Muir Mills Co. Ltd., Kanpur 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. 305 of 1959

Decision Date: 07/04/1960

Coram: K.C. Das Gupta, P.B. Gajendragadkar, K.N. Wanchoo

In this matter the Supreme Court of India heard a petition filed by Muir Mills Co. Ltd., Kanpur against its workmen, with the judgment rendered on 7 April 1960. The bench comprised Justice K.C. Das Gupta, Justice P.B. Gajendragadkar and Justice K.N. Wanchoo. The case is reported in 1960 AIR 985 and 1960 SCR (3) 488. The dispute concerned the structure of wages under the Uttar Pradesh Industrial Disputes Act, 1947, specifically whether production bonus and incentive bonus could be taken into account when fixing a new basic wage, and whether the intention of the Government could be interpreted to prejudice the interests of labour, industry and the country. The appellant, Muir Mills, paid its workmen in the Carding Department on a piece‑rate basis and, in addition, the workers were entitled to receive further emoluments when their production exceeded a prescribed norm. This right to additional emoluments had become part of the terms of service of those workmen. In 1948 the Government of Uttar Pradesh, exercising the powers granted by section 3 of the Uttar Pradesh Industrial Disputes Act, 1947, issued an order intended to obligate employers in various industries to maintain the wages of workmen at a certain level, and it specified the standard of basic wages and dearness allowance for different industries in the province. Acting on that order, the appellant introduced a new piece rate by raising the fixed piece rate but simultaneously discontinued the system of paying the additional emoluments, reasoning that it was justified in doing so because it had taken into account the total amounts actually earned by the workers, including the production and incentive bonuses that had previously been paid. The workmen argued that by stopping the additional emoluments to which they were entitled on the basis of higher production, the employer had in effect reduced the wages they were lawfully owed, and that the increase in piece rates did not cure this deficiency. The central question was whether the Government order required or authorised the company to include the incentive bonus and production bonus, which had been paid for a long period, in the calculation of the new piece rate for the purpose of complying with the Government’s directions concerning basic wages. The Court held that the Government order did not require or justify the employer to incorporate the production and incentive bonuses in the calculation of the basic wage rates of the workers, and consequently the order did not relieve the company of its duty to continue paying the production and incentive bonuses to the workmen as before. The Court further observed that the term “basic” is not confined solely to wages; it denotes the component ordinarily payable to all employees, irrespective of special claims, and is understood in contrast to “dearness allowance,” which varies with changes in the cost of living. Thus, “basic wage” never includes the additional emoluments that some workmen may earn through bonus schemes linked to production.

In the interpretation of the term “basic wage”, the Court explained that it is ordinarily understood to denote the portion of the price of labour that the employer is obliged to pay to each of the 489 workmen, irrespective of their specific categories. The expression is normally used in clear contrast to “dearness allowance”, whose amount varies periodically in response to changes in the cost of living. Accordingly, “basic wage” is defined as a fixed component that never incorporates any extra payments that certain workmen might obtain through bonus schemes that are linked to their production output.

The Court referred to the earlier decision in Titaghur Paper Mills Co. Ltd. v. Their Workmen, reported in 1959 Supplement (2) of the Supreme Court Reporter at page 1012, to support this interpretation. The judgment in the present appeal was filed under the civil appellate jurisdiction as Civil Appeal No. 305 of 1959, and it was taken up by special leave from the decision dated 10 January 1957 of the Labour Appellate Tribunal of India, Bombay, in Appeal No. 111‑346 of 1955. Counsel for the appellants included G. S. Pathak, S. P. Sinha and K. K. Sinha, while the respondents were represented by the General Secretary of the Union, Maqbool Ahmad Khan, and by J. P. Goyal. The appeal was decided on 7 April 1960, and the judgment was delivered by Justice Das Gupta.

The appeal was filed by the employer, Muir Mills Co., Ltd., Kanpur, challenging the order of the Labour Appellate Tribunal of India, Bombay, which had modified an award originally made by the Adjudicator in Kanpur. The matter arose from a reference made by the Government of Uttar Pradesh under sections 3, 4 and 8 of the Industrial Disputes Act, 1947. The original issue presented to the tribunal was framed as follows: “Whether the employers have wrongfully and/or unjustifiably reduced the wages of their workmen of the Carding Department, given in the annexure? If so, to what relief are the workmen entitled and from what date?” By an order dated 25 April 1955, the Government altered the question by substituting it with the wording: “Whether the employers have wrongfully and/or unjustifiably reduced the wages of their workmen of the Carding Department, given in the annexure, by discontinuing the payment of production and/or special bonus, if so, to what relief are the workmen entitled and from what date?” This amendment made it clear that the alleged reduction in wages was said to have resulted from the cessation of production and special bonus payments.

To understand how this alleged reduction arose and to identify the considerations relevant to deciding whether any such reduction was wrongful or unjustifiable, the Court set out several factual points. The appellant, Muir Mills Co., Ltd., is a textile mill that employs workers in its Carding Department who are classified as Inter Tenters, Roving Tenters, Draw Frame Tenters and Slubbers. All of these employees are paid on a piece‑rate basis. Prior to 1948, the prevailing rates per hank were 2 annas 3 pice for Inter Tenters, 2 annas 3 pice for Slubbers and Draw Frame Tenters, and 2 annas 5 pice for Roving Tenters. In addition to these piece rates, the workers were also entitled to further emoluments, a point that becomes significant in the subsequent analysis of the dispute.

In this matter the workmen of the Carding Department were contractually entitled to receive additional remuneration when their output exceeded prescribed norms. At the relevant time the rates applicable to such additional remuneration were set at two annas for each rupee of basic earnings when the workers earned between fifteen rupees and twenty‑five rupees per month, and at three annas for each rupee of basic earnings when their basic earnings were above twenty‑five rupees per month. In addition to these two rates, the employer also paid a further sum of nine pies for each hank produced on a day when the daily output reached seven hanks or more. Although both forms of extra payment were tied to production, the lower tribunals had described the first form as a “production bonus” and the second form as an “incentive bonus.” For convenience this description is retained here. These two categories of bonus were payable only when the workers’ production met or exceeded the stipulated standards, and the effect of receiving them was to raise the total earnings of certain workmen considerably above what they would have earned under the ordinary piece‑rate wage. Consequently, the entitlement to such bonuses had become an integral part of the terms of service of the Inter Tenters, Roving Tenters, Draw Frame Tenters and Slubbers employed in the Carding Department. Effective from 1 December 1948, the appellant‑company discontinued the system of paying these bonuses and instead increased the fixed piece‑rate to three and nine annas for Inter Tenters, three and six annas for Slubbers and Draw Frame Tenters, and four and nine annas for Roving Tenters. This change was implemented immediately after the Government issued an order under section three of the Uttar Pradesh Industrial Disputes Act, 1947, which prescribed the standards of basic wages and dearness allowance for various industries in the province. Clause two of that order fixed the minimum basic wage for the cotton and woollen textile industries in Kanpur and certain other areas at thirty rupees per month. Clause three authorised the payment of a dear‑food allowance. Clause five stipulated that persons who were employed on 30 November 1948 in any industrial textile concern should receive wages at the increased rates specified in the order. Clause seven required that every employee of an industrial concern to which the order applied should be paid wages, including dear‑food allowance, in accordance with the provisions of clauses two, three, five and six. A proviso to clause seven provided that if the consolidated wage payable to an employee who was on the payroll on 30 November 1948 exceeded the consolidated wage calculated under the said clauses, the excess should be paid as a personal wage. Clause eight defined “basic wages” as the consolidated wages payable to an employee on 30 November 1948 minus the dear‑food allowance calculated at the rates prevailing in the concern on that date. The workmen contended that by terminating the additional bonuses, which they had earned through higher production and extra effort, the employer had in fact reduced the wages to which they were legally entitled.

In this case, the court observed that the introduction of higher piece‑rates effective 1 December 1948 did not alter the issue before it. The employer argued that, under the Government order, it was obliged to set the new piece‑rates after taking into account the total amounts actually earned by the workers, including the amounts that had previously been paid as production and incentive bonuses; consequently, the employer maintained that the discontinuation of those additional emoluments did not constitute any reduction in wages. The adjudicator, however, found that the company had not incorporated the production bonus and the incentive bonus when it calculated the revised piece‑rates, and he further held that, according to the terms of the Government order, such bonuses could not be considered in law because the order did not envisage their inclusion in the computation of the basic wage figure required by the order. On this basis, the adjudicator concluded that the workers had suffered an unjustifiable wage reduction and ordered the management to reinstate, with effect from 1 December 1948, the system of granting production and incentive bonuses to all workers who were entitled to them, also prescribing the method by which the bonuses should be calculated. The Appellate Tribunal deemed it unnecessary to examine whether the bonuses had actually been taken into account while fixing the new piece‑rates, reasoning that if the Government order did not require or justify the employer’s inclusion of those bonuses in the wage calculation, the company was legally bound to restore the bonuses even if it had in fact considered them. Accordingly, the tribunal held that the Government order did not mandate or support the inclusion of the bonuses in the basic wage calculation and affirmed the adjudicator’s decision that the bonus system must be restored. Noting that the workers had not raised the matter for a considerable period after 1 December 1948, the tribunal directed that the restoration should take effect only from 1 February 1954, and it modified the earlier directions concerning the rates at which the bonuses were to be computed. The appellant‑company’s principal contention before the Supreme Court was that the Appellate Tribunal erred in concluding that the Government order did not require or justify the inclusion of the production and incentive bonuses in the computation of the basic wage rate. Before addressing that issue, the court noted a preliminary objection raised by counsel for the appellant, who, relying on a note made by the adjudicator on 27 August 1955, sought to argue that the lower tribunals should not have considered the question of whether, under the Government order, the appellant could have included the incentive bonus in the calculation of the basic rate.

In this case, counsel for the appellant contended that the tribunals below were not authorised to consider at all the question of whether, under the Government order, the appellant could include the incentive bonus in the computation of the basic rate of wages. To support this submission, reference was made to a note dated 27 August 1955 made by the Adjudicator, which read as follows: “The parties are represented. The calculations have been filed by them which were made in the presence of the Adjudicator. There is no difference between the parties that while calculating the rates with effect from 1‑12‑48 if production and incentive bonus have been considered the question of any relief does not arise, and vice versa. The workers say that in the said wages, these bonuses have not been included while the employers contend that they have been included. The latter have not filed the required information. Proceedings closed.” At first glance, this note appears to provide a basis for the argument that the parties had agreed before the Tribunal to treat the issue solely as a factual dispute and that the workmen had not raised any question that the Government order prohibited the inclusion of such bonuses in the rate calculation. However, the Court found it unnecessary to analyse the legal effect of any such concession because the record of the appellate tribunal demonstrated a different position. The judgment of the appellate tribunal recorded that the workmen expressly stated that they had not conceded any such position in the lower tribunal and maintained that the bonuses could not be taken into account. Moreover, the appellate tribunal’s decision showed that both parties had framed their appeal on two specific contentions: firstly, whether the Government order permitted the employer to incorporate the production and incentive bonuses into the calculation of the new basic wage rates for piece‑rate workers such as those involved in the present suit; and secondly, if the order did permit such inclusion, whether the employer had in fact taken the bonuses into account. The Court observed that the contention that, because of the alleged concession of 27 August 1955, the appellate tribunal was barred from deciding whether the Government order required or authorised the employer to include the bonuses, had been abandoned before the lower tribunal. When the point was raised before counsel for the appellant, it was indicated that the contention could no longer be pursued, and counsel accordingly withdrew it. Consequently, the real issue before the Court was whether the Government order required or authorised the company to include the incentive bonus and the long‑standing production bonus when fixing the new piece‑rate for compliance with the order’s directions concerning basic wages. To answer this question, the Court deemed it necessary to examine the entire scheme of the Government order and to refer to the relevant clauses of that order.

The Court explained that the Government order, whose relevant clauses had already been set out, was intended to make it compulsory for employers in various industries to keep the wages of workmen at a specified level. To achieve this aim, the order stipulated two components: on the one hand the basic wage that had to be paid, and on the other hand the dearness allowance, called “dear food allowance” in the order, which also had to be paid. The Court noted that the idea of a basic wage was familiar to both employers and workmen and to anyone dealing with questions of labour remuneration. It observed that the term “basic” was not confined to wages alone. For example, when a rationing system was introduced for any commodity such as food, coal, or petrol, a basic ration was fixed as the amount that every individual under the system would receive, while additional quantities could be allotted to certain persons based on special claims. In every such case the basic amount was the portion available to all, irrespective of any special entitlement. Likewise, the phrase “basic wages” was ordinarily understood to denote the part of the price of labour that an employer was required to pay to all workmen, irrespective of their category. The Court explained that this term was normally used in clear contrast to “dearness allowance,” whose quantum varied from time to time in response to changes in the cost of living. Consequently, “basic wage” did not include any extra emoluments that some workmen might receive under a system of production‑related bonuses. The Court described how the amount of such bonuses varied from individual to individual according to efficiency and diligence, and could also change from season to season because of alterations in working conditions, availability of raw material, or assistance from machinery. This inherent variability, the Court said, excluded these bonus payments from the meaning of “basic wages.” The appellant, however, argued that the ordinary understanding of “basic wages” was irrelevant because the Government order itself provided a definition. Clause 8, which the Court quoted, stated: “‘Basic Wages’ for the purposes of this order will mean consolidated wages payable to an employee on November 30, 1948, minus Dear Food Allowance calculated according to the rates prevailing in the concern on the said date.” On behalf of the appellant, Mr Pathak focused on the words “consolidated wage” and contended that every element that satisfied the description of a wage had to be included in the process of consolidation. He further argued that the emoluments paid as production bonus and incentive bonus were also “wages,” even if they were not normally regarded as basic wages, and therefore should be part of the consolidated wage calculation.

The appellant argued that the term “consolidated wage” in clause 8 must encompass every component that can be described as wage. He further contended that the emoluments paid as a production bonus and an incentive bonus, although not normally regarded as basic wages, should nevertheless be treated as wages for the purpose of the definition. Accordingly, the appellant submitted that clause 8 makes “basic wages” for the order equal to the total of all emoluments that fall within the description of wages, which would include both the production bonus and the incentive bonus, but would exclude dearness allowance because the clause expressly mentions that allowance. To support this position, the appellant’s counsel placed strong reliance on observations made by this Court in the case of Titaghur Paper Mills Co., Ltd. v. Their Workmen (1), where the Court had held that a production bonus is “in the nature of an incentive wage.” The appellant sought to establish that because the bonuses are characterized as incentive wages, they must be incorporated within the “consolidated wage” contemplated by clause 8 of the order. Before deciding whether that characterization assists the appellant’s claim, the Court considered it necessary to examine precisely what was said in the Titaghur decision.

In Titaghur Paper Mills Co., Ltd. v. Their Workmen the Court was faced with a question concerning the jurisdiction of Industrial Tribunals to adjudicate a claim for production bonus, a matter that the parties argued was governed by a private agreement between employer and employees. The Court began its analysis by defining the essence of a production bonus. It stated: “Before we go into the question of jurisdiction of a tribunal under the Industrial Disputes Act, 1947, we should like to consider what production bonus essentially is. The payment of production bonus depends upon production and is in addition to wages. In effect it is an incentive to higher production and is in the nature of an incentive wage.” The Court further explained that there is “a base or standard above which extra payment is made for extra production in addition to the basic wage,” and that such a scheme typically guarantees a time wage up to the standard performance level while granting workers a share of the savings generated by superior performance. It continued: “Therefore generally speaking, payment of production bonus is nothing more or less than a payment of further emoluments depending upon production as an incentive to the workmen to put in more than the standard performance.” The Court added that the bonus in the case before it was of the same nature, describing it as “additional emolument paid as an incentive for higher production.” Finally, the Court noted that it would later examine whether the bonus was something other than a profit bonus, but at that stage it was sufficient to observe that the bonus “depends essentially on production and therefore is in the nature of incentive bonus.” (1) [1959] SUPP. 2 S.C.R. 1012.

In this case, counsel correctly observed that the bonus linked to production had been described as an incentive wage, but the Court also stated clearly that such bonuses did not constitute wages in the ordinary sense and that they were payable in addition to the basic wage. The Court then examined whether, despite not being part of the basic wage as normally understood, an incentive wage could be deemed to fall within the “consolidated wages” referred to in clause 8. The Court answered this question in the negative. Although the term “consolidated wage” might, when taken out of context, suggest the inclusion of every category of wage, the Court emphasized that the provision was specifically defining basic wage. It would therefore be unreasonable to suppose that the Government, while defining basic wage, intended to incorporate a component that is universally recognised as being outside the ordinary concept of basic wage. Consequently, the Court reasoned that only those emoluments which are regularly received by workmen as a normal feature of their earnings – and which therefore satisfy the characteristics of basic wage – could be intended to be covered by the consolidation. The Court noted that the dear‑food allowance failed to meet this characteristic and was consequently expressly excluded. Although Mr Pathak argued that because dearness allowance was expressly excluded, every other element that could be called a wage ought to be included, the Court held that when the definition concerns basic wage, the presumption is that any element essentially different from basic wage was not meant to be included. The Court further observed that the notification did not refer to a piece‑rate system of payment; this omission indicated that production bonuses, which are an essential feature of piece‑rate but not of time‑rate systems, were not contemplated by the drafters of the order. Moreover, the Court considered that the Government, in formulating a scheme to improve the wage structure, would not deliberately adopt measures that would eliminate production incentives, for such a move would harm labour by preventing workers from earning extra through additional effort, would diminish returns to capital, and would be detrimental to the nation at a time when higher production was urgently needed across all industries. An interpretation that would ascribe to the Government the unthinkable intention of harming all concerned parties could not be lightly accepted, yet such a result would follow if “consolidated wages” were interpreted to include even an incentive wage such as a production‑related bonus. On every consideration it

It was held that the production bonus and the incentive bonus were not included in the definition of basic wages contemplated by the Government order. An argument was advanced, on behalf of the petitioner's counsel, that the workmen’s failure to raise any protest for several years after the old system of production and incentive bonuses was discontinued indicated that the workmen themselves understood the Government order to require that such bonuses be taken into account when fixing basic wages for the purposes of the order. The Court found that it was unnecessary to decide whether that perception was correct, because the only sensible interpretation of the language used in the order was that the bonuses were to be excluded from basic wage calculations. Accordingly, the Court concluded that the Labour Appellate Tribunal had been correct in holding that the Government order neither required nor justified the employer’s inclusion of the production and incentive bonuses in the computation of the basic wage rates for the employees. The Court further observed that, as a result of this interpretation, the Government order could not be said to relieve the company of its obligation to continue paying the production and incentive bonuses to the workmen as had been done previously. No party raised any objection before the Court regarding the directions issued by the appellate tribunal for the method of calculating those bonuses. For these reasons, the appeal was dismissed and the costs of the proceedings were awarded against the appellant.