The Tata Oil Mills Co. Ltd vs Its Workmen And Others

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

Court: supreme-court

Case Number: Civil Appeal No. 321 of 1958

Decision Date: 05 May 1959

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

The case was titled The Tata Oil Mills Co. Ltd. versus Its Workmen and Others, and the judgment was delivered on 5 May 1959 by the Supreme Court of India. The opinion was authored by Justice K. N. Wanchoo and the bench was composed of Justice K. N. Wanchoo, Justice Natwarlal H. Bhagwati, Justice S. K. Das and Justice P. B. Gajendragadkar. The petitioner was The Tata Oil Mills Co. Ltd. and the respondents were its workmen and others. The citation for the decision appears as 1959 AIR 1065 and 1960 SCR (1) 1, with related citator references including 1960 SC 571, 1960 SC 1346, 1961 SC 941, 1968 SC 963, 1972 SC 330, and 1973 SC 2394. The dispute concerned the application of the Industrial Disputes Act to the calculation of a profit-bonus for the workmen, specifically the definition of gross profits, the treatment of extraneous income, the relevance of profits unrelated to the effort of labour, the determination of available surplus, the inclusion of prior charges, and the claim for a return on the depreciation reserve when it was used as working capital.

In resisting the workmen’s claim for a bonus for the fiscal year 1955-56, the appellant submitted that certain items of income should be excluded from the gross-profit calculation prescribed by the Full Bench formula. The items identified for exclusion were: income earned from rent, light and power; estate revenue generated by the sale of excess coconuts that had been used in preparing oil from the appellant’s own groves; profit arising from the sale of empty barrels; and the proceeds obtained from the sale of tin cans, scrap material, logs, planks, gunny sacks and similar articles, which the appellant argued were extraneous because they were not directly related to the workmen’s efforts. Additionally, the appellant contended that a profit of three lakh rupees shown in the accounts, which resulted from a change in the method of valuation, did not represent a real profit attributable to labour and therefore should be disregarded. The appellant further claimed that, in computing the available surplus, it was entitled to a 4 percent interest on the depreciation reserve that had been employed as working capital. The Court held that the four categories of income identified by the appellant were earned in the ordinary course of its business and could not be excluded from gross profits merely because a direct causal link to the labour of the workmen in the bonus year had not been proven. While the Court acknowledged that the workmen must contribute to the generation of profit in order to qualify for a profit bonus, it emphasized that it was unnecessary to demonstrate a direct connection between the workmen’s efforts and each specific item of profit earned. The Court explained that profits generated in the regular course of business generally arise from the combined effort of both capital and labour. Income or profit may be deemed extraneous only when it did not actually arise in the relevant year, when it resulted from fortuitous circumstances entirely unrelated to labour, or when it stemmed from the sale of fixed or capital assets. In support of its view, the Court referred to earlier decisions such as Mill Owners Association, Bombay v. The Rashtriya Mill Mazdoor Sangh, Bombay (1950) L.L.J. 1247, and Shalimar Rope Works Mazdoor Union Howrah v. Shalimar Rope Works Ltd., Howrah (1956) 2 L.L.J. 371. The Court concluded that the profit of three lakh rupees arising from the change in the method of accounting was extraneous income and therefore had to be excluded from the calculation of the bonus.

It was held that the amount in question constituted extraneous income and therefore had to be excluded from the surplus calculation. The Court observed that this sum was not ordinary income earned in the normal course of business because it was unlikely to recur. It had arisen from fortuitous circumstances and bore no connection whatsoever with the effort of the labour force. In addition, the appellant was recognized as being entitled to a return of four percent on the depreciation reserves that were employed as working capital. The Court noted that if those reserves were not used for that purpose, the company would be compelled to obtain a loan and would have to pay interest on the borrowed sum. The judgment was rendered in the Civil Appellate Jurisdiction of Civil Appeal No 321 of 1958, an appeal by special leave from the award dated 27 September 1957 of the Industrial Tribunal, Bombay, in Reference (I.T.) No 119 of 1957. Counsel for the appellant included the Solicitor-General of India together with two other representatives, while counsel for respondent No 1 appeared for the workmen. The decision was delivered on 5 May 1959 by Justice Wanchoo, who affirmed that the matter before the Court involved an appeal against the Industrial Tribunal’s award concerning a profit-bonus dispute for the year 1955-56 between Tata Oil Mills Co. Ltd., Bombay, and its workmen.

The dispute originated from a demand by the workmen that the company pay an unconditional bonus for the year 1955-56 equivalent to four months’ wages for all employees earning less than Rs 500 per month. The Government of Bombay had referred the case to the Industrial Tribunal by order dated 18 June 1957. The company had already granted bonuses amounting to twenty-one months’ basic wages, leaving only a month and a half’s worth of bonus in issue. The workmen argued that the company had recorded exceptionally high profits and had declared a dividend of twelve per cent free of income-tax; they contended that their wages were below a living wage, the dearness allowance was inadequate, and consequently a profit-bonus of four months’ basic wages should be awarded. The company countered that it paid wages according to a graded scale with regular increments and had already paid a profit-bonus of two and a half months, and that the surplus calculated under the Full Bench formula did not support a larger payment. The company further pointed out that although it had been established in 1917, dividends to shareholders began only in 1940, making a twelve-per-cent dividend not unusually high. It maintained that certain items of income, including a profit of Rs 3 lakh appearing due to a change in the method of valuation, were extraneous and should be excluded from the surplus used to compute the bonus. The Tribunal rejected the company’s claims on all three points, calculated a sufficient surplus, and awarded a bonus of three and a half months’ basic wages, a decision that was subsequently appealed by special leave.

In this matter the company asserted three separate points. First it argued that certain income should be excluded from the surplus calculation because such income did not arise from the efforts of the workmen. Second it contended that the amount placed in the depreciation fund should be excluded for the same reason. Third it claimed entitlement to an interest rate of four per cent on the working capital, and that this interest should be computed on the amount held in the depreciation fund as well. The Industrial Tribunal examined these submissions and rejected the company’s claim on each of the three grounds. After making the required calculations the Tribunal found that a surplus sufficient to allow a profit-bonus equal to three and one-half months’ basic wages existed, and accordingly ordered that the bonus be granted. The company then sought special leave to appeal; that leave was granted, and the appeal now lies before this Court for determination.

The first issue that this Court will consider is whether the items identified by the company constitute extraneous income that should be excluded from the surplus used to compute the bonus. The company named six particular items that it sought to treat as extraneous. These were: (i) income earned by way of rent, light and power amounting to Rs. 0.24 lakh; (ii) estate revenue of Rs. 0.08 lakh; (iii) profit on the sale of empty barrels of Rs. 0.89 lakh; (iv) an excess provision for expenses in the previous year amounting to Rs. 0.31 lakh; (v) a refund of income-tax on the revision of the Cochin assessment of excess profits tax of Rs. 0.49 lakh; and (vi) sale proceeds of tin cans, scraps, logs, planks, gunnies and other articles totalling Rs. 2.11 lakh. The aggregate of these items was Rs. 4.12 lakh. The Tribunal rejected the company’s request to exclude all of these amounts, although in its written judgment it specifically recorded a dispute only over items (i), (ii), (iii) and (vi). Items (iv) and (v) were apparently not contested before the Tribunal, yet the Tribunal’s calculations appear to have omitted this distinction and disallowed those two items as well. Counsel for the respondents informed this Court that the workmen had actually conceded the exclusion of items (iv) and (v) before the Tribunal, and that the failure to strike them out was an oversight. He accepted that those two items may be excluded when determining the available surplus. Consequently, the matter is reduced to the four items that the Tribunal definitively disallowed. The Tribunal’s reasoning was that these amounts formed part of the profits generated in the ordinary course of the company’s business and there was no satisfactory basis for deducting them from the profit pool. Regarding the income from rent, light and power, the Tribunal noted that the expenditures related to the buildings – such as repairs, maintenance, taxes and rates – were already recorded on the expense side of the accounts, leaving no justification for further deduction of the rent income. The Tribunal did not examine the remaining three items in detail and simply included them on the general premise that they represented ordinary business profits. Counsel for the company, Mr. Daphtary, has referred this Court to a number of decisions of industrial tribunals and labour appellate tribunals that have treated similar items as extraneous income because they are unrelated to the workmen’s efforts.

By reference to earlier rulings of industrial tribunals and labour appellate tribunals, the Court observed that certain items of income had been excluded on the ground that such income was extraneous and not connected with the efforts of the workmen. The Court stated that it was unnecessary to catalogue every decision on this point, because the aggregate of those decisions already supported the contention that the income in question should be treated as extraneous. The principal reason articulated in the cited authorities for excluding what was described as extraneous income was that the income did not arise from the labour of the employees. To illustrate this principle, the Court referred to two decisions of the Labour Appellate Tribunal. In the case of The Mill-Owners’ Association, Bombay v. The Rashtriya Mill Mazdoor Sangh, Bombay, the Full Bench formulated a rule and the appellate tribunal observed on page 1257 that “No scheme of allocation of bonus could be complete if the amount out of which a bonus is to be paid is unrelated to employees’ efforts.” The Court further noted that the same tribunal reiterated the principle in Shalimar Rope Works Mazdoor Union, Howrah v. Messrs. Shalimar Rope Works Ltd., Shalimar, Howrah, where on page 372 it was observed that “it is however too late in the day to question the view that there are profits unrelated to workers’ efforts and referred to as ‘extraneous profits’ and that such profits must be left out of account in deciding the question whether there is available surplus in any particular year.” On the basis of these decisions, industrial tribunals had generally treated income derived from the rent of quarters and from the sale of scrap-materials as extraneous income.

The Court explained that the correctness of treating such income as extraneous was the issue before it in the present appeal. It also noted that some tribunals had relied upon the decision of this Court in Muir Mills Co. Ltd. v. Suti Mills Mazdoor Union, Kanpur (1950 L.L.J. 1247) and its later citation (1956 (11) L.L.J. 371). The Court quoted the earlier judgment at page 998, which set out two conditions that must be satisfied before a demand for bonus could be justified: (1) wages must fall short of the living standard, and (2) the industry must make large profits, part of which are attributable to the contribution of the workmen in increasing production. The Court further quoted the same judgment at page 999, stating that “It is therefore clear that the claim for bonus can be made by the employees only if as a result of the joint contribution of capital and labour the industrial concern has earned profits. If in any particular year the working of the industrial concern has resulted in loss there is no basis nor justification for a demand for bonus.” From these observations, the Court concluded that the Muir Mills judgment was not concerned with the concept of extraneous income, but rather affirmed that a profit must exist in the specific year for which a bonus is claimed, thereby establishing the necessity of an available surplus before a profit-bonus can be awarded.

In this case the Court explained that a profit bonus can be awarded only when the enterprise actually makes a profit, and even then only if two additional conditions are satisfied. The first condition is that the wages of the workmen fall short of the prevailing standard of living. The second condition is that the industry generates a large profit, part of which must be attributable to the contribution made by the workmen in the process of production. The tribunals have often relied on this latter condition to require a direct link between the labour effort and the profit earned; they have held that unless such a direct connection is shown, the profit must be treated as unrelated to labour and consequently regarded as extraneous income. The Court recognised that the workmen must indeed contribute to the earning of profit before they can claim a profit bonus, but it clarified that the decision in Muir Mills Case (1) 1955 (1) S.C.R. 991 did not impose a requirement that a direct connection between the labour effort and each specific item of profit be established before that profit could be counted in computing the available surplus.

The Court observed that an industrial concern conducts a particular business and, in doing so, employs both capital and labour. Generally, the profits that accrue at the end of the financial year are the result of the joint effort of capital and labour. Nevertheless, the Court noted that there are situations in which certain portions of profit may be classified as extraneous income for the purpose of applying the Full Bench formula. Such situations arise, for example, when (i) a portion of the profit was not actually earned during the relevant year, or (ii) a portion of the profit results from fortuitous circumstances that have no connection with the effort of labour. A third category of extraneous income consists of gains derived from the sale of fixed or capital assets. In either of these cases, the income may be deemed extraneous because it either did not arise in the year in question or, although it did arise, the labour force contributed nothing to its generation, and therefore it cannot be included in the Full Bench calculation.

Beyond these recognized categories, the Court stated that it could not accept a view that profit earned in the ordinary course of the business during the year should be labelled extraneous merely because a direct link between labour effort and that profit has not been proved. Applying this principle to the present matter, the Court identified two items that fall within the first category of extraneous income: a return of excess provision for expenses and a refund of excess profits tax. Both amounts increased the profit figure for the year but did not arise in that year, so they must be treated as extraneous income. Additionally, the Court pointed to a second-type instance, namely a profit of Rs 3 lacs generated in the current year as a result of a change in the method of valuation of the company's assets, which also qualifies as profit unrelated to the direct effort of labour.

In this case the Court examined the remaining four items of income and determined that each of them was earned by the company in the ordinary course of its business, and therefore there was no justification for excluding them on the basis that a direct contribution by labour during the relevant year had not been proved. The Court first considered the income derived from rent, light and power. It noted that many industrial enterprises provide residential quarters for their workmen, and these quarters are supplied with light and power from a power house owned by the enterprise. The construction of the quarters and the power house is financed either out of capital or out of profits that were earned in earlier years. When the facilities are built out of capital, the law generally permits a return of about six per cent on the paid-up capital. Even when the facilities are erected out of accumulated profits, the depreciation and rehabilitation charges that arise are charged against the gross profits before the available surplus is calculated. Moreover, the expenses for repairs, maintenance, rates and taxes are all discharged from the company’s income before the gross profit figure is arrived at. In other words, these costs are met from the profits that were generated by the labour of the workmen. Consequently, the Court held that the company could not logically exclude the rent, light and power income while at the same time meeting the associated expenditures from profits that include the contribution of labour. The Court further observed that the company must employ labour to maintain and repair the quarters and the power house, even if that labour is not devoted exclusively to those tasks. Accordingly, the Court concluded that income from rent, light and power arises in the normal course of business and cannot be treated as extraneous income under the formula discussed earlier. The second item considered by the Court was estate revenue. The Court was informed that the company owned coconut groves, and that the coconuts produced in those groves were primarily used in the manufacture of oil, which constituted a principal activity of the company. Occasionally the entire harvest was not required for oil production, and the surplus coconuts were sold in the market, generating additional income. The Court observed that this income also arose in the ordinary course of the company’s business, because the sale of surplus coconuts is a direct extension of the coconut-oil production activity. The expenses incurred in cultivating, caring for and maintaining the groves are borne by the company and recorded in its accounts, and labour is employed to look after the groves. In view of these facts, the Court found no reason to exclude the revenue from the sale of surplus coconuts from the profit calculation for the purpose of the Full Bench formula.

The Court observed that there was no justification for excluding the revenue obtained from the sale of surplus coconuts from the profit computation required by the Full Bench formula. It then turned to the receipts arising from the sale of empty barrels, tin cans, scraps, logs, planks, gunnies and similar items. Although the accounting treatment differs—profits being shown for barrels and sale proceeds for the other articles—the nature of the receipts is essentially the same. The respondents argued that such receipts should be labelled extraneous because they are not directly linked to the labour effort. The Court rejected this argument, holding that the income is generated in the ordinary course of the company’s business. The Court further explained that when the company purchases chemicals it also acquires the containers, such as barrels, together with the chemicals. After the chemicals are consumed, the empty barrels are sold. The proceeds from selling these empty barrels effectively reduce the overall cost of the chemicals, even though the accounting method may present the result as profit on barrel sales. Consequently, the Court saw no reason to disregard this cost reduction when calculating gross profits under the Full Bench formula. Likewise, scraps that remain after manufacturing are occasionally sold, and the proceeds from such sales also lower the effective material costs and thereby increase profit. The Court found no basis for excluding this income on the ground that labour did not directly contribute to its generation. Accordingly, the Court concluded that the tribunal was correct in including all four categories of receipts in the computation of gross profits.

Turning to the profit of three lakh rupees that arose from a change in the method of accounting, the Court noted that the tribunal had failed to treat this amount as extraneous and thus erred. The Court stated that the three-lakh-rupee profit bears no connection to labour effort, even though it appeared in the current year. It resulted from a fortuitous circumstance—a revision of the basis of stock valuation for that year—and is not a recurring element of the ordinary business. Because such an item is unlikely to recur, the Court held that it must be regarded as extraneous income and excluded from the calculations based on the Full Bench formula. Having set out these principles, the Court proceeded to the numerical computation in accordance with the Full Bench formula, subject to the observations made above, and listed the figures for profit for the year, the provision for tax, depreciation and bonus as respectively fifteen-fifty-three lakh, fourteen-fifty-one lakh and one-nineteen-seventy-five lakh.

In the calculation of the profit available for bonus, the Court first identified the gross profits of the company as Rs 49.55 lacs. From this amount the total statutory depreciation of Rs 13.19 lacs was deducted, leaving a balance of Rs 36.36 lacs. Income-tax payable, computed in accordance with the decision in the Meenakshi Mills case, was then subtracted, amounting to Rs 15.90 lacs, which produced a further balance of Rs 18.73 lacs. The next deductions consisted of the dividend on paid-up capital of Rs 5.54 lacs and the return on reserves that had been utilized as working capital; the reserves were valued at Rs 139.09 lacs and, at a rate of 4 per cent, generated a charge of Rs 5.56 lacs. After making these deductions, the available surplus of profit was calculated to be Rs 7.63 lacs. From this surplus the company had already paid a bonus of Rs 7.90 lacs to the workmen. Because the bonus payment entitled the company to a rebate of income-tax of Rs 3.40 lacs, the actual amount that the company was required to pay after the rebate was Rs 4.50 lacs. Consequently, the sum that remained with the company from the available surplus was Rs 3.13 lacs. The Court observed that more than half of the available surplus had already been distributed to labour. It noted that the available surplus is shared among three classes – the industry, the shareholders and the labour force – and that the evidence did not support any request for a profit-bonus exceeding the amount already paid. The Court also remarked that the company had claimed no rehabilitation charges for the year under consideration. Accordingly, the Court allowed the appeal, set aside the order of the Industrial Tribunal and dismissed the workmen’s claim for any bonus beyond what had already been granted. In the circumstances of the case, each party was ordered to bear its own costs, and the appeal was allowed.