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: Petition No. 62 of 1962

Decision Date: 11 September, 1962

Coram: K.N. Wanchoo, Bhuvneshwar P. Sinha, Syed Jaffer Imam, J.C. Shah, N. Rajagopala Ayyangar

In this matter the Supreme Court of India delivered its judgment on 11 September 1962. The case was styled Bridge & Roof Co. (India) Ltd versus Union of India. The judgment was authored by Justice K N Wanchoo, who sat with Justices Bhuvneshwar P. Sinha, Syed Jaffer Imam, J C Shah and N Rajagopala Ayyangar. The bench is recorded in the reports as 1963 AIR 1474 and 1963 SCR (3) 978, with citator references F 1963 SC 1480 (1,3,4,9) and D 1979 SC 607 (3,4,10). The statutory framework involved was the Employees’ Provident Fund Act of 1952 (Act 19 of 1952), particularly sections 2(b), 5, 6 and 19A, and the issues related to the definition of “basic wages”, the treatment of bonus, and the validity of a Central Government order directing the inclusion of production bonus in the calculation of statutory contributions.

Bridge & Roof Co. (India) Ltd, a public limited company engaged in the manufacture of engineering goods, paid its employees basic wages together with dearness allowance and additionally operated two separate production‑bonus schemes. Questions arose as to whether the production bonus could be taken into account for the purpose of computing the contribution required under section 6 of the Employees’ Provident Fund Act, 1952. In response, the Central Government issued an order stating that a production bonus, whether paid at a fixed rate or linked to the amount of work completed, satisfied the definition of “basic wages” under section 2(b) of the Act. The order further directed the petitioner to recover the provident‑fund contributions and to deposit any arrears of contribution as required. The petitioner then filed a writ petition under article 32 of the Constitution, challenging the order.

The petitioner contended that the term “bonus” appearing without any qualification in the definition of “basic wages” was expressly excepted, and consequently every form of bonus, including the production bonus, was excluded from “basic wages”. Accordingly, because the contribution provisions refer only to basic wages, dearness allowance and retaining allowance, no contribution should be payable on any bonus. The petitioner argued that the Central Government’s order directing inclusion of the production bonus was therefore invalid. The Court held that when the legislature used the word “bonus” without qualification, it intended to encompass every kind of bonus that could be payable to an employee and that was common in industry prior to 1952. The Court rejected the respondent’s position that any amount arising from the price of labour under a contract must automatically fall within “basic wages”. In view of the express exception of all bonuses from the definition, the production bonus, being an incentive wage, could not be treated as “basic wages”. Consequently, the Central Government order, presumably issued under section 19A, was deemed incorrect.

The Court observed that the order issued by the Central Government, which appeared to be made under section 19A of the Employees' Provident Funds Act, was erroneous. The judgment referred to several earlier decisions for guidance, namely M/s. Titagur Paper Mills Co. Ltd. v. Its Workmen ([1959] Supp. 2 S.C.R. 1012), M/s. Ispahani Ltd. Calcutta v. Ispahani Employees Union ([1960] 1 S.C.R. 24), The Graham Trading Co. Ltd. v. Its Worker ([1960] 1 S.C.R. 107) and Mill Owners Association v. The Rashtriya Mill Mazdoor Sangh, Bombay (1960) L.L.J. 1247. The original jurisdiction of the case was Petition No. 62 of 1962, filed under Article 32 of the Constitution of India for the enforcement of fundamental rights. The petitioners were represented by counsel G.B. Pai, J. B. Dadachanji, O.C. Mathur and Ravinder Narain, while respondents 1 and 2 were represented by counsel Veda Vyasa and R.H. Dhebar, and respondent 4 by counsel M.S. K. Sastri and M.S. Narasimhan. The judgment was delivered on 11 September 1962 by Justice Wanchoo. The central issue presented in the writ petition was whether a production bonus forms part of “basic wages” as defined in section 2(b) of the Employees' Provident Funds Act, No. 19 of 1952. Alongside this petition, Writ Petition 64 of 1962, The Jay Engineering Works Limited v. The Union of India, was also heard, raising a further question concerning the nature of the production‑bonus scheme operating in that company. The Court allowed the parties additional time to file supplementary affidavits on that matter. It was noted that the arguments concerning reduction bonus in general could not be automatically applied to the specific scheme under consideration in Writ Petition 64 of 1962.

For the present case, the Court set out the essential facts. Petitioner No. 1, hereinafter referred to as “the Company,” is a public limited corporation engaged in the manufacture of engineering goods, structural fabrication and rolling stock, and is therefore covered by the Employees' Provident Funds Act. The Company operates a production‑bonus scheme that provides for the payment of a bonus in addition to the wages fixed by the major engineering award of 1958, which was published in the Calcutta Gazette on 5 November 1958. That award, which governs seventy‑four major engineering concerns in the region, remains in force and prescribes basic wages and dearness allowance on a time‑rate basis for the entire major engineering industry. In addition to the basic wages and dearness allowance stipulated by the award, the Company maintains two distinct production‑bonus schemes: one applicable to hourly‑rated workers and another applicable to all other employees. While the Court did not delve into the detailed mechanics of each scheme, it highlighted the principal feature common to both schemes. Under each scheme, a production bonus is payable only when the company's annual output reaches or exceeds five thousand tons; if the output falls below that threshold, no production bonus is earned. The Court also noted that the scheme for hourly‑rated workers had been revised, a point that would be addressed in subsequent proceedings.

In the revised scheme that became effective on 1 January 1962, the Company applied the production‑bonus provisions to hourly‑rated workers on a quarterly basis. Under this revision, a production bonus was payable only when the output for a particular quarter reached at least 1 300 tons; if the quarterly output fell short of that amount, no bonus was awarded. For the remainder of the staff, the earlier scheme continued to operate, although the Company indicated that negotiations were underway to modify the old scheme so that it would correspond with the new arrangement introduced for hourly‑rated workers from 1 January 1962. The Court then turned to the provisions of the Employees’ Provident Funds Act that required consideration. Section 5 of the Act mandates the establishment of an Employees’ Provident Fund Scheme for the industries listed in Schedule 1, and consequently a Provident Fund Scheme known as the Employees’ Provident Funds Scheme, 1952, was framed in September 1952 and was applicable to the Company. Section 6 of the Act directs that both employer and employee contribute a sum equal to six and one‑quarter per cent of the basic wages, dearness allowance and any retaining allowance that are presently payable. Although Section 6 also contains provisions for higher contributions in certain circumstances, those were not relevant to the present dispute. The Act defines “basic wages” in section 2(b) as all emoluments earned by an employee while on duty or on leave, payable in cash, but expressly excludes (i) the cash value of any food concession; (ii) any dearness allowance (that is, any cash payment made to an employee on account of a rise in the cost of living), house‑rent allowance, overtime allowance, bonus, commission or any other similar allowance payable in respect of his employment; and (iii) any presents made by the employer. Furthermore, Section 19A empowers the Central Government to issue an order, not inconsistent with the Act, to remove any difficulty or doubt that arises in giving effect to the Act’s provisions, particularly where there is a question as to whether the total quantum of benefits to which an employee is entitled has been reduced by the employer; such an order is final. The Court observed that a difficulty had indeed arisen concerning whether the production bonus should be included in the calculation of the six and one‑quarter per cent contribution required under Section 6, and that the Central Government was therefore empowered to make a definitive order on the matter.

In this case the Court noted that the Central Government had, on 7 March 1962, issued an order to resolve the doubt concerning whether a production bonus was liable to provident‑fund deduction under section 6 of the Employees’ Provident Funds Act. The Government had re‑examined the question and concluded that a production bonus, whether paid at a fixed rate or linked to the amount of work performed, satisfied the definition of “basic wages” contained in section 2(b) of the Act. Accordingly, the Government directed the company to begin deducting provident‑fund contributions on the production bonus without further delay and to pay the arrears of such contributions, calculated from 1 January 1960, into the statutory fund immediately. The petition was filed in April 1962 challenging that Government order, which had been communicated to the company in March 1962. The company’s principal argument was that the term “basic wages” in section 2(b) was intended to exclude any bonus unless the word “bonus” was qualified; therefore, profit bonus, production bonus, attendance bonus, festival bonus and similar payments—whether stipulated as a condition of service or made as a customary practice—were to be excluded from the definition of “basic wages.” The company further contended that section 6 only requires contributions on basic wages, dearness allowance and retaining allowance (if any), and that bonuses, being outside the scope of section 6, should not be subject to the contribution rate. It was submitted that the legislature, when enacting the Act in 1952, was fully aware of the various types of bonuses paid across different industries and deliberately chose to exclude unqualified bonuses from “basic wages.” Consequently, the company argued, the Central Government had no authority to re‑classify a production bonus as basic wages for the purpose of calculating contributions under section 6. In addition, the company raised a constitutional objection, claiming that the inclusion of production bonus within basic wages would violate article 14 of the Constitution because production bonuses are not a universal feature of all industrial establishments; they are applicable only to certain concerns. As a result, those establishments that paid a production bonus would have to contribute to the provident fund at a substantially higher rate than others that did not grant such a bonus, creating an unreasonable classification. The petition was opposed on behalf of the Union of India and on behalf of two trade unions representing the workers of the company. The respondents contended that wages represent the price of labour arising from the employment contract, and that the phrase “basic wages” merely identifies a particular component of total wages that is separated for specific statutory purposes. They argued that a production bonus, being an incentive wage, falls within the definition of “basic wages” in section 2(b) because the provision defines 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 are paid or payable in cash to him.” Accordingly, the respondents maintained that a production bonus, earned while the employee is on duty and stipulated in the contract, qualifies as one of “all emoluments” and must be included in the computation of basic wages for provident‑fund contribution purposes. They also submitted that the reference to “bonus” in clause (ii) of the exceptions to section 2(b) was intended to refer only to profit bonus, as it was well established before 1952 that the unqualified term “bonus” in industrial adjudications denoted profit bonus alone.

The parties contended that the total wages are divided for specific purposes and that, consequently, a production bonus, being an incentive wage, must fall within the meaning of “basic wages” under section 2(b). They argued that “basic wages” are defined 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 are paid or payable in cash to him.” Accordingly, because a production bonus is earned by the employee while on duty pursuant to the terms of his contract, it should be treated as part of “all emoluments” and therefore included in “basic wages.” The petitioners further submitted that when the term “bonus” appears in clause (ii) of the exceptions to section 2(b), it historically referred only to profit bonus. They noted that before 1952, industrial adjudications understood the unqualified word “bonus” to mean profit bonus exclusively. Hence, the exception that excludes “bonus” without qualification was intended to exclude profit bonus alone and not any other form of bonus such as production bonus. The central issue for determination, therefore, was which of the two rival interpretations conformed with the language of section 2(b). It is undisputed that “basic wages,” as defined, comprise all emoluments earned by an employee while on duty or on leave, in accordance with the contract of employment, and payable in cash. If the definition were without any exceptions, there would be no difficulty in concluding that a production bonus, irrespective of its character, would be included. However, the definition contains three specific exclusions. The first clause excludes the cash value of any food concession, and the third clause excludes any presents made by the employer. The inclusion of presents among the exclusions indicates that, although the definition mentions all emoluments earned under the contract, the legislature deliberately omitted certain items that are not ordinarily earned pursuant to the contract. Likewise, although the definition embraces “all emoluments” payable in cash, the exemption of the cash value of food concessions—an amount not actually payable in cash—demonstrates that the exclusions do not follow a simple logical pattern aligned with the main definition. Turning to clause (ii), it excludes dearness allowance, house‑rent allowance, overtime allowance, bonus, commission, or any other similar allowance payable to the employee in respect of his employment or work performed. This exclusion suggests that even though the principal part of the definition captures all emoluments earned under the contract, certain payments that are in fact the price of labour and earned under the contract are deliberately left out of “basic wages.”

In this case, the Court observed that although the principal part of the definition of “basic wages” embraces all emoluments that are earned in accordance with the terms of the employment contract, certain payments that actually constitute the price of labour and are likewise earned under the contract are deliberately left out of that definition. The Court noted that the exceptions listed in clause (ii) specifically refer to payments that an employee receives pursuant to his contract of employment. Both sides’ counsel conceded before the Court that it was difficult to discern a single unifying rationale for the three separate clauses of exceptions. Nonetheless, clause (ii) makes it clear that some earnings are excluded from the meaning of “basic wages” even though they are earned under the contract. The Court pointed out that while “dearness allowance” is excluded from the definition of “basic wages,” Section 6 subsequently provides for the inclusion of dearness allowance when calculating the contribution. Section 6 expressly states that the contribution shall be six and one‑quarter per cent of the basic wages, dearness allowance and retaining allowance, if any. Consequently, the Court set out to determine the basis for the exclusion in clause (ii) and, at the same time, the basis for the inclusion of dearness allowance and retaining allowance in Section 6. It appeared that the distinction lay in whether a particular payment is payable across all establishments and earned by all permanent employees. Payments that are universally payable and earned by every permanent employee are brought within the scope of Section 6 for contribution purposes, whereas payments that are not uniformly payable or not earned by every employee of a concern are excluded from the definition of “basic wages” for contribution purposes. The Court explained that dearness allowance, for example, is paid in every establishment, either as an addition to basic wages or as part of consolidated wages where a separate dearness allowance and basic wage are not distinguished. Retaining allowance likewise is paid to all permanent workers in seasonal factories such as sugar factories and is therefore included in Section 6. By contrast, house‑rent allowance is not paid in many establishments and, even where it is paid, it may be given to some workers and not to others; the prevailing view treats house‑rent allowance as part of basic wages together with dearness allowance or consolidated wages where it exists. Because it is not universally payable to all employees of a concern, the Court held that house‑rent allowance is removed from the definition of “basic wages,” despite the fact that its basis of payment is the employment contract. Similarly, overtime allowance, although generally provided for in most establishments, is not earned by every employee; it is earned under the contract but may not be…

In the judgment, it was explained that any allowance that is not earned by every employee of an employer is excluded from the definition of “basic wages”. Accordingly, commissions and other similar allowances were held to be excluded because such payments are not necessarily present in all enterprises, nor are they necessarily earned by all workers of a particular enterprise, even though, when they do exist, they are awarded according to the terms of the employment contract. The Court observed that the rationale for the exclusion listed in clause (ii) of the exceptions in section 2(b) is that any component of remuneration that is not universally earned across all concerns or by all employees of a concern is to be left out of “basic wages”. The exemption of dearness allowance in clause (ii) was noted as an exception to that rule. However, the Court pointed out that this particular exception has been effectively removed by the inclusion of dearness allowance in section 6 for the purpose of contributions. Consequently, although dearness allowance continues to be excluded from the definition of “basic wages”, it is treated as part of the wage base for contribution purposes under section 6, and the genuine exceptions in clause (ii) are now limited to the other items besides dearness allowance.

The discussion then turned to the treatment of “bonus”, which is also listed as an exception in clause (ii). The Court observed that the word “bonus” appears in the provision without any qualifying adjective. From this, it inferred that the legislature must have intended to cover every type of bonus that could be payable to an employee. The Court noted that it was not contested by the respondents that, prior to the enactment of the 1952 Act, various forms of bonus other than profit bonus were already recognized and widely practiced. For instance, the Coal Mines Provident Fund and Bonus Schemes Act, No. 46 of 1948, provided for a bonus based on employee attendance. In addition to attendance bonus, the Court identified four other categories of bonus that had been established under industrial law before 1952 and were operational in different industries. The first was a production bonus, which had been awarded in certain enterprises long before 1952, as referred to in the case of Messrs. Titaghur Paper Mills Co. Limited v. Its Workmen. The second category was a festival or puja bonus, which existed as an implied term of employment well before 1952, cited in Messrs. Ispahani Limited Calcutta v. Ispahani Employees’ Union. The third was a customary bonus associated with particular festivals, mentioned in The Graham Trading Co. (India) Limited v. Its Workmen. The fourth category was the profit bonus, whose underlying principles and method of calculation had been developed by the Labour Appellate Tribunal in the matter of Mill Owners’ Association v. The Rashtriya Mill Mazdoor Sangh, Bombay. The Court concluded that the legislature could not have been unaware of the existence of these diverse bonus forms across various concerns and industries when it enacted the 1952 legislation. Consequently, the Court indicated that the respondents’ argument that the term “bonus” in the statute should be read narrowly to refer only to profit bonus required careful scrutiny.

In this case, the Court observed that when the legislature employed the term “bonus” without any qualifier in clause (ii) of the exception in section 2(b), the term was intended to encompass every type of bonus that existed in the industrial sector prior to 1952. Accordingly, the respondents’ argument that, before 1952, an unqualified reference to “bonus” in industrial law signified only profit bonus and nothing else required careful examination. The Court did not find this argument persuasive. While it is true, as shown by the references in various profit‑bonus cases, that the word “profit” was not placed before “bonus” as a qualifying term, it is also true that in disputes concerning other kinds of bonus, such as attendance bonus or puja bonus, the qualifying word “attendance” or “puja” was normally used. However, when a reference concerned profit bonus, the usual practice was to qualify “bonus” by indicating the year for which the bonus was claimed. For instance, in Millowners’ Association Bombay v. The Bashtrya Mill Mazdoor Sangh, paragraph 16 at page 1252, the reference was recorded as “Reference No. 1 of 1948 … Re: Bonus for the year 1947”. This illustrates that, in profit‑bonus matters, the term “bonus” was consistently limited by specifying the relevant year, even though the word “profit” did not appear before it. Consequently, although literally the adjective “profit” was omitted, the context made it clear that the unqualified term “bonus” referred to profit bonus by the addition of the year. Therefore, it would be inaccurate to state that, in industrial adjudications before 1952, an unqualified “bonus” meant only profit bonus and excluded all other forms. Moreover, the intention behind a reference to profit bonus was unmistakably clarified by the use of phrases such as “for the year …” following the word “bonus”. The Court therefore declined to accept the respondents’ position that an unqualified “bonus” necessarily indicated only profit bonus. On the contrary, the Court found that an unqualified reference to “bonus” before 1952 could denote any of the various bonuses recognized in industrial law, provided the reference was not limited by a qualifying term or by a specific year.

In interpreting clause (ii), the Court observed that the reference to “year” must be understood to relate to every type of bonus that was recognised by industrial law and by industrial adjudication prior to 1952. The Court explained that the reason for omitting all categories of bonus from the definition of “basic wages” is the same reason that other components such as house‑rent allowance, overtime allowance, commission and similar allowances were excluded. The payment of a bonus is not made in every industrial undertaking, and it is not necessarily paid to every employee of a concern; for example, an attendance bonus may be granted only to a selected group of workers. Because of this irregularity, the legislature chose to keep all forms of bonus outside the definition of “basic wages”. The Act, being an All‑India legislation, applies to every industry listed in Schedule I and to every enterprise engaged in those industries. The intention behind the exclusion appears to have been to ensure that the incidence of the provident fund would be uniform across all industrial concerns covered by the Act. Consequently, it was necessary to remove from the broad definition of “basic wages” any payment that would not be common to all industries or to all employees within the same concern. The Court noted that, to this principle, only dearness allowance in clause (ii) was originally an exception, and that the exception has since been corrected by the inclusion of dearness allowance in section 6. Therefore, the Court concluded that there is no justification for interpreting the word “bonus” in clause (ii), when it appears without any qualifying adjective, as anything less than an inclusion of every kind of bonus known to industrial adjudication before 1952. Such bonuses must be deemed to fall within the knowledge of the legislature.

The Court then turned to the argument advanced by the respondents that wages represent the price for labour and arise from the contract of employment, and that only those elements which are a reward for labour not stemming from the contract—such as bonuses based on profit or attendance—should be excluded from the definition of “basic wages” in section 2(b). The Court acknowledged that, absent any exceptions, any cash payment that constitutes the price for labour and that arises from the employment contract would be captured within the term “basic wages”. Conversely, a reward for labour that does not arise from the contract might be left out of the definition. However, the Court emphasized that the main definition in section 2(b) is expressly subject to the exceptions listed in clause (ii), and those exceptions plainly encompass even the price for labour. Accordingly, the Court could not accept the respondents’ contention that only the price for labour arising from the contract is included in “basic wages”, and that therefore a production bonus—being a form of incentive wage—should be excluded. The Court held that the production bonus falls within the definition of “basic wages” because the clause (ii) exceptions demonstrate that such incentive payments are to be treated as part of basic wages.

In this matter the Court observed that a production bonus constitutes a form of incentive wage. The Court referred to a previous decision in Messrs. Titaghur Paper Mills Co. Ltd. v. Its Workmen, (1) where it had been noted that “the payment of production bonus depends upon production and is in addition to wages. In effect, it is an incentive to higher production and is in the nature of an incentive wage”. The Court further explained that the straight piece‑rate plan, in which payment is made for each piece produced, represents the simplest type of incentive‑wage arrangement. Under such a plan the worker receives remuneration for each piece without any minimum guarantee and is free to produce as many or as few pieces as he wishes, his earnings being directly linked to the number of pieces he completes. Consequently, the Court held that when a straight piece‑rate system operates, the entire amount paid for the pieces produced must be treated as basic wage within the meaning of section 2(b) of the Act, even though the system itself is framed as an incentive plan. The Court cited the authority (1) [1959] Supp 2 S. C.R. 10 12 to support this observation.

The Court then turned to the situation where a straight piece‑rate system cannot be applied because the finished product results from the cooperative effort of many workers, each contributing only a small part to the final output. In such circumstances the Court explained that a production‑bonus scheme, based on tonnage or another standard, is introduced. The essential feature of such a scheme is the existence of a base or standard level of output; work performed up to that level is paid as basic wage, while any output exceeding the base attracts an additional payment. This additional payment, which the Court described as an incentive wage or production bonus, is earned only for production above the predetermined standard. The scheme typically guarantees a time‑wage for work up to the standard and allows workers to share in the savings generated by superior performance. The Court observed that the scheme operating in the Company under review follows this typical pattern: basic wages, calculated as time wages, are paid up to the established base, and any extra remuneration for output beyond the base is classified as production bonus. Workers are not compelled to exceed the base, and even if their performance falls short, the minimum basic wage must still be paid. When workers do exceed the base, the extra earnings are not part of basic wage but are instead termed production bonus or incentive wage. The Court reiterated that such production bonus lies outside the definition of “basic wages” in section 2(b) because of the specific exception previously identified. Accordingly, the Court concluded that the production bonus earned under the Company’s scheme is payable only beyond the base or standard and cannot be included within the definition of basic wages under section 2(b).

The Court observed that the definition in the statute expressly excludes all kinds of bonus, and therefore concluded that a production bonus of the sort described does not fall within the meaning of “basic wages” in paragraph 2 (b). Consequently, the Court held that the decision issued by the Central Government, which appears to have been made under section 19A of the Act and was intended to remedy the difficulty created by giving effect to the statutory provisions by treating such a bonus as part of “basic wages”, was erroneous. Because the Court found the Government’s interpretation to be incorrect, it considered it unnecessary to examine the application of Article 14 of the Constitution to the present facts. Accordingly, the petition was allowed and the Court declared that the production bonus that is regularly paid by the Company in the usual manner is excluded from the term “basic wages”. As a result, the communication dated 7 March 1962 from the Central Government to the Company, which directed that contributions to the Employees’ Provident Fund should also be made on the amount of the production bonus earned by the employees, was set aside. The Court noted that this petition had been heard together with petition number 64 of 1962 and that the principal arguments had been advanced in that other petition. In view of this procedural context, each party was ordered to bear its own costs, and the petition was finally granted.