The Bharatkhand Textile Mfg. Co. Ltd. and Others vs The Textile Labour Association

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

Court: supreme-court

Case Number: Civil Appeal No. 1 of 1959

Decision Date: 17 March 1960

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

In this case the Supreme Court of India recorded that the petition was filed by The Bharatkhand Textile Manufacturing Company Limited together with other respondents against The Textile Labour Association of Ahmedabad, and that the judgment was delivered on 17 March 1960. The opinion was authored by Justice P. B. Gajendragadkar and the bench also included Justice K. N. Wanchoo. The citation for the decision was reported as 1960 AIR 833 and 1960 S·C·R (3) 329, and subsequent citator references included various reports from 1962 to 1980. The matter concerned an industrial dispute involving a claim of gratuity by workers in the textile industry, the framing of a gratuity scheme in modification of a previous award, the validity of such a scheme, whether gratuity could be treated as a profit‑bonus, the applicability of the Full Bench formula, and the duties of the Industrial Court under the Bombay Industrial Relations Act of 1946, section 116A, as well as the Employees’ Provident Funds Act of 1952, section 17. The headnote explained that certain textile mills in Ahmedabad appealed against a gratuity scheme that had been awarded by the Industrial Court. The respondent, the Labour Association, issued a notice of change under section 42(2) of the Bombay Industrial Relations Act, informing the Mill Owners’ Association that it desired a gratuity scheme and listing four categories of service termination in an annexure. That demand was refused, leading the parties to refer the dispute to the Industrial Court under section 73A of the Act. While the reference was pending, the Employees’ Provident Funds Act, 1952 came into force, and the Industrial Court, hearing an objection from the Mill Owners’ Association, held that it was inadvisable to continue with the reference and suggested that a fresh application be made after the statutory scheme introduced by the 1952 Act was implemented, thereby rejecting the respondent’s demand. Subsequently the respondent issued another notice of change and further references were made to the Industrial Court concerning the demand. The parties later agreed to refer all their disputes to arbitration, withdrew the references, and submitted the matters to a Board of Arbitrators. Before the Board the Mill Owners’ Association argued that, because the award of the Industrial Court dismissing the earlier reference remained in force, the gratuity claim could not be considered, and the Board upheld that objection, making no provision for gratuity. Thereafter the respondent applied for modification of the award under section 116A of the Act, and the Industrial Court, by the award that is the subject of the present appeal, framed a scheme for gratuity on an industry‑and‑region basis. The Court held that the decision of the Industrial Court was correct and must be upheld, noting that, given the true nature of the earlier award and the scope of the application for modification, the respondent was not seeking to alter the framework or change any principles of that award, and therefore the application under section 116A was competent.

In this case the Court observed that nothing in the material before it indicated that the respondent was trying to alter the basic framework or to change any of the principles underlying the original award, and therefore the application made under section 116A of the Industrial Disputes Act was to be regarded as competent. The Court explained that a gratuity scheme is, by its very nature, an integrated scheme that must encompass every class of service termination for which a gratuity right can be properly claimed; consequently the earlier refusal of the Industrial Court to frame any scheme amounted to a refusal to establish any scheme at all. The Court further held that the statutory provident fund created by the Employees’ Provident Funds Act of 1952 could not be invoked as a barrier to the respondent’s claim for a gratuity scheme, although the Court recognised that any gratuity scheme awarded by an industrial tribunal must take the provident fund provisions into appropriate account. Section 17 of the same Act was cited to show that the statutory benefits it provides constitute the minimum entitlement of employees and do not preclude the grant of additional benefits, a principle illustrated by the decision in Indian Hume Pipe Co. Ltd. v. Their Workmen. The Court rejected the contention that a gratuity claim is essentially the same as a claim for profit‑bonus and must always be examined on a unit‑wise basis. It emphasized that gratuity is a retiral benefit, and that before an industrial tribunal frames such a scheme it must consider a range of relevant factors, including the employer’s overall financial condition, its capacity to generate profit, the profits realised in past years, the size of its reserves, the likelihood of replenishing those reserves, the capital that the employer has invested, and any other considerations that affect the long‑term financial health of the enterprise. On the basis of this comprehensive financial analysis the tribunal should determine both the feasibility of the scheme and the extent of the benefit to be provided. The Court referred to the authorities in Arthur Butler & Co. (Muzaffarpur) Ltd. and Arthur Butler Workers Union and Boots Pure Drug Co. (India) Ltd. v. Their Workmen to support this approach. Even assuming that gratuity does not form part of a deferred wage, the Court found it unreasonable to treat a gratuity scheme as analogous to a profit‑bonus scheme or to apply the Full Bench formula that governs profit‑bonus calculations. A gratuity claim, the Court noted, is strictly not a claim to share in the employer’s profits, as affirmed in Express Newspapers (Private) Ltd. v. The Union of India and Indian Oxygen and Acetylene Co. Ltd. Employees’ Union v. Indian Oxygen and Acetylene Co. Ltd. The Court also held that it was incorrect to say that an industry‑wise basis is wholly inappropriate for dealing with gratuity or that the Industrial Court erred in adopting such a basis. While acknowledging that some hardship may be unavoidable for weaker units within the industry, the Court observed that several factors support the industry‑wise approach both from the perspective of employers and from that of employees.

In this case the Court observed that, given the present stage of economic development in the country, the desirability of applying an all‑India framework for a gratuity scheme could be questioned; nevertheless, on principle no exception could be permitted to the industry‑and‑region basis that had been adopted in the matter before the Court. The Court cited the decision in Express Newspapers (Private) Ltd. v. The Union of India, [1959] S.C.R. 12, as applicable to the issue.

The judgment arose in the civil appellate jurisdiction concerning Civil Appeal No. 1 of 1959. The appeal was filed by special leave against the award dated 16 September 1957 issued by the Industrial Court, Bombay, in Miscellaneous Application (IC) No. 20 of 1957. Counsel for the appellants included the Attorney‑General for India and several senior advocates, while counsel for the respondent, the Textile Labour Association, Ahmedabad, comprised the Solicitor‑General of India together with other senior counsels. The Intervener was also represented by the Solicitor‑General of India and additional counsel. The judgment was pronounced on 17 March 1960 by Justice Gajendragadkar.

The appeal challenged the award of the Industrial Court, Bombay, which had established a gratuity scheme for the workmen represented by the Textile Labour Association, Ahmedabad. These workmen were employed in textile mills situated in Ahmedabad, including the twenty mills that were the appellants in this proceeding. To understand the legal questions raised by the appellants, the Court first set out the material facts that gave rise to the dispute over the contested gratuity scheme.

On 13 June 1950 the respondent issued a notice under section 42(2) of the Bombay Industrial Relations Act, 1946 (Bombay Act XI of 1947), hereinafter referred to as “the Act”. The notice was addressed to the Mill Owners’ Association of Ahmedabad, hereinafter “the Association”. The notice expressed the respondent’s desire for a change, as detailed in an annexure attached to the communication. The annexure stipulated that a gratuity scheme should be created for any employee whose service was terminated by the mills on the grounds of old age, invalidity, incapacity or natural death. The respondent further demanded that gratuity be payable at the rate of one month’s wages, including dearness allowance, for each completed year of service. Additional incidental demands were also set out in the annexure.

The Association did not accept the demanded changes, and consequently the matter was referred to the Industrial Court. While the reference was pending, the Employees’ Provident Funds Act, 1952 (Act 19 of 1952) came into force on 4 March 1952. The Association’s counsel argued before the Industrial Court that, because the statutory provident‑fund scheme was about to become compulsory, it would be untimely to adjudicate the respondent’s gratuity claim at that juncture. The Industrial Court accepted this argument and held that once the new statutory scheme was operational, the appropriate date from which it would apply could be determined, and if, after its implementation, a sufficient margin remained, the parties could later make a fresh application for establishing a gratuity fund either for all employees or for those who would retire in the near future. Consequently, the Industrial Court dismissed the respondent’s demand on 18 April 1952.

The Court noted that the scheme contemplated under the new legislation would become operative on a specified date, and that if, after its introduction, a sufficient surplus remained, the respondent and the Association would be entitled to file a fresh application for the establishment of a gratuity fund either for all employees or for those who would retire within the next few years. On the basis of this observation, the demand presented by the respondent was rejected on 18 April 1952. The Court further recorded that the scheme prescribed by the Provident Funds Act actually came into force on 1 October 1952. In June 1955 the respondent issued a fresh notice of change to all the mills concerning its demand for gratuity; this demand subsequently became the subject of several references before the Industrial Court at Bombay under section 73A of the Act. At that time the Association and the respondent had entered into an agreement to refer all their disputes to arbitration. In accordance with the spirit of that agreement, the references that were pending before the Industrial Court with respect to gratuity were withdrawn and transferred to the Board of Arbitrators. Before the Board, however, the Association argued that as long as the award previously passed by the Industrial Court remained in force, a gratuity claim that formed the subject of that award could not be properly or validly considered by the Board. The Board accepted this objection and consequently made no provision for gratuity in its proceedings. The Board’s decision was published on 25 July 1957. After the Board had rendered its decision but before it was published, the respondent filed the present application for modification of the earlier award under section 116A of the Act on 6 July 1957. In that application the respondent asserted that there was sufficient justification to modify the earlier award and to introduce the gratuity scheme it had proposed. The application set out the demand for gratuity in three categories: (1) a payment of one month’s basic wages, together with dearness allowance, for each completed year of service in the case of death or physical or mental incapacity for further service; (2) a similar payment on voluntary retirement after ten continuous years of service; and (3) a payment on termination of service, with varying rates depending on the length of service – three‑quarters of a month’s wages for service of more than seven but less than ten years, one‑half of a month’s wages for service of five years or more but less than seven years, and a full month’s wages for service exceeding ten years. The Court observed that a typographical error had occurred in the application, causing the third category to be incompletely typed. The respondent subsequently filed a correction of this error in August, seeking to amend the application accordingly.

The amendment of the typing mistake was sought on 21, 1657 and the amendment was allowed. The demand that resulted from this application formed the subject‑matter of the present proceedings under section 116A of the Act. In these proceedings the Association neither filed a written statement nor contested the amendment; instead it withdrew, thereby leaving each individual mill free to file its own separate written statement. It appears that the constituents of the Association held differing views, and consequently written statements were filed on behalf of the sixty‑five constituent mills. The great majority of those statements raised preliminary objections questioning the competence of the present proceedings and also disputed, on the merits, the respondent’s claim for gratuity. The industrial Court rejected all of the preliminary objections and, on the merits, formulated a gratuity scheme on an industry‑cum‑region basis. The award embodying that scheme was pronounced on September 16, 1957. Against this award, twenty‑one of the sixty‑five mills approached this Court by way of special leave. One of the appellant mills later withdrew its appeal, so that, of the original sixty‑five mills, forty‑five did not consider themselves aggrieved by the award, while twenty remained dissatisfied and their contentions are now before this Court. Before examining the merits of the appellants’ points, it is appropriate to recall briefly the relevant provisions of the Act. The Act was enacted by the Bombay Legislature because it deemed it expedient to provide for the regulation of relations between employers and employees in certain matters, to consolidate and amend the law relating to the settlement of industrial disputes, and to provide for other purposes. Accordingly, the Act contains extensive provisions governing industrial relationships and aims at the speedy disposal of industrial disputes. Section 3, subsection 17, defines an “industrial dispute” as any dispute or difference between an employer and employer, between employers and employees, or between employees and employees, which is connected with any industrial matter. The term “industrial matter” is defined inclusively and broadly. Section 3(2) defines “approved union” as a union that appears on the approved list; section 3(28) defines “primary union” as a union registered at that time as a primary union under the Act; section 3(30) defines “registered union” as a union registered under the Act; and section 3(33) defines “representative union” as a union that, at that time, is registered as a representative union under the Act. Section 3(39) defines “wages” as remuneration of all kinds capable of being expressed in monetary terms and payable to an employee in respect of his employment or work done therein, and includes, inter alia,

The judgment explained that the term “any gratuity payable on discharge” forms part of the definition of wages. Section 42, sub‑section (2), was then described. It requires an employee who wishes to obtain a change in respect of an industrial matter that is not listed in Schedule I or Schedule II to give notice in the prescribed form to the employer through the employees’ representative. The employee must also send a copy of the notice to the Chief Conciliator, to the Conciliator of the industry for the local area, to the Registrar, to the Labour Officer, and to any other person who may be prescribed by law.

Section 66(1) was quoted next. That provision states, inter alia, that when an employer and a representative union or any other registered union that represents the employees enter into a written agreement to submit any present or future industrial dispute, or a class of such disputes, to the arbitration of a person—whether or not that arbitrator is named in the agreement—the agreement is called a “submission”. The Court noted that the Association and the respondent had already executed such a submission concerning several disputes that were later referred to the Board of Arbitrators.

The judgment then turned to Section 73A, which is relevant to the present case because it governs the reference of industrial disputes to arbitration by unions. The provision allows, notwithstanding any other provision of the Act, a registered union that is both a representative union of the employees and an approved union to refer any industrial dispute for arbitration to the Industrial Court, subject to the prescribed proviso. It was under the authority of Section 73A that the earlier reference had been made to adjudicate the respondent’s claim for a gratuity, as set out in its notice of change.

Having reached that point, the Court examined Sections 116 and 116A. Section 116 deals with the period during which an award remains binding. Sub‑section (1) provides that an award ceases to have effect on the date specified in the award; if no date is specified, the award ends two months after a written notice of termination is given in the prescribed manner by any party to the other party. However, such a notice may not be issued until at least three months have elapsed from the date the award came into operation, meaning that an award cannot be terminated for a minimum of three months after it becomes operative; thereafter termination may proceed as prescribed by Section 116(1). The Court clarified that the remaining provisions of Section 116 were not relevant to the present appeal.

Section 116A(1) was then considered. That provision allows any party who, under Section 116, is entitled to give a notice of termination of an award to instead apply, after the expiry of the period specified in sub‑section (2), to the Industrial Court that made the award for its modification. The Court stated that it was unnecessary to set out the other provisions of Section 116A. Finally, the Court observed that the award presently under appeal had been made by the Industrial Court in response to an application filed by the respondent.

In this matter, the learned Attorney‑General, appearing for the appellant, put forward the initial contention that the respondent’s application for modification under section 116A was legally incompetent. The argument was that the respondent was not seeking a permissible modification of the earlier award as contemplated by section 116A, but instead was attempting a reversal and a revision of that award, which the statute does not authorize. The phrase “modification of the award” was explained to possibly include alterations to the details of the award or any other subsidiary or incidental matters. The Court was reminded that a fundamental distinction exists between the terms “change” and “modification.” Section 116(2) expressly provides for a change or modification of a registered agreement, settlement, or award in accordance with the agreement, thereby highlighting the difference between the two concepts. Under section 116(2), agreements or settlements may be wholly revoked and fresh ones substituted by consent, or they may be modified in subsidiary or incidental details by consent. The Legislature, when it intended to permit a “change,” used both the words “changed” and “modified” in section 116(2). By contrast, section 116A is limited solely to the modification of the award and does not encompass its change.

The same line of reasoning was presented in a different form, asserting that the Legislature did not intend to allow proceedings under section 116A to alter the policy underlying the award or its essential framework. Such an outcome, the argument continued, could be achieved only by terminating the award under section 116(1) and then raising an industrial dispute as prescribed by the Act. To support this position, reliance was placed on the observations of Mukherjea, J., in the case concerning the Delhi Laws Act 1912, where the learned judge held that the word “modification” in section 7 of that Act did not mean a change of policy but was confined to alterations that kept the policy intact while permitting changes appropriate to local conditions as judged by the executive government. In the same case, Bose, J. observed that “the power to restrict and modify does not import the power to make essential changes.” On the opposite side, the learned Solicitor‑General argued that the context in which the word “modification” appears in section 116A does not support the narrow construction advocated by the appellants. He contended that the policy purpose of the Act and the rationale for enacting section 116A indicate that “modification” was intended to have a broader meaning than the ordinary sense of the term.

The ordinary meaning was considered. The Legislature realized that the procedure prescribed in section 116, sub‑section (1), for terminating an award, which required several subsequent steps, was likely to cause delay and was cumbersome. Therefore the Legislature introduced section 116A to provide an effective and speedy alternative remedy for altering an award. To support this argument reliance was placed on the meaning assigned to the word “modify” in the reference work “Words and Phrases,” which states that although one of the primary meanings of “modify” is “to limit” or “to restrict,” the term also means “to vary,” and authorities indicate that it may even mean “to extend” or “to enlarge” (2). The cited authorities include [1955] 2 S.C.R. 747, 1006 (1) and “Words and Phrases” by Roland Burrows, volume 3, page 399 (2). It is common ground that the modification permissible under section 116A does not require that the provisions of the award always be reduced; the provisions may even be increased. Accordingly the respondent urged that the word “modification” should receive a wider denotation in the context of section 116A. This construction finds support in the provision of section 116A that a party may apply for the modification of the award instead of giving notice of termination, showing that the procedure under section 116A is an alternative to that prescribed by section 116. The industrial court appeared inclined to adopt a broader meaning of “modification” in section 116A. The Court held that it was unnecessary to decide the larger question of constructing section 116A because, even if the appellant’s narrow construction of “modification” were applied, the respondent’s application would still fall within the scope of the section. There is no doubt that the claim for gratuity made by the respondent in earlier proceedings was rejected by the industrial court and that the rejection constituted an award; however, whether the present application seeks a modification of that award depends on what the industrial court had decided earlier. It is clear that the industrial court did not then consider the merits of the claim. It upheld the Association’s contention that the matter should not be decided at that time but could be considered later, given that the Employees’ Provident Funds Act had already been passed and the statutory scheme for provident funds was about to come into force. On that ground alone the industrial court rejected the claim as it stood, but it expressly added that after the introduction of the provident‑fund scheme it would be open to

In the earlier order the industrial court indicated that either the respondent or the Association could submit a new application for establishing a gratuity fund whenever they considered it appropriate to do so. The court’s wording suggested that it was keeping the provisions of section 116A in view when it reserved this right for the parties. Effectively, the order treated the initial application as premature and allowed the parties to renew it if, after the statutory scheme became operative, either side found the scheme inadequate or unsatisfactory. Consequently, when the respondent now seeks a modification of the award, it is not attempting to alter the original framework of the award or to change any principle that was decided therein. Rather, the respondent is asking the court to examine its demand afresh in light of the fact that the gratuity scheme has come into force and, according to the respondent, does not satisfy the workers’ grievance. The matter that the industrial court promised to revisit after the scheme’s commencement is now being presented again for decision. Because this accurately reflects the nature of the original award and the true scope of the prayer contained in the present application, it is difficult to conclude that the application is incompetent under section 116A.

The learned Attorney‑General raised a further argument that the application for modification was incompetent because it dealt with matters not addressed in the earlier proceeding. The court previously identified the issues that were covered in the earlier reference as well as those that form the subject matter of the present application. It is true that the notice served by the respondent before the earlier reference specifically listed a claim for gratuity in four categories of employee termination, whereas the present proceedings include additional categories. The objection to the competence of the current application attempts to interpret the earlier notice in a strictly technical manner, limiting the subsequent proceedings before the industrial court to those four categories only. According to that argument, termination cases not specified in the earlier notice could not now be brought before the industrial court under the guise of modifying the award, and any modification sought under section 116A must be confined to the original four categories. The industrial court rejected this narrow construction, holding that the earlier notice should be understood as a claim for a general gratuity scheme. The appellant has seriously challenged the validity of that conclusion. There is no dispute that industrial matters not covered by an award fall outside the scope of section 116 of the Act; therefore, if a claim for gratuity concerning categories not mentioned in the earlier notice is considered outside that notice and the related reference proceedings, the respondent could not raise such a claim and seek industrial adjudication without terminating the award. This assessment is difficult to sustain.

The Court observed that awards which do not come within the ambit of section 116 of the Industrial Disputes Act cannot be the subject of a claim for gratuity that falls outside the scope of an earlier notice and the related reference proceedings. Consequently, the question arose whether the respondent could still invoke industrial adjudication for a gratuity claim concerning categories not mentioned in the earlier notice without seeking termination of the award. The Court found it difficult to answer this question in the affirmative. It noted that a gratuity scheme is an integrated system that necessarily embraces all classes of service termination for which a gratuity benefit may legitimately be claimed. In light of this principle, when the industrial court declined to frame a gratuity scheme for the four categories that had been presented before it on the earlier occasion, the Court held that such refusal, in substance, amounted to a rejection of any gratuity scheme altogether. It would be hard to assume that, having dismissed the gratuity claim for the specified four categories, the same court could nevertheless entertain a claim for gratuity on behalf of other categories that were not included in the original notice. Accordingly, the Court was inclined to view the formal rejection of the earlier gratuity demand—limited to the four categories mentioned in the notice—as effectively a rejection of the entire claim for a gratuity scheme. The Court further emphasized that it could not be disputed that, had the earlier demand been framed as a pure request for a comprehensive gratuity scheme without any categorisation, the present application for modification of the award together with a claim for a gratuity scheme covering all categories listed in the application would fall squarely within the purview of section 116 of the Act. The industrial court, in its findings, concluded that this was indeed the situation in the present case, and, given the unusual circumstances, the Court saw no reason to interfere with that determination. The respondent then urged that the industrial court erred in law by framing a gratuity scheme despite the existence of the statutory scheme under the Employees’ Provident Funds Act, which has been operative since 1952. It was contended that the provident fund guaranteed by statute constitutes a form of retirement benefit and, because this benefit is already available to the workmen, the industrial court should not have been authorized to provide an additional gratuity scheme. The Court noted that this contention has been frequently raised before industrial courts and has generally been rejected. While acknowledging that the Employees’ Provident Funds Act was enacted to establish provident funds for covered employees and that the statutory scheme is intended to furnish a retirement benefit, the Court stressed that the scheme prescribed by the statute represents only the minimum benefit that the Legislature intended employees to receive, and therefore it does not preclude the jurisdiction of the industrial court to fashion an additional gratuity scheme where appropriate.

In every situation where an industrial court was satisfied that it could provide a benefit larger and higher than that prescribed under the Employees’ Provident Funds Act, the court could not be prevented from doing so on the ground that the Act created any bar. The Court recognised that after the Act became effective, industrial courts would inevitably have to keep in mind the benefits of the statutory scheme to which the workmen were entitled. However, only after giving due consideration to those statutory benefits could the courts lawfully frame an additional gratuity scheme, and they were required to do so when the circumstances warranted. The Court further held that an employer could not argue that the Act excluded the jurisdiction of industrial courts to devise such an additional scheme.

The judgment then turned to section 17 of the Employees’ Provident Funds Act, which authorized the appropriate government to grant exemptions from all or any of the provisions of the statutory scheme to establishments specified in sub‑section 17(1)(a) and (b). Under subsection 17(1)(b), any establishment could apply for exemption if its employees already enjoyed benefits in the nature of a provident fund, pension or gratuity which, in the opinion of the appropriate government, were overall not less favourable than the benefits provided under the Act or than the benefits enjoyed by employees in any other establishment of a similar character. This provision made two points unmistakably clear. First, where the benefits offered by an employer were not less favourable than the statutory benefits, the employer could seek exemption and the government could grant it. Second, where the employer’s benefits were less favourable than those guaranteed by the statute, the employer could not obtain an exemption, and consequently the statutory benefits would continue to be available to the employees alongside any additional benefits the employer might provide.

These provisions, the Court observed, demonstrated that the statutory benefits, which the Legislature intended as the minimum to which employees were entitled, could not be invoked as a bar against employees’ claims for additional benefits from their employers. In support of this view, the Court referenced its earlier decision in Indian Hume Pipe Co. Ltd. v. The Workmen (1), where it had held that the statutory provision for retrenchment compensation under section 25F did not preclude a claim for gratuity. The argument that the statutory retrenchment provision possessed the character of gratuity and thereby barred an additional gratuity claim was rejected. Accordingly, the Court held that the Industrial Court was correct in rejecting the appellants’ contention that the statutory provision for the provident fund under the Employees’ Provident Funds Act barred the present claim for a gratuity scheme.

Subsequently, the learned Attorney‑General challenged the validity of the gratuity scheme on the ground that the Industrial Court had erred by addressing the issue on an industry‑wide basis rather than on a unit‑wise basis, contending that the proper approach should have been a unit‑wise assessment.

The Court observed that the claim for gratuity was being compared with a claim for bonus and that, on that view, it should be dealt with on a unit‑wise basis. It was not contested that gratuity is a retiral benefit. The Court held that, before a gratuity scheme is framed, an industrial adjudicating authority must take into account a number of relevant facts. These facts include the employer’s present financial condition, the capacity of the employer to make profits, the profits actually earned in the past, the size of the employer’s reserves, the likelihood that such reserves can be replenished, and the claims relating to the capital that the employer has invested. All of these material considerations, and any other pertinent factors, must be borne in mind when determining the terms of a gratuity scheme. This position has long been recognised by industrial courts, for example in the case of Arthur Butler and Co. (Muzaffarpur) Ltd. and Arthur Butler Workers’ Union.

The Court further noted that, although the grant of a gratuity claim must depend upon the employer’s ability to bear the long‑term burden, it would be inappropriate to place excessive emphasis on temporary periods of prosperity or temporary hardship. In formulating a long‑term scheme, a long‑term view of the employer’s financial condition must be adopted, and only on that basis should it be decided whether a scheme should be framed at all and, if so, what the extent of the benefit should be. This principle was reiterated in Boots Pure Drug Co. (India) Ltd. and Their Workmen. For the purposes of the present case, the Court stated that it was unnecessary to engage in the academic question of whether gratuity forms part of a deferred wage; it assumed that gratuity is not a deferred wage. Nevertheless, the Court ruled that it would be unreasonable to treat the character of a gratuity scheme as equivalent to that of a profit bonus and to import the considerations of the Full Bench formula that governs the grant of bonus. A profit‑bonus claim rests on the assumption that employees contribute, at least in part, to the employer’s profits and are therefore entitled to a share of those profits to bridge the gap between the wages actually received and a living wage. By contrast, a gratuity claim is solely a retiral benefit and does not involve any share of the employer’s profits. Consequently, the considerations relevant to a profit‑bonus claim are not applicable to a gratuity claim. This view had been expressed by the Labour Appellate Tribunal in the case of Indian Oxygen and Acetylene Co. Ltd. Employees’ Union and Indian Oxygen and Acetylene Co. Ltd., a decision that the Court later approved.

In this case, the Court observed that the argument equating a gratuity claim with a profit‑bonus claim and consequently insisting that a gratuity claim must always be resolved on a unit‑wise basis was not persuasive. The Court noted that, while a profit‑bonus claim is sometimes dealt with on an industry‑wise basis, this does not compel the same method for gratuity. The principal issue, therefore, was whether the industrial court had erred by handling the gratuity claim on an industry‑wise basis. The appellants contended that applying an industry‑wise approach to gratuity was wholly inappropriate and should not have been adopted by the industrial court. The Court conceded that when an industry‑wise basis is employed for a gratuity scheme, the stronger units of the industry may receive a smaller benefit than they would have under a unit‑wise determination, whereas workers in weaker units might obtain a more favorable scheme than they would have received if each unit were considered separately. This imbalance, the Court explained, is an inevitable consequence of an industry‑wise method. The Court acknowledged that such a potential mischief could be lessened by selecting a fair cross‑section of the industry or by applying an averaging rule after gathering relevant facts from all constituent units. Nevertheless, the Court warned that even with such safeguards, very weak units could still be disadvantaged, while very strong units might obtain an undue advantage. The question before the Court was whether this possible outcome required that a gratuity scheme, in principle, must always be framed on a unit‑wise basis. The Court identified several considerations that worked against the appellants’ position that a unit‑wise basis was the sole appropriate method. First, the Court held that equality of competitive conditions was necessary from the employers’ perspective; this was the basis of the Association’s claim that the gratuity scheme should be formulated on an industry‑wise basis covering the whole country. Second, the Court observed that equal benefits such as gratuity were likely to foster employee satisfaction and contribute to industrial peace and harmony. Third, the Court remarked that if similar gratuity schemes were established for all units of an industry, employee migration between units would be naturally restrained, thereby reducing industrial disputes arising from unequal treatment. Accordingly, the Court concluded that, from the standpoint of both employers and employees, an industry‑wise approach to the gratuity scheme was desirable.

In this case, the Court recorded that the Committee on Fair Wages, after a comprehensive examination of the issue, had reached the clear conclusion that assessing an industry’s capacity to pay could not be based on the capacity of a single unit nor on the aggregate capacity of every industry in the country. The Committee articulated that the proper yardstick should be the capacity of the particular industry within a defined region, and it advised that, wherever practicable, identical wages be prescribed for all units of that industry operating in that region. The Court further noted that this line of reasoning had been endorsed by the Supreme Court in Express Newspapers (Private) Ltd. (1) at page 19. The Court emphasized that the same principle governing wages applied equally to a gratuity scheme. It observed that, given the current stage of economic development, industrial tribunals would be reluctant to adopt an all‑India standard for resolving a gratuity dispute, and consequently there was no reason to fault the industrial court for choosing an industry‑wise approach. The Court then pointed out that, in the textile sector, wages have already been standardized on an industry‑wise basis, dearness allowance has been fixed similarly, and the provision of unsubstituted holidays follows the same pattern. It added that the Employees’ State Insurance Scheme (Act 34 of 1948) is organized industry‑wise, and that retrenchment compensation has been statutorily standardized under Section 25F of Act XIV of 1947. Moreover, the Court observed that the Association and the respondent had previously concluded a five‑year agreement covering bonus, and that the gratuity scheme for clerical and supervisory staff had likewise been established on an industry‑wise basis through mutual agreement. The Court remarked that the Association and the respondent could rightly take pride in the fact that most of their earlier disputes had been settled amicably, and that the present disagreement arose only because of divergent views among the Association’s constituent members, which led the Association to withdraw from the proceedings and permit individual members to appear before the industrial court. Despite this withdrawal, the Court noted that forty‑five of the sixty‑five mills had accepted the award.

The Court then framed the precise question before it: whether the industrial court erred in law by adopting an industry‑wise basis in deciding the present proceedings. It acknowledged that the industrial court could have chosen either a unit‑wise methodology or an industry‑wise methodology, and that several considerations favored the latter, even though it might cause some hardship to the weaker units within the industry. The Court listed the factors supporting the industry‑wise approach, including the desire for uniformity of benefits, the ease of administration, and the precedent of industry‑wide standardisation in wages, allowances, and related statutory schemes. After a careful and thorough examination of all relevant aspects, the Court concluded that there was no legal error in the industrial court’s decision to employ an industry‑wise approach, and therefore the award could not be set aside on the ground that a unit‑wise basis should have been adopted.

After examining the matter in every respect, the Court indicated that it was not prepared to overturn the gratuity scheme that was under review merely because the industrial court could have chosen to analyse the case on a unit‑wise basis. The Court then observed that the cotton textile sector constitutes the leading industry of the nation and that a large concentration of textile mills is situated in Ahmedabad. Many of these mills have built up substantial reserves, and the documentary evidence placed before the Court shows that output has risen steadily and that there is a ready market for the products. The Court noted that an industry‑wide gratuity scheme already operates in Bombay and that a comparable scheme appears to have been extended to the regions of Nadiad and Khandesh. Moreover, an award granting gratuity on an industry‑wide basis has also been made for the textile industry in Coimbatore. In view of these circumstances, the Court agreed with the industrial court’s finding that there was no justification for denying an important textile centre such as Ahmedabad a gratuity scheme, especially when the workers’ needs warranted it and the industry possessed the financial capacity to support it.

The Court further explained that when industrial disputes are addressed on an industry‑plus‑region basis, a classification of the individual units within the industry may become necessary if the region under consideration encompasses the entire country. An illustration of this approach is seen in the adjudication of wage structures for newspaper and banking sectors across the nation. However, the requirement for such classification diminishes when the geographical region is confined to a smaller area, although in certain appropriate cases even a limited region may still warrant classification. In the present proceedings, the industrial court concluded that classifying the textile mills was neither feasible nor expedient. No classification was undertaken for the textile mills in Bombay, and the industrial court did not feel compelled to depart from that approach for Ahmedabad. The Court found no defect in this conclusion. Subsequent criticism of the scheme argued that, prior to its formulation, the industrial court had failed to consider the existing liabilities already imposed on the industry. It was contended that the actual liabilities arising from the scheme itself had been ignored, that the significant burden created by the levy of excise duty had been overlooked, that excessive emphasis had been placed on bonus shares, and that the industry’s duty to contribute to the State Insurance Scheme had not been accounted for. The Court was not persuaded by these submissions, stating that the argument concerning the accrued liability was largely theoretical and lacked practical significance. The Court further observed that if it were suggested that a gratuity scheme should be framed only when an employer can set aside a fund sufficient to cover the entire theoretically accrued liability, such a requirement would render the creation of long‑term gratuity schemes virtually impossible.

In discussing gratuity, the Court noted that an employer’s ability to pay should be assessed only when the employer can set aside a separate fund that is sufficient to meet the entire liability that has theoretically accrued. Because of this requirement, the Court observed that gratuity schemes could be framed only in very rare circumstances. The Court further explained that such schemes are inherently long‑term arrangements and that a fund capable of covering the total liability must inevitably be accumulated gradually, year after year, rather than being created instantaneously.

With respect to the issue of excise duty, the Court agreed with the industrial court’s observation that the imposition of a higher duty had been a direct consequence of the excessive rise in the price of mill cloth. The Court reiterated that the higher duty had in fact been levied “to mop off those extra profits”. The Court added that, should the price of mill cloth decline, it would not be unlikely for the excise duty to be reduced accordingly. Nevertheless, the Court held that, although the obligation to pay excise duty or to contribute to the State insurance scheme might be relevant considerations, they did not have a material bearing on the formulation of the gratuity scheme.

Turning to the matter of bonus shares, the Court rejected the contention that the industrial court had placed undue importance on them. The Court stated that the industrial court’s observation was limited to noting that a large majority of the mills had issued bonus shares and paid generous dividends during both the war and the post‑war periods, and that this pattern served as an indicator of the prosperity enjoyed by the cotton textile industry in Ahmedabad. The Court found no basis for criticism of that observation. In the same connection, the Court remarked that the statutory ceiling imposed on agents’ commissions might, in due course, assist the mills to some extent in meeting their liability under the gratuity scheme.

The final argument against the validity of the scheme was based on the assumption that the industrial court had erred in working out the preliminary figures before framing the scheme. The Court explained that the industrial court had relied on information previously collected by the Association, compared that data with the statement prepared by the respondent, and then made a rough estimate of the industry’s liability under the scheme. The Court emphasized that the Association’s calculations had been based on total pay, which included dearness allowance, rather than on basic pay alone, and that this methodological choice had naturally produced considerably larger amounts. The scheme itself, however, was framed with reference to basic wages, a position that was not disputed. The Court also highlighted another material point: the Association’s calculations rested on the assumption that most employees would seek to retire as soon as they completed fifteen years of service. The Court found this assumption to be unwarranted, observing that it is common ground that employees typically enter the textile industry between the ages of eighteen and twenty, that the statutory age of superannuation is sixty, and that, on average, each employee works for thirty‑five to forty years. Consequently, the Court concluded that it would be unrealistic to base the scheme’s calculations on a retirement point of merely fifteen years of service.

The Court observed that it was unrealistic to calculate gratuity liability on the assumption that each employee would retire as soon as he completed fifteen years of service. Because better employment opportunities were lacking in Ahmedabad, it was considered likely that most workers would continue in their jobs until reaching the statutory age of superannuation. The data examined by the industrial court related to the years 1953, 1954 and 1955 and were presented in seven separate columns. From these columns the Court derived the percentages of persons who retired in each of the three years as 3.13 percent, 4.13 percent and 3.84 percent respectively. The industrial court noted that the largest number of retirements were voluntary and were accompanied by payment of gratuity. This occurred because an agreement between the Association and the respondent linked staff rationalisation with gratuity for surplus workers who were retrenched. The Court also found that some of the retired workmen had voluntarily resigned before completing one and a half years of service and therefore were not eligible for gratuity. Considering all material facts, the industrial court concluded that under a normal gratuity scheme, the proportion of employees entitled to gratuity would probably not exceed two percent of the labour force. If it is safely assumed that an employee ordinarily serves his employer for thirty‑five to forty years, the percentage calculated by the industrial court cannot be said to be erroneous. The scheme devised by the industrial court provided, inter alia, one month of basic wage for each completed year of service for periods before the Employees’ Provident Funds Act, 1952 came into force. For service after that date, the scheme provided half a month of basic wage for each completed year, subject to a ceiling of fifteen months’ basic wage payable to the employee or his heirs, executors or nominees. This provision, which departs from the earlier Bombay gratuity scheme, demonstrates that the industrial court duly accounted for the provisions of the Employees’ Provident Funds Act. Consequently, the Court was satisfied that the scheme framed by the industrial court did not suffer from any infirmities alleged by the appellants. The appeal therefore fails and is dismissed with costs.