Khandesh Spg. and Wvg. Mills Co. Ltd vs The Rashtriya Girni Kamgar Sangh

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

Court: Supreme Court of India

Case Number: Civil Appeal No.257 of 1958

Decision Date: 02 January 1960

Coram: P.B. Gajendragadkar, K.C. Das Gupta, Subba Rao

Khandesh Spg. and Wvg. Mills Co. Ltd. filed a petition against The Rashtriya Girni Kamgar Sangh, Jalgon, and the matter was decided by the Supreme Court of India on 2 January 1960. The judgment was delivered by a bench comprising Justice Subbarao K., Justice P. B. Gajendragadkar, Justice P. B. Gupta and Justice K. C. Das. The official citation for the decision is 1960 AIR 571 and 1960 SCR (2) 841. The decision is referenced in several citator entries, including E 1960 SC1006 (5), RF 1967 SC 122 (22), RF 1968 SC 963 (34), R 1969 SC 612 (8), R 1972 SC 330 (10, 11) and RF 1972 SC 1954 (15). The case falls under the provisions dealing with industrial disputes, the calculation of bonus under the Full Bench formula, the concept of rehabilitation, the use of reserves as working capital and the mode of proof required for such matters.

The Court explained that, in determining the surplus available for bonus payment according to the Full Bench formula, the Industrial Court had permitted the statutory depreciation but had refused to credit the rehabilitation amount claimed by the appellant. The Industrial Court estimated the total rehabilitation cost at Rs 60 lakhs, deducted Rs 51 lakhs as reserves, and therefore apportioned Rs 9 lakhs over fifteen years, which yielded a yearly rehabilitation provision of Rs 60,000. Because this figure was lower than the statutory depreciation, the Industrial Court concluded that the appellant could not claim any deduction for rehabilitation as a prior charge. The appellant argued that the balance‑sheet showed that the entire reserves had been employed as working capital and therefore should not be deducted from the rehabilitation amount. The Court held that the appellant had not produced evidence that the reserves were actually used as working capital, and therefore the deduction made by the Industrial Court was proper. The Court referred to the decision in Associated Cement Companies Ltd. v. Its Workmen, [1959] S.C.R. 925, for guidance. It emphasized that, given the significance of the rehabilitation component in calculating the surplus, tribunals must examine the evidence of both parties with great care to identify each sub‑item added to or subtracted from the rehabilitation figure. Where parties agree on figures, those may be accepted; where they agree on affidavits, that route may be used. In the absence of agreement, the procedure prescribed by Order XIX of the Code of Civil Procedure must be followed. The Court noted that the accounts, balance‑sheet and profit‑and‑loss statements were prepared by management and that labour had no role in their preparation. Because the rehabilitation amount was decisive, the Industrial Court was required to demand clear proof of that item and to give labour a real and adequate opportunity to contest the particulars presented by the employer. The Court also cited Indian Hume Pipe Company Ltd. v. Their Workmen, [1960] 2 S.C.R. for further illustration.

In this matter, the Supreme Court considered a civil appeal designated as number 257 of 1958, which had been taken up by way of special leave from an award dated 20 August 1957 issued by the Industrial Court of Bombay in reference (IC) No. 197 of 1956. The appellant was Khandesh Spinning and Weaving Mills Company Limited, a textile mill whose factory was located at Jalgaon. The respondent was the Rashtriya Girni Kamgar Sangh, a trade union that represented the employees of the appellant‑company. The respondent, on behalf of its members, served a notice to the appellant under section 42(2) of the Bombay Industrial Relations Act, 1946, seeking payment of a reasonable bonus for the period from 1 January 1955 to 31 December 1955. After the parties were unable to settle the dispute through negotiation, the respondent invoked section 73A of the same Act and referred the matter to the Industrial Court for arbitration. The Industrial Court, applying the so‑called “Fall Bench Formula”, calculated a surplus of Rs 2.20 lakhs after deducting prior charges from the gross profits of the company, but it did not allow any credit for a rehabilitation amount beyond the statutory depreciation. The Court estimated that the sum required for rehabilitation of plant and machinery amounted to Rs 60 lakhs. From this figure it subtracted Rs 51 lakhs as reserves and allocated the remaining Rs 9 lakhs over a fifteen‑year period, which yielded a yearly provision of Rs 60,000 for rehabilitation. Because the statutory depreciation for the year was Rs 83,639, the Court concluded that the company could not claim any prior charge for rehabilitation. Consequently, after excluding the rehabilitation item, the Court fixed the surplus at Rs 2.20 lakhs and awarded the employees a bonus equivalent to four months’ basic wages.

The Solicitor General of India contended that the Industrial Court had accepted the premise that the reserves were being used as working capital, yet it had deducted those reserves from the rehabilitation amount on an unjustified assumption that, since the rehabilitation expenditures would be spread over fifteen years, the temporary use of the reserves would not affect the calculation because the reserves would eventually be released in part or in whole in later years. He argued that this assumption contradicted established case law and the principle governing the determination of rehabilitation amounts. Counsel for the respondent countered that the Industrial Court had merely presumed that the reserves had been employed as working capital and that, irrespective of whether that presumption was accurate, the appellant could not succeed unless it produced relevant and acceptable evidence demonstrating that the reserves had indeed been utilized in that manner. The appellant had not presented any such evidence before the Industrial Court. The principal issue, therefore, was to ascertain the scope and effect of the findings made by the Industrial Court regarding the deduction of reserves from the amount required for rehabilitation.

In the appeal, the petitioner argued that because the amount required for rehabilitation could be spent in instalments over a period of fifteen years, the temporary use of the reserves as working capital would not affect the calculation, since those reserves would be released partially or wholly in later years. He further contended that this assumption was contrary to the view expressed in decided cases and to the established principle governing the ascertainment of the rehabilitation amount. In response, counsel for the respondent maintained that the Industrial Court had merely assumed that the reserves had been utilised as working capital and that, in the Court’s view, it was immaterial whether such utilisation had actually occurred. The respondent added that even if the assumption were erroneous, the appellant could not succeed unless it produced relevant and admissible evidence showing that the reserves had indeed been used as working capital, evidence which it had not placed before the Industrial Court. Consequently, the first question for consideration was the scope of the finding made by the Industrial Court on this point. While addressing the parties’ submissions, the Industrial Court observed: “It is true that until some amount is required to be spent for rehabilitation, replacement or modernization, reserves must be used as working capital, but Shri Vimadalal’s argument overlooks that the amount required to be spent for rehabilitation over a course of fifteen years is not required to be spent all at once, but by installments over a long period.” The Court noted that these observations did not constitute a formal finding that the reserves were used as working capital; rather, they represented an assumption that, according to the Industrial Court, was irrelevant to the outcome.

The Court further explained that, in determining the surplus for the purpose of fixing the bonus for a particular year, the factual situation prevailing in that year must be the controlling factor. If, in a subsequent year, any portion of the reserves that had been employed as working capital were to be released, that amount would have to be taken into account while ascertaining the surplus for that later year and for each following year. Failing to do so would create an anomaly in which the reserves would be excluded from the rehabilitation amount even though, in reality, the entire reserves had been used as working capital and were expected to be released in future years but might not actually be released. Such an outcome would be inconsistent with established decisions that expressly hold that reserves utilised as working capital should not be deducted from the amount fixed for rehabilitation. The Court observed that this result could not aid the appellant’s case unless it could prove, by admissible evidence, that it had used the reserves as working capital during the bonus year in question. The principles governing the treatment of “reserves” in this context were therefore deemed well settled.

In the earlier decision of The Associated Cement Companies Ltd. v. It, Workmen (1) the Court restated the guiding principle at page nine hundred and seventy, explaining that before an appropriate rehabilitation amount can be awarded for the bonus year, certain deductions must first be made. The first deduction concerns the breakdown value of plant and machinery, which is ordinarily calculated at fifty per cent of the cost price of the block in question. Following that, the depreciation charge and the general liquid reserves that are presently available to the employer must be deducted. The Court further observed that reserves which have already been reasonably earmarked for specific purposes of the industry are not to be taken into account in this connection. Finally, any rehabilitation amount that may have been allowed to the employer in previous years must also be deducted if it is shown that the amount was available at the time it was awarded and that it has not been used for rehabilitation purposes in the intervening period. These steps constitute the broad features that must be considered when deciding the employer’s claim for rehabilitation under the formula. Consequently, the decision establishes that, for the present case, two items are to be deducted from the rehabilitation amount determined by applying the “Full Bench Formula”: (i) the general reserves that are available to the employer, and (ii) reserves that have not already been reasonably earmarked for specific industry purposes. The Court then considered whether the mere availability of reserves or their simple earmarking for specific purposes would be sufficient to allow those amounts to be claimed as deductions. It was held that the language used did not intend to depart from the well‑recognised rule that general reserves which have not been employed as working capital cannot be deducted from the rehabilitation amount. The Court explained that reserves can be of two kinds. Money may be set aside by a company to meet future contractual or statutory obligations, such as gratuity, and such amounts are tied to a specific purpose and therefore are not available for rehabilitation. By contrast, general reserves remain available to the employer unless they have actually been used as working capital. The phrase “reasonably earmarked” was described as deliberate and significant. A mere nominal allocation in the company’s books for binding purposes, such as gratuity, is not sufficient; the Industrial Court must examine the material before it to determine whether the amount is in excess of the requirements of the particular purpose and whether it is being used as a device to reduce the labour claim for bonus. The Court emphasized that it is not the duty of the Industrial Court to determine the exact figure required for a particular purpose, but it must ascertain whether the purported earmarking is a device to circumvent the formula.

In this matter the Court explained that the Industrial Court must examine whether a claim of earmarking reserves for a particular purpose is in fact a device intended to avoid the statutory bonus formula. If the Court is satisfied that such a device exists, it must deduct the amount in question when it calculates the sum required for employee rehabilitation, and, where practicable, it should determine the actual amount that has been earmarked for that purpose. The same duty applies when an employer asserts that a specific reserve has been employed as working capital. The Court must decide, on the evidence before it, whether any part of the general reserves has been used as working capital during the relevant bonus year and, if so, to what extent. In short, before any reserve can be subtracted from the rehabilitation amount, it must be established that the reserve has either been reasonably earmarked for a binding obligation or that it, or a portion of it, has been utilised as working capital; only the portion falling within either of these two categories may be deducted.To illustrate the principle, the Court referred to a hypothetical bonus year, for example 1955. It held that, in arriving at the surplus for that year, the only items that may be deducted from the gross profits are those specifically identified by this Court in The Associated Cement Companies Ltd. v. Its Workmen as having a prior charge over the bonus. No other amounts reserved out of the profits of that year may be deducted. The Court further noted that a company may have, in 1954 or earlier, earmarked certain sums for definite binding liabilities such as gratuity, or may have set aside amounts for general purposes that are not tied to any contractual or statutory duty and that have not been employed as working capital. In the first situation, the earmarked amount is deemed to have been utilised and therefore cannot be deducted from the rehabilitation sum; in the second situation, because the amount was not used as working capital, it must be deducted from the rehabilitation amount. The Court emphasised that the burden of proof rests upon the employer who claims that reserves should be excluded from the rehabilitation figure on the ground that they have been used as working capital or are reasonably earmarked for a specific purpose. The employer must establish these facts by presenting relevant and acceptable evidence. The Court stressed that this issue is of great importance for fixing the rehabilitation amount, which is a major component in the calculation of surplus and consequently the bonus. Accordingly, there is a natural tendency for employers to inflate the rehabilitation figure, while employees attempt to reduce it. Since the company’s accounts, including the balance sheet and profit‑and‑loss statement, are prepared by management and not by the labour, the Court insisted that the principles of equity and justice require the Industrial Court to demand clear proof of the employer’s claims and to give workers a real and adequate opportunity to challenge the accuracy of the particulars supplied by the employer. (1) [1959] S.C.R. 925

The company’s balance sheet and profit‑and‑loss account are prepared exclusively by its officers, and the labour force has no involvement in their preparation. Because the calculation of the rehabilitation amount is crucial for determining surplus and bonus liabilities, the principles of equity and justice require that an Industrial Court demand clear and reliable proof of these financial figures and provide the workers with a genuine opportunity to examine and challenge the accuracy of the data supplied by the employer. The cases that have come before the Court reveal that many Industrial Courts and Labour Tribunals have not given this aspect the careful attention it deserves. Some tribunals have relied on affidavits, and in certain instances even on balance‑sheets or extracts of accounts, without ensuring that such documents have been proved in accordance with the law. Under section 118 of the Bombay Industrial Relations Act, 1946, an Industrial Court is vested with the same powers as ordinary courts to (a) admit proof of facts by affidavit, (b) summon persons and compel them to attend and be examined on oath, (c) order the production of documents, and (d) issue commissions for the examination of witnesses. In ordinary courts, facts must be established either by oral testimony or by documentary evidence that has been proved according to statutory procedure. Order XIX of the Code of Civil Procedure, however, authorises a court to direct that particular facts may be proved by affidavit. The rule provides that any court may, for sufficient reason, order that a fact or facts be proved by affidavit or that the affidavit of a witness be read at the hearing, subject to conditions that the court deems reasonable. A proviso stipulates that if the court is of the opinion that either party sincerely desires the personal production of a witness for cross‑examination and such witness can be made available, the court must not authorize proof of that witness’s evidence by affidavit alone. Further, under rule 2, evidence may be presented by affidavit upon application, but the court may, upon request of either party, order the deponent’s attendance for cross‑examination. The combined effect of these provisions is that, as a rule, facts must be proved by oral evidence, yet the courts may, in accordance with the conditions laid down in Order XIX, permit particular facts to be proved by affidavit. Industrial Courts may therefore adopt this procedure when necessary. Given the significance of the rehabilitation figure in computing surplus for bonus calculations, equity and justice demand that tribunals scrutinise with great care the evidence presented by both management and labour, and verify every sub‑item that is added to or deducted from the rehabilitation amount. Where the parties reach an agreement, the agreed figure may be accepted. If the parties consent to the determination based on affidavits, that method may be employed. In the absence of any agreement, the procedure prescribed in Order XIX should be followed.

Order‑XIX of the Code of Civil Procedure could be applied by the industrial tribunals so that both the employer and the workers were given a full chance to prove their respective cases. The Supreme Court has repeatedly highlighted the importance of this procedural safeguard. In the case of Indian Hume Pipe Company Ltd v. Their Workmen(1), the balance‑sheet was produced as evidence to show that certain amounts were in fact available for use as working capital and had been utilized for that purpose. Justice Bhagwati, who delivered the judgment, addressed the argument that the balance‑sheet had not been proved by stating at page 362 that no objection had been raised against it and that the tribunal had not recorded any finding to the contrary. The Court accepted that the reserves shown in the balance‑sheet had been used as working capital, noting that the judge had relied on the specific entries in the balance‑sheet to reach that conclusion. However, the Court indicated that it would not have accepted the balance‑sheet entries as proof of use if an objection had been made, thereby underscoring the necessity for the parties to be allowed to contest such evidence.

A similar issue arose in Tata Oil Mills Company Ltd. v. Its Workmen(1). The labour representatives claimed that the depreciation reserve had not been employed as working capital and therefore no bonus should be calculated on that reserve. The company’s chief accountant submitted an affidavit stating that the depreciation reserve, together with other reserves, had indeed been used as working capital. The Supreme Court accepted the affidavit for the year in question but also laid down guidance for future cases. The Court observed that the workmen could, in future proceedings, challenge the claim by cross‑examining the company’s witnesses or by producing proper evidence to show that the amount shown as the depreciation reserve was not, wholly or in part, available for use as working capital, or that it had not actually been used in that sense. In the appeal before the Court, the affidavit of the chief accountant was accepted. The Court further reinforced this principle in the case of Anil Starch Products Ltd. v. Ahmedabad Chemical Workers Union(1). There, the manager of the company filed an affidavit asserting that all reserves, including the depreciation fund, had been utilized as working capital, and he testified before the Tribunal that his affidavit was correct. While the manager was cross‑examined on the rehabilitation amount, no question was put to him regarding his statement that the entire depreciation reserve had been used as working capital. Consequently, the Court accepted the affidavit for the current year, recording the working capital as Rs 34 lacs, but expressly reserved the right of the workmen to contest the depreciation reserve’s use in future proceedings through proper cross‑examination or other evidence.

The Court observed that the manager of the company had submitted an affidavit stating that all of the company's reserves, including the depreciation fund, had been employed as working capital. The manager then appeared before the Tribunal as a witness for the company and solemnly affirmed that the contents of his affidavit were accurate. During his testimony, he was cross‑examined concerning the amount required for rehabilitation, a figure that he had also set out in the affidavit; however, no question was raised to contest his declaration that the entire depreciation reserve had been utilized as working capital. In view of these circumstances, the Court held that the affidavit could be accepted for the year in question and accordingly determined that the working capital amounted to Rs 34 lakhs. Notwithstanding this finding, the learned Judge expressly reserved the future rights of the workmen, stating that they would be entitled to demonstrate, by duly cross‑examining the company’s witnesses or by presenting proper evidence, that the amount shown as the depreciation reserve was not, in whole or in part, available for use as working capital and that any portion that was available had not in fact been employed for that purpose. This pronouncement reinforces the Court’s earlier position that labour must be given a proper opportunity to test the correctness of affidavits submitted by management concerning the employment of reserves as working capital. Turning to the matter before the Court, it was noted that there was no suggestion of any reserve being reasonably earmarked to meet a contractual or statutory obligation; the dispute concerned only the general reserves. The learned Solicitor General argued that the balance‑sheet indicated that the entire reserves had been used as working capital and that the respondent had not contested this position in its statement filed before the Industrial Court. The Court pointed out that a balance‑sheet, unless proved by a competent person, does not by itself establish that any reserves were utilised as working capital. In the written statement filed by the appellant before the Industrial Court, no specific allegation was made that the reserves had been used as working capital, although the reserves were not excluded from the amount claimed for rehabilitation. Because there was no specific allegation, the respondent did not deny the fact, yet its calculations also failed to deduct the reserves from the rehabilitation sum. Consequently, the Court held that the respondent did not accept that reserve funds had been employed as working capital. Strong reliance was placed on the evidence of the General Superintendent of the appellant‑Company, but a review of that evidence showed that the superintendent had not testified that the company had used the reserves as working capital, nor had he attempted to prove the balance‑sheet or any extract drawn from it.

In the circumstances, the respondent was not given any opportunity to cross‑examine the witness concerning the allegation that the reserve funds had been utilized as working capital. Because this opportunity was denied, the Court could not accept the claim that the reserves were used for that purpose. Consequently, the Court held that the amount of fifty‑one lakh rupees, which represented the reserve funds, was not employed as working capital. Accordingly, the Court found that the deduction of this amount by the Industrial Court from the sum of sixty lakh rupees that had been fixed for rehabilitation was proper and justified. The Court further observed that the remaining balance of nine lakh rupees, when spread over a period of fifteen years, resulted in a mere sixty thousand rupees being available during the bonus year. In addition, the statutory depreciation amounting to eighty‑three thousand six hundred thirty‑nine rupees was taken into account. On the basis of these calculations, the Industrial Court correctly excluded the entire rehabilitation amount from its computation of the surplus. The Court noted that no other arguments or points were raised before it for consideration. As a result of the foregoing reasoning, the Court concluded that the appeal could not succeed. Accordingly, the appeal was dismissed, and the costs of the proceedings were awarded against the appellant. The dismissal of the appeal was therefore confirmed.