M/s. Tulsidas Khimji vs Their Workmen

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 503 of 1961

Decision Date: 11/04/1962

Coram: Bhuvneshwar P. Sinha, N. Rajagopala Ayyangar, J.R. Mudholkar, Subba Rao, Venkatarama Aiyar, T.L. Venkatarama

The case titled M/s. Tulsidas Khimji versus Their Workmen was decided on 11 April 1962 by the Supreme Court of India. The judgment was authored by Justice Bhuvneshwar P. Sinha, and the bench comprised Justices N. Rajagopala Ayyangar and J.R. Mudholkar. The petition was filed by M/s. Tulsidas Khimji as the petitioner and the workmen employed by the firm were named as respondents. The judgment was reported in 1963 AIR 1007 and 1963 SCR Supplement (1) 675, and it later appeared in several citator references including R 1964 SC 864, F 1965 SC 1499, R 1972 SC 70, RF 1972 SC 299, RF 1976 SC 1455. The applicable statutory framework involved provisions relating to industrial disputes, profit‑sharing bonuses, customary festival bonuses, the quantum of deductions from profits for income‑tax purposes in a partnership firm, the nature of Supreme Court control over tribunals, and the rules of the Supreme Court under the Industrial Disputes Act, 1947 (14 of 1947). The appellants were a registered partnership firm conducting business under the name “Messrs. Tulsidas Khimji.” The firm had six partners and engaged in four distinct lines of business. The respondents were workmen employed by the firm. A dispute arose concerning the amount of bonus payable to the workmen for the year ending 30 October 1958. The central issue referred to the Tribunal was whether the claim should be limited to a profit‑sharing bonus or a customary bonus based on implied contractual terms, and whether the workmen could simultaneously invoke a surplus‑profits basis and a customary or implied‑terms basis, or whether they had to select a single basis for their bonus claim. The Tribunal held that the workmen were entitled to claim bonus on each of three alternative bases: a profit‑sharing bonus, a bonus implied by the terms of service, and a customary or traditional bonus payable on the occasion of Divali. It fixed the bonus at one‑fourth of the total basic wages earned by the workmen during the reference year, after deducting the amount equivalent to one month’s wages already paid for that year. The Tribunal further found that the workmen had proved their right to a traditional or customary bonus at the uniform rate of one month’s basic wages plus dearness allowance. It observed that the amount deductible for income‑tax purposes was slightly more than 5 percent of the total gross profits of Rs 676. Additionally, the Tribunal fixed the remuneration of each partner at Rs. 20,000. The appellants challenged the award by obtaining special leave to appeal before this Court. The Supreme Court, by a majority comprising Justices Sinha (C.J.), Subba Rao, Mudholkar, and Venkatarama Aiyar, and a dissenting opinion by Justice Rajagopala Ayyangar, held that a sum of Rs. 53,000 should be allowed under the head of income‑tax. The Court observed that it was not right to give the employers the double benefit of granting deduction on

The Court observed that it would be incorrect to allow the employers to obtain a double benefit by first calculating the income‑tax payable by each partner on his share of the firm’s profits and then also adding the tax that the registered firm itself had paid in order to secure certain reliefs under the Income‑Tax Act which could not otherwise have been obtained. Regarding the remuneration that was to be paid to the partners of the firm, the Court found that the amount fixed by the Tribunal was insufficient. However, because this Court does not act as a regular appellate court from the Tribunal but merely ensures that the law is applied correctly in accordance with the established rules of natural justice, it declined to determine the exact quantum of remuneration that should be allowed to the partners. The Court further held that the Tribunal was fully justified in concluding that a traditional or customary bonus had been established in the present case. It explained that in order to defeat a claim for a customary bonus, the claimant must prove that the bonus was given gratuitously and accepted as such, or that it was unrelated to any occasion such as a festival. The Court refused to permit the respondents to demonstrate that a bonus could be granted as an implied term of the contract of service, noting that such a case had not been pleaded in the statement of the case. Emphasising strict compliance with the pleading rules prescribed in the Supreme Court Rules, the Court reiterated that those rules are intended to narrow the controversies between the parties and to give proper notice to the opposite side that a particular issue will be raised, thereby obliging that side to be prepared to meet that issue. Consequently, the Court stated that it would not ordinarily tolerate any laxity in pleadings before it. The Court cited the decisions in Graham Prading Co. (India) Ltd. v. Its Workmen, [1960] 1 S.C.R. 107, and B. N. Elias & Co. Ltd. Employees' Union v. B. N. Elias & Co., Ltd., [1960] 3 S.C.R. 382, which were approved in Associated Cement Companies Ltd. v. Its Workmen, [1959] S.C.R. 925. Per Justice Ayyangar, a firm is regarded as an entity for income‑tax purposes, whereas a partnership is not an entity at law; the partners themselves constitute the employers for all purposes other than income‑tax. Accordingly, the tax payable by the individual partners on their share of the firm's income, without considering any other income or losses they may have, represents the amount of income‑tax that is deductible for computing the available surplus. The tax paid by the registered firm must be added to the tax payable by the individual partners on their share of the profits, arriving at the total income‑tax payable.

The Court explained that the tax payable by the partnership as a registered firm had to be added to the amount of Rs 53,000 and some change that each partner was required to pay individually on account of their share of the firm’s profits. By adding these two components, the total amount that could be deducted under the heading “Income‑tax payable” amounted to approximately Rs 60,000. After arriving at this figure, the Court determined that a reasonable sum that could be allowed as remuneration to the partners was Rs 40,000. This figure was reached on the basis that the partners themselves performed work for the firm; consequently, if the partners had not supplied the labour, the firm would have needed to employ someone else and would have had to pay that person for the work performed. Regarding the bonus to be awarded to the workmen, the Court reduced the originally awarded amount from an equivalent of three months’ basic wages to an amount equal to two months’ basic wages. The Court also held that the declaration made by the Tribunal concerning the customary bonus was not justified and therefore set aside that declaration. In reaching its decision, the Court referred to several earlier decisions, namely Millowners’ Association, Bombay v. Rashtriya Mill Mazdoor Sangh, 1950 L.L.J. 1247; Associated Cement Companies Ltd. v. Its Workmen, [1959] S.C.R. 925; M/s. Ispahani Ltd., Calcutta v. Ispahani Employees Union, [1960] 1 S.C.R. 24; Graham Trading Co. (India) v. its Workmen, [1960] 1 S.C.R. 107; B. N. Elias & Co. Employees Union v. B. N. Elias & Co., [1960] 3 S.C.R. 382; and The Management of Tooklai Experimental Station v. Workmen, [1962] Supp. 1 S.C.R. 557. The judgment concerned a civil appeal (No. 503 of 1961) filed by special leave against an award dated 10 May 1961 issued by the Central Government’s Additional Industrial Tribunal, Bombay, in Reference (CGIT) No. 4 of 1960. The appellants were represented by counsel for the Attorney‑General of India and other counsel, while counsel for the respondents also appeared. The appeal was heard in April 1962 before a bench of the Supreme Court composed of Chief Justice Sinha, and Justices Subba Rao, Mudholkar and Aiyar, with Justice Ayyangar delivering a separate opinion. The appeal challenged the Tribunal’s award concerning the quantum of bonus payable to the workmen for the year ended 31 October 1958, focusing on the issues of customary bonus and profit‑sharing bonus.

The six partners had been associated with the firm for varying lengths of time; the fourth partner had been with the business for about fifteen years, the fifth partner for roughly eight years, and the sixth partner for approximately five to six years. Throughout the period material to this dispute, all six partners had worked for and in the interest of the partnership, which engaged in several distinct lines of business. Specifically, the firm operated as clearing and forwarding agents, as godown keepers, as insurance agents, and as cotton supervisors and controllers. To manage these diverse activities, the partnership maintained four separate and distinct departments, each corresponding to one of the business categories. The respondents in this matter were workmen who were employed by the firm under the various departments.

The question that was referred to the Industrial Tribunal concerned the quantum of bonus payable to the workmen for the financial year that ended on 31 October 1958. Prior to the Tribunal, a number of issues were raised, but only the fourth and fifth issues were essential for the determination of the matter. Issue four asked whether the claim should be limited to a profit‑sharing bonus, a customary bonus, or a bonus based on the implied terms of the employment contract. Issue five inquired whether the workmen were permitted to claim a bonus on the basis of surplus profits while simultaneously claiming a bonus on the ground of custom and practice, or implied terms and conditions of service, or whether the workmen were required to elect a single basis for their claim.

The workmen’s union had put forward two distinct claims. First, it sought a profit‑sharing bonus calculated at the rate of six months’ wages, inclusive of dearness allowance. Second, it claimed a traditional or customary bonus, the exact rate of which was not precisely stated but could be described as either three months’ wages or one month’s wages together with dearness allowance, to be paid on the occasion of the Diwali festival. The union’s position was clouded by uncertainty; the workmen themselves were not clear whether they were pursuing the customary bonus as an implied term of their employment or as a special festival bonus, nor were they sure whether the six‑month profit‑sharing claim represented the total bonus entitlement or was to be added to the customary or festival bonus. This lack of clarity gave rise to the specific form of the issues listed above.

The appellants, that is, the partnership, conceded that they had already paid a bonus equivalent to one month’s basic wages and contended that the claim for a traditional or customary bonus should not be treated as an implied term of the service contract nor as a festival bonus. Because of the confusion surrounding the respondents’ claim, the Tribunal examined a variety of documents and oral statements. After this examination, the Tribunal concluded that the respondents’ maximum claim amounted to six months’ wages on a profit‑sharing basis, while the minimum claim corresponded to a customary or traditional bonus of three months’ basic wages together with one month’s dearness allowance. Regarding issue four, the Tribunal held that the three alternatives—profit‑sharing bonus, bonus as an implied term of service, and customary or traditional festival bonus—were mutually exclusive options and that the workmen were not required to choose a single alternative. The Tribunal therefore pointed

In this case, the Court observed that until the judgment in The Graham Trading Co. (India) Ltd. v. Its Workmen (1) was delivered, the courts had not drawn a clear distinction between a claim for bonus that arises as an implied term or condition of service and a claim for a customary or traditional bonus, and the tests for determining each were not defined. Consequently, the Tribunal held that the workmen were entitled to claim bonus on each of three alternative bases: a profit‑sharing bonus, a bonus that would be an implied term of service, and a customary or traditional bonus payable on the occasion of Dewali. The Tribunal noted that the appellants had already paid the workmen a bonus equivalent to one month’s basic wages, an amount of Rs 20,780.

To assess the first alternative, namely the profit‑sharing bonus, the Tribunal was required to determine the surplus available for distribution. In order to compute the surplus, it needed to allow certain deductions from the gross profits of the firm. The appellants had claimed a number of deductions, but the Tribunal confined its consideration to two principal deductions: first, whether the appellants' claim to deduct fifty‑one percent of the gross profits on account of income tax was proper; and second, the amount of remuneration payable to the six partners, for which a deduction might also be allowed. The Tribunal concluded that only the tax actually payable by the firm should be deducted, and not the higher amount claimed by the appellants. On that basis, the Tribunal calculated that the deductible amount for income tax would amount to a little over five percent of the total gross profits.

With regard to the partners’ remuneration, the Tribunal fixed a lump‑sum figure of twenty thousand rupees. The basis for this figure was not clearly stated in the award and appears to be an approximate estimate. After providing for these prior charges against the residuary surplus, the Tribunal determined that a bonus equal to one‑quarter of the total basic wages earned by the workmen during the reference year, which ended on 31 October 1958, was justified.

The Tribunal then examined the workmen’s alternative claim for a bonus comprising three months’ basic wages together with one month’s dearness allowance, either as an implied term of the conditions of service or as a customary or traditional bonus. After reviewing the precedents of this Court as well as those of various High Courts and Tribunals, the Tribunal concluded that, although the respondents had not succeeded in establishing the bonus as an implied term of the contract, they had succeeded in proving entitlement to a traditional or customary bonus at a uniform rate of one month’s basic wages plus dearness allowance. Accordingly, the Tribunal awarded the workmen a bonus equal to one‑quarter of the total basic wages, reduced by the amount of bonus already paid in the amount of one month's basic wages.

In the matter before the Court, the Tribunal had previously awarded the workmen wages for the reference year on the same terms and conditions that had been prescribed in the award for the preceding year ending on 31 October 1957, and the firm had subsequently appealed against that award. No workmen filed a cross‑appeal, even though the Tribunal’s findings indicated that the workmen were entitled to a profit‑sharing bonus equivalent to three months’ wages and, on the occasion of Dewali, to a traditional or customary bonus consisting of one month’s wages together with dearness allowance. On behalf of the appellants, three substantive questions were framed for consideration. The first question concerned the method of deducting income‑tax in order to determine the actual surplus available; the appellants argued that the deduction should not be based on the tax actually payable by the registered firm, but rather on a notional basis comparable to that applied to a registered company, or on the tax payable on the lump‑sum income of 1.95 lakh rupees of an unregistered firm, or on any other basis that might resemble the tax each partner would individually owe on his share of income. The second question challenged the Tribunal’s fixing of the partners’ remuneration at Rs 20,000 by a rule‑of‑thumb, contending that remuneration should instead be fixed on the basis of reasonable compensation that the firm ought to pay its partners for operating its four departments; in this regard the appellants suggested that if the claimed amount of Rs 96,000 was excessive, a figure of Rs 48,000—half of the claim—would be highly reasonable given the firm’s factual circumstances. The third question asserted that the Tribunal had erred in concluding that the workmen had established a right to the traditional or customary bonus at a uniform rate of one month’s basic wages plus dearness allowance. The Court indicated that it would address these points in the order presented. While the respondents did not dispute the necessity of an income‑tax deduction, their counsel maintained that the tax should be the amount actually payable by the firm as a legal entity for income‑tax purposes, and that the Tribunal was justified in crediting only approximately Rs 10,000 on that basis. Conversely, the appellants contended that the deduction should reflect the corporate rate of 51.5 percent, or whatever the actual company tax rate might be, and alternatively argued that a rate of seven annas per rupee would be a fair basis. The Court expressed the view that equating a registered firm with a company for the purpose of income‑tax deduction would be inappropriate.

It was observed that the deduction for income‑tax could not be treated in the same manner as it would be for a company. The Court acknowledged that, as laid down by a five‑judge bench of this Court in The Associated Cement Companies Ltd., Dwarka Cement Works, Dwarka v. Its Workmen (1), the deduction must be made on a notional basis. However, the Court emphasized that even a notional basis must be connected with the law applicable to firms for the purpose of income‑tax. The appellants proposed four alternatives for calculating the notional deduction. The first alternative suggested an income‑tax rate of seven annas in a rupee, which would eliminate roughly Rs 85,000, representing about forty‑five percent of the profits. The second alternative proposed a deduction of approximately Rs 53,000 based on income‑tax payable on a firm income of Rs 1.95 lakh, with the partners paying tax at the appropriate rate on their respective shares; after adding the Rs 10,000 registered‑firm tax already indicated, this would amount to about twenty‑seven percent of the profits (1959) S.C.R. 925. The third alternative suggested a tax of about Rs 1,40,000 on the basis that the firm was unregistered, a position that the income‑tax authorities may adopt in certain circumstances, which would correspond to roughly seventy percent of the profits. The fourth alternative proposed a deduction of roughly Rs 68,000 plus the Rs 10,000 registered‑firm tax, calculated on the basis of the tax payable by the partners on the income of the registered firm at the rates applicable to their worldwide income on their respective shares. The Court rejected the first suggestion because it relied on a corporate tax rate, which had already been dismissed as unfair. The third suggestion was also unacceptable, as it would allocate a major portion of the profits to income‑tax on a highly notional basis. The fourth alternative was deemed unjust and inequitable to the workmen, particularly where the partners were wealthy individuals; it was also objectionable because determining each partner’s worldwide income could require a lengthy process, making it impractical for ascertaining the bonus for a specific year. While accepting the appellants’ contention that the deduction must be notional, the Court held that the basis for such a deduction must be readily ascertainable. Consequently, the only workable method was to compute the deduction directly from the firm’s profits for the relevant year. The final alternative, which involved calculating the tax on the actual profit figures attributable to each partner separately, was considered reasonable because those figures were known and the tax for each partner could be easily determined on the basis of his share of the firm’s profit.

The Court observed that calculating the income‑tax deduction on the basis of each partner’s share of the firm’s profit was a reasonable method because the partners’ individual profit shares were known and the tax liability of each partner could therefore be readily computed. The respondents, however, contended that the deduction should be based on the amount of tax payable by the firm as a whole, which was approximately Rs 10,000, on the ground that the firm, being the employer, alone could claim a deduction under the relevant head. The Court rejected this contention, holding that a partnership is not a legal person within the meaning of the Industrial Disputes Act; the partners themselves are the employers. Consequently, the tax payable by each partner in his capacity as a participant in the firm’s business must be taken into account, irrespective of any other sources of income or loss that the partners may have. The Court further examined whether the tax paid by the registered firm could be added to the tax calculated on the partners’ individual shares. It concluded that allowing a double benefit—first by permitting a deduction based on each partner’s tax and second by also adding the registered‑firm tax, which is paid to obtain specific reliefs under the Income Tax Act—would be inappropriate. Accordingly, the Court held that a sum of approximately Rs 53,000, in round figures, should be allowed as an income‑tax deduction under the head in question; this amount was acknowledged to represent roughly one‑quarter of the firm’s profits.

The Court then turned to the issue of the amount to be allowed under the head “Remuneration to the partners of the firm.” It noted that the Tribunal had found the partners’ claim that they devoted their entire time to the business of the firm to be inaccurate, observing that the partners were engaged in other independent business activities, including participation in another partnership. Moreover, the partners had failed to produce reliable data showing the quantity of time and effort they actually devoted to the firm under consideration. The Tribunal had fixed a remuneration amount of Rs 20,000, which was roughly ten percent of the firm’s gross profits; the Court described this figure as largely conjectural. By contrast, the wage bill for the relevant year amounted to about Rs 4,60,000. When the Court compared the Tribunal’s awarded remuneration with this wage bill, it found that the amount fixed by the Tribunal appeared insufficient. The Court, however, indicated that it was not in a position to make a definitive finding on this factual issue, given the lack of solid evidence in the record, and emphasized its role in ensuring that the law is applied in accordance with established principles of natural justice.

In reviewing the amount that had been fixed as remuneration for the partners, the Court observed that the figure arrived at by the Tribunal appeared to be considerably insufficient. Nevertheless, the Court stated that it could not, on the material presently before it, reach an independent definitive conclusion about the exact amount that should be awarded. The Court explained that it is not a regular appellate body for the Tribunal; its role is limited to ensuring that the law is applied correctly and that the principles of natural justice are respected. Accordingly, the Court declined to engage in the speculative exercise of calculating a specific sum when the record lacked any firm factual basis or reliable data to support such a calculation. The remaining issue before the Court concerned the claim for a traditional or customary bonus raised by the appellants. It was alleged that the Tribunal had failed to follow earlier Supreme Court decisions that dealt with this type of bonus. The Tribunal, however, had found as a matter of fact that the workmen had demonstrated that a bonus equal to one month’s basic wages plus dearness allowance was paid every Diwali for a continuous period of more than fifteen years, spanning the years 1940‑41 to 1956‑57. The Tribunal accepted this factual finding but the appellants argued that, according to Supreme Court precedent, a claim for such a bonus could only succeed if four requirements were satisfied: (i) the payment had been made in an unbroken series of years; (ii) the period of payment was sufficiently long; (iii) the amount paid remained uniform throughout; and (iv) the bonus had been paid even in years when the firm incurred losses, that is, without reliance on profit. The Tribunal held that the first three requirements were met, but it could not establish the fourth because the firm had enjoyed an uninterrupted record of profits each year.

The appellants contended vigorously that, because the fourth requirement was not satisfied, the Tribunal was not legally authorised to conclude that a customary bonus at the stated rate had been established. The Court rejected this contention on several grounds. First, it clarified that the four factors identified by the Court in earlier case law are not strict conditions precedent but rather circumstances that the Court may consider when determining whether a customary or traditional bonus claim is justified. These circumstances were discussed in the decision of The Graham Trading Co. (India) Ltd. v. Its Workmen, where the Court emphasized that the length of the period required depends on the facts of each case and therefore cannot be treated as a rigid prerequisite. Second, the Court noted that there is no logical basis for treating payment during loss years as a mandatory condition, especially where a firm has enjoyed an unbroken series of profitable years. If such a requirement were imposed, a firm that paid a uniform bonus for many years but happened not to have a loss year would be barred from establishing a claim, which would be unreasonable. Consequently, the Court concluded that the failure to demonstrate payment in loss years did not invalidate the Tribunal’s finding that a traditional or customary bonus had been paid at the rate claimed.

In the case earlier referred to, the Court observed that the Tribunal was required to examine the four enumerated circumstances and emphasized that these were circumstances rather than conditions precedent. This distinction was illustrated by the Court’s remark that the appropriate length of the period depended upon the facts of each individual case, whereas a condition precedent must be a fixed requirement that does not vary with the circumstances of the case. The Court further argued that there was no logical basis for treating payment of a bonus in a year of loss as a condition precedent, because a firm might enjoy an uninterrupted series of profitable years from its inception. If the requirement of profitability in every year were treated as a condition precedent, then even a bonus satisfying the first three circumstances would be deemed insufficient to establish a claim for a customary bonus, regardless of how long the profitable period was. The Court noted that the difference between profit and loss in a particular year could be minimal—a loss of one rupee or a nominal profit—while a third theoretical situation might involve neither profit nor loss. The appellants contended that a claim for such a bonus could be made in the first scenario of a nominal loss but not in the second or third. The Court rejected this argument, stating that the law could not rest on such insubstantial considerations and that the issue was always one of substance rather than form. Consequently, the Court could not accept the submission that the presence of loss, substantial or otherwise, was an essential condition.

The Court explained that its earlier observations in the cited decisions were based on substantive, not formal, considerations. It pointed out that a customary bonus is traditionally tied to special occasions such as festivals—examples given were the Pujas in Bengal and the Diwali celebrations in Western India—events that employers typically use to reward their employees. Therefore, the Court held that the decisive factor in rejecting a claim for a customary bonus would be proof that the payment was made ex gratia and accepted as such, or that it was unrelated to any festival occasion, as established in the case of B.N. Elias & Co. Ltd. Employees' Union v. B.N. Elias & Co. Ltd. (1). On this basis, the Court concluded that the Tribunal was fully justified in finding that a traditional or customary bonus had been established in the present case, even though it could not be shown that the bonus had been paid in a year of loss. The respondents attempted to argue that such a bonus could arise as an implied term of the contract of service, but the Court noted that this argument had not been properly pleaded in the record, and therefore it was not allowed to be considered at the stage of argument.

The Court emphasized that it must apply the pleading rules of this Court with great rigor, particularly those rules that govern how parties present their statements of case. These procedural rules are intended to assist the Court in limiting the issues in dispute and to give the opposing side adequate notice of any specific question that will be raised, so that the other party can be prepared to meet that point. Accordingly, the Court would not normally tolerate any laxity in the drafting of pleadings, and it directed that litigants and their counsel should heed the repeated warnings that have been issued in numerous recent arguments. The Court then turned to examine the consequence of its earlier finding on the first issue, namely the deduction for income‑tax from the award made by the Tribunal. It noted that the Tribunal’s record, found on page 129 of volume 1 of the paper book, contained a statement of the firm’s profits for the years 1943‑44 through 1957‑58. In addition, page 157 of volume II of the Tribunal’s reasons displayed a tabular statement showing the bonus paid for each of those years, and that bonus had consistently been equivalent to three months’ basic wages (see citation (1) [1960] 3 S.C.R. 382), which was also the amount allowed for the year presently under consideration. The Court observed that this uniform bonus had been paid despite considerable fluctuations in the firm’s profits from year to year. Even after the bonus was paid as directed by the Tribunal and after accounting for the higher income‑tax amount determined by this Court, the appellants retained a substantial share of the profits. The Court therefore concluded that the Tribunal had not been overly generous to the workmen when it approved a consolidated bonus of three months’ basic wages, reduced by the amount already paid to them. Consequently, the appeal was dismissed with costs. The judgment further recorded that the presiding judge expressed regret at being unable to concur with the order proposed by the Chief Justice. The judge explained that the facts of the case and the disputed points had already been exhaustively detailed in the earlier judgment, and it was unnecessary to repeat them. The remaining controversy was confined to two matters: first, the amount of any profit‑bonus to which the respondents might be entitled for Samvat year 2013 (1956‑57); and second, the correctness of the Tribunal’s declaration in its award, now under appeal, that the respondents were entitled to a customary or festival bonus on the occasion of Diwali. The judge indicated that these issues would be addressed in that order, beginning with the profit‑bonus. The quantum of the profit‑bonus, it was noted, depended on the surplus available for distribution, and the Tribunal had awarded a bonus equivalent to three …

In this case the Tribunal awarded the workmen a bonus equal to three months’ basic wages, the amount including one month’s basic wage that the appellant‑firm had already paid. The three‑month figure was arrived at by applying the formula set out by the Full Bench of the Labour Appellate Tribunal in Mill Owners Association, Bombay v. Rashtriya Mill Mazdoor Sangh, a formula that has received approval from this Court in several later decisions, notably in Associated Cement Companies Ltd. v. Its Workmen. The Tribunal first calculated the gross profit – that is, the net profit of the firm for the relevant year after adding back items that are not admissible for the purpose of computing a workmen’s bonus – and determined that amount to be Rs 1,95,060. Both parties accepted that gross‑profit figure as correct, and the only dispute that remained was which items should be deducted from it in order to determine the residuary surplus available for distribution among those entitled to a share.

The Tribunal proceeded to deduct the following amounts from the Rs 1,95,060: income tax of Rs 10,305; return on partners’ capital of Rs 9,810; return on working capital of Rs 5,595; and remuneration for the six partners of Rs 20,000, a total deduction of Rs 45,710. After these deductions a residuary surplus of Rs 149,350 remained. From this surplus the Tribunal awarded a bonus equivalent to three months’ basic wages, which amounted to Rs 62,340, to the workmen, leaving Rs 87,010 as the employer’s share. The Tribunal further observed that this share would be adequate for the company, provided that Rs 4,250 was set aside for gratuity and the income‑tax rebate on the bonus awarded was taken into account. The two items that remained in controversy before this Court were (1) the quantum of the income‑tax deduction and (2) the remuneration allowable to the partners. Regarding the tax deduction, the Court agreed with the reasoning that, where the employer is a firm registered under section 26‑A of the Indian Income‑Tax Act, the tax to be deducted is not the “registered‑firm tax” on the firm’s gross profits but rather the tax that would be payable on each partner’s share of income. Both the learned Attorney‑General for the appellants and counsel for the workmen argued that the deduction should be “notional” and thus the same rate should apply irrespective of whether the employer is a company or a firm – the Attorney‑General proposing a rate of seven annas in the rupee at one stage and 51 % when the company tax rate was raised, while counsel for the workmen contended that for a registered firm only the “registered‑firm tax” imposed since the Finance Act of 1956 should be considered. The Court found that both submissions rested on a misapprehension of the term “notional,” which has been used to distinguish the notional tax deduction from the actual tax payable by the employer for the year in question, and reiterated that the actual tax paid was deliberately excluded as a proper deduction, as explained in the Associated Cement case.

The Court observed that the argument concerning a company was raised to the figure in question. On the other hand, counsel for the workmen submitted that, in the situation of a registered firm, the tax obligation of the individual partners on the profits should be disregarded and that the Tribunal ought to consider only “the registered firm tax” which had been imposed on such firms since the Finance Act of 1956. The Court considered that both of these submissions were based on a misapprehension or misunderstanding of the true meaning of the word “Notional” as it has been employed by this Court. The expression “notional” has been used to distinguish it from the actual tax payable by the employer for the year in which the profits are being calculated, and the reason why the actual tax paid was rejected as a proper deduction was explained by this Court in the Associated Cement Co. case. The Court quoted the passage from that case: “The formula for awarding bonus to workmen is based on two considerations; first that Labour is entitled to claim a share in the trading profits of the industry because it has partially contributed to the same. In consequence, in working out the formula it should not be ignored that the formula proceeds to deal with the labour’s claim for bonus on the basis that the relevant year for which bonus is claimed is a self‑sufficient unit and the appropriate accounts have to be made on the notional basis in respect of the said year. It is because the bonus year is taken as a unit self‑sufficient by itself that the refund amount received by the employer, being the refund paid by him in previous years, is not included on the credit side. Similarly, the same principle governs losses incurred in previous years which the employer is entitled to have claimed under s. 24(2) during the bonus year. Similarly, that the employer was not required to pay tax during the bonus year as a result of the adjustment of the previous year’s unabsorbed depreciation has no relevance in determining the available surplus from the trading profits of the bonus year. It is on the same ground, viz., that the unit is the bonus year and the trading profits of that year determining the quantum of bonus available, that the initial and additional depreciations besides a statutory depreciation are held not allowable.” After eliminating those factors that are either exceptional, such as special reliefs intended to aid an industry, or that reflect credits or debits attributable to different years, the Court held that one must compute the actual tax payable on the income under the relevant provisions of the Income Tax Act before the figure of available surplus, which could be distributed between the employer and the workmen, can be ascertained. Finally, the Court noted that the rate of seven annas in the rupee was applied by this Court in cases where the employer was a company, the rate having been applicable under the Income Tax law in force at that time.

In this case the Court explained that the amount of income tax to be considered for the purpose of computing the deduction under the head “income tax” must be taken as the actual tax that is payable under the Income Tax Act, and not as a purely notional figure that could be subtracted without reference to real tax liability. The Court emphasized that the calculations are intended to determine the surplus that is truly available after the employer has satisfied its tax obligations; therefore the figure must be tied to the amount that remains once the tax has been paid. The Court noted that while certain items, for example a penalty imposed for a default under the Income Tax Act or any tax credits that are unrelated to the ordinary tax liability on the employer’s income, may be disregarded, this does not mean that the amount deductible under this head is completely unrelated to the provisions of the Income Tax Act or to the surplus that would exist after eliminating the inadmissible factors. The Court clarified that the term “notional” is used only in the sense that the figure does not incorporate the actual tax that is payable; however, once the irrelevant factors are excluded, the amount becomes a real, not a notional, deduction. Consequently, the Court found no basis for the argument that, because the employer in question is a company, the corporate tax rate applicable to the year in question could be used as a basis for computing the deduction under the head “income tax”. Accordingly, the Court rejected without hesitation the principal submission made by the Attorney General and likewise dismissed the contention advanced by counsel for the respondent. The Court held that, when the income tax payable must be related to the actual surplus available, the business must be considered as a single unit and the factors that are extraneous to determining the tax payable for the bonus year must be eliminated. In that context, the only appropriate basis for the deduction is the tax that is payable by the individual partners on their respective shares of the firm’s income. While the Court acknowledged that, under the Indian Income Tax Act, a partnership firm is treated as a unit of assessment and that a registered firm pays a special “registered firm” tax since 1956, it also observed that a partnership is not a separate legal entity. Therefore, for all purposes other than income‑tax assessment, the partners constitute the employer. In agreement with the opinion expressed by the Chief Justice, the Court concluded that the real basis for the deduction is the tax payable by each partner on his share of the firm’s income, without taking into account any other income they may earn or any losses they may have incurred in other ventures.

In the matter of the tax payable by the employer, the Court observed that this amount formed the deductible head for computing the surplus available to the firm. The Court, however, disagreed with the view expressed by the senior judge that the tax paid by the appellant‑firm under the provisions for a registered firm should be excluded from the total income tax liability of the business. Referring to firms registered under section 26‑A of the Income Tax Act, the Court summarised the position that has existed since 1956. Under that regime, income tax at specially low rates was levied on the profits of a registered firm, while super‑tax was not. The partners of such a firm were consequently liable, in their personal assessments, to both income tax and super‑tax on their respective shares of the firm’s profits. This arrangement created an element of double taxation with respect to income tax, although super‑tax was not doubled, and only a partial relief from this double taxation was provided by section 14(2)(aa) of the Act. The Court pointed out that the “registered firm tax” was effectively a tax paid jointly by the partners and, therefore, should be treated as a deduction from the surplus profits in the same manner as the income tax each partner paid individually. Consequently, the Court found no rational basis for distinguishing between the jointly paid “registered firm tax” and the individual income tax on each partner’s share of profit. In the Court’s opinion, after allowing for the rebate under section 14(2)(aa), the amount of “registered firm tax” payable by the firm ought to be added to the Rs 53,000/‑ and odd that the partners were liable to pay individually on their profit shares. Taking the rebate into account, the Court computed the total deductible under the head “income tax payable” to be Rs 60,000/‑.

The next disputed item concerned the amount allowed as remuneration for the six partners who performed the work of the firm. The Court respectfully agreed with the senior judge that the figure of Rs 20,000/‑ sanctioned by the Tribunal was not grounded in any relevant evidence and was merely a speculative amount that could not be accepted. The Court noted that a proper approach would have required the parties to produce evidence showing what reasonable remuneration would have been payable to an independent contractor performing the same work. It was common ground that neither the parties nor the Tribunal had considered the question from this perspective. In these circumstances, the Court identified two possible courses of action. First, the matter could be remitted to the Tribunal so that the parties might adduce the necessary evidence and enable the Tribunal to record a satisfactory finding. Second, the Court could itself determine an appropriate figure for the partners’ remuneration, based on the material already before it.

In this appeal, counsel for the workmen, identified as Mr Agarwala, proposed that if the Court did not accept the Tribunal’s finding that a sum of Rs 20,000 represented reasonable remuneration for the six partners who had attended to the firm’s work, the case should be remitted to the Tribunal so that further evidence could be led and a fresh computation and award could be made. The learned Attorney‑General, on the other hand, argued that because the appeal concerned only the bonus for a single year and because any evidence that might be required for later years could be produced if a dispute later arose, it was unnecessary to burden the parties with additional proceedings before the Tribunal. He suggested that, in the interest of both parties, the Court could itself determine a reasonable remuneration figure based on the material already before it. The Attorney‑General also pointed out that, before the Tribunal, the appellants had claimed Rs 96,000 as the reasonable remuneration for the partners, but he was prepared to reduce that claim to Rs 48,000 if the respondents would accept it. Although Mr Aggarwala initially appeared to accept the Rs 48,000 figure as reasonable, he later returned to the position that, should the Court reject the Tribunal’s Rs 20,000 figure, the matter should be sent back to the Tribunal for a computation based on further evidence that the parties might adduce.

Considering that the dispute before the Court related solely to the remuneration for one year and recognizing that the parties could supply more satisfactory evidence concerning later years should a controversy arise, the Court concluded that remitting the matter to the Tribunal would impose an unnecessary strain on the parties and would not be worthwhile. Consequently, the Court decided that the most appropriate course was to determine a reasonable remuneration amount using the existing record. The evidence indicated that the managerial staff, who worked under the partners, received a remuneration of Rs 750 per month, suggesting the wage scale for senior staff in the concern. If a paid manager rather than a partner had been employed, the reasonable remuneration would be about Rs 1,000 per month. The concern operated four distinct departments—Clearing & Forwarding Agents, Godown‑keepers, Insurance Agents, and Cotton Supervisors and Controllers. If each department employed a senior supervisory staff member, the total monthly remuneration would be Rs 4,000, amounting to Rs 48,600 for a year. Applying this method of reasoning, the figure proposed by the Attorney‑General was deemed reasonable, and the Court was therefore not surprised that Mr Aggarwala at first seemed to accept this figure.

In this case, the Court noted that it was not surprised that Mr Aggarwala initially appeared to accept the figure proposed as reasonable. The Court added that even if each head of the four departments were paid only Rs 750 per month, the aggregate remuneration would be Rs 36,000 for the year. Consequently, the Court held that the amount deemed reasonable for that head could not be less than Rs 40,000. It therefore ordered that the item “Remuneration of partners” in the award under appeal be increased from Rs 20,000 to Rs 40,000. Having made that adjustment, the Court proceeded to examine the impact of the revised figures on (a) the surplus available for distribution and (b) the portion that could be fairly allotted to labour as a bonus. Based on the revised computation, the Court calculated a gross profit of Rs 1,95,060, from which it deducted income tax of Rs 60,000, a return on partners’ capital of Rs 9,810, a return on working capital of Rs 5,595, and the newly fixed partners’ remuneration of Rs 40,000, leaving a net available surplus of Rs 79,655, roughly Rs 80,000. Even if that surplus were split equally between the employer and the labour force, with no provision made for reserves, the labour share would amount to only Rs 40,000 for distribution as a bonus. The Court observed that the total amount payable if a bonus of one month’s basic wages were granted would be Rs 20,780. The maximum that could be allowed to labour, therefore, would be a bonus equivalent to two months’ basic wages. The Court also considered the concession made by the learned Attorney‑General that the return on partners’ working capital should be computed at six percent instead of the nine percent used by the Tribunal; this alteration would add merely about Rs 3,000 to the surplus pool. Accordingly, the Court concluded that the bonus payable to the respondents should be reduced from three months’ basic wages to two months’ basic wages, a reduction that would absorb Rs 41,560 and leave the employer with less than Rs 46,000, rather than the Rs 87,000 the Tribunal had deemed a reasonable apportionment for the employer.

The next issue before the Court was whether the Tribunal was correct in holding that the workmen were entitled to a customary festival bonus of one month’s basic wage on the occasion of Diwali. The Court noted that the question of a customary bonus had been examined by it on more than three occasions. Before discussing those precedents, the Court restated certain undisputed facts. First, it was an admitted fact that a bonus of one month’s basic wage had been paid continuously from Samwat year 1997 (1940‑41) through Samwat year 2013 (1956‑57) until disputes arose concerning the year now in controversy, namely 1957‑58. Second, although there was a slight dispute concerning the exact day on which the bonus was paid in relation to the Diwali festival—whether on the day of the festival or on the following day—the parties agreed that the payment was made at or about the time of Diwali so that the workmen could meet the additional expenses that the festival entailed. The Court emphasized that Diwali is one of the most important Hindu festivals in the Bombay area and that, during the many years for which evidence was available, the firm had consistently generated more than adequate profits to support the payment of such a bonus. In other words, there had never been any year in which the firm sustained a loss or earned insufficient profits to justify the payment of a bonus equal to one month’s basic wage. In light of these admitted facts, the Court identified the narrow point of controversy as whether it was a necessary and essential prerequisite for establishing a claim to a customary festival bonus that the bonus must have been paid in a year of loss.

It is undisputed that the bonus was paid at or around the time of Diwali, and that the purpose of the payment was to help the workmen meet the additional expenses incurred during the festival. This fact must be read together with the observation that Diwali is one of the most important Hindu festivals celebrated in the Bombay area. Moreover, the evidence shows that from the year 1940 onward the firm consistently generated profits that were more than sufficient to allow the payment of a bonus equal to one month’s basic wage. In other words, throughout these many years the firm never experienced a loss year nor a year in which profits fell short of what would justify the payment of a bonus of one month’s basic wage.

In view of these admitted facts, the narrow issue that remains for determination is whether it is a necessary and essential prerequisite for establishing a claim to a customary festival bonus that the bonus must have been paid in a year of loss, or at least in a year when the firm did not have adequate profits to support such a payment. The conditions that workers must satisfy to establish a right to a customary bonus have been set out in at least three decisions of this Court, which are to be examined shortly. None of the parties have contended that those decisions are erroneous or that they should be reconsidered. The only point raised by either side concerns the proper interpretation of the requirements articulated in those decisions. It is important to stress that the present appeal does not require the Court to re‑examine the factual circumstances under which a customary bonus may be payable; rather, the Court’s task is limited to construing the earlier decisions of this Court to determine the conditions they prescribe for establishing such a custom. The learned Attorney General for the appellants emphasized that each of the earlier decisions identified as an essential condition for a right to a customary bonus the requirement that the payment be made in a loss year. Since this condition was not satisfied in the case of the appellant’s business, the Attorney General argued that the Tribunal’s declaration was unwarranted.

The Calcutta Tile Industrial Tribunal had ruled that the evidence did not demonstrate that puja bonus had been paid at a uniform rate for a sufficiently long and uninterrupted period, and consequently it dismissed the claim for puja bonus for the year 1953. The workmen challenged this award before the Labour Appellate Tribunal. The appellate body allowed the appeal, holding that the claim to puja bonus had indeed been established. That appellate decision was subsequently affirmed by this Court. In affirming it, Justice Wanchoo summarized the factual basis for the finding, stating that the circumstances showed two essential points: first, that the payment of puja bonus had been continuous without interruption; and second, that the bonus had not been paid out of any bounty arising from profits, because it had also been paid in years when the enterprise incurred losses. The judgments in the two related cases were reported respectively at (1) [1960] 1 S.C.R. 24 and (2) [1960] 1 S.C.R. 107.

In the judgment delivered the following day in the matter of Graham Trading Co. v. Its Workmen, the learned judge undertook a more detailed examination of the conditions necessary to establish a right to a festival bonus. He began by drawing a distinction between puja bonus that is an implied term of employment on the one hand and puja bonus that is a customary or traditional payment on the other. He observed that, in Bengal, puja bonus typically falls into two categories: (1) a bonus that is paid as an implied term of the employment contract, and (2) a bonus that is paid as a customary and traditional practice. He noted that the tests applicable to the first category had already been considered in Messrs Ispahani Ltd. v. Ispahani Employees’ Union, and therefore there was no need to repeat those principles.

The judge then turned to the facts of the present case. He pointed out that the company had argued that the payments made in the years 1940 to 1952 could not be treated as arising from an implied term of employment in the circumstances before the court. Consequently, the remaining issue was whether the payments in the present case could be characterized as customary and traditional. Referring back to the earlier Ispahani decision, the judge reiterated that a term may be implied even if the payments were not made at a uniform rate, and that the Industrial Tribunal could determine the appropriate quantum for a particular year by taking into account the variations in previous years’ payments. However, he stressed that when the matter concerned a customary and traditional bonus, the considerations differed. In such cases, the Tribunal must examine (i) whether the payments have been made over an unbroken series of years; (ii) whether the period of such payments is sufficiently long, acknowledging that the required length may vary depending on the facts of each case; and (iii) the other relevant factors that distinguish customary practice from an implied contractual term. This analysis laid the groundwork for the Court’s subsequent conclusions regarding the entitlement to puja bonus under the customary tradition.

In assessing whether a puja bonus may be regarded as traditional and customary, the Court explained that the period over which the bonus has been paid must generally be longer than the period required to infer a bonus based on an implied term of employment. The Court further required that the payment of the bonus must not be contingent upon the earning of profits; consequently, it must be demonstrated that the bonus was actually paid in years when the employer incurred a loss. In addition, the Court stressed that the amount of the bonus must have been paid at a uniform rate throughout the relevant period, so that the uniform rate can be deemed customary and traditional within the specific concern. The Court observed that these criteria are substantively more stringent than the tests applied when a puja bonus is claimed on the basis of an implied term of employment.

Later, while examining the factual matrix from which the Court had inferred that the workmen had established a right to a customary bonus, the learned Judge specifically addressed the third condition concerning payment in years of loss. The Judge stated that the requirement that the bonus be paid in years of loss, thereby excluding the hypothesis that it was paid merely because profits had been earned, had indeed been satisfied. The evidence, according to the Judge, showed that the employer had made such payments in at least two years when the business recorded a loss.

The Court then referred to a further decision, Elia Co. Employees’ Union v. Elias and Co., reported in [1960] 3 S.C.R. 382, where the same Judge, Wanchoo, delivered the judgment. In that case the appeal was entertained by special leave from an award of the Industrial Tribunal. The employees contended that they were entitled to a bonus irrespective of profit, on a scale they had set out. The Tribunal had rejected the employees’ claim on three grounds: bonus payable as a profit bonus, as an implied condition of service, and as a customary bonus. Addressing the question of a customary bonus equivalent to one month’s basic wages for subordinate staff, the Judge observed that the payment of one month’s basic wage as a puja bonus appeared to have continued without interruption from its inception in about 1942 up to the dispute in 1954. The payment was consistently one month’s basic wage and, crucially, the Judge noted that the bonus had also been paid in a year when the employer suffered a loss. On the basis of these findings, the Court allowed the appeal insofar as the customary bonus item was concerned.

Finally, the Court discussed the case Management of Tooklai Experimental Station v. Workmen, in which Justice Gajendragadkar—who had also sat on the benches deciding the earlier three cases—delivered the judgment. While dealing with the puja bonus, Justice Gajendragadkar observed that customary puja bonuses are acknowledged in many industries in Bengal, but their validity must be examined by applying certain tests. Among these, the amount of the puja bonus must be shown to have been consistently paid by the employer to his employees from year to year.

The Court noted that the customary puja bonus must satisfy three requirements: it must be paid consistently each year at the same rate, it must continue to be paid even in a year of loss, and it must bear no relationship to the profit earned by the employer in the relevant year. The Court emphasized that the long‑standing course of conduct between the employer and the employees regarding the payment of puja bonus is of great significance, referring to the principle laid down in The Graham Trading Co. (India) Ltd. v. Its Workmen. The Court then asked whether, on the authority of these earlier decisions, it is a necessary condition for establishing a claim to customary bonus that the bonus has been paid in a year of loss. The Court extracted from the Graham Trading case the observation that payment during a loss year is the third condition, and observed that the other three decisions also mentioned loss, especially since the same members of the Court, including Gajendragadkar, J., participated in all four rulings. The Court expressed that it could not conclude that the learned judges intended the loss‑year payment to be merely a relevant circumstance and not an essential requirement.

In the Graham case, the Court explained that the insistence on payment during a loss year is because such a payment would negate the characterization of the bonus as a bounty. Accordingly, the Court found it impossible to interpret the earlier judgments as treating the loss‑year payment as optional. Since the present task is only to interpret these precedents and not to re‑examine the issue afresh, the Court was compelled to hold that the earlier decisions indeed made the loss‑year payment a sine qua non for a successful claim to customary bonus. The Court rejected the argument that a loss of one rupee should be treated the same as a profit of the same amount, noting that a literal reading would lead to an unreasonable result: a nominal loss would defeat the claim, while a nominal profit would permit it. The Court clarified that, although it is not construing a statute, the term “loss” must be understood to mean an inadequacy of profit that would not justify the bonus payment. Consequently, where the employer’s profits are sufficient to allow the bonus, the Court concluded that the right to customary bonus does not arise under the cited decisions.

The Court observed that a customary bonus could not be said to exist in the present case. It relied on the reasoning set out in the Graham Trading Co case, where the Court explained that a payment made by way of bounty would not be excluded from consideration as a bonus. Accordingly, the Court noted that once the right to a customary bonus is recognised, the workmen become entitled to receive that bonus in future years even if the employer suffers a loss in a particular year, and a fortiori even when the profits for that year are insufficient to justify the payment. From this principle the Court inferred that a payment made in an earlier year under such circumstances would serve as a precedent, thereby establishing a custom for payment in later years. In the matter before it, the Court found that it was admitted that the firm had achieved an adequacy of profits in each of the earlier years sufficient to justify the payment of one month’s bonus during the Diwali period. Because the profit situation was adequate, the Court concluded that the declaration granted by the Tribunal was without justification. Accordingly, the finding on the customary bonus in the Tribunal’s order was ordered to be set aside.

The Court therefore allowed the appeal in part. It directed that the profit bonus be reduced to an amount equal to the basic wage for two months, taking into account that one month’s basic wage had already been paid as a bonus. In addition, the Court ordered that the Tribunal’s declaration relating to the customary bonus be deleted. Finally, in accordance with the judgment of the majority, the Court dismissed the appeal with costs.