Bridge and Roof Co. (India) Ltd. vs Union Of India

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 11 September 1962

Coram: B.P. Sinha, J.C. Shah, K. Subba Rao, K.N. Wanchoo, N. Rajgopala Ayyangar, S.J. Imam

The writ petition filed under article 32 of the Constitution raised a concise question for determination. The petition sought to ascertain whether a production bonus formed part of the term “basic wages” as defined in section 2(b) of the Employees’ Provident Funds Act, No 19 of 1952, which the judgment refers to as the Act. Alongside this petition, writ petition 64 of 1962, titled The Jay Engineering Works Limited v. The Union of India, was also considered. In that accompanying petition a further issue emerged concerning the character of the production‑bonus arrangement operating in that particular company. The Court allowed the parties additional time to file supplemental affidavits addressing that issue. Accordingly, the observations made in the present case concerning reduction bonuses in a general sense were not intended to be automatically applied to the specific scheme that was the subject of writ petition 64 of 1962.

The factual backdrop required for the present deliberation can be summarised as follows. Petitioner No 1, referred to in the judgment as “the Company”, was a public limited enterprise engaged in the manufacture of engineering goods, structural fabrication and rolling stock, and the provisions of the Employees’ Provident Funds Act were applicable to it. The Company operated a production‑bonus programme that provided payments in addition to those wages fixed by the major engineering award of 1958, which had been published in the Calcutta Gazette on 5 November 1958. That award governed seventy‑four major engineering concerns within the region, including the Company, and remained in force at the time of the hearing. The award stipulated the payment of basic wages together with a dearness allowance on a time‑rate basis for the entire major engineering industry. Beyond the basic wages and dearness allowance stipulated by the award, the Company maintained two distinct production‑bonus schemes: one applicable to hourly‑rated workers and another applicable to the remaining staff. While the judgment does not elaborate the complete details of each scheme, it notes that the essential feature of both schemes was that a bonus became payable only when the company’s output reached a prescribed level. Specifically, a bonus was payable when annual output attained five thousand tons, and no bonus was payable if output fell below that figure. The scheme for hourly‑rated workers was amended effective 1 January 1962. The amendment altered the basis of payment to a quarterly assessment, whereby a bonus accrued when the output for a quarter reached one thousand three hundred tons, with no bonus payable for lower quarterly output. For the other categories of employees, the original scheme continued to operate, although the Company reported that negotiations were underway, presumably to align the older scheme with the revised quarterly arrangement introduced for hourly‑rated workers.

The Court noted that negotiations were presently underway for revising the older bonus scheme, apparently with a view to bring that scheme into conformity with the newer scheme that had been introduced for hourly‑rated workers effective from 1 January 1962. The Court then turned to the statutory provisions of the Employees’ Provident Funds Act that were relevant to the dispute. Section 5 of the Act authorises the establishment of an Employees’ Provident Fund Scheme for the industries listed in Schedule I, and consequently a Provident Fund Scheme was framed in September 1952, known as the Employees’ Provident Funds Scheme, 1952, which applies to the company in question. Section 6 of the Act mandates contributions by both employer and employee to the provident fund at the rate of six and one‑quarter per cent of the employee’s basic wages, dearness allowance and retaining allowance, if any, that are payable at the time. The provision also contemplates certain increased contributions, but those are not material to the present matter. For the purpose of computing the contribution, “basic wages” are defined in section 2(b) of the Act as all emoluments earned by an employee while on duty or on leave with wages in accordance with the employment contract and paid or payable in cash, expressly excluding: (i) the cash value of any food concession; (ii) any dearness allowance, house‑rent allowance, overtime allowance, bonus, commission or any similar allowance; and (iii) any presents made by the employer. The Court further referred to section 19A, which empowers the Central Government to remove difficulties that arise in giving effect to the Act, including doubts as to whether the total quantum of benefits payable to an employee has been reduced by the employer. Under this provision the Government may issue an order, not inconsistent with the Act, that is final and binding. The Court observed that a difficulty arose concerning whether the production bonus should be taken into account in computing the six and one‑quarter per cent contribution under section 6. Accordingly, on 7 March 1962 the Central Government issued a directive stating that it had re‑examined the question of whether the production bonus is liable to deduction under the Act, and concluded that the production bonus, whether payable at a flat rate or linked to the quantum of work, satisfied the definition of “basic wages”.

In this case, the Court noted that the Central Government had earlier held that the term “basic wages” under section 2(b) of the Employees’ Provident Funds Act included the production bonus. Accordingly, the Government directed the Company to recover Provident Fund contributions on the production bonus without further delay, and to pay arrears of such contributions effective from 1 January 1960, which were to be deposited in the statutory fund immediately. The Company filed the present petition in April 1962 challenging that Government decision, which had been communicated to it in March 1962. The Company’s principal argument was that the expression “basic wages” in section 2(b) was intended to exclude any bonus unless the word was qualified. Accordingly, the Company contended that profit bonus, production bonus, attendance bonus, festival bonus and any other bonus paid either as an implied condition of service or as a customary practice were all outside the scope of “basic wages.” The Company further pointed out that section 6 of the Act prescribes Provident Fund contributions only on basic wages, dearness allowance and, if any, retaining allowance, and that the rate of contribution must be applied to these three heads only, not to bonuses which are not mentioned in section 6. The Company urged that when the Act was enacted in 1952 the legislature was aware of the various types of bonuses paid across industries, and that by expressly excluding “bonus” without qualification from the definition of “basic wages,” Parliament did not intend for the Central Government to later treat production bonus as part of basic wages for the purpose of contributions under section 6. In addition, the Company argued that interpreting “bonus” in section 2(b) to exclude production bonus would not violate Article 14 of the Constitution, because production bonus is not a universal feature of all industrial establishments but is practiced only in certain sectors; therefore, including it in basic wages would cause some establishments to contribute to the Provident Fund at a substantially higher rate than others that do not pay such a bonus. The petition was opposed by counsel for the Union of India and by representatives of the two trade unions existing in the Company. The respondents argued that wages represent the price of labour arising from the employment contract, and that the term “basic wages” merely separates a portion of total wages for specific statutory purposes. Consequently, because production bonus is an incentive wage earned while the employee is on duty in accordance with the terms of the contract, the respondents maintained that it falls within the definition of “basic wages” as “all emoluments which are earned by an employee while on duty or on leave with wages in accordance with the terms of the contract of employment and which …”.

In the matter before the Court, it was contended that a production bonus, being an incentive wage, fell within the phrase “all emoluments” that formed part of the definition of “basic wages”. The argument rested on the premise that a production bonus was earned by an employee while performing duties, in accordance with the terms of the contract of employment, and therefore should be treated as an emolument payable in cash. Further, it was submitted that the word “bonus” appearing in clause (ii) of the exceptions to section 2(b) referred only to profit bonus. The submission relied upon the historical understanding that, prior to 1952, the term “bonus” without any qualification was understood in industrial adjudications to signify profit bonus alone. Consequently, the counsel argued, when clause (ii) excluded “bonus” without qualification, the legislature intended to exclude only profit bonus and not any other form of bonus such as a production bonus. The principal issue that the Court had to resolve was therefore which of the two rival contentions aligned with the language of section 2(b). The Court noted that “basic wages”, as defined in the statute, meant all emoluments earned by an employee while on duty or on leave, in accordance with the contract of employment, and which were paid or payable in cash. In the absence of any exceptions, the Court observed, there would be no difficulty in holding that a production bonus, irrespective of its character, would be captured within the definition. However, the difficulty emerged because the definition itself listed three specific clauses of exclusion. The first clause excluded the cash value of any food concession, while the third clause excluded presents made by the employer. The Court pointed out that the inclusion of presents as an exclusion demonstrated a deliberate intention to leave out items that would not ordinarily be earned under the contract of employment, even though the definition spoke of “all emoluments” earned under that contract. In a similar vein, although the definition required that emoluments be paid or payable in cash, the first clause excluded the cash value of a food concession, which by nature was not payable in cash. The Court therefore concluded that the three exceptions did not follow a single logical pattern that would be consistent with the main definition. Turning to clause (ii), the Court observed that this clause excluded dearness allowance, house‑rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work performed therein. This exclusion indicated that, even though the main part of the definition encompassed all emoluments earned according to the contract, certain payments that were, in fact, the price of labour and earned under the contract were deliberately left out of the definition of “basic wages”. The Court affirmed that the exceptions listed in clause (ii) indeed referred to payments earned by an employee in accordance with his contract, highlighting the legislative intent to carve out particular components from the concept of basic wages.

In this matter the Court observed that clause (ii) dealt with payments that were indeed earned by an employee in accordance with the terms of his contract of employment. Both parties’ counsel acknowledged before the Court that it was difficult to discern a single rationale that could explain the exceptions enumerated in the three clauses. Nevertheless, the Court noted that clause (ii) clearly demonstrated that, despite being earned under the employment contract, certain earnings were deliberately omitted from the definition of “basic wages.” The provision of section 6 subsequently reinstated dearness allowance for the purpose of calculating contributions, expressly stating that the contribution rate of six and one‑fourth per cent was to be applied to basic wages, dearness allowance and, where applicable, retaining allowance. Consequently, the Court endeavoured to identify the principle underlying the exclusion in clause (ii) as well as the inclusion of dearness and retaining allowances under section 6. It concluded that the underlying principle was that amounts payable across all concerns and earned by every permanent employee were to be incorporated for contribution purposes, whereas amounts that were not universally payable or not universally earned were to be excluded. The Court illustrated this principle by explaining that dearness allowance is generally payable in every concern, either as a separate addition to basic wages or as part of consolidated wages where a distinct dearness allowance does not exist. Similarly, retaining allowance is paid to all permanent employees in seasonal enterprises such as sugar factories, and therefore it falls within the ambit of section 6. By contrast, house‑rent allowance is not paid by many concerns and, even where it is paid, it may be granted only to certain employees; the prevailing view treats house‑rent allowance as part of basic wages, dearness allowance or consolidated wages. Since it is not universally payable, the Court held that it was removed from the definition of “basic wages,” despite being contractually based. Likewise, overtime allowance, although commonly practiced, is not earned by every employee and thus was excluded from “basic wages.” The same reasoning applied to commission and other similar allowances, which are not necessarily present in every concern nor earned by every employee, even though, when they exist, they are earned under the terms of the employment contract.

It was observed that the rationale for the exclusion mentioned in clause (ii) of the exceptions listed in section 2(b) is that any element which is not universally earned by every concern or by every employee of a concern is to be left out of the definition of basic wages. Within that framework the dearness allowance was initially treated as an exclusion under clause (ii). However, that treatment was later amended by the inclusion of dearness allowance in section 6 for the purpose of contributions. Consequently, although dearness allowance remains an exception in the definition of “basic wages”, it is now counted for contribution purposes under section 6, and the true exceptions in clause (ii) are the remaining items other than dearness allowance, which has been brought within the contribution base by section 6.

The discussion then moved to the issue of bonus, which is also listed as an exception in clause (ii). The term “bonus” appears in that clause without any qualifying adjective. From this unqualified usage, it was deemed reasonable to infer that the legislature intended the word to encompass every type of bonus that might be payable to an employee. The respondents did not dispute that, prior to the enactment of the 1952 Act, several forms of bonus other than profit bonus were already in existence and well known. For instance, the Coal Mines Provident Fund and Bonus Schemes Act, No. 46 of 1948, provided for an attendance‑based bonus payable to workers for any period of service. In addition to the attendance bonus, four further categories of bonus had been developed under industrial law before 1952 and were practiced by various concerns across different industries.

The first of these was the production bonus, which had been awarded by certain concerns long before 1952, as noted in the decision of Messrs. Titaghur Paper Mills Co. Limited v. Its Workmen ([1959] Supp. 2 SCC 1012). The second was the festival or puja bonus, which operated as an implied term of employment well before 1952, as reflected in Messrs. Ispahani Limited Calcutta v. Ispahani Employees’ Union. The third was the customary bonus associated with particular festivals, illustrated by The Graham Trading Co. (India) Limited v. Its Workmen. The fourth and final type was the profit bonus, whose underlying principles and method of quantification had been shaped by the Labour Appellate Tribunal in Millowners’ Association v. The Rashtriya Mill Mazdoor Sangh, Bombay ([1950] L.L.J. 1247).

Given this historical background, it was concluded that the legislature could not have been unaware of the existence of these diverse bonus schemes when it enacted the 1952 Act. Accordingly, unless the respondents’ argument—that an unqualified reference to “bonus” is meant to signify only profit bonus—proved persuasive, the term “bonus” in clause (ii) of the exception in section 2(b) must be interpreted to cover every form of bonus that was prevalent in industrial employment before 1952. The respondents’ contention, therefore, was that the unqualified term should be limited to profit bonus, a position that required careful consideration in light of the legislative history and the variety of bonus types already in practice.

In considering the argument that, prior to 1952, the term “bonus” used in industrial law without any qualifying word signified only a profit bonus, the Court found that contention required careful examination but was not convincingly supported. It observed that, although earlier judgments concerning profit bonus did not prepend the word “profit” to “bonus,” the customary practice was to limit the reference by stating the year for which the bonus was claimed. The Court cited the decision in Millowners’ Association Bombay v. The Rashtriya Mill Mazdoor Sangh [(1950) L.L.J. 1247] where paragraph sixteen at page 1252 records a reference described as “Re: Bonus for the year 1947.” This illustration demonstrated that, when the dispute concerned a profit bonus, the term “bonus” was effectively qualified by the specific year, even though the word “profit” itself was omitted. Consequently, the Court concluded that it would be inaccurate to assert that, in pre‑1952 industrial adjudications, the unqualified word “bonus” exclusively denoted a profit bonus. Rather, the inclusion of the year after the word “bonus” made clear that the reference was to a profit bonus, and the absence of a qualifying adjective alone did not restrict the meaning to profit bonus alone.

The Court therefore rejected the proposition that an unqualified mention of “bonus” must be interpreted as referring solely to profit bonus. It held that, in the industrial context before 1952, the plain word “bonus” without any preceding qualifier or subsequent limitation was understood to encompass all varieties of bonus recognized by industrial law, including attendance bonuses, festival or “puja” bonuses, and any other customary bonuses. The rationale for excluding all such bonuses from the definition of “basic wages” was the same as that applied to the exclusion of house‑rent allowance, overtime allowance, commission, and similar payments—namely, that bonus payments were not universally made across all industrial undertakings or to every employee within a concern, as illustrated by the selective nature of attendance bonuses. Hence, the Court affirmed that the legislative intent in using the unqualified term “bonus” in clause (ii) of section 2(b) was to refer to the entire spectrum of bonuses existing in industry before the enactment of the Act.

In this case the Court explained that the reason bonus of every type was omitted from the definition of “basic wages” was to achieve uniformity in the application of the provident‑fund scheme across all industrial establishments covered by the Act. The legislation is a nationwide law that applies to every industry listed in Schedule I and to every concern engaged in those industries. The purpose of the exclusion, the Court said, was to ensure that the liability to contribute to the provident fund would be the same for all industrial concerns falling within the Act. Consequently it was necessary to carve out from the broad definition of “basic wages” appearing in the introductory provision any payments that would not be common to every industry or to every employee within the same concern. The Court observed that, of the various components, only dearness allowance listed in clause (ii) was initially treated as an exception, but that anomaly was later corrected by expressly incorporating dearness allowance in section 6 of the Act. Accordingly the Court held that there is no justification for interpreting the word “bonus” in clause (ii) without any qualifying adjective as anything other than an inclusion of all forms of bonus that were recognised by industrial adjudication before 1952 and that therefore must have been within the contemplation of the legislature. The Court then turned to the respondents’ argument that wages represent the price for labour and arise from contract, and that every amount constituting such a price and arising from contract was intended to be captured by the definition of “basic wages” in section 2(b), while only those items that constitute a reward for labour not derived from the employment contract—such as payments based on profit, attendance or other considerations—were to be excluded. The Court noted that, if there were no exceptions to the principal clause of the definition in section 2(b), any cash amount payable as the price for labour and arising from contract would automatically fall within “basic wages”, whereas a reward for labour that did not arise from contract might be left out. However, the primary definition is qualified by the exceptions in clause (ii), and those exceptions clearly demonstrate that they also encompass amounts that represent the price for labour. For this reason the Court could not accept the respondents’ contention that every amount that is the price for labour and arises from contract must be included in “basic wages”, thereby bringing a production bonus—an incentive wage—within the definition. The Court further referred to its earlier consideration of production bonus in the matter of Messrs Titaghur Paper Mills Co. Ltd. v. Its Workmen, where it was observed that the payment of production bonus depends on the level of production, is paid in addition to ordinary wages, functions as an incentive for higher output, and therefore constitutes an incentive wage.

The Court observed that the straight piece‑rate arrangement represents the most elementary type of incentive‑wage plan. Under a straight piece‑rate plan, a worker is paid for each individual piece that he or she produces, there is no prescribed minimum output, and the employee may choose to produce as much or as little as desired. The remuneration in such a system is directly linked to the number of pieces manufactured. Nevertheless, the Court held that the total amount paid for all pieces produced under this arrangement constitutes “basic wages” within the meaning of section 2(b) of the Employees’ Provident Funds Act, even though the arrangement is structured as an incentive‑wage plan.

The Court then explained that the straight piece‑rate method becomes impracticable when the finished product emerges from the cooperative effort of a large number of workers, each contributing only a small part to the final output. In such circumstances, a production‑bonus system based on tonnage or another measurable standard is introduced. The essential feature of this type of plan is the establishment of a base or standard level of production. Payment up to that base is regarded as basic wages, while any production that exceeds the base attracts an additional payment. This additional payment is over and above the basic wages and is regarded as an incentive wage, commonly referred to as a production bonus.

The Court described the typical characteristics of a production‑bonus scheme. The scheme guarantees a time‑wage that corresponds to the standard level of performance, and it also provides workers with a share of the savings that arise from superior performance. In the Company that was before the Court, the scheme in operation was of this typical kind: basic wages, in the form of time wages, were paid up to the established base or standard, and any output beyond that threshold attracted extra payments. Those extra payments were identified by the Court as incentive wages and were also termed production bonuses.

The Court emphasized that under such schemes workers are not compelled to produce beyond the prescribed base or standard. Their actual performance may fall short of the standard, but the minimum basic wages must still be paid irrespective of whether the standard is attained. Only when workers exceed the base or standard does the remuneration earned beyond that point become a production bonus or incentive wage, not basic wages.

According to the Court, this production bonus falls outside the definition of “basic wages” in section 2(b) of the Act because the provision expressly excludes all kinds of bonuses from that definition. The Court therefore concluded that the production bonus applicable in the present case is a typical bonus that is payable only after the base or standard has been reached and, consequently, cannot be included in the definition of basic wages. The Court further held that the Central Government’s decision, apparently made under section 19A of the Act, to treat such a bonus as part of basic wages was erroneous. As a result, the Court found it unnecessary to examine the effect of Article 14 in the present matter.

In addressing the application of Article 14 to the matter before it, the Court concluded that the petition should be granted. The Court determined that the production bonus, which was regularly paid by the Company and represented a typical form of such bonus, was to be excluded from the definition of “basic wages” under the relevant statutory provision. Accordingly, the Court held that the instruction issued by the Central Government to the Company on 7 March 1962, which required the employer to make Provident Fund contributions on the amount of the production bonus earned by the employees, could not be sustained and therefore had to be set aside. The Court observed that this petition had been heard together with petition number 64 of 1962, and that the principal arguments concerning the issue had been presented in that accompanying petition. In view of that circumstance, the Court directed that each party should bear its own costs of the proceedings. Finally, the Court formally recorded that the petition was allowed.