The Management of Praga Industries Ltd., Coimbatore vs. The Workers

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 226 of 1958

Decision Date: 8 May 1959

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

In this matter the Supreme Court of India rendered its judgment on 8 May 1959. The case was authored by Justice P. B. Gajendragadkar and was decided by a bench comprising Justices P. B. Gajendragadkar, Bhuvneshwar P. Sinha and K. N. Wanchoo. The petitioner was the Management of Praga Industries Ltd., Coimbatore, and the respondents were the workmen of the company, hereinafter referred to as the workers. The citation of the decision appears as 1959 AIR 1194 and 1960 SCR (1) 161. The principal statutory provision involved was the Industrial Dispute Act concerning an award by consent that dealt with an interim increase in wages in lieu of fixing a permanent wage structure, the question of whether such an award could be challenged, the wage structure applicable to piece-rate workers, the entitlement of the workers to an annual increment, the status of machinery, land and building taken on lease, the claim for rehabilitation charges, the method of calculating bonus and the determination of surplus available for that purpose. The appellant, who held the lease of the Praga Industries premises, had taken on lease the buildings and machinery for a period of five years with an option to renew. The dispute that was referred to the Industrial Tribunal concerned two main points: first, the amount of bonus that should be payable to the workers for the year 1954; and second, the fixation of a wage scale that would provide graded annual increments for the various categories of workmen. Because the lease held by the appellant was approaching its expiration, the appellant proposed to the Tribunal that the classification of the workers into skilled and unskilled categories and the establishment of systematic pay grades could be postponed to a later date. The workers accepted this proposal. Both parties jointly requested that the Tribunal issue an interim order granting an increase in wages. Accordingly, the Tribunal refrained from fixing any permanent wage structure and, as an interim measure, ordered a 4 percent increase in wages. The Tribunal directed the appellant to grant this increment each year until such time as the workers were classified and a wage-scale chart was introduced, the increments being intended to reach a predetermined maximum. The increment was to apply to monthly, time-based and piece-rate workmen.

The appellant subsequently challenged the propriety of the Tribunal’s approach. The appellant argued that the Tribunal had been asked to fix a complete wage structure but had instead issued only an interim order, which the appellant claimed to be irregular. The appellant also contested the workers’ claim for an additional bonus for the year 1954, asserting that the company’s financial condition was unsatisfactory, that it was indebted, that rent due to the lessor had not been paid and that the amount of rent due had been injected back into the business as working capital. Further, the appellant resisted the direction that required payment of the bonus, alleging that the award produced an unfair distribution of the surplus available and that the appellant was entitled to rehabilitation charges for the leased property and machinery as well as interest on the unpaid rent. The Court held that when both parties had expressly represented to the Tribunal that the issue of classifying the workers and providing systematic pay grades could be deferred and that they would be satisfied with a reasonable interim order granting a wage increase, the parties could not later challenge the award on the basis of those representations. The Court further observed that although piece-rate workers are normally not covered by a wage structure with annual increments, the rate of wages fixed for such workers could be legitimately revised when a proper case is made. The Court also noted that an amount earmarked for a particular purpose but used as working capital should attract interest, even if it appears as a liability in the profit-and-loss account, and that such interest must be taken into account when calculating the surplus available for bonus distribution. Finally, the Court ruled that no prior charges for rehabilitation could be allowed where land, machinery and building for the business were taken on lease, and that any rehabilitation claim arising from the purchase of new machinery must be assessed accordingly.

It was held that if the parties were prepared to defer the granting of future increments to a later date, they could be satisfied by a reasonable interim order that provided an immediate increase in the wages of the workmen. Because the parties themselves had accepted such a representation before the Tribunal, they were not permitted to later contest the award on the ground that the representation had been made. The Court further explained that, although it is not customary to prescribe a wage structure with yearly increments for workers who are paid on a piece-rate basis, the wage rate fixed for such employees could nevertheless be lawfully altered if a proper case was made out justifying the revision. In addition, the Court observed that when an amount that was earmarked to be paid for a specific purpose was instead used as working capital, that amount ought to earn interest even though it appears as a liability in the profit and loss account. The interest on such an amount should be taken into account when calculating the surplus that is available for the purpose of distributing bonus. The Court also ruled that no prior rehabilitation charges could be allowed where the land, machinery and building used for the business were obtained on lease. When new machinery was purchased, the cost of rehabilitation was deemed to have been covered by the depreciation that was allowed in respect of that machinery.

The appeal, which was entertained by special leave, arose from an industrial dispute between the management of Praga Industries (P) Ltd., hereinafter referred to as the appellant, and its workmen, hereinafter referred to as the respondents. The dispute had been referred by the Government of Madras to the Industrial Tribunal at Coimbatore and comprised four points of contention. Two of those points were settled by compromise between the parties, while the remaining two issues were left for adjudication. The matters that required adjudication concerned the amount of bonus that should be payable to the respondents for the year 1954 and the method of fixing wage scales with graded annual increments for the different categories of respondents. The Tribunal ordered the appellant to pay the respondents a bonus equivalent to three months’ wages. Because the appellant had already paid one month’s bonus, it was directed to pay the balance of two months’ bonus. Regarding the fixation of a wage structure, the Tribunal refrained from establishing a permanent structure at that stage and, as an interim measure, directed the appellant to grant all of its workmen an increment of four per cent. The Tribunal further ordered that such an increment be continued each year until the workmen could be classified and a proper pay scale could be introduced, with the scale eventually reaching a predetermined maximum. These two directions contained in the award were the subject of the appellant’s challenge in the present appeal. The appellant was identified as a private limited company engaged in the manufacture of nut and plastic buttons in Coimbatore, operating as a lessee under a lease arrangement with Praga Industries, Coimbatore, which is a partnership firm.

The appellant, Praga Industries Ltd., is a private limited company that manufactures nut and plastic buttons in Coimbatore, and it holds a lease over land, buildings and machinery owned by a partnership firm named Praga Industries, Coimbatore. The lease deed was executed on 15 January 1954 and required the appellant to pay a monthly rent of Rs 5,000 for a period of five years. The lease also contained a renewal clause that granted the appellant a right to renew the lease for an additional three years. The appellant contended that its financial condition was poor. It disclosed that it had obtained an overdraft facility from Indian Bank Limited, Coimbatore, which left it owing Rs 48,414 as of 1954. The appellant further admitted that it had failed to pay the rent due for the year and that it had redirected the amount of Rs 60,000, which represented the unpaid rent, back into its business as working capital. Regarding the respondents’ claim for an additional bonus, the appellant argued that the Full-Bench formula did not support such a claim, whereas the respondents maintained that the appellant was earning large profits and that their claim for bonus was fully justified. The respondents also pressed for a proper wage structure to be fixed by the tribunal, seeking a guarantee of fair wages with systematic annual increments that would eventually lead to specified maximums. On behalf of the appellant, counsel Mr Viswanatha Sastri challenged the propriety of the tribunal’s interim order concerning wage increments for the appellant’s employees. The tribunal had been asked to fix a wage structure under issue No 3, but instead issued an interim order, which Mr Sastri described as irregular. The Court found this argument untenable, noting that the award itself showed that the appellant had suggested to the tribunal that the lease in its favour would expire within a year and a half and that the classification of respondents into skilled and unskilled categories, together with a systematic grade-wise pay structure, could be deferred to a later date. The respondents had accepted this suggestion, and both parties had represented to the tribunal that they would be satisfied with a reasonable interim order providing an increment in the respondents’ wages. Consequently, the Court held that the appellant could not now claim that the tribunal should have fixed a full wage structure instead of issuing an interim order.

The only objection raised by the appellant before this Court concerned the application of the interim order to piece-rate workers. On 25 October 1955, the appellant and the respondents reached an agreement, and clauses 5 and 6 of that agreement provided for an annual increment of four percent of the basic pay, with the revised wages to take effect from 1 November 1955. The appellant did not challenge the interim order as it applied to monthly-rated and daily-rated employees. Its grievance was limited to the tribunal’s extension of a similar increment order to piece-rate workers, noting that ordinarily annual increments are not granted to such workers because they are paid according to the work they perform, and wage structures with annual increments are not normally provided for piece-rate remuneration. The appellant therefore emphasized this aspect, arguing that the tribunal erred in applying the same incremental scheme to piece-rate employees.

In this case the Court observed that the agreement between the appellant and the respondents provided that the pay for all monthly-rated and time-rated employees was to be increased and that the revised wages were to become effective on 1 November 1955. Accordingly, Mr Sastri had not contested the interim order issued by the tribunal with respect to the monthly-rated and daily-rated workmen. His objection was limited to the tribunal’s decision to extend a similar order to the piece-rated workmen. The Court noted that, as a general principle, annual increments are ordinarily not granted to piece-rated workers because they receive remuneration on the basis of the actual work performed, and a wage structure incorporating regular annual increases is not normally applicable to such employees. Mr Sastri, however, placed considerable emphasis on this customary practice. By contrast, the Court recorded that Mr Joseph Nejedly, who testified for the appellant, openly admitted that the piece-rate wages had been fixed in 1947, that only minor adjustments had been made since that time, and that the cost of living in Coimbatore had risen considerably since 1947. Those admissions, the Court held, demonstrated that a case existed for revising the piece-rate wages in a manner comparable to the revisions made for monthly-rated and daily-rated workmen. Consequently, the Court concluded that the appellant could not successfully challenge the tribunal’s direction ordering a 4 percent increase in the rates of pay for piece-rated workers. Nevertheless, the Court chose to modify the interim order concerning the piece-rated employees by directing that, although their rates should be raised by 4 percent, they should not be granted the benefit of an annual increment at that rate until the entire workforce had been classified and appropriate pay scales introduced. In other words, the Court affirmed that part of the award while imposing the sole modification that future annual increments of 4 percent would not apply to piece-rated workers. The next issue raised by Mr Sastri concerned the award’s directive that the appellant pay the respondents an additional two months’ bonus. The Court explained that the award of bonus must be determined by applying the Full Bench formula, and that only two items under that formula had generated controversy in the present proceedings. The appellant claimed a 4 percent interest on a sum of Rs 60,000, either on the ground that the interest should be payable to the lessor because rent had been in default, or on the ground that the amount had been used as working capital and therefore should bear interest. The Court found the appellant’s second ground to be well founded and thus upheld it. The Court further noted that the monthly rent of Rs 5,000, which was shown as a liability in the profit and loss account, had in fact not been paid to the lessor and that the entire amount had been utilized by the appellant as working capital. Accordingly, the appellant’s claim to interest at 4 percent on this amount could not be resisted by the respondents. The tribunal had considered dissecting the claim on a month-by-month basis to assess the return on the amount, but the Court held that such a detailed approach was unnecessary in the present case.

In this case the Court observed that the amount of Rs 60,000 recorded as a liability in the profit and loss account for the monthly rent of Rs 5,000 had, in reality, never been paid to the lessor and that the entire sum had been employed by the appellant as working capital; consequently the Court held that the appellant’s request for interest at the rate of four per cent on that amount could not be resisted by the respondents. The tribunal had proposed to dissect the claim on a month-by-month basis and to consider the question of return on the amount for each individual month, but the Court decided that such a detailed approach was unnecessary for the present proceedings.

The Court then turned to the other claim advanced by the appellant, namely a demand of Rs 20,000 for improvement and modernisation of its machinery. The tribunal had rejected this claim and the Court found the rejection to be correct. It was pointed out that the appellant had taken the land, machinery and buildings on lease from Praga Industries, Coimbatore; therefore the appellant could not claim the right to rehabilitate any of the leased machinery or plant. In the event that the appellant had purchased new machinery in the year 1954, any rehabilitation expense for that machinery for the year 1954 was already covered by the depreciation allowance that had been permitted to the appellant, a position that was not disputed by counsel for the appellant. For this reason the Court was satisfied that the appellant was not entitled to claim Rs 20,000 as a prior charge for rehabilitation.

Having established these findings, the Court applied the Full Bench formula and concluded that the tribunal was justified in directing the appellant to pay an additional bonus for two months. It was undisputed that the net profit for the year amounted to Rs 42,726. When depreciation and the bonus already paid for 1953 were added back, the gross profit rose to Rs 69,546. From this figure, after deducting notional normal depreciation, income tax, a six per cent return on paid-up capital and a four per cent return on the working capital of Rs 60,000, a surplus of more than Rs 26,000 remained. The tribunal had awarded a three-month bonus, which included one month already paid by the appellant, and the total of that bonus was in the neighbourhood of Rs 22,000. On that bonus the appellant would be entitled to an income-tax rebate of Rs 12,300. Accordingly, the Court held that the order of the tribunal did not result in an unfair distribution of the available surplus.

In the result the Court found that the appeal substantially failed and therefore confirmed the award of the tribunal, modifying only the provision relating to future annual increments for piece-rated workers. The Court also directed that each party should bear its own costs. Accordingly the appeal was dismissed in substance and the award was partially modified.