Workmen of the Hercules Insurance Co., Ltd. vs Hercules Insurance Co., Ltd., Calcutta

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

Court: supreme-court

Case Number: Civil Appeal No. 531 of 1959

Decision Date: 7 December 1960

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

In this case the Supreme Court of India recorded a petition filed by the workmen of the Hercules Insurance Company Limited against the same company, which was then situated in Calcutta. The judgment was delivered on 7 December 1960. The decision was authored by Justice P. B. Gajendragadkar, who was joined by Justices K. N. Wanchoo and K. C. Das Gupta. The parties were identified as the workmen of the Hercules Insurance Co., Ltd., the petitioner, and Hercules Insurance Co., Ltd., Calcutta, the respondent. The citation for the case appears as 1961 AIR 853 and 1961 SCR (2) 995, and the case is also referenced as R 1964 SC 1766 (14). The statutory provisions discussed include Section 10(1) of the Industrial Disputes Act, 1947 (14 of 1947), Section 31A(1)(c) of the Insurance Act, 1938 (IV of 1938), and the proviso (vii) attached to that section.

The headnote of the judgment explained that Section 31A(1)(c) of the Insurance Act imposes an absolute prohibition on the payment of bonus to employees engaged in the general insurance business, and that the exemption provided by proviso (vii) must be interpreted strictly within the limits set out in that proviso. The purpose of the proviso, according to the Court, was to keep the matter of bonus payment out of the jurisdiction of Industrial Tribunals and to leave it entirely to the discretion of the Central Government. Consequently, when workmen employed in the general insurance sector claimed a bonus and the Central Government referred the dispute to an Industrial Tribunal under Section 10(1) of the Industrial Disputes Act, 1947, the Tribunal, relying on a preliminary objection under Section 31A(1)(c) read together with proviso (vii), held that the reference was invalid. The Court affirmed that the Tribunal’s decision was correct and should be upheld, relying in part on the earlier decision in Central Bank of India v. Their Workmen, [1960] 1 SCR 200.

The case proceeded in civil appellate jurisdiction as Civil Appeal No. 531 of 1959, filed by special leave against an award dated 21 October 1957 rendered by the Central Government Industrial Tribunal at Dhanbad, in Reference No. 6 of 1957. The appellants were represented by counsel, while the respondent was defended by the Attorney‑General of India and counsel for the respondent. The short question of law that the Court needed to resolve was whether a dispute raised by employees of a general insurance company concerning the payment of a bonus for a particular year could be referred to an Industrial Tribunal under Section 10(1) of the Industrial Disputes Act, 1947. The factual backdrop was that on 11 April 1957 the Central Government had referred the workmen’s claim for bonuses for the years 1954 and 1955 to the Industrial Tribunal at Dhanbad, which had been constituted under Section 7A of the Industrial Disputes Act, and that this reference had been made under Section 10(1)(d) of the same Act.

Before the Tribunal the respondent raised a preliminary objection to the validity of the reference itself. The respondent argued that the payment of bonus by an insurance company was governed entirely by the provisions of the Insurance Act, 1938 (IV of 1938) and that those provisions did not permit a dispute concerning bonus to be referred to an Industrial Tribunal for adjudication. The respondent further maintained that because the Insurance Act exclusively regulated the conditions under which bonuses could be paid, the Industrial Disputes Act could not be invoked to resolve the same issue. The objection relied on sections 31A(1) and proviso (vii) of the Insurance Act. In addition the respondent contended that, in view of the restrictions imposed on general insurance companies by section 40C of the Insurance Act, the appellants’ claim for bonus could not be sustained. Section 40C, according to the respondent, placed a limitation on the amount of surplus that could be distributed as bonus, thereby rendering the claim untenable. The Tribunal accepted the preliminary objection, held that the reference was invalid, and also examined the plea under section 40C, observing that this plea was well founded. In its reasoning the Tribunal noted that the statutory limitation under section 40C directly affected the entitlement claimed by the workers. Consequently the Tribunal declined to entertain the reference and dismissed it. The appellants then approached this Court by special leave against the Tribunal’s order.

It was common ground that the respondent had paid the appellants a bonus equal to two months’ basic wages for each of the years 1954 and 1955. The Court observed that this payment had been made in accordance with the terms of the employment relationship for those years. The appellants subsequently sought an additional bonus of two months’ basic wages for each of the same years, relying on the reference to the Industrial Tribunal. They contended that if the respondent’s trading profits were calculated from its balance sheet and the Full Bench formula applied, the respondent would possess a substantial surplus from which the additional bonus could be paid. The appellants maintained that the additional bonus was not a discretionary gratuity but a legal right arising from the industrial legislation governing bonus entitlement. Because the Tribunal had dismissed the reference on the preliminary ground, it had not examined this argument concerning the availability of surplus. The preliminary objection was founded on the provisions of section 31A of the Insurance Act, hereinafter referred to as the Act, and therefore the Court turned to those provisions for analysis. Section 31A(1)(c) of the Act provides, inter alia, that notwithstanding anything to the contrary contained in the Indian Companies Act, 1913, or in the articles of association of the insurer, no insurer, after the expiry of one year from the commencement of the Insurance (Amendment) Act, 1950, shall be directed, managed, or employ any person whose remuneration, or any part thereof, takes the form of commission or bonus in respect of the general insurance business of the insurer. Viewed without the proviso, this provision makes the position clear: the respondent could not be required to employ the appellants in any capacity that would create a liability to pay bonus in respect of the general insurance business. The Court noted that the claim for bonus, if allowed, would constitute part of their remuneration and would thus be prohibited by section 31A(1)(c). The provision therefore barred the inclusion of such a bonus in their wages, unless an exception under proviso (vii) applied, an issue that the Court indicated it would consider subsequently.

The Court observed that, although a bonus under the Industrial Disputes Act was not classified as wages, the entitlement to claim such a bonus had been universally recognised by industrial tribunals in employment matters covered by that Act, and consequently the right to bonus had acquired the character of a legal right. The Court explained that a bonus could be claimed as a matter of right provided that, applying the Full Bench formula, it was shown that the employer possessed a sufficient surplus for the relevant year. Accordingly, the Court held that the appellants’ claim for bonus in the present case amounted to a claim arising out of the respondent’s general insurance business, and that, if allowed, the bonus would increase the remuneration payable to the appellants. In other words, for the purpose of section 31A(1)(c), any bonus awarded to the appellants would constitute part of their remuneration, which the provision expressly prohibited. The Court then turned to the limited exceptions to this general prohibition. It noted that proviso (vii) to section 31A(1)(c) provided that nothing in that subsection should be taken to forbid “the payment of bonus in any year on a uniform basis to all salaried employees or any class of them by way of additional remuneration, such bonus, in the case of any employee, not exceeding in amount the equivalent of his salary for a period which, in the opinion of the Central Government, is reasonable having regard to the circumstances of the case.” The Court explained that this proviso created a specific exception allowing insurance companies to pay bonuses to their employees, subject to two conditions. First, the bonus must not exceed an amount equal to the employee’s salary for a period deemed reasonable by the Central Government. Second, the Central Government must evaluate the circumstances of each insurer and decide whether a bonus may be paid. The Court stated that where an insurer’s financial position was satisfactory, the Central Government could permit the payment of bonus and would then prescribe the maximum amount that could be paid. The Court emphasized that no bonus payment could exceed the ceiling fixed by the Central Government, and that the decision on whether a bonus may be paid rested exclusively with that authority and not with any other body. Referring to the overall scheme of the Act, which was intended to supervise and regulate insurance companies, the Court concluded that the legislature had envisaged a general prohibition on bonus payments by insurers, allowing such payments only under the overriding control of the Central Government, which could set the permissible maximum. Consequently, if the Central Government decided that no bonus should be paid, no bonus could be paid by

The Court explained that once the Central Government decided that a bonus should be paid, it could also specify a maximum amount, and the insurer was prohibited from paying any bonus that exceeded that ceiling. According to the Court, this consequence followed directly from proviso (vii) to section 31A(1). The parties, however, contended that proviso (vii) merely gave the Central Government the power to set the maximum limit and did not remove the Government’s authority to refer a bonus dispute to an Industrial Tribunal under section 10 of the Industrial Disputes Act. Counsel for the appellants argued, relying on submissions of Mr Mazumdar, that in certain situations the Central Government might find the insurer’s financial position sufficient to warrant a bonus, yet consider that the exact amount should be determined by an Industrial Tribunal. In such circumstances, the appellants maintained, the Central Government ought to be able to make a reference to the Tribunal. They further argued that even when the Central Government decided that a bonus within the prescribed maximum should be paid, an insurer might refuse to comply with that decision; the only effective remedy, according to the appellants, would be to refer the matter to adjudication so that the employees could obtain a enforceable award. Consequently, the appellants urged that proviso (vii) should not be interpreted as barring the Central Government from exercising the power granted by section 10(1) of the Industrial Disputes Act. The Court was not persuaded by this line of reasoning. It held that the policy underlying the relevant clause of proviso (vii) was unmistakably clear: the legislature intended that the payment of bonuses by insurers be governed exclusively by the conditions set out in that clause, thereby excluding the jurisdiction of Industrial Tribunals and placing the entire discretion in the hands of the Central Government. Regarding the argument that an insurer might refuse to obey a Government directive issued under proviso (vii), the Court observed that such a refusal was unlikely, although it was theoretically possible. In that unlikely event, the Court noted a lacuna in the statute and suggested that the legislature might need to provide a mechanism to make the Government’s decision binding and final. Considering the absolute prohibition contained in section 31A(1)(c), the Court found it difficult to accept any view that the payment of bonuses to insurance‑company employees was not fully conditioned by proviso (vii). Since, without that proviso, insurance employees could not claim any bonus, the Court concluded that the effect of the provision was to confine the right to a bonus within the limits prescribed by the Central Government.

The Court held that the Tribunal was correct in concluding that the reference made by the Central Government was invalid. The Court observed that the Central Government’s view that it could make such a reference was of little relevance when the scope and effect of the relevant provisions of the Insurance Act were examined. The issue, according to the Court, had to be decided by applying a fair construction to the statutory provision, and that construction, as the Court indicated, clearly supported the Tribunal’s position. The Court also noted that the Tribunal’s award cited several decisions of Industrial Tribunals that had adopted the same view, although a small number of decisions had upheld the validity of the reference without properly considering the effect of section 31A(1). In this connection, the Court referred to its own earlier decision in The Central Bank of India v. Their Workmen (1), where a similar question had arisen under section 10 of the Banking Companies Act, 1949, as it stood before the 1956 amendment. In that case, Justice S. K. Das, speaking for the Court, explained that section 10 prohibited the grant of an industrial bonus because such a bonus constituted remuneration in the form of a share of the profits of a banking company. He further observed that a bonus, whether described as contingent or supplementary, represents labour’s share of profits and therefore falls within the mischief of section 10. The Court likened section 10 of the Banking Companies Act to section 31A of the Insurance Act, and consequently affirmed that its own view on the effect of section 31A(1)(c) was consistent with the earlier decision.

The Court reiterated its earlier finding that the payment of a bonus constitutes an additional form of remuneration to employees of insurance companies, specifically relating to the general insurance business of the insurer. Because the Tribunal was deemed correct in upholding the preliminary objection, the Court declined to examine the alternative argument that had been raised by the respondent under section 40C of the Act, an argument that the Tribunal had already considered and accepted. Accordingly, the Court concluded that the appeal failed and ordered its dismissal. No costs were awarded to either party, and the appeal was formally dismissed.