisms, the Court considered it important to point out that the witness had provided exhaustive details in response to the examination-in-chief, and that his evidence, when read in its entirety, presented a substantial body of information. Nevertheless, the Court recognised that an abundance of technical detail from experts can sometimes complicate the narrow points of dispute between the parties, creating doubt and confusion; the profusion of technical language may, on occasion, obscure rather than illuminate the matters that the tribunal must decide. The Court was of the view that this situation had indeed arisen to some extent in the present proceedings. However, such complexity did not, in itself, constitute a defect in the expert’s testimony nor did it necessarily affect his credibility. It merely required the tribunal to carefully analyse the statements, consider them in the light of the cross-examination, and determine the extent to which reliance on them was justified. The respondents submitted that the claim advanced by Mr Tongaonkar concerning rehabilitation of the pre-1939 block should be rejected on the ground that the block had been entirely replaced before 1953, and therefore no rehabilitation claim could be entertained. This submission was based largely on the assumption that a portion of the sum of Rs 997.42 lakhs had been spent on replacing that block. Mr Tongaonkar contended that, up to 1 August 1954, the total expenditure on modernisation, replacement, rehabilitation and other sundry capital work, excluding expansion, was roughly Rs 9.97 crores. To support this statement he produced Exhibit C-29, which detailed the yearly expenditures. According to that schedule, Rs 78 lakhs had been spent on constructing the Rohri Works and the Kistna Works, while Rs 622.13 lakhs had been spent on expansion during the post-war period, giving a total expansion figure of Rs 700.13 lakhs. By deducting this expansion amount from the overall expenditure of Rs 1 697.55 lakhs, the remaining balance of Rs 997.42 lakhs was shown to represent spending on modernisation, rehabilitation, replacement and other sundry capital projects. The Court noted that this balance formed the basis of the disputed claim.

The Court examined the figure of Rs 997.42 lakhs that Mr Tongaonkar had produced and found that, during cross-examination, he could not say whether a major part of that amount had been spent on rehabilitating or replacing the pre-1939 block or the 1940-44 block. He acknowledged that the numbers shown in Exhibit C-29 had been prepared by the Accounts Department from the financial books and that they represented only the year-to-year total expenditure. He further stated that he was unable to break down the Rs 997.42 lakhs into specific items. From these answers, the Court inferred that the sum of Rs 997.42 lakhs had been derived in a mechanical way by subtracting from the overall expenditure of Rs 1 697.55 lakhs incurred on all works up to 31 July 1954 an estimated Rs 700.13 lakhs, which had been treated as the amount spent on expansion during that period. The respondents relied on this calculation to argue that the entire Rs 997.42 lakhs must have been used to replace the pre-1939 block, an argument that appeared quite plausible at first sight. Consequently, the Court invited Mr Kolah to explain how that expenditure was allocated. Mr Kolah submitted a statement, Exhibit I, which presented a rough classification of the total capital outlay of about Rs 997 lakhs incurred up to 31 July 1954 for modernisation, replacement, rehabilitation and other sundry and miscellaneous jobs. He grouped the various items under eight heads; the last head, amounting to Rs 160 lakhs, was further divided into five separate items in statement 1(a). Some dispute arose before the Court regarding the admissibility of certain items listed under clause 5 of document 1(a). Nonetheless, Mr Kolah argued, and the respondents did not contest, that even if the entire disputed item 5 were excluded, the remaining items in Exhibit 1 would still provide a fairly satisfactory explanation of the rehabilitation, replacement and modernisation work on which the bulk of the Rs 997.42 lakhs must have been spent. In light of this explanation, the Court concluded that the respondents’ assumption that the whole Rs 997.42 lakhs had been used to replace the pre-1939 block was not well founded. The Court also considered the contention that there was no justification for keeping the pre-1939 block operational, given Mr Tongaonkar’s estimate of the plant’s and machinery’s useful life. It was suggested that the oldest block was being kept in service deliberately so that the appellant could claim a higher multiplier when calculating the rehabilitation amount. While the criticism could not be dismissed entirely, the Court noted that Mr Tongaonkar himself had admitted that a portion of the block could have been discarded earlier, although he added that a part of it had been retained as a temporary measure.

The witness explained that a part of the pre-1939 block had been rehabilitated only as a temporary measure so that production could continue, and that is why this particular portion had not yet been discarded. He further stated that the block still contains a segment whose useful life has already expired, but the appellant must continue to use it until sufficient funds are obtained for its modernisation, reconstruction, or complete replacement. The Court found this explanation to be less than fully satisfactory, observing that if the entire block were truly beyond its useful life the appellant, considering its overall financial position, would have been able to replace the block in a reasonable period of time.

Another point of criticism was directed at the witness’s methodology because he had not calculated the average life of the block. He said his assessment of the pre-1939 block was based on personal visits to the factory, during which he observed the extent of temporary rehabilitation and evaluated the present condition of the machinery. While the Court acknowledged that, given his knowledge and experience, the witness might be capable of forming a proper assessment of the machinery’s life, it also noted that the effectiveness of cross-examination on this issue was substantially limited. Specifically, during cross-examination, questions posed to the witness were objected to by counsel for the respondents, and those objections were upheld by the tribunal.

The tribunal had disallowed a question asking whether, drawing on his extensive experience, the witness could tell the tribunal how many years, on average, the pre-1939 block had already spent in service prior to 1939. The Court considered this question to be clearly relevant and important from the respondents’ standpoint because, if the witness could predict the future useful life of the machinery from his inspection, he should also be able to estimate how much of its life had already been consumed. The purpose of the question was to demonstrate that the machinery had operated for a considerably longer period than the life estimate provided by the witness. Because this question was excluded, any further cross-examination intended to test the witness’s claim that he could deduce the future useful life of the machinery from his inspection became impossible.

A further line of inquiry asked the witness whether it would be correct to assume that, on average, the pre-1939 block had already spent more than fifteen years of its useful life. This question was also disallowed. Consequently, the respondents expressed a serious grievance that they were denied the opportunity to show that the witness’s estimate of the plant’s and machinery’s life was a gross understatement. The respondents additionally objected to the inclusion of several items in the approximate cost of rehabilitation listed in column 8 of Exhibit C-2. The new additional packing

In this matter, the respondents contended that the costs listed for the new machinery at the Banmore factory and for the crane storage should be regarded as items of expansion rather than items of rehabilitation. They made a similar objection to the inclusion of the dust-collector plants, the coal-handling installations, components of the fluidification system, the diesel-engine shunting locomotive and other comparable items. Their grievance was that by classifying these expansionary items as rehabilitation costs, the estimated total rehabilitation expense had been inflated beyond what was appropriate. The Court noted that it could not determine at this stage whether the respondents’ grievance was justified.

Regarding the multiplier employed by the expert, Mr. Tongaonkar, the respondents argued that the multiplier was derived from hypothetical considerations that were subjective in nature. They further pointed out that the expert had failed to ascertain the present-day replacement cost of each individual item belonging to the pre-1939 block, thereby introducing an additional element of uncertainty into his final multiplier calculations. The expert did acknowledge that he had applied a multiplier of 4.8, which he derived from a comparative study of quotations received for equipment between 1939 and the present day, but the Court observed that determining a multiplier on a block-wise basis rather than on an item-by-item basis was not a satisfactory method.

The respondents cited the expert’s statements concerning the cost of a 180-ton-per-day kiln. The expert had said that, if the appellant manufactured such a kiln, its cost would be lower than that of a 300-ton-per-day kiln. He then added that the appellant did not produce a 180-ton-per-day kiln and that, should such a kiln be imported, its price would be somewhat higher than that of a domestically manufactured 300-ton-per-day kiln under present-day conditions. When asked whether he possessed a quotation for a 180-ton-per-day kiln, the expert admitted that he had none and that his estimate of Rs 11½ lakh was only an approximate figure. The respondents maintained that this estimate was purely notional and lacked any material basis. The Court found this particular criticism to be justified.

Another argument advanced by the respondents was that the expert appeared to have relied solely on price levels prevailing in 1956, while disregarding prices from earlier years. The Court previously observed that, when determining the amount of rehabilitation and selecting an appropriate multiplier, the tribunal must consider all relevant facts and must not limit its analysis to the price level of a single year. In assessing the hypothetical future price at which plant and machinery would need to be replaced or rehabilitated, the tribunal must adopt an overall view of price trends. Consequently, focusing exclusively on the 1956 price level was identified as a flaw—or infirmity—in the expert’s calculations.

It was observed that the calculations criticised by the respondents suffered from a methodological flaw because the expert, Mr. Tongaonkar, had combined the values of plant and machinery with those of buildings and other properties belonging to the appellant in column 2 of Exhibit C-2. The Court considered a more scientific and satisfactory approach to be the separation of plant and machinery from buildings and other assets when assessing the rehabilitation requirement. Accordingly, the Court directed Mr. Kolah to provide a statement that disclosed the cost of plant and machinery separately from the cost of buildings and other assets, so that a clearer picture of the appellant’s rehabilitation needs could be obtained. Mr. Kolah complied and filed the required statement as Exhibit F (a).

Another point of criticism raised by the respondents concerned the scope of Mr. Tongaonkar’s evidence on “modernisation”. The respondents argued that his concept of modernisation permitted the inclusion of several items that were in fact expansion. Mr. Tongaonkar explained that by “modernisation” he meant a composite scheme that comprised three components: the replacement of part of the old machinery with new machinery; the installation of additional machinery because the layout of the composite modernisation scheme differed from the previous layout; and the rehabilitation of the remaining machinery as a short-term measure. He further defined “rehabilitation” as “alterations to a machine or machinery, installation for improving its mechanical performance, its technical efficiency or to extend its life by a further span”. He also noted that rehabilitation included, in his words, the removal of weak links.

According to his testimony, expansion could be divided into two groups. Group No-1 involved the construction of an entirely new factory that was intended solely to obtain additional production. Group No-2 covered the installation of specific additional machines that were not installed for modernisation purposes per se, but whose primary objective was to achieve additional production. Mr. Tongaonkar acknowledged that within the “modernisation of an existing factory” expansion formed only a part of the overall scheme, which meant that a modernisation plan inevitably contained an element of expansion. This broad and wide description of “modernisation” could understandably create apprehension among the workmen that items of pure expansion might be subsumed under the heading of modernisation.

The Court therefore stressed that expert evidence in such proceedings must be examined carefully so that items of genuine expansion are properly excluded from the relevant calculations. Mr. Tongaonkar also stated that when plant or machinery is rehabilitated or replaced, it may lead to an increase in production, but such an increase was described as purely incidental. He illustrated this point by contemplating a situation where a 180-ton-a-day kiln was substituted by a 300-ton-a-day kiln through rehabilitation or replacement. The employer could argue that the first category of kilns was unavailable in the market or that the larger kiln was more economically profitable. This example highlighted the difficulty of distinguishing between rehabilitation-induced incidental gains and deliberate expansion.

In the present case, the substitution of a 180-ton-per-day kiln by a 300-ton-per-day kiln was regarded as an act of rehabilitation or replacement rather than an act of expansion. The Court observed that, although the larger kiln would inevitably generate a noticeable rise in output, the replacement itself should be classified as rehabilitation. Nevertheless, the workmen might argue that the substantial increase in production justifies an apportionment that separates the rehabilitation component from any expansion element that may have inadvertently entered the transaction. The Court acknowledged that performing such an apportionment would be a highly difficult undertaking, yet it held that tribunals could be required to examine the workmen’s claim if they were convinced that the employer’s rehabilitation measures had resulted in a very large surge in production. The respondents supported their position by relying on Exhibit H. O. C-2, which they said demonstrated a considerable increase in output that, in their view, stemmed from expansion rather than rehabilitation. Mr Tongaonkar, in his evidence, suggested that the employer’s intention determines whether a transaction is rehabilitation or expansion; he argued that an intention to expand would make the act expansion, while an intention to acquire new machinery for ordinary business reasons would constitute rehabilitation even if production rose. The Court, however, cautioned that placing undue weight on the employer’s intention could be misleading and indicated that, on a proper occasion, an objective test should be applied to resolve the issue.

The Court also examined the estimate made by the appellant’s Chairman concerning the cost of replacing pre-war plant and machinery. In a speech delivered on 24 January 1951 at the fourteenth Annual General Meeting of the company, the Chairman stated that most of the pre-war plant would require replacement within the next ten years and that, at prevailing price levels, replacement would cost on average two and a half times the original cost, amounting to approximately Rs 8 crores above the provision already made for depreciation. The respondents argued that, when viewed against this estimate, the current claim for rehabilitation appeared markedly inflated. When questioned about the Chairman’s estimate, Mr Tongaonkar disclosed that the Chairman had not consulted him while drafting the annual report or the portion of the speech that dealt with rehabilitation, and that he did not agree with the figures presented by the Chairman regarding replacement costs. Although the Court found this explanation unsatisfactory, it noted that the Chairman’s statements were not intended to calculate the rehabilitation claim using a specific formula, and therefore it would be inequitable to test the witness’s evidence against the Chairman’s estimate. Consequently, the Court resolved to determine an appropriate multiplier and divisor for assessing the rehabilitation claim, having already identified certain infirmities in Mr Tongaonkar’s evidence and in the statements prepared.

In this matter, the witness Mr Tongaonkar explained that the chairman’s statement on “rehabilitation” was not something with which he agreed, and he also disclaimed the figures given by the chairman regarding the replacement cost of plant and machinery in the report dated 24 January 1951. Although that explanation was not entirely satisfactory, the court noted that the chairman had never claimed to have calculated the rehabilitation claim using the precise formula, and therefore it would be unfair to test the witness’s evidence against the estimate made in the chairman’s speech. The court observed that it had already examined the broad arguments presented against Mr Tongaonkar’s evidence and that the tribunal before it had confined itself to a remark that a multiplier of 2.7 would be adequate, without providing any finding on the appropriate divisor. Consequently, the court felt it necessary to adopt both a suitable multiplier and a suitable divisor for determining the rehabilitation claim. The court reiterated its earlier conclusions concerning certain weaknesses in Mr Tongaonkar’s evidence and the statements he prepared. It pointed out that he had aggregated all of the appellant’s assets that required rehabilitation, had relied only on the prices prevailing in 1956, and that his choice of an average multiplier appeared to be slightly generous to the appellant. Moreover, his estimate of the useful life of the plant and machinery had not been sufficiently tested during cross-examination, and on the whole his estimate seemed to err on the side of a conservative view; therefore his divisor might need to be revised. The court also considered the possibility that some items included by him under rehabilitation were more akin to expansion rather than genuine rehabilitation, replacement or modernisation. In addition, the steps taken by the appellant, ostensibly for rehabilitation, replacement and modernisation, had apparently increased production, a result that could be attributed in part to a general expansion plan that the appellant had been pursuing for some time. In light of these facts, the court decided to examine the appellant’s rehabilitation claim using Exhibit C-2, Exhibit C-23 and Exhibit F(a) as the basis for its calculations. It expressed regret that Mr Tongaonkar had not prepared separate calculations for plant and machinery distinct from buildings, roads, bridges and railway sidings. Although Exhibit F(a) had been filed at the court’s suggestion, the court noted that had such a statement been filed before the tribunal, the respondents would have had a better opportunity to test the accuracy of the calculations and to understand the basis on which the respective multipliers and divisors were derived. The court therefore clarified that the calculations it was about to propose for the rehabilitation item should not be regarded as binding on the parties for subsequent years.

The Court noted that the calculations it was about to perform in relation to the rehabilitation item were not to be understood as creating a binding precedent for the parties in any future years. It further explained that, if in view of the Court’s decision on the main issues raised in the present appeals the parties chose to settle their disputes concerning bonuses for later years, there would be no occasion for the tribunal to examine those matters on their merits. Conversely, the Court held that should the parties be required to have those disputes resolved by the tribunal, each party would be permitted to present evidence supporting its respective position, and the tribunal would be free to reconsider the issue anew and reach its own substantive conclusion. Having set out this procedural framework, the Court then proceeded to make the relevant calculations. The first step identified by the Court was to adjust the figures shown in Exhibit C-2 by removing the cost attributable to buildings, roads, bridges and railway sidings from the total cost recorded for each block. The cost of those items had been supplied to the Court by the appellant in Exhibit F (a). After making those adjustments, the Court presented the corrected figures, all expressed in lakhs of rupees, as follows: for the period up to 1939 the original cost was 486.89 lakhs, of which 132.98 lakhs represented the cost of buildings, roads, bridges and sidings, leaving a net amount of 353.91 lakhs; for 1940-44 the original cost was 59.91 lakhs, the excluded cost was 22.38 lakhs and the net amount was 37.53 lakhs; for 1945-47 the original cost was 208.93 lakhs, the excluded cost was 68.15 lakhs and the net amount was 140.78 lakhs; and for 1948-54 the original cost was 1 144.81 lakhs, the excluded cost was 333.47 lakhs and the net amount was 811.34 lakhs. The Court observed that Exhibit F (a) presented average ratios for the items of property listed, and it concluded that, for the purpose of its calculations, it would be reasonable to apply a multiplier of 3.5 to the net amount for the period up to 1939, a multiplier of 2 to the net amounts for the periods 1940-44 and 1945-47, and a multiplier of 1 to the net amount for 1948-54, these multipliers being the same as those used in Exhibit C-2 for replacement of ACC machinery. The Court did not alter the divisors that had been employed in Exhibit C-2, but it expressed the view that the appellant, Mr Tongaonkar, had likely underestimated the probable useful life of the machinery. After applying the chosen multipliers and retaining the original divisors, the Court calculated that the yearly requirement for rehabilitation of the total block, after excluding buildings, roads, bridges and sidings, amounted to a sum of Rs 229.39 lakhs. The Court remarked that this figure did not yet take into account any reserves that might be available, and that the treatment of those reserves would be considered later. To illustrate the detailed computation, the Court broke down the calculation for each period: for the period up to 1939 the net amount of 353.91 lakhs was multiplied by 3.5 to give 1 238.68 lakhs; after subtracting the balance and applying the divisor the annual requirement was determined to be approximately 167.54 lakhs; for 1940-44 the net amount of 37.53 lakhs was multiplied by 2 to give 75.06 lakhs, leading to an annual requirement of about 135.41 lakhs; for 1945-47 the net amount of 140.78 lakhs was multiplied by 2 to give 281.56 lakhs, resulting in an annual requirement of roughly 518.02 lakhs; and for 1948-54 the net amount of 811.34 lakhs was multiplied by 1 to remain 811.34 lakhs, giving an annual requirement of approximately 38.42 lakhs. Adding these figures together reproduced the total yearly rehabilitation requirement of Rs 229.39 lakhs. Finally, the Court turned to the consideration of the buildings, roads, bridges and railway sidings themselves. It proposed to assign an average useful life of thirty years to all such items across the various blocks, thereby providing a uniform basis for compensation in cases where demolition might be necessitated by modernisation. Although the appellant had previously stated that factory buildings typically had a useful life of about thirty-five years and residential areas about fifty years, the Court elected to adopt the thirty-year average for the purpose of its calculations concerning these components.

The Court explained that the appropriate multipliers were to be applied as follows: a factor of 2.25 for blocks constructed before 1939, a factor of 1.5 for blocks built between 1940 and 1947, and a factor of 1 for blocks erected from 1948 to 1954. The Bombay block was dealt with separately and its figures were set out in Exhibit C-2, labelled Chart III. For each period the Court listed the original cost, applied the relevant multiplier, arrived at a total cost, deducted the balance, and then calculated the yearly depreciation at five per cent of the cost. Thus, for the pre-1939 period the cost of 132.98 lakhs was multiplied by 2.25 to give 299.20 lakhs; after deducting a balance of 6.65 lakhs, the remaining amount of 292.55 lakhs yielded a yearly depreciation of 20 lakhs, and the building component contributed 144.63 lakhs. Similar calculations were shown for the 1940-44, 1945-47 and 1948-54 periods, and for the Bombay office block. Adding all the yearly depreciation amounts together gave a total yearly rehabilitation requirement of 31.14 lakhs for the Bombay block. The Court then turned to the appellant’s claim for rehabilitation and computed it on the basis of Exhibit C-23, after correcting it in light of the three charts it had prepared. Using the figures in the charts, the Court held that the appellant was entitled to a rehabilitation allowance of 216.10 lakhs for the relevant year. The detailed computation was presented in Chart IV. For the pre-1939 block the cost of machinery, after deducting reserves of 311.00 lakhs, was 861.76 lakhs; dividing this by seven gave 123.11 lakhs, to which 14.63 lakhs for buildings was added, resulting in a total of 137.74 lakhs. Replacement costs for the 1940-44 block (including buildings) amounted to 5.41 plus 1.29 lakhs, for the 1945-47 block 18.02 plus 3.95 lakhs, for the 1948-54 block 38.42 plus 10.56 lakhs, and for the Bombay office block 0.71 lakhs. Summing these amounts produced the overall rehabilitation entitlement of 216.10 lakhs.

Having fixed the admissible rehabilitation claim at 216.10 lakhs, the Court proceeded to determine whether any surplus profit remained after applying the statutory formula. The Court displayed its calculations in Chart V. Total profit, excluding that of the Bhupendra factory, was 428.71 lakhs. From this, a notional normal depreciation of 100.22 lakhs was deducted, followed by income-tax payable at seven per cent, amounting to 115.16 lakhs. Further deductions comprised six per cent on the paid-up capital (76.06 lakhs) and four per cent on the working capital (26.10 lakhs). After all these subtractions, the balance stood at 317.54 lakhs. From this balance, an amount of 111.17 lakhs was set aside for other purposes, leaving 115.88 lakhs to be allocated for the rehabilitation provision. When the rehabilitation allowance of 216.10 lakhs (as determined in Chart IV) was compared with the notional normal depreciation of 100.22 lakhs, the residual amount was 115.88 lakhs, which exactly matched the rehabilitation provision, leaving a final surplus of merely 4.71 lakhs. The Court also explained how it calculated the income-tax payable: gross profits of 428.71 lakhs were reduced by statutory depreciation of 165.49 lakhs, yielding a taxable base of 263.22 lakhs; applying the seven per cent rate gave tax of 115.16 lakhs. The Court noted that the Bhupendra factory had not been included in the calculations because the material available concerning that factory was insufficient and unsatisfactory. Nevertheless, the Court observed that even if the profits of the Bhupendra factory and its associated rehabilitation requirement were taken into account, the overall rehabilitation figure would not be materially altered. Consequently, the Court concluded that no surplus profit remained from which the respondents could claim any bonus for the relevant year.

In the circumstances, the Court observed that the workmen were unable to claim any additional bonus for the year in question because the calculation formula did not produce a surplus from which such a payment could be made. The Court noted that the employer had already disbursed an amount of twenty-point-six-five lakhs as a bonus for that same year, and it was conceivable that the employer might continue to make similar payments in subsequent years; however, the Court emphasized that any further bonus payments were outside the scope of the statutory formula under consideration.

The Court then explained that, since the application of the formula resulted in no surplus being available, the proper conclusion was to permit the appeal and to set aside the award that had been made by the industrial tribunal. Because the appellant had approached the Supreme Court primarily to obtain a decision on the broader and more significant issue concerning the revision of the bonus calculation formula, the Court directed that no order as to costs should be made against either party. Accordingly, the appeal was allowed, and the tribunal’s award was vacated.