Mysore Kirloskar Limited vs Workers Of The Mysore Kirloskar Limited

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 233 of 1960

Decision Date: 15 November 1961

Coram: Wanchoo

The case of Mysore Kirloskar Limited versus the Workers of the Mysore Kirloskar Limited was decided by the Supreme Court of India on 15 November 1961. The petition was filed by Mysore Kirloskar Limited and the respondents were the workers employed by that company. The matter was heard by a Bench appointed to consider issues arising under the Industrial Disputes Act, including bonus entitlement, income‑tax deduction methods, calculation of return on working capital, treatment of borrowed or deposited sums, and rehabilitation charges. The headnote of the judgment recorded several holdings that clarified the legal position on these points. It held that, following the decision in the Associated Companies Limited case, income‑tax must be computed on the balance remaining after the full statutory depreciation has been deducted from the gross profit. The Court also stated that the rate permitted for return on working capital may vary between two and four percent and that such determination lies within the discretion of the Tribunal, which the Supreme Court will ordinarily not disturb. Regarding the composition of working capital, the judgment declared that amounts which have been borrowed or held on deposit by the company, for which the company pays interest, cannot be included in the calculation of working capital for the purpose of granting a return. The Court explained that interest on borrowed funds used as working capital has already been accounted for as an expense in arriving at gross profit, and therefore the company cannot claim an additional return on the same borrowed sum. It further observed that a return on reserves employed as working capital may be granted only on monies that genuinely belong to the company and are employed as working capital. The judgment also addressed the issue of bonus claims where evidence of rehabilitation charges was not presented for a particular year. It held that the absence of such evidence for that year does not prevent the employer from introducing evidence of prior rehabilitation charges in later disputes concerning bonus for subsequent years. The decision referenced the earlier authority of Associated Cement Companies Ltd. v. Its Workmen. The case proceeded as a civil appeal numbered 233 of 1960, taken on special leave from an award dated 29 September 1958 issued by the Industrial Tribunal of Mysore in reference (I.T.) No. 21 of 1957. Counsel for the appellant included the Attorney‑General for India and two additional advocates, while counsel for the respondent was instructed by a separate advocate. The judgment was delivered on 15 November 1961 by Justice Wanchoo. The factual background noted a dispute between the employer and its workmen concerning the payment of bonus for the financial year 1954‑55, a dispute that had been referred by the Government of Mysore under the Industrial Disputes Act, 1947, to the tribunal for adjudication.

In this case, the Court noted that the appellant had raised many objections before the tribunal, but the Court did not need to consider those objections because the principle concerning profit bonus had already been settled by the Court in the Associated Cement Companies Ltd. v. Its Workmen case. The only matters that the learned Attorney‑General pressed on behalf of the appellant related to three specific calculations made by the tribunal: the amount of income‑tax that should be deducted, the rate and base for return on working capital, and the provision for rehabilitation. Accordingly, the Court limited its review to these three points. Regarding income‑tax, the tribunal had permitted a deduction of Rs 1.67 lacs. The appellant argued that this figure was wrong in light of the decision in the Associated Cement Companies case. The appellant’s records showed gross profits of Rs 9.46 lacs for the year in dispute and statutory depreciation of Rs 4.30 lacs. Subtracting the depreciation from the gross profit gave a taxable profit of Rs 5.16 lacs. The applicable tax rate for that year was seven annas in the rupee, which translates to a tax liability of Rs 2.25 lacs. The Court agreed with the appellant’s contention and held that the tribunal’s calculation must be corrected to reflect the higher tax amount. The second issue concerned the return on working capital. The tribunal had applied a rate of three per cent to the working‑capital base. The appellant maintained that the appropriate rate should be four per cent. The Court observed, as earlier noted in the Associated Cement Companies decision, that tribunals have historically allowed a return ranging from two to four per cent on working capital. While the tribunal’s three‑per‑cent rate fell within that range, recent practice had shifted toward a four‑per‑cent rate. The Court concluded that there was no sufficient reason to disturb the tribunal’s discretion on the rate, even though the prevailing trend favored a higher percentage. The final point dealt with the amount of working capital on which the return should be calculated. The appellant initially claimed that the working‑capital figure was Rs 43.85 lacs, but later amended the claim to Rs 36.70 lacs. The tribunal, however, determined the working‑capital amount to be only Rs 7.85 lacs. The tribunal’s reasoning was that the sum held in the depreciation reserve could not be treated as working capital, and therefore it excluded the entire depreciation reserve of Rs 36.24 lacs from the working‑capital calculation. The Court found this approach to be contrary to its earlier ruling in The Tata Oil Mills Co. case, which held that reserves actually used as working capital should be included for the purpose of granting a return.

In the case of Ltd. v. Its Workmen the Court observed that a return may be granted on reserves that are employed as working capital because, without such use, the undertaking would be compelled to borrow money and would consequently incur interest charges. The Court articulated this principle by stating that “a return is allowed on the reserves used as working capital on the ground that if these reserves are not used for this purpose, the concern would have to borrow money and pay interest on that. This being the basis on which a return on reserves used as working capital is allowed, there is no reason why, if there is in fact money available in the depreciation reserve and if that money is actually used during the year as working capital a return should not be allowed on such money also.” The same reasoning was reaffirmed by the Court in Petlad Turkey Red Dye Works Ltd. v. Dyes and Chemical Workers’ Union, where it was stressed that a balance‑sheet alone does not prove that a reserve has been utilized as working capital. The law, the Court held, demands that an employer must produce evidence—such as an affidavit or other documentary proof—to demonstrate the actual use of any portion of the reserve for working capital, and the employer must also give the workmen an opportunity to challenge that evidence through cross‑examination. Accordingly, the tribunal’s decision to exclude the entire amount present in the depreciation reserve on the ground that it was a depreciation reserve was deemed erroneous.

The matter then turned to the precise quantum of reserve that had actually been deployed as working capital during the relevant financial year. Evidence was adduced by Shri M. S. Vartak, who served as the Secretary of the appellant company. The tribunal accepted Shri Vartak’s testimony concerning the utilization of the reserve. According to his statement, the revised working‑capital figure of Rs 36.70 lacs represented the amount that had truly been employed as working capital in that year, and the appellant sought a return on this entire sum. While it could be accepted that Rs 36.70 lacs had indeed been used as working capital, the Court expressed the opinion that the appellant could not claim a return on the whole amount. This is because the cited figure includes Rs 14.56 lacs which either originated as borrowed funds or represented money held in deposit, on which the appellant was already paying interest. Since interest on that borrowed or deposited amount had already been accounted for as an expense in calculating gross profit, granting an additional return on the same sum would be impermissible. The Court reiterated the principle articulated in The Tata Oil Mills Co. case: a return on reserves used as working capital is justified only when the alternative would be to obtain borrowed money for the same purpose; where borrowed money is already being used, no further return may be awarded.

The Court observed that when borrowed money is employed as working capital, no additional return may be granted on that borrowed amount. A return on reserves used as working capital is permissible only when the money belongs to the company itself. Consequently, although the total sum of Rs 36.70 lacs was utilized as working capital in the year under consideration, Rs 14.56 lacs of that total represented borrowed funds on which interest had already been paid. Because interest on the borrowed portion had been accounted for as an expense in calculating gross profits, the appellant could not claim any further return on that portion. Therefore, the amount on which the appellant could claim a return as a prior charge was the difference between Rs 36.70 lacs and Rs 14.56 lacs, namely Rs 22.14 lacs. Applying the statutory rate of three per cent to Rs 22.14 lacs yielded a return of Rs 0.66 lacs. The Court directed that the tribunal’s earlier computation be corrected to reflect this revised figure of Rs 0.66 lacs. This correction ensured that the surplus calculation would not be inflated by an improper inclusion of interest on borrowed capital.

The Court noted that no evidence concerning rehabilitation had been produced during the present proceedings. It was suggested that the absence of such evidence might have resulted from the appellant’s expectation that its claim on other prior‑charge items would be sufficient to defeat any further bonus claim beyond the one month’s bonus already paid. The learned Attorney‑General proposed that the matter be remanded so that the appellant could adduce evidence on the rehabilitation issue. The Court observed that the dispute related to the fiscal year 1954‑55 and considered that a remand at this stage would be untimely. Nonetheless, the Court clarified that the failure to produce rehabilitation evidence in the present year would not bar the appellant from presenting such evidence in any future dispute concerning bonus for later years. In the present case, however, the Court found no basis for allowing any amount as a prior charge on account of rehabilitation. Accordingly, after incorporating the corrected return on working capital, the Court recomputed the surplus as follows: Gross profits of Rs 9.46 lacs, less national normal depreciation of Rs 3.32 lacs, leaving a balance of Rs 6.14 lacs; less income tax of Rs 2.25 lacs, leaving Rs 3.89 lacs; less return on paid‑up capital of Rs 1.33 lacs, leaving Rs 2.56 lacs; less return on working capital of Rs 0.66 lacs, leaving an available surplus of Rs 1.90 lacs. The Court estimated that one month’s wages for the workers amounted to approximately Rs 0.64 lacs. On this basis, the Court concluded that it would be equitable to award a bonus of one and a half months’ wages, which corresponded to roughly Rs 0.96 lacs. The Court further observed that the appellant would likely receive a rebate on this amount from the income‑tax department. Consequently, the Court held that the workmen were entitled to an additional half‑month’s bonus for the year. The appeal was therefore partly allowed, with the additional bonus being reduced from one month to a half month, and each party was ordered to bear its own costs.

The Court indicated that the petition before it was allowed, thereby granting the relief that had been sought through the appeal. In accordance with the reasoning set out in the preceding discussion, the appellate request was affirmed and the order to modify the bonus entitlement for the workmen was confirmed. By allowing the appeal, the Court gave effect to the conclusion that the workmen were entitled to an additional half‑month’s wages as bonus for the relevant year. The direction to reduce the additional bonus from a full month to half a month, as previously articulated, became operative as a result of the allowance of the appeal. Consequently, the parties were directed to bear their own costs, reflecting the Court’s determination that the appeal was allowed and that the relief sought was appropriate under the facts and calculations presented. The allowance of the appeal thus concluded the adjudicative process, establishing that the appellant’s contentions regarding the bonus calculation were accepted and that the final order reflected this allowance.