Voltas Limited vs Its Workmen

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

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 153 and 154 of 1960

Decision Date: 9 December 1960

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

In the matter of Voltas Limited versus its Workmen, the Supreme Court delivered its judgment on the ninth day of December 1960. The opinion was authored by Justice K. N. Wanchoo, who was joined on the bench by Justices P. B. Gajendragadkar and K. C. Das Gupta. The petition was filed by Voltas Limited, hereinafter referred to as the appellant, and the respondents were the workmen of the company. The judgment is reported in the 1961 volume of the All India Reporter at page 941 and also appears in the 1961 Supreme Court Reports, volume three, page 167, with subsequent citations in later reports. The subject matter of the dispute concerned the applicability of the Industrial Dispute Act provisions relating to bonus, the deductibility of contributions to a political fund as an expense, the treatment of certain amounts as extraneous income, and the entitlement of salesmen and apprentices to bonus under the legislation.

The court held that although the company's rules permitted the employer to make donations to a political fund, such contributions could not be treated as a proper expense when calculating the surplus available for bonus under the Full‑Bench formula. It further held that profits derived from ordinary business transactions and commissions earned on dealings directly with foreign manufacturers, where the workmen had performed services that generated the business, could not be classified as extraneous income. The court also concluded that salesmen who received commissions already participated fairly in the company's profits and therefore could not be granted an additional bonus from the surplus, while apprentices, whose contribution to profits was minimal, were not entitled to any bonus. The rulings in Associated Cement Companies Ltd. v. Its Workmen (1959) S.C.R. 925 and The Tata Oil Mills Co. Ltd. v. Its Workmen and Others (1960) 1 S.C.R. 1 were applied. The civil appeals numbered 153 and 154 of 1960 were taken on special leave from the award dated 5 February 1959 of the Industrial Tribunal, Bombay, in reference I.T. No. 212 of 1958. Counsel for the appellant in appeal 153 and respondent in appeal 154 included S. D. Vimadalal, S. N. Andley and J. B. Dadachanji. Representing the respondents in appeal 153 and the appellants in appeal 154 were the Attorney‑General for India, M. C. Setalvad, and Janardan Sharma. The judgment commenced with Justice Wanchoo observing that the sole question presented for determination was the quantum of bonus payable to the workmen for the financial year 1956‑57, a dispute that had been referred to the Bombay industrial tribunal, where the appellant had already paid bonus equivalent to four and a half months’ basic wages for that year.

In the original dispute, the employer had paid a bonus equivalent to four and a half months’ basic wages for the financial year in question. The workmen, however, contended that the bonus should be calculated at six months’ basic wages, subject to a minimum payment of Rs 250 per employee. The industrial tribunal examined the financial statements, performed the necessary calculations, and concluded that, when the surplus was determined using the Full‑Bench formula, the appropriate bonus amounted to five months’ basic salary. Consequently, the tribunal ordered the employer to pay the difference between this five‑month amount and the four‑and‑a‑half‑month sum that had already been disbursed. On appeal, the employer argued that the tribunal should not have required any additional payment beyond what had already been made, while the workmen maintained that they were entitled to the full six‑month bonus. The Supreme Court had previously laid down the principles for calculating bonuses in the case of Associated Cement Companies Ltd. v. Their Workmen. The sole issue for the Court’s consideration therefore was whether the tribunal’s computation adhered to those established principles. This required an examination of the various submissions made by the parties, each seeking to demonstrate that the tribunal’s methodology deviated in some respect from the precedent set by the Associated Cement Companies decision.

The appellant first urged that the tribunal erred by refusing to treat a contribution of one lakh rupees to a political fund as a legitimate expense. The argument was that such a contribution was permissible under the company’s rules and therefore should have been deducted when determining gross profits, rather than being added back by the tribunal. The Court held that the tribunal was correctly entitled to disallow this amount as an expense. The contribution, in effect, resembled a charitable donation made by the employer; although the donation might be consistent with the company’s articles of association, it was not an expenditure incurred for the ordinary business operations of the firm. Moreover, while the donation in the present case was modest, the Court noted that in other circumstances permissible donations could be disproportionately large, thereby diminishing the surplus from which low‑paid workmen are entitled to a bonus. Accordingly, even if the law or the company’s regulations allowed such political contributions, they could not be treated as a deductible expense for the purpose of calculating the available surplus under the Full‑Bench formula. On this ground, the Court affirmed the tribunal’s decision and dismissed the appellant’s contention.

The second contention raised by the appellant concerned the deduction of amounts that the tribunal had classified as “extraneous income.” The Court observed that this issue had previously been examined in the case of The Tata Oil Mills Co. Ltd. v. Its Workmen and Others. The appellant sought to deduct certain sums on the basis that they did not constitute ordinary income of the year under review. The Court therefore indicated that the correctness of the appellant’s claim would be assessed in light of the principles articulated in that earlier decision, and that the tribunal’s treatment of such items would be scrutinised accordingly.

In examining whether the appellant’s claim for deducting certain amounts as extraneous income should be accepted, the Court first referred to the principle laid down in the earlier decision involving The Tata Oil Mills Co. Ltd. v. Ite Workmen and Others. The appellant’s counsel presented four separate items for consideration. The first item concerned a sum of Rs 3.47 lacs, which the appellant argued was not part of the income of the year and therefore should have been excluded from the calculation of gross profits. The record, however, did not clearly establish the nature of this sum, and the appellant’s counsel, who had appeared before the tribunal, conceded that the amount could not be deducted from profits. On the basis of that concession, the Court declined to allow the deduction of Rs 3.47 lacs as extraneous income.

The second item involved a sum of Rs 1.76 lacs representing a rebate earned on insurance by the appellant in its capacity as a holding principal agency for other companies. The Court observed that this rebate formed part of the appellant’s insurance business and was handled entirely by its insurance department. Consequently, the tribunal had correctly refused to treat the rebate as extraneous income, and the Court affirmed that position.

The third item related to a sum of Rs 3.33 lacs described as a gain on foreign‑exchange transactions. The Court noted that such transactions were carried out in the ordinary course of the appellant’s business. As the tribunal had correctly pointed out, a loss on these transactions would have reduced gross profit, while a profit, as in this case, had to be taken into account because it arose from normal business activities. The Court therefore upheld the tribunal’s decision not to allow the Rs 3.33 lacs as extraneous income.

The fourth and final item was a sum of Rs 9.78 lacs received as commission on transactions conducted by government agencies and other organisations directly with manufacturers abroad. The appellant acted as the sole Indian agent for certain foreign manufacturers and earned commission even when the transactions were made directly with those manufacturers. The tribunal held that, despite the direct nature of the transactions, the respondents were entitled to argue that the commission should be included in gross profit because the respondents had serviced the goods and performed other work that brought the business to the appellant. The Court found that there was no direct evidence indicating whether the specific goods on which the commission was earned had also been serviced free of charge, as was the practice for other goods sold by the appellant in India. When questioned, counsel for both sides could not agree on the exact position regarding free service of those goods. The Court concluded that if those goods were indeed serviced free of charge or on the same terms as other goods sold, the commission should be taken into account. However, because no definitive evidence was presented, the Court could not prescribe a rule that such commission must always be included. For the present year, the appellant had failed to satisfy the tribunal that the commission was extraneous income, and therefore the Court saw no reason to disturb the tribunal’s order to include the Rs 9.78 lacs in the calculation of gross profit.

In this case the Court observed that the respondents were entitled to ask that the income derived from commission on goods sold by the appellant in India be taken into account, provided those goods were serviced in the same manner as other goods sold by the appellant; however, because there was no definite evidence showing that the particular goods on which the commission was earned received free or charged service, the Court could not decree that such commission must always be considered. Nevertheless, for the specific year under dispute the Court held that the amount of commission had to be taken into account because the appellant had failed to present proper evidence that the goods had been serviced, and a claim of this character must always be proved to the satisfaction of the tribunal. Consequently, the Court saw no reason to interfere with that part of the tribunal’s order. The Court then turned to two further points raised by the appellant concerning interest on capital and on working capital. The tribunal had allowed the usual six per cent interest on capital and four per cent on working capital, while the appellant sought a higher rate in both instances. The Court agreed with the tribunal that there was no special justification for granting a higher rate of return to the appellant. The Court also considered the principal objection raised by the respondents, namely a sum of Rs 4.4 lacs allowed by the tribunal as income‑tax for the previous year. It appeared that a discrepancy existed between the appellant’s accounting year and the financial year, and that in the year in question the tax rate had increased, resulting in an extra payment that had to be made in the current year; under these special circumstances the tribunal had allowed the amount, and the Court found no reason to disagree. The respondents further contended that the tribunal had permitted a sum of Rs 4.76 lacs as a prior charge for provision for gratuity, which the Court held to be incorrect, referring to the Associated Cement Companies case that explains no fresh items of prior charge may be added to the Full‑Bench formula, although provisions for gratuity and debenture redemption may be considered at the time of distributing surplus. This resolved the objections relating to the accounts. Finally, the respondents raised two additional points concerning salesmen and apprentices. The tribunal had excluded these categories from the bonus award, and the respondents argued that they should be included. The Court found the tribunal’s decision correct. Regarding salesmen, the tribunal had examined decisions of other tribunals and concluded that salesmen who receive commission are not treated on par with other workmen under the Industrial Disputes Act; their commission averages about Rs 1,000 per month, providing adequate total emoluments, and they already share in the appellant’s profits, so there is no justification for an additional bonus. As for apprentices, the tribunal determined that a definite term of contract excludes them from bonus entitlement; apprentices merely learn their jobs, the appellant incurs training expenses, and they contribute little to profits.

In regard to the question of bonus, the Court observed that the clerical duties performed by salesmen are minimal and merely incidental to their primary function of selling. Consequently, the tribunal, relying on the decision reported in (1) [1959] S.C.R. 925, held that salesmen do not fall within the definition of “workmen” under the Industrial Disputes Act. The tribunal further noted that the average commission earned by a salesman is roughly Rs 1,000 per month, which makes their overall remuneration satisfactory. Moreover, because salesmen receive commissions that already constitute a fair share of the appellant’s profits, the tribunal found no reasonable basis for granting them an additional bonus from any surplus profit that may exist. Turning to the apprentices, the tribunal concluded that a specific term of contract exists between the apprentices and the appellant, expressly excluding the apprentices from any bonus entitlement. The appellant also pointed out that apprentices are engaged only in learning their trades, that the employer must bear the costs of their training, and that apprentices contribute little, if any, to the appellant’s profit margin. Accordingly, the tribunal’s view that apprentices are not eligible for bonus was affirmed. The Court then proceeded to calculate the surplus available for bonus distribution, applying the method laid down in the Associated Cement Companies case (1). The gross profit determined by the tribunal was Rs 109.97 lacs. After deducting depreciation of Rs 3.28 lacs, the balance stood at Rs 106.69 lacs. Income tax at a rate of 51.15 percent reduced this to Rs 54.20 lacs, leaving a balance of Rs 52.49 lacs. Further deductions for dividend tax, wealth tax and similar levies amounted to Rs 7.50 lacs, resulting in a balance of Rs 44.99 lacs. A return on capital at six per cent, amounting to Rs 13.20 lacs, was then subtracted, leaving Rs 31.79 lacs. After deducting a return on working capital at four per cent, which is Rs 1.66 lacs, the final available surplus was Rs 30.13 lacs. From this surplus, the tribunal allotted a bonus equivalent to five months’ basic wages to the respondents, which calculated to Rs 16.80 lacs. The Court held that this award was justified and that it would be inappropriate to increase the bonus beyond what the tribunal had granted. The reasoning included the appellant’s obligation to establish a gratuity fund, especially since the appellant is a new concern that assumed the employees of a predecessor and therefore bears a greater liability for gratuity. Accordingly, the Court affirmed that the tribunal’s award of five months’ basic wages as bonus for the disputed year should remain in force. Both appeals were dismissed, no costs were awarded, and the appeals were terminated.