The Graham Trading Co. (India) Ltd vs Its Workmen

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 161 of 1959

Decision Date: 07 May 1959

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

The case is Graham Trading Co. (India) Ltd. versus its workmen, decided on 7 May 1959. The judgment was delivered by Justice K.N. Wanchoo, joined by Justices Bhuvneshwar P. Sinha and P.B. Gajendragadkar. The citation for the decision is 1959 AIR 1151 and 1960 SCR (1) 107. The dispute concerned the payment of a puja bonus under the Industrial Dispute‑Puja Bonus‑Customary and Traditional Payment of‑Test. From 1940 to 1952 the company had paid a bonus equal to one month’s wages to its workmen. Between 1948 and 1952 the company expressly stated that each such payment was made ex gratia and would not set any future precedent. In 1953 the workmen claimed that the bonus had become a customary term of employment intended to meet puja expenses, and therefore they were entitled to it despite the company’s declaration of its ex gratia nature. The company argued that the earlier payments were purely ex gratia and that it could not make a similar payment in a year of loss. The Court held that the workmen were not entitled to the bonus as an implied term of employment because the company’s clear ex gratia declarations prevented the inference of an implied agreement. Nevertheless, the Court found that the workmen were entitled to the bonus on the basis that it constituted a customary and traditional payment. To determine whether a payment is customary and traditional, the Court listed four conditions: the payment must have been made continuously over an unbroken series of years; it must have been made for a period longer than that required for an implied term of employment; it must have been paid even in years of loss and without reliance on profit; and it must have been paid at a uniform rate. The Court emphasized that the employer’s characterization of the payment as ex gratia was irrelevant, and that a unilateral declaration inconsistent with the established course of conduct did not alter the customary nature of the payment.

This appeal was filed by special leave in a civil appellate jurisdiction, identified as Civil Appeal No. 161 of 1959. The appeal challenged the judgment and order dated 31 January 1956 of the Labour Appellate Tribunal, which itself stemmed from the award dated 20 October 1954 of the Second Industrial Tribunal in West Bengal. Counsel for the appellant were B. Sen and S.N. Mukherjee, while counsel for the respondents was D.N. Mukherjee. The Court noted that the present proceeding was an industrial matter brought before it on special leave. The appellant, Graham Trading Co. (India) Ltd., is referred to in the judgment as “the company”. The dispute involved the company’s workmen, who were the respondents. The judgment began with the Court’s observation that the matter concerned a question of bonus payment, which had been referred by the Government of West Bengal on 17 December 1953 to the Second Industrial Tribunal. The parties agreed that the dispute related to the bonus for the year 1953. The Court then proceeded to examine the factual background, the arguments of the parties, and the legal principles governing customary and traditional payments in industrial relations.

In this matter the dispute concerned the payment of a bonus by the company to its workmen, a question that had been referred by an order of the Government of West Bengal dated 17 December 1953 to the Second Industrial Tribunal. Although the reference order did not indicate the particular year for which the bonus was contested, both sides agreed that the controversy related to the bonus for the year 1953. The workmen, who appear before this Court as respondents, asserted that the company had consistently paid a bonus equal to one month’s wages for each year from 1940 through 1950. In the year 1951 the company paid one month’s bonus in October and an additional half‑month bonus in December, while in 1952 it again paid a full month’s bonus. On 27 August 1953 the workmen sent a letter demanding a bonus of three months’ wages. The company responded that the payments made in previous years had been made entirely ex gratia and, because the company incurred a loss in 1953, it could not make any ex gratia payment that year. Subsequently, in a letter dated 21 September 1953, the workmen argued that the sole purpose of the bonus historically granted up to that date had been to meet the expenses of the puja festival, and that the regular payment of this bonus had become a customary practice and thus a term of employment. Because the parties were unable to resolve the disagreement, the matter was referred for adjudication. The company maintained that the bonus had always been paid ex gratia and was dependent on the existence of profits, except for a few years when the company expressly clarified that the payment was nevertheless ex gratia and did not create any precedent for future obligations. Consequently, the company contended that no term of employment or custom existed that would obligate it to pay a bonus in a year when it suffered a loss. The Industrial Tribunal examined the issue from three separate angles. First, it considered whether a profit‑based bonus was payable for the year in question, applying the Full Bench formula developed in The Mill‑Owners’ Association, Bombay v. The Rashtriya Mill Mazdoor Sangh, Bombay (1). The Tribunal concluded that there was no surplus profit available to justify such a bonus. Next, the Tribunal turned to the remaining two aspects: whether a puja bonus could be awarded either as an implied term of employment, following the authority in Mahalakshmi Cotton Mills Ltd., Calcutta v. Mahalakshmi Cotton Mills Workers’ Union (2), or on the basis of a recognized custom. The Tribunal’s discussion appeared to conflate these two separate bases, and after determining that a puja bonus could not be granted on the ground of an implied term of employment, it also dismissed the claim on the basis of custom. The workmen appealed this decision to the Labour Appellate Tribunal, which allowed the appeal. The Appellate Tribunal’s decision likewise intermixed the two concepts of a puja bonus—whether it arose from an implied term of employment or from a custom—but

It was held that the evidence on record was sufficient to demonstrate that a custom of paying a puja bonus existed, and consequently the Tribunal ordered the payment of one month’s basic wages as puja bonus. The Tribunal also expressed a tentative view that the company’s accounts, which showed a loss, were not reliable and that a claim for a profit bonus might be viable; nevertheless, the final order was limited to granting one month’s basic wages as a customary puja bonus. Following this decision, the company applied for special leave to appeal to this Court, and that application was granted, bringing the matter before the present Court.

Puja is a distinctive festival that holds particular importance in Bengal, and it has become customary for many firms in that region to pay their employees a bonus to help meet the special expenses associated with the celebration. Various disputes concerning this bonus have been adjudicated by different tribunals. In the case cited as (1) 1950 L.L.J. 1247 and (2) 1952 L.A.C. 370, a dispute arose between The Bengal Chamber of Commerce, Calcutta and Its Employees. The Industrial Tribunal handling that dispute observed that Durga Puja was a national festival in Bengal and that it was customary to give presents to relatives and acquaintances during that time. Because employees with low wages found it difficult to save enough from their monthly earnings to make such gifts, it had become a traditional and customary practice in Bengal for employers to make a monetary grant at the time of the pujas. The Bengal Chamber of Commerce promptly recognized this custom and had been granting a bonus equivalent to one month’s wages, and the Tribunal was assured that there was no intention to discontinue the practice.

Subsequent jurisprudence, such as the decision in Mahalaxmi Cotton Mills case (2), established certain tests that would permit the inference of an implied term of employment for the payment of a bonus at the time of the annual Durga Puja. That case, however, dealt specifically with puja bonus as an implied term of employment rather than as a matter of tradition or custom in Bengal. It is now clear that puja bonus paid in Bengal falls into two categories: (1) a bonus paid as an implied term of employment, as explained in the Mahalaxmi Cotton Mills case, and (2) a bonus paid as a customary and traditional payment, as set out in the Industrial Tribunal’s award referred to above. The Court has previously considered the tests applicable when a bonus is claimed on the basis of an implied term of employment in Messrs. Ispahani Ltd. v. Ispahani Employees’ Union (3), and there is no need to repeat that analysis here.

In the present matter, the company submitted that the payments made between 1940 and 1952 could not be said to be based on an implied term of employment given the circumstances of those years. The Court agrees with that submission. An implied term of employment cannot be inferred where the employer, each year, expressly stated that the payment was made ex gratia and that it would not create a precedent for future years, because an implied term requires a meeting of minds regarding the subject matter, which is absent when one party continuously declares the payment to be a gratuitous, non‑precedential act.

The Court observed that an implied term of employment could not be inferred in the present matter. It referred to the publication of the Government of West Bengal titled “Awards made by the Tribunals for the quarter ending March 1949” (page 116) and to the 1952 law report citation (1952 L.A.C. 370). The Court further noted the earlier decision reported in [1960] (1) S.C.R. 24. From 1948 to 1952, whenever the company paid the puja bonus, it expressly stated that the sum was an ex‑gratia payment and that it would not set any precedent for future years. Because the employer consistently gave such a notice each year, the Court held that it was impossible to imply a term of employment on the basis of an implied agreement, since an agreement requires a meeting of minds on the subject matter, and here one party continually clarified that the payment was ex‑gratia and would not become a precedent. In considering the question of an implied term of service, the Court found it difficult to disregard the employer’s explicit statements made at each payment. Nevertheless, the Court said that the issue of whether the payment was customary and traditional still required examination. It recalled that, in Messrs. Ispahani Ltd. v. Ispahani Employees’ Union, the Court had explained that a term may be implied even if the payment had not been made at a uniform rate, and that an Industrial Tribunal could determine the appropriate quantum for a particular year by considering the varying amounts paid in earlier years. However, when the matter concerned a bonus that was claimed to be customary and traditional, the considerations differed. The Court listed the factors that a Tribunal must evaluate in such cases: first, whether the payment had been made over an uninterrupted series of years; second, whether the period was sufficiently long, noting that the required length might vary with the circumstances of each case and that, generally, a longer period would be needed to infer a customary and traditional bonus than to infer an implied term of employment; third, the Court emphasized that any link between the payment and the earning of profits must be excluded, and therefore it must be shown that the payment was made even in years of loss. Regarding the effect of a declaration that the payment was ex‑gratia, the Court held that such a unilateral statement would not alter the proof of custom, because the determination of custom depends on the factors enumerated by the Court and is not materially affected by inconsistent declarations when the actual conduct shows otherwise. Finally, the Court added that, to infer that a particular rate had become customary and traditional, the payment must have been made at a uniform rate throughout the relevant period.

In this matter the Court observed that the criteria used to establish a customary and traditional bonus are substantially more demanding than those applied to recognise a puja bonus as an implied term of employment. The Court therefore examined whether each of those stricter criteria was satisfied by the facts before it. The practice of paying a bonus in the present case commenced in 1940 and continued without interruption until 1950. During this interval an industrial adjudication was held in 1948 in which the company participated. At that hearing the company, through its representative, informed the tribunal that a bonus was being paid and that there was no intention to discontinue it. Consequently the tribunal did not issue any further order on the subject, a circumstance which the Court interpreted as evidence that the company recognised the payment as having a traditional and customary character and had expressly assured the tribunal of its intention to maintain it. The bonus payments persisted from 1949 through 1951, reinforcing the view that there had been a continuous practice over an extended period.

In 1952 a dispute arose when the company initially paid an amount described as an advance of wages rather than as a bonus. Some workmen accepted this advance, while others refused, objecting to the amount being characterised as an advance. Later that year, after a visit to Calcutta by the chairman of the board of directors, the company, responding to the workmen’s representations, re‑characterised the advance as a one‑month bonus and permitted even those workmen who had previously declined the advance to receive the bonus. The Court therefore concluded that there was no interruption in the bonus payment from 1940 to 1952, because the conversion of the advance into a bonus in December 1952 prevented any break that might otherwise have been argued up to 1951. The Court held that the unbroken period was sufficiently long to infer a customary and traditional bonus. Although the payments in four of the years were made in November and December rather than at the time of the pujas, the Court found this timing irrelevant, noting that a director who testified as a witness confirmed that the one‑month bonus was intended to assist staff during the puja season. The requirement that the bonus be paid in years of loss, intended to exclude the notion that it was paid solely when profits were earned, was satisfied because evidence showed payments were made in at least two loss years. Finally, the uniformity of the bonus rate was established, as the quantum of one month’s basic wage remained unchanged from 1940 through 1952. The Court did acknowledge that in December 1951 a half‑month bonus was also paid, but that additional payment coincided with a profitable year in which a special cloth‑bonus for half a month was awarded, and therefore did not disturb the finding of a consistent, uniform rate for the puja bonus.

The Court observed that in the year in which the company earned a profit a bonus equivalent to half a month’s wages had been paid, and that in the same year a special cloth‑bonus of half a month’s wages had also been granted. Accordingly, the Court noted that, with respect to the puja bonus, the rate had consistently remained uniform at the amount of one month’s basic wage throughout the period under consideration. The Court acknowledged that the workmen had, in 1953, made a demand for a bonus amounting to three months’ wages, which the Court described as excessively high. Nevertheless, the Court held that this heightened demand did not, in its view, diminish the inference that could be drawn from the established facts of the case. Because all the requirements for a customary and traditional bonus had been satisfied, the Court found no justification for overturning the order of the Appellate Tribunal. However, the Court expressly stated that it did not concur with the Appellate Tribunal’s observations concerning the profit‑bonus component of the dispute. Consequently, the Court concluded that the appeal failed and ordered its dismissal. Since the issue of the puja bonus had arisen for the first time before this Court as a separate question and had not been clearly addressed by the Appellate Tribunal, the Court directed each party to bear its own costs and formally dismissed the appeal.