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: Not extracted

Decision Date: 22 January 1960

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

In this appeal the Court examined how far reserves may be deducted from the amount that must be set aside for the rehabilitation of plant and machinery, and also how the portion of reserves that can be deducted should be determined. The appellant, Khandesh Spinning and Weaving Mills Company Limited, operated a textile mill located at Jalgaon. The respondent, Rashtriya Girni Kamgar Sangh, acted on behalf of the mill’s employees. On behalf of those employees the respondent served a notice to the appellant invoking section 42(2) of the Bombay Industrial Relations Act, 1946, and demanded the payment of a reasonable bonus for the period from 1 January 1955 to 31 December 1955. After negotiations failed, the respondent referred the dispute to the Industrial Court for arbitration under section 73A of the same Act. The Industrial Court, acting as arbitrator, applied the “Full Bench Formula” and calculated a surplus of Rs 2.20 lakhs after deducting prior charges from the company’s gross profits. However, the Court gave no credit for any rehabilitation amount other than the statutory depreciation. It estimated that rehabilitation would require Rs 60 lakhs; from this sum it subtracted Rs 51 lakhs as reserves, leaving a balance of Rs 9 lakhs. This balance, when spread over fifteen years, produced a yearly allocation of Rs 60,000 for rehabilitation. Because statutory depreciation amounted to Rs 83,639, the Court concluded that the company was not entitled to any further prior charge for rehabilitation. After excluding the rehabilitation component, the Court confirmed the surplus of Rs 2.20 lakhs and directed that the employees receive a bonus equal to four months’ basic wages. The learned Solicitor General argued that the Industrial Court had erroneously assumed that the reserves were being used as working capital and that deducting them from the rehabilitation amount on the basis that the rehabilitation expenditure would be made in installments over fifteen years was unjustified. He maintained that this assumption conflicted with established case law and with the principles governing the calculation of rehabilitation requirements. The judgment then proceeded to consider further arguments, as indicated by the subsequent reference “5. On the …”.

The counsel for the respondent contended that the Industrial Court had merely presumed that the company’s reserves had been employed as working capital and that, in the Court’s view, it was irrelevant whether that presumption was correct. He further argued that even if the presumption were erroneous, the appellant could not succeed unless it produced admissible evidence demonstrating that the reserves had indeed been utilized as working capital, and that no such evidence had been placed before the Industrial Court. Consequently, the first issue for determination was the precise scope of the Industrial Court’s finding on this point. In addressing the parties’ arguments, the Industrial Court had observed that “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 instalments over a long period.” The Court noted that these remarks did not amount to a formal finding that the reserves had been employed as working capital; rather, they represented an assumption that, in the Court’s view, was immaterial to the ultimate calculation. The present Court considered that assumption unsound. When determining the surplus for the purpose of fixing the bonus for a particular year, the factual situation in that year must govern. If, in a later year, any portion of the reserves previously used as working capital were released, that amount must be taken into account in ascertaining the surplus for that later year. Failing to do so would create the anomaly of excluding the reserves from the amount required for rehabilitation even though, in reality, the entire reserves had been used as working capital and were expected, but not actually, to be released in future years. Such an outcome would conflict with established decisions that expressly hold that reserves employed as working capital should not be deducted from the rehabilitation amount. Accordingly, the appellant could not advance its case unless it could establish, by admissible evidence, that the reserves had indeed been used as working capital during the bonus year in question. The principles governing “reserves” in this context were well settled. In The Associated Cement Companies Ltd. v. Its Workmen, the Court restated that before awarding a rehabilitation amount for the bonus year, certain deductions are mandatory: first, the breakdown value of plant and machinery, usually calculated at five percent of the cost price; second, depreciation; and third, the general liquid reserves available to the employer. Reserves that have been reasonably earmarked for specific industrial purposes are excluded from this computation, and any rehabilitation amount previously allowed to the employer must also be deducted if it was still available at the time of award and had not been used for rehabilitation in the interim.

In determining the amount of rehabilitation payable to an employer, the Court explained that the first step is to assess the value of the plant and machinery. That value is ordinarily computed at a rate of five percent of the cost price of the block of assets under consideration. After arriving at that figure, the Court said that the depreciation charge as well as any general liquid reserves that are presently available to the employer must be deducted. The Court further clarified that reserves which have already been reasonably earmarked for specific industrial purposes are excluded from these deductions and are not to be taken into account in this part of the calculation. Finally, the Court noted that if a rehabilitation sum was previously granted to the employer in earlier years, that amount must also be subtracted, provided that it was still available at the time of the earlier award and that it has not been applied to rehabilitation purposes since that award. These steps together constitute the broad framework that must be followed when applying the formula to resolve an employer’s claim for rehabilitation.

The Court then observed that, for the purposes of the “Full Bench Formula,” two distinct categories of reserves are to be deducted from the rehabilitation amount that is arrived at after applying the foregoing steps. The first category is the general reserves that are presently available to the employer. The second category consists of reserves that have not already been reasonably earmarked for specific industrial purposes. The Court questioned whether merely having reserves on the books or merely earmarking them for a purpose would be enough to permit a deduction, and it rejected the notion that the Court’s language signaled a departure from the established principle that general reserves which have not been utilized as working capital cannot be deducted. The Court explained that reserves fall into two groups. One group comprises monies that a company sets aside to meet future contractual or statutory obligations, such as gratuity, and these amounts are tied to a specific purpose and therefore are not available for rehabilitation. The other group is the general reserves, which remain available to the employer unless they have actually been employed as working capital. The Court emphasized that the term “reasonably earmarked” is purposeful and significant; a mere nominal entry in the books indicating that an amount is earmarked for a binding purpose is insufficient. The Industrial Court must examine the material before it to determine whether the earmarked amount exceeds the genuine requirement of the purpose for which it is set aside and whether the earmarking is merely a device to diminish the labourers’ bonus claim. While the Court does not require the Industrial Court to calculate the exact amount needed for a particular purpose, it does require the Court to discover whether the earmarking is intended to circumvent the formula. If the Court is satisfied that such a device exists, it must deduct the appropriate figure when calculating the rehabilitation amount and, where possible, determine the actual amount needed for that purpose.

The court explained that when an employer asserted that a specific sum taken out of the general reserves had been utilised as working capital, the industrial court was required to make a finding on whether those reserves, or any portion of them, had actually been employed as working capital and, if that was the case, to ascertain the extent of such use during the bonus year in question. In other words, before any particular reserve could be subtracted from the amount required for rehabilitation, it had to be established that the reserve was either reasonably earmarked for a binding purpose or that the whole or part of it had been used as working capital; only those portions falling under either of those two categories could be deducted from the rehabilitation sum. To illustrate the principle, the court considered a hypothetical bonus year, for example the year 1955. It held that, beginning with the gross profits of that year, only those items that had been specifically identified by the court in The Associated Cement Companies Ltd. v. Its Workmen ([1959] S.C.R. 925) as having a prior charge over the bonus were to be deducted in order to arrive at the surplus. No other amounts reserved out of the profits of that year could be deducted. The court then distinguished two possible situations. First, the company might have earmarked certain amounts in 1954 or earlier for specific binding obligations such as gratuity; second, the company might have set aside amounts for general purposes that did not correspond to any contractual or statutory liability and that had not been drawn upon as working capital. In the first situation, the earmarked sum was to be regarded as having been utilised and therefore could not be deducted from the rehabilitation amount. In the second situation, because the amounts had not been used as working capital, they were permissible deductions from the rehabilitation sum. The court further observed that the burden of proof lay with the employer who claimed that the reserves should be excluded from the rehabilitation calculation on the ground that they were either used as working capital or reasonably earmarked for a specific purpose. The employer was required to establish those facts and to substantiate them with relevant and admissible evidence. The court stressed that the significance of this question could not be overstated, since the rehabilitation figure formed a major component of the calculation of surplus and consequently of the bonus payable. Consequently, there existed a natural tendency for the employer to exaggerate the rehabilitation amount and for the employees to seek to minimise it. The court noted that the company’s accounts, including the balance‑sheet and the profit‑and‑loss statement, were prepared by the management and the company’s officers, and that the labour force had no involvement in their preparation. Because the rehabilitation amount was pivotal to the computation of bonus, the principles of equity and justice demanded that the industrial court require clear proof of the figure and provide the parties with a genuine and adequate opportunity to examine and challenge the particulars presented by the employer.

In this case the Court observed that labour must be permitted to examine the accuracy of the figures supplied by the employer. It noted that the authorities before it revealed a tendency of Industrial Courts and Labour Tribunals to give insufficient attention to this critical issue. Some tribunals had accepted affidavits, and even balance‑sheets and extracts of accounts, without requiring that such documents be proved in accordance with the law. The Court then explained that, for inquiries or proceedings under the Bombay Industrial Relations Act, 1946, section 118 of that Act granted the Industrial Court the same powers as ordinary courts to (a) prove facts by affidavits, (b) summon and compel the attendance of any person and examine that person on oath, (c) compel the production of documents, and (d) issue commissions for the examination of witnesses. It further stated that, in regular courts, facts must be established either by oral evidence or by documentary evidence proved in the manner prescribed by law. However, Order XIX of the Code of Civil Procedure authorised a court to have particular facts proved by affidavit. Under rule 1 of that order, any court could, for sufficient reason, order that any particular fact or facts be proved by affidavit or that the affidavit of any witness be read at the hearing, subject to conditions the court deemed reasonable. A proviso required that, if the court was satisfied that either party sincerely desired the production of a witness for cross‑examination and that such witness could be produced, the court could not authorise the evidence of that witness to be given solely by affidavit. Under rule 2, upon any application evidence could be given by affidavit, but the court could, at the request of either party, order the attendance of the deponent for cross‑examination. Consequently, the combined effect of these provisions was that ordinarily a fact had to be proved by oral evidence, but courts, subject to the conditions of Order XIX, could direct that a particular fact be proved by affidavit. The Court said that Industrial Courts could conveniently adopt this procedure. Given the importance of the rehabilitation item in calculating the surplus for fixing the bonus, the Court held that principles of equity and justice required tribunals to examine very carefully the evidence presented by both management and labour in order to determine every sub‑item that was added to or deducted from the rehabilitation amount. When the parties agreed on a figure, that agreed figure could be accepted. If the parties agreed to decide the matter on affidavits, that method could be followed. In the absence of any agreement, the Court advised that tribunals should use the procedure prescribed in Order XIX of the Code of Civil Procedure so that both parties would have a full opportunity to prove their respective cases. The Court further referenced recent decisions of this Court that stressed this point, citing Indian Hume Pipe Company Ltd.

In the case of Their Workmen (1959) S.C.R. 925, the tribunal relied on the balance‑sheet to demonstrate that certain amounts were available for use as working capital and that, in fact, those amounts had been employed for that purpose. Justice Bhagwati, delivering the judgment of the Court, addressed the argument that the balance‑sheet had not been proved. He observed at page 362 that no objection had been raised to the use of the balance‑sheet and that the tribunal had not recorded any finding to the contrary. The judgment further noted that, in that case, it was conceded that the reserves had indeed been utilized as working capital. Although it was suggested that the learned judge had relied solely on the balance‑sheet items to reach his conclusion and that his remark was merely an additional ground, the Court was of the view that it would not have accepted the balance‑sheet figures as proof of usage unless it was satisfied that no objection had been made on that point.

The Court addressed a similar issue in Tata Oil Mills Company Ltd. v. Its Workmen (1959) S.C.R. 924, where labour contended that the depreciation reserve had not been used as working capital and therefore no return should be allowed on that reserve. The company’s chief accountant submitted an affidavit stating that the depreciation reserve, together with other reserves, had been used as working capital. The Court accepted this affidavit for the year in question but provided guidance for future cases. It held that workmen would be entitled, in subsequent proceedings, to demonstrate by proper cross‑examination of the company’s witnesses or by other proper evidence that the amount shown as the depreciation reserve was not available, in whole or in part, for use as working capital, and that whatever portion was available had not actually been employed in the manner described. Nonetheless, for the present appeal, the Court affirmed acceptance of the chief accountant’s affidavit.

The observations in Tata Oil Mills highlighted the necessity of granting workmen an opportunity to challenge the evidence presented by management regarding the utilization of any particular reserve as working capital. This principle was reiterated when the Court considered the matter in Anil Starch Products Ltd. v. Ahmedabad Chemical Workers Union (Civil Appeal No 684 of 1957, not reported). That appeal also raised the question of whether a return should be allowed on a depreciation reserve purportedly used as working capital. Labour argued that the depreciation reserve had not been employed for that purpose. Justice Wanchoo rejected this contention, noting that the manager of the company had filed an affidavit declaring that all reserves, including the depreciation fund, had been used as working capital. The manager appeared before the Tribunal as a witness for the company and affirmed under oath the correctness of his affidavit.

In the earlier reference, the manager’s affidavit was treated as correct. The manager had been cross‑examined regarding the amount required for rehabilitation, a figure that he had also supplied in his affidavit. However, the tribunal did not pose any question to him that would challenge his assertion that the entire depreciation reserve had been employed as working capital. In view of these circumstances, the Court accepted the affidavit for the year that was under consideration and concluded that the working capital amounted to Rs 34 lakhs.

The judge, while accepting that finding, expressly reserved for the workmen the future right to contest the claim that the depreciation reserve had been used as working capital. The judgment emphasized that the workmen could, in subsequent proceedings, demonstrate, through proper cross‑examination of the company’s witnesses or other appropriate evidence, that the amount shown as a depreciation reserve was not, in whole or in part, actually available for use as working capital, and that any amount that was available had not been utilised in that manner. This pronouncement reaffirmed the Court’s view that labour must be given a genuine opportunity to test the accuracy of affidavits filed by management concerning the use of reserves as working capital. Turning to the matter before this Court, it was observed that there was no suggestion of any reserve being earmarked for the discharge of a contractual or statutory obligation; the issue concerned only general reserves. The Solicitor General argued that the balance‑sheet indicated that the entire reserves had been employed as working capital and that the respondent had not disputed this position in its statement before the Industrial Court. The Court noted, however, that a balance‑sheet, unless proved by a competent person, could not by itself establish that reserves had been used as working capital. Moreover, the appellant’s written statement before the Industrial Court made no specific allegation that the reserves were employed as working capital, although its calculations did not exclude those reserves from the amount claimed for rehabilitation. Since there was no explicit allegation, the respondent’s statement likewise did not deny the fact, but its calculations also failed to deduct the reserves from the rehabilitation amount, indicating that the respondent had not accepted the position that the reserve funds were utilised as working capital. Although the appellant relied heavily on the testimony of its General Superintendent, a review of that testimony showed that the witness neither affirmed that the company had used the reserves as working capital nor attempted to prove the balance‑sheet or any extracts from it. Consequently, the respondent was denied any opportunity to cross‑examine the witness on the alleged use of the reserves. On these grounds, the Court held that Rs 51 lakhs representing the reserves had not been used as working capital.

Consequently, the Industrial Court correctly deducted the sum of fifty‑one lakhs from the total amount of sixty lakhs that it had previously fixed as the amount payable for rehabilitation of the appellant‑company. The residual balance of nine lakhs, when spread evenly over a fifteen‑year period, produced an annual surplus of merely sixty thousand rupees in the particular bonus year under consideration. Moreover, the statutory depreciation applicable to the relevant assets was calculated at eighty‑three thousand six hundred thirty‑nine rupees, a figure that reinforced the Industrial Court’s rationale for excluding the rehabilitation amount from the surplus computation. No further contentions or submissions were presented to the Court for consideration, and consequently the proceedings moved forward without any additional argument or evidence being introduced by either party. In view of the foregoing findings, the appellate authority concluded that the appellant’s appeal was unsuccessful and ordered that the appeal be dismissed, directing that the costs of the proceedings be borne by the appellant. Accordingly, the final order affirmed the dismissal of the appeal and confirmed that no further relief or remedy would be granted to the appellant in this matter. The dismissal was therefore definitive, leaving the original rehabilitation award unchanged aside from the duly deducted amount consequently.