The Fine Knitting Co., Ltd vs The Industrial Court, Bombay And Others

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 306 of 1961

Decision Date: 15 February 1962

Coram: Gajendragadkar, J.

The case titled The Fine Knitting Co., Ltd versus The Industrial Court, Bombay and Others was decided on 15 February 1962 by the Supreme Court of India. The petitioner in the proceeding was The Fine Knitting Co., Ltd and the respondents were The Industrial Court, Bombay together with other parties. The matter arose under the Industrial Relations Act, 1946 (Bombay) and concerned an industrial dispute involving the alleged splitting of a single going concern into two separate undertakings. The specific issue was whether the hosiery division of the company and the spinning division could be treated as distinct undertakings for the purposes of section 11 of the Bombay Industrial Relations Act, 1946 (Bombay Act No. 11 of 1947). The headnote of the judgment records that the petitioner company was incorporated in 1908 with the principal business of manufacturing hosiery. In 1924 the company transferred its factor to Ahmedabad and installed spinning machinery for the purpose of ensuring a steady and reliable supply of yarn for its hosiery production. Initially, a notification dated 30 May 1939 issued under the Bombay Industrial Dispute Act, 1938 had classified hosiery concerns as part of the “Cotton Textile Industry”. However, a later notification dated 17 July 1945 removed hosiery manufacture from that definition and placed it under a separate notification. Pursuant to the Bombay Industrial Relations Act, 1946, the Registrar, exercising the power conferred by section II of that Act, recognised the petitioner’s concern as an undertaking belonging to the hosiery industry. Subsequently, following proceedings initiated by the Textile Labour Association of Ahmedabad, the Registrar decided that the petitioner’s concern comprised two separate undertakings: one consisting of the hosiery section and the other consisting of the remaining activities excluding the hosiery section. This decision of the Registrar was affirmed by the Industrial Court. The petitioner challenged the court’s order on two principal grounds. First, it argued that the spinning and hosiery sections formed a single concern because they shared common ownership, management, supervision, control and employment, exhibited complete functional integration, and operated under the same roof. Second, it contended that section 11 of the Act did not empower the authorities to split a single concern into two distinct undertakings. The evidence presented demonstrated that although the spinning section began in 1924 as a subsidiary intended to supply yarn to the hosiery section, it gradually expanded to the point where it operated as an independent spinning mill and could no longer be regarded as a minor adjunct to the hosiery works. Only about twenty percent of the yarn produced by the spinning section was consumed by the hosiery division, with the remaining eighty percent being sold in the open market. Moreover, the spinning department manufactured yarn of various counts, some of which were unsuitable for hosiery production. When the knitting department was closed in 1948, the spinning department continued its operations. It was also established that the remuneration paid to employees in each of the two departments, in terms of minimum wages and dearness allowances, differed, further indicating a separation between the two sections.

The Court observed that the allowance paid to employees in the two departments was different and held that the Registrar’s decision to recognise the hosiery and spinning departments of the appellant concern as separate undertakings under section 11 of the Bombay Industrial Relations Act, 1946, was correct. The Court further held that the question of whether several undertakings carried on by the same company are separate depends on whether they are distinct and independent of each other or are functionally integral or constitute inter‑departmental units, and that the Registrar was within his powers under section II of the Act to decide this question on the basis of the circumstances disclosed by the evidence. The Court relied on the authorities Associated Cement Companies Ltd. v. Their Workmen, (1960) 1 S.C.R. 703; Pratap Press v. Their Workmen, (1960) 1 L.L.J. 497; Pakshiraja Studios v. Its Workmen, (1962) 2 L.L.J. 380; and Honorary Secretary, The South India Mill Workers’ Association v. The Secretary, Coimbatore District Textile Workers’ Union, Coimbatore (1962) Supp. 2, S.C.R. 926. The judgment was issued in civil appellate jurisdiction, Civil Appeal No. 306 of 1961, by special leave from the judgment and order dated 16 May 1959 of the Industrial Court, Bombay, in Appeal (I.C.) No. 90 of 1959. Counsel for the appellant appeared, and counsel for respondent No. 3, the Secretary of the Labour Association, also appeared. The judgment was delivered on 15 February 1962. The Court noted that the appellant, the Fine Knitting Co. Ltd., was incorporated in 1908 with the principal activity of manufacturing hosiery. In 1924 the appellant shifted its factory from Barejadi to Ahmedabad and installed spinning machinery of nine thousand spindles to ensure a suitable and even supply of yarn for its hosiery manufacture. On 30 May 1939 the Government of Bombay issued a notification under the Bombay Industrial Disputes Act, 1938 (No. XXV of 1938) that included hosiery concerns within the definition of “Cotton Textile Industry”. Subsequently, on 17 July 1945 another notification excluded hosiery manufacture from the Cotton Textile Industry and placed it under a separate notification issued under the same Act. That later notification applied to all concerns using power and employing twenty or more persons engaged in the manufacture of hosiery or other knitted cotton articles and all processes incidental or supplementary thereto. After this notification the appellant ceased to be covered by the broader definition of “Cotton Textile Industry” and was recognised as a hosiery concern engaged in the manufacture of hosiery. In 1946 the Bombay Industrial Relations Act, 1946 (No. XI of 1947) was applied to the industries to which the Bombay Industrial Disputes Act had been applied, by virtue of section 2(3) of the former Act. Consequently, for the purposes of the Act, the appellant concern was recognised as an undertaking of the hosiery industry under section 11.

The situation originated with notification No. 10 of 1948, which had been issued by the Registrar acting under the Act. The Industrial Tribunal subsequently accepted this position in the industrial adjudications that involved disputes between the appellant and its workmen. Nevertheless, respondent No 3 – the Textile Labour Association of Ahmedabad – applied to the Registrar on 16 October 1953, requesting that the appellant’s factory be recognised as an undertaking in both the Cotton Textile Industry and the Hosiery Industry. The Registrar, who is identified as the second respondent in this appeal, conducted an enquiry and finally concluded that there was no justification for dividing the concern into two separate units as the third respondent had proposed. The third respondent chose not to appeal the second respondent’s decision; however, respondent No 4, consisting of the five elected representatives of the appellant’s employees, filed an appeal before the Industrial Court (respondent No 1) challenging the same decision. The appellant argued that respondent No 4 lacked standing to appeal because they were not parties to the original application before the second respondent. The tribunal accepted this preliminary objection, dismissed the appeal filed by respondent No 4, and thereby left in force the Registrar’s order rejecting the third respondent’s application, which resolved the dispute. While that appeal was still pending before the first respondent, the appellant initiated two further applications before the second respondent, again seeking recognition of the concern as an undertaking in both the Cotton Textile Industry and the Hosiery Industry. The second respondent refused these applications, holding that his earlier decision remained unchanged and that no new circumstances justified reconsideration.

Subsequently, respondents No 3 and No 4 each appealed to the first respondent, and both appeals were allowed. The first respondent issued a direction that the appellant company should be recognised as two distinct undertakings – one belonging to the Cotton Textile Industry and the other to the Hosiery Industry. The appellant then approached the High Court of Bombay under Articles 226 and 227 of the Constitution, challenging the validity of the first respondent’s order. On 20 August 1958 the parties entered into a consent order in the High Court. That consent order set aside the direction issued by the first respondent and remitted the matter back to the second respondent for a fresh enquiry, directing him to resolve the dispute in accordance with law. Accordingly, the second respondent rendered a new decision on 14 February 1959, concluding that, based on the evidence disclosed, the appropriate approach would

The second respondent concluded that, based on the evidence, the most appropriate approach was to regard the spinning and the hosiery sections of the appellant’s company as two distinct undertakings and to treat each as a separate enterprise. Accordingly, relying on section 11(1), he ordered that the Fine Knitting Co. Ltd. (Hosiery Section) be recognised as an undertaking belonging to the Hosiery Industry, while the Fine Knitting Co. Ltd. excluding the Hosiery Section be recognised as an undertaking belonging to the Cotton Textile Industry. The appellant was dissatisfied with this determination and filed appeals before the first respondent. Respondents numbered three and four also contested the second respondent’s decision, arguing that the whole of the appellant’s concern should be treated as a single Cotton Textile undertaking. All three appeals were dismissed, and the first respondent affirmed the order made by the second respondent. As a result, the appellant’s concern was officially recognised as comprising two undertakings: the Hosiery Section and the remainder of the business excluding the Hosiery Section. The appellant now approaches the Court by way of special leave, seeking to overturn that order of the first respondent.

The counsel for the appellant vigorously urged that, when the proper tests laid down by this Court are applied, the spinning and hosiery sections should be regarded as one single concern. To support this position, he referred to the decisions in Associated Cement Companies Ltd. v. Their Workmen (1), Pratap Press v. Their Workmen (2) and Pakshiraja Studios v. Its Workmen (3). This issue was recently examined by the Court in the case of the Honourary Secretary, The South India Millowners’ Association v. The Secretary, Coimbatore District Textile Workers’ Union, Coimbatore (4), where judgment was delivered on 1 February 1962. In that case, the Court reviewed earlier authorities and held that, although the question of whether two industrial establishments constitute a single concern must be assessed according to the various tests formulated over time, it would be unreasonable to treat any single test as decisive. The Court observed that several factors are relevant in solving the problem, but the importance of each factor differs from case to case and their relative weight is not uniform. It was further noted that the significance of the various factors would not be the same in each situation, nor would their importance be identical. The Court therefore emphasized that the point raised by the counsel for the appellant must be considered in the light of these observations. The counsel contended that, in the present matter, there is unity of ownership, and consequently there is also unity of management, supervision and control; there is unity of purpose and design, and he argued that there is complete functional integration. He maintained that, because no hosiery can be manufactured without yarn, a functional inter‑dependence exists between the two sections.

In his submission, Mr. Mehta argued that the two business units of the appellant could not be regarded as separate because they shared many common features. He observed that the spinning operation could not exist without the hosiery operation, and that the two units also shared a single system of finance. Accordingly, there was one capital account, one depreciation fund, a single account of expenditure and income, one balance‑sheet and one profit‑and‑loss account for the whole establishment. Mr. Mehta further pointed out that the two concerns employed their personnel in the same premises, which meant that there was unity of habitation and of employment as well. On the basis of these assertions, he contended that the first and the second respondents erred in dividing the appellant’s establishment into two distinct sections and in treating them as separate entities.

While considering the importance of the factors relied upon by Mr. Mehta, the Court noted that it must also take into account other material considerations that formed the basis of the decision under appeal. It was acknowledged that the spinning department had originally been set up in 1924 as a subsidiary of the hosiery department, intended to act as a feeder for the latter. However, the evidence on record demonstrated a reversal of this relationship. The spinning department had grown to assume a position of primary importance, whereas the hosiery activity now occupied a relatively minor role in the overall industrial operations of the appellant.

The inspection notes furnished by the second respondent recorded that the management admitted the spinning department had developed to such an extent that it functioned essentially as an independent spinning mill. The Court observed that the management conceded that only about twenty percent of the yarn produced in the spinning department was consumed by the hosiery operation, while the remaining eighty percent was available for sale in the open market. The production figures for the spinning department and the consumption data for the yarn it produced clearly indicated that the spinning department could no longer be described as a minor segment operated solely for the benefit of the hosiery unit.

Specific production statistics were provided to illustrate the shift in the relative significance of the two departments. In the months of November and December 1955, the spinning department generated output valued at Rs 1,17,742, whereas the knitting (hosiery) department consumed yarn worth only Rs 23,817, leaving a surplus that was sold for Rs 93,925. For the full year 1956, the spinning department’s output was Rs 6,70,854, the knitting department’s consumption was Rs 1,40,105 and the surplus sold amounted to Rs 5,30,749. In 1957, the corresponding figures were Rs 8,17,153 for spinning, Rs 1,31,725 for knitting consumption and Rs 7,04,018 sold as surplus. In 1958, the spinning output stood at Rs 6,68,095, knitting consumption at Rs 1,26,252 and surplus sales at Rs 5,40,873.

Balance‑sheet data reinforced this trend. The balance‑sheet for the year 1954 recorded total hosiery sales of Rs 2,37,232‑60, while total yarn sales amounted to Rs 14,82,705‑50. For the year 1955, hosiery sales were Rs 2,56,986 and yarn sales were Rs 14,44,929. Employee strength data further corroborated the conclusion. A table prepared by the second respondent from information supplied by the management showed that in 1955 the spinning department employed 174 workers, the hosiery department employed 56 workers, and there were additional common workmen employed across both units.

For the fiscal year 1956 the records showed that the spinning department employed 217 workers, the hosiery department employed 54 workers and there were 38 workers classified as common labour. In the following year, 1957, the employment figures changed to 194 persons in spinning, 65 persons in hosiery and again 38 persons in the common category. During the year 1958 the numbers further adjusted to 178 employees in spinning, 60 employees in hosiery and 32 in the common group. Counsel for the respondent, Mr Mehta, challenged the accuracy of some of these individual numbers but he did not dispute the overall inference that could be drawn from the tables. Both parties accepted that the data demonstrated a clear numerical disparity, namely that a considerably larger workforce was engaged in the spinning operation than in the hosiery operation.

The Court therefore concluded that there was no doubt that the spinning activity of the appellant, which had originally been described as a subsidiary to the hosiery business, had grown in significance and had become a prominent component of the appellant’s overall industrial undertaking. The Court held that, at this stage, the spinning activity could no longer be characterised as a subsidiary to the hosiery activity. It was also unanimously recognised that, under the notification issued pursuant to the Cotton Textile (Control) Order, 1948, the appellant was required to supply to the Government a specified quantity of yarn produced by its spinning department. The Court found it unnecessary to recite the detailed provisions of the order or to quantify the exact amount of yarn that the appellant was obliged to deliver. What mattered, the Court observed, was that the very application of the order treated the appellant as a producer possessing a spinning plant, thereby acknowledging the spinning function as an independent activity subject to governmental control under the 1948 order.

When the appellant argued that the spinning and hosiery operations were functionally integrated, the Court noted that a hosiery enterprise could continue to exist without an in‑house spinning operation, provided it purchased the yarn necessary for knitting from external sources. This observation addressed one facet of the integration argument. A more critical point relied upon by the respondents was that the appellant’s spinning department manufactured yarn of all possible counts, including many that were not suitable for the appellant’s own hosiery production. When questioned about the allegation raised by respondents 3 and 4 that the yarn produced was intended exclusively for internal use, the appellant’s management reluctantly denied the claim. Nevertheless, an advertisement placed in the local daily newspaper “Sandesh” clearly advertised that yarn of every count was being offered for sale to the general market. Consequently, the Court found it untenable to maintain that the spinning department’s output was produced solely for the hosiery department. If the spinning plant was generating yarn that could not be used by the hosiery section, the logical inference was that the spinning operation was functioning independently and was producing yarn for commercial sale. Accordingly, the Court rejected the contention that the two departments were functionally inter‑dependent or integral to each other. The Court also noted, without dispute, that the knitting department had been closed in 1948, a fact that further undermined the claim of necessary inter‑dependence between the two sections.

In 1948 the knitting department was closed while the spinning department continued to operate without interruption as before. If the two departments were truly functionally interdependent, the closure of one without the other would require a satisfactory explanation. The first and second respondents explained that although some spinning work might be useful for hosiery production, the majority of the spinning activity was undertaken independently with a view to the market. Consequently, the closure of the hosiery department did not and could not affect the continued operation of the spinning department. The respondents also relied heavily on another circumstance, namely the appellant’s own conduct in dealing with employees of the spinning and knitting departments. It was admitted that the minimum wages paid to knitting employees differed from those paid to spinning employees, and that the dearness allowance amounts also varied between the two groups. This distinction is difficult to comprehend if both groups are employed in different departments of the same establishment and are claimed to be part of a single unified concern. Counsel for the appellant argued that there was unity of employment, purpose, and design, making it inconceivable that employees in two integrally connected departments would receive different minimum wages. The same reasoning applies to the dearness allowance, and it also applies to the payment of bonuses to employees. It appears that in years when the appellant earned profits and paid bonuses to workers in the spinning department, no bonus was paid to workers in the knitting department. Such a pattern can be explained only by the appellant treating the two departments as distinct and separate entities, resulting in one group receiving bonuses while the other did not. Counsel for the appellant suggested that the dispute originated from the third respondent’s desire to bring the spinning employees within its jurisdiction. Conversely, counsel for respondents Nos. 3 and 4 asserted that the trouble began when the appellant denied spinning employees the benefits of service conditions applicable to textile industry workers in Ahmedabad. Regardless of the background or origin of the conflict, it is unmistakably clear that the appellant’s differentiated treatment of spinning and knitting employees strongly indicates that the two departments were regarded as separate units.

The Court observed that the appellant had treated the knitting and spinning departments not as a single unified enterprise but as two distinct units, each operating independently of the other. In view of this factual situation, the first and second respondents were not persuaded by the appellant’s argument that the two activities formed a single enterprise. Accordingly, the respondents concluded that the knitting and spinning activities constituted separate undertakings, which under section 11 must be recognized separately. The Court found no basis on which the appellant could successfully contest this conclusion. The Court then turned to an additional argument raised by counsel for the appellant. Counsel contended that the order under appeal, which recognized two different undertakings pursuant to section 11(1), was not authorized by the statutory scheme. Section II authorizes the Registrar, after such inquiry as he deems appropriate, to recognize for the purposes of the Act (i) any concern in an industry as an undertaking and (ii) any segment of an undertaking as an occupation. The appellant’s counsel argued that subsection (1) of section II does not permit a concern to be divided into two separate undertakings, asserting that a “concern” denotes the whole establishment run by the appellant and therefore must be treated as a single undertaking. The Court was not persuaded by this line of reasoning. It noted that the appellant is unquestionably engaged in the hosiery business, a sector that cannot be classified as the cotton textile industry because the appellant’s spinning operations fall exclusively within the latter category. Consequently, the appellant’s activities in the hosiery sector must be recognized as distinct from its textile undertaking. The Court explained that when a single concern or company carries out multiple lines of business or distinct types of industrial work, each line of business constitutes a separate enterprise or undertaking that must be recognized as such. Moreover, the appellant itself has been treating the two kinds of work as separate, having effectively split its overall business into two independent divisions. In such circumstances, there is no logical reason why the Registrar could not acknowledge the existence of two separate undertakings carried on by the appellant and treat them accordingly. The Court rejected the contention that section II(1) bars the recognition of several undertakings operated by the same company. The decisive factor, the Court held, is whether the undertakings are separate, distinct, and independent of each other, or whether they are functionally integrated and inter‑dependent. If they are separate, the Registrar is justified in treating them as distinct undertakings; if they are functionally integral, the Registrar may recognize them as a single undertaking. The Court also noted, incidentally, a minor point that before the first respondent some additional procedural matter had arisen, though the excerpt ends before that issue is elaborated.

The appellant argued that the applications filed by respondents numbered three and four should be dismissed on the ground of res judicata. The basis of that argument was that the second respondent, on an earlier occasion, had examined the merits of the dispute and had refused the request made by the third respondent for separate recognition of the two undertakings. The appellant therefore contended that the same issue could not be revived before the same authority. The Court examined this contention and found that it lacked any substantive foundation. The Court reiterated that when the second respondent issued his earlier order, the fourth respondent had filed an appeal against that order before the first respondent. That appeal was subsequently dismissed because the fourth respondent had not been a party to the proceedings before the second respondent and consequently was not entitled to lodge an appeal. The Court observed that if the fourth respondent was barred from appealing due to his non‑party status in the earlier proceedings, it was difficult to argue that he could be barred now from making a fresh application on the ground of res judicata. At most, a plea of res judicata could be raised against the third respondent, but such a plea would be ineffective because, in the present matter, the fourth respondent had also filed an application. For this reason, counsel for the appellant did not press the issue of res judicata with any vigor before the Court. Accordingly, the Court concluded that the appeal failed and ordered that it be dismissed with costs. The appeal was therefore dismissed.