Jardine Henderson Ltd vs The Workmen And Another

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 359 of 1961

Decision Date: 5 March 1962

Coram: K.N. Wanchoo, P.B. Gajendragadkar, A.K. Sarkar

Jardine Henderson Ltd. filed a petition against the workmen and another respondent, and the matter was decided by the Supreme Court of India on the fifth day of March, 1962. The judgment was authored by Justice K. N. Wanchoo, and the bench was composed of Justices K. N. Wanchoo, P. B. Gajendragadkar and A. K. Sarkar. The case was recorded with the citation 1963 AIR 474 and also appears in the 1962 Supplement to the Supreme Court Reports at page 582. The dispute concerned an industrial question relating to the payment of a bonus, specifically a “closing bonus,” and involved issues of available surplus, the determination of a closing bonus, whether such a bonus formed an implied term of the employment agreement or a condition of service, and whether the bonus could be characterized as a customary bonus under existing labour law principles.

The appellant, a company operating in Calcutta, had consistently paid its workmen a closing bonus equal to one month’s salary for each year from 1948 through 1957. In 1958, after the company’s profits fell significantly, the management reduced the bonus to half a month’s salary. The workmen contended that the closing bonus, having been paid uniformly for ten years, had become an implied condition of service and, alternatively, that it had acquired the status of a customary bonus independent of the company’s profitability. The industrial tribunal held that the payment of the closing bonus had not become an implied condition of service and that it could not be classified as a customary bonus. It further observed that sufficient surplus existed to justify the award of a full month’s salary as a profit bonus, and consequently ordered that the workmen receive an additional half‑month’s basic salary for the year in dispute. The tribunal also ruled that a company’s decision to declare a dividend at a rate different from six percent does not justify altering the rate of interest contemplated by the Full Bench formula on paid‑up capital. Moreover, it stated that a customary bonus is necessarily linked to a festival, and because the closing bonus was not associated with any festival, it could not be treated as a customary bonus in the manner discussed in the Graham Trading Co. Ltd. case and the related authorities of B. N. Elias and Co. Ltd. and Associated Cement Companies Ltd. The tribunal noted that throughout the period from 1948 to 1957 the company had not incurred any loss and that the bonus was paid only after the annual trading results were known, indicating that the bonus was based on the previous year’s profits rather than being an unconditional term of employment.

In this case the Court observed that the closing bonus for the year was calculated on the basis of the profits earned in the preceding financial year and that it could not be regarded as an automatic entitlement of one month’s wages irrespective of whether the company made a profit. The Court referred to the decision in M/s Isphani Ltd Calcutta v Isphani Employees Union (1960) C.R. 24 for support. The judgment concerned Civil Appeal No 359 of 1961, filed by special leave against the award dated 18 April 1960 of the Third Industrial Tribunal, West Bengal, in case No VIII 153 of 1959. Counsel for the appellant, consisting of three members, appeared on behalf of the company, while counsel for the first respondent represented the workmen. The appeal was heard on 5 March 1962, and the judgment was delivered by Justice Wanchoo. This appeal arose from a question of bonus that the Government of West Bengal referred to the Tribunal. The appellant was a company engaged in business in Calcutta, and the dispute concerned the closing bonus for the financial year 1958. Historically the appellant had paid a closing bonus equivalent to one month’s wages to its workmen for each year from 1948 through 1957. In 1958, however, the company’s profits declined markedly and the amount of the closing bonus was reduced to half a month’s wages. The reduction gave rise to a dispute brought by the workmen, who were represented by two trade unions. The workmen claimed that they should continue to receive the full one‑month bonus as had been paid in previous years. Consequently, the matter was referred to the Tribunal for determination of whether the employer was justified in reducing the quantum of the closing bonus to half a month’s pay for the year 1958.

The workmen contended that the employer had been paying two separate bonuses each year: (i) a Puja bonus, which was usually disbursed before the Puja festival, and (ii) a closing bonus, which was paid after the close of the financial year on 31 March. They argued that because the closing bonus had been paid at a uniform rate of one month’s wages from 1948 to 1957, the payment had become an implied term of employment and therefore could not be altered unilaterally. Alternatively, the workmen maintained that the closing bonus had acquired the character of a customary bonus, independent of the company’s profitability. The appellant, on the other hand, maintained that the regular payment of a closing bonus of one month’s wages for ten consecutive years did not transform the bonus into an implied condition of service, because the bonus was of the profit‑linked type and its payment depended on the profit earned by the company. The employer further argued that the timing of the bonus—being paid after the accounts for the year had been prepared and the profit ascertained—demonstrated its nature as a profit‑dependent bonus. The appellant also emphasized that the uniform rate of payment over the earlier years was merely fortuitous and did not create any legal entitlement. Moreover, the employer submitted that the bonus could not be classified as a customary bonus because it bore no connection to any festival and was paid only after the profit situation was known. Finally, the appellant asserted that if the closing bonus were to be treated as a profit bonus, there was no surplus available to justify any amount beyond the half‑month’s wage that had already been paid to the workmen for 1958. The Tribunal concluded that it had not been established that the closing bonus had become an implied condition of service, relying on the precedent set by the Court in Messrs Ispahani Limited Calcutta v Ispahani Employees Union, and further held that the bonus could not be characterized as a customary bonus because there was no evidence to support such a classification.

In this matter the appellant argued that the occasional payment of the Puja bonus had been merely fortuitous, noting that the bonus had been increased in proportion to the appellant’s rising profits in order to assist the workmen during the festival season. Regarding the alternative claim that the closing bonus was a customary bonus, the appellant maintained that the bonus bore no connection with any festival and was paid only after the appellant’s profit for the year had been ascertained, and therefore it could not be demanded as a customary bonus. Finally, the appellant contended that if the closing bonus were treated as a profit bonus, there was no surplus available to justify granting any amount in addition to the half‑month’s salary that had already been paid to the workmen as a bonus. The tribunal concluded that the evidence did not establish that the payment of the closing bonus had become an implied condition of service; in reaching that conclusion the tribunal relied on the Supreme Court’s decision in Messrs. Isprahani Limited Calcutta v. Ispahani Employees Union (1). The tribunal further held that the bonus could not be characterised as a customary bonus because there was no proof that it had been paid in any year when the appellant incurred a loss. Accordingly, the tribunal rejected the workmen’s case that a one‑month closing bonus was payable each year after the accounts were closed, whether as an implied condition of service or as a customary bonus. Turning next to the question of whether any amount beyond the half‑month’s salary already paid could be awarded as a profit bonus, the tribunal applied the Full‑Bench formula approved by the Court in Associated Cement Companies Limited v. Its Workmen (2). The tribunal found that a sufficient surplus existed to warrant payment of an additional one‑month’s salary as a profit bonus and therefore ordered that an extra half‑month’s basic salary be paid to the workmen for the year in dispute. This tribunal decision was challenged before this Court by the appellant. Concerning the profit bonus, the appellant’s principal contention was that the tribunal erred in allowing interest at the rate of two and one‑half per cent on paid‑up capital and that, under the Full‑Bench formula, interest should have been set at six per cent, which is the usual rate. The tribunal had justified the lower rate on the ground that the appellant had declared a dividend of two and one‑half per cent in that year, citing the cases (1) [1960] 1 S.C.R. 24 and (2) [1959] S.C.R. 925. The Court, however, expressed the opinion that the tribunal was incorrect in limiting the interest to two and one‑half per cent merely because the actual dividend declared by the appellant was that amount, noting that the return on paid‑up capital prescribed in the Full‑Bench formula is not linked to the dividend actually declared by a company, and that companies frequently declare dividends higher than six per cent.

In this matter the Court explained that the Full‑Bench formula ordinarily permits six per cent interest on paid‑up capital regardless of the dividend a company declares. The formula allows a higher rate only when a company demonstrates an exceptional circumstance justifying more than six per cent, and it permits a lower rate only when an exceptional case for less than six per cent is established. The Court therefore held that the fact a company declares a dividend that is either higher or lower than six per cent does not warrant alteration of the interest rate prescribed by the Full‑Bench formula. In the present case the tribunal reduced the rate to two and a half per cent solely because the appellant declared a dividend of two and a half per cent, without furnishing any other reason for a lower rate. Consequently the Court was of the opinion that the tribunal ought to have allowed the standard six per cent interest on paid‑up capital, which would raise the amount due under that head from Rs 5 lacs to Rs 12 lacs. Learned counsel for the respondents did not dispute that, if six per cent interest were applied, there would be no justification for awarding a profit bonus exceeding what the appellant had already paid. Accordingly, the Court concluded that the tribunal’s award of an additional half‑month’s wages as bonus, based on a purported surplus, must be set aside.

Respondents’ counsel further submitted that, even though the Full‑Bench formula precludes a further bonus, the workmen were entitled to one month’s pay as a closing bonus, either because it formed an implied condition of service or because it represented a customary bonus. Regarding customary bonus, the Court noted that the customary bonus discussed in Graham Trading Co. Ltd. v. Its Workmen (1) is invariably linked to a festival. The present case involves a closing bonus that is not associated with any festival, and therefore it cannot be classified as the type of customary bonus examined in Graham’s case. The Court referred to B. N. Elias & Co. Ltd. Employees’ Union v. B.N. Elias & Co. Limited (2), where it was observed that imposing a customary bonus on an employer‑employee relationship governed by express or implied service contracts is difficult unless the bonus is tied to a festival, whether a puja in Bengal or an equally important celebration elsewhere. Since the closing bonus at issue is expressly not connected with any festival, the Court held that it cannot be treated as a customary bonus of the kind considered in Graham’s decision.

In order to determine whether the payment of one month’s wages as a closing bonus had become an implied condition of service, the Court first observed that the closing bonus had consistently been paid only after the trading results for the preceding year were known. Because the bonus was paid after the profit figures for the previous year had been ascertained, the Court held that it was reasonable to infer that the bonus was dependent upon the profits earned by the appellant. The Court noted that, during the entire period from 1948 to 1957 when the closing bonus was actually paid, the appellant’s business had not suffered any loss. The Court referred to the earlier Ispahani case, which had pointed out that the occurrence of a bonus being paid in a year of loss would be a significant factor in concluding that the bonus was an obligatory payment based on an implied agreement. In the present case that factor was absent, because there was no loss in any of the years under consideration. The Court therefore concluded that the absence of a loss, together with the fact that the bonus was paid only after the year‑end trading results had been determined and was thus likely to be linked to the amount of profit, showed that the bonus could not be regarded as an obligation arising from an implied term of employment. The Court also observed that the business had originally belonged to another owner and had merged with the appellant in 1946. While under the former ownership there was no record of any closing bonus being paid between 1940 and 1945, the appellant did not make any closing‑bonus payment in 1946 or 1947 either. It was only from 1948, after the trading results for the year ending 31 March 1948 were known, that the employer began to pay a closing bonus equal to one month’s basic wages, in addition to the puja bonus which had originally been one month’s basic wages and was later increased to two months’ basic wages from 1955. For the year that was in dispute the appellant paid a puja bonus of two months but reduced the closing bonus to half a month’s basic wages because the profits had fallen from rupees twenty‑seven lakh in 1957 to a little over rupees fifteen lakh in 1958. The Court noted that the closing bonus had not been paid from the moment the appellant acquired the business, but it had been paid at a uniform rate from 1948 to 1957. In 1959, when profits rose again, the appellant again paid a closing bonus of one month’s wages. Considering all of these circumstances, the Court held that the closing bonus had been paid on the basis of the previous year’s trading results and was therefore dependent on the profits earned in that year. Consequently, the Court concluded that the one‑month‑pay closing bonus could not be treated as an implied condition of service that was payable irrespective of the profit made by the appellant.

The Court observed that the additional payment was connected to the profit made by the appellant during the relevant period. On that basis, the Court characterized the payment as a profit bonus, even though it had been made at a uniform rate for ten successive years. The finding that the bonus depended on the company’s profit meant that it could not be regarded as an implied condition of service enforceable irrespective of fluctuations in earnings. Consequently, the Court concluded that the bonus could not be treated as an unconditional entitlement that arose independently of the company’s earnings. Accordingly, the Court allowed the appeal filed by the petitioner and set aside the decision rendered by the tribunal. It also dismissed the workmen’s claim for any closing bonus that exceeded the amount actually paid by the appellant for the year 1958. The Court further ordered that each party bear its own legal costs in respect of the proceedings. Thus the workmen were not entitled to a standard one‑month closing bonus as a matter of right, but only to the amount actually disbursed by the employer for that financial year. In the final order, the appeal was affirmed and the relief sought by the workmen was denied.