Akola Electric Supply Co. vs J. N. Jarare and Ors

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 637 of 1962

Decision Date: 25 March 1963

Coram: K.C. Das Gupta, P.B. Gajendragadkar, K.N. Wanchoo

The case titled Akola Electric Supply Co versus J N Jarare and others was decided on 25 March 1963 by the Supreme Court of India. The judgment was authored by Justice K C Das Gupta and the bench was composed of Justices K C Das Gupta, P B Gajendragadkar and K N Wanchoo. The petitioner was the Akola Electric Supply Company and the respondents were J N Jarare and the other respondents. The citation of the decision is 1963 AIR 1721 and 1964 SCR (2) 513. The dispute arose under the Industrial Disputes‑State Electricity Board context where the State Electricity Board had issued a notice indicating its intention to acquire the appellant’s undertaking upon the expiration of the licence granted to the company. Two days before the licence expired, the Industrial Court at Nagpur framed a scheme for payment of gratuity to the employees of the appellant company, and the scheme was to take effect from the date of the order. The appellant company subsequently filed an application under article 227 of the Constitution, prompting the Nagpur High Court to set aside the Industrial Court’s order and to remit the matter for fresh consideration, with particular reference to the financial condition of the company. After the remand, the Industrial Court held that the company was capable of meeting its gratuity obligations and issued a new award directing payment of gratuity at the rate of one month’s average wage to each employee. This fresh award was pronounced more than one year after the company had ceased its business operations. The present appeal was brought before the Supreme Court by way of special leave, challenging the validity of the gratuity scheme imposed on a company that had already stopped carrying on its trade.

The principal argument advanced by the appellant was that the Tribunal was not justified in imposing a gratuity scheme at a time when the company had permanently closed its operations. The Court examined the principle that gratuity schemes are normally formulated on the assumption that the industry will continue to function for a substantial period, and therefore it held that the Industrial Court had acted incorrectly in framing any gratuity scheme for the appellant at that stage. The Court distinguished the authorities of Indian Hume Pipe Co v Its Workmen (1960 2 SCR 32) and Bharatkhand Textile Manufacturing Co Ltd v Textile Labour Association (1960 3 SCR 329) as not applicable to the present facts. Consequently, the Court concluded that the award of gratuity could not be sustained against a company that had already ceased its business, and it set aside the award rendered by the Industrial Court. The judgment fell under civil appellate jurisdiction as Civil Appeal No 637 of 1962, arising from the award dated 29 April 1961 of the State Industrial Court at Nagpur in Industrial Reference No 13 of 1959. The Court’s decision was delivered by Justice K C Das Gupta on 25 March 1963.

The award under the Berar Industrial Disputes Settlement Act of 1947 was dated 29 April 1961 by the Industrial Court. Earlier, on 4 December 1959, the Industrial Court had issued an award ordering the payment of gratuity to the employees of the appellant company at specified rates. That earlier award was expressly stipulated to become effective from 4 December 1959, thereby establishing the commencement date for the gratuity obligations. Subsequently, the company filed an application under Article 227 of the Constitution, and the Nagpur High Court set aside the Industrial Court’s order and remanded the matter for consideration after reviewing the company’s financial condition. Upon remand, the Industrial Court heard evidence from parties regarding the company’s finances and concluded that the company was in a sound financial state and could meet gratuity liability of at least Rs 50,000 or more. Consequently, the Industrial Court issued a fresh award directing that gratuity be paid to the employees at a rate of one month’s average wage. The average wage was to be calculated for the period from 1 December 1958 to 30 November 1959 for each employee who had at least five years of uninterrupted continuous service. The award further specified that the gratuity obligation would not apply where the employee’s service was terminated by dismissal on account of misconduct. The new award was expressly stipulated to become effective from 29 April 1961, establishing the date from which the gratuity payments were to be made. The appellant company was licensed to supply electric energy to the public within an area roughly corresponding to the municipal limits of Akola. The licence that authorized the company to supply electricity expired on 6 December 1959, after which the company no longer had the legal right to operate. Earlier, on 27 November 1957, the State Electricity Board had issued a notice indicating its intention to exercise its option to purchase the undertaking upon the licence’s expiry. After that notice was served and it became known that the company would close its business on 6 December 1959, the claim for gratuity was first made. This claim formed the foundation for the award issued later by the Industrial Court in the matter of gratuity for its employees. The application for arbitration explicitly stated that the gratuity claim was being made because of the imminent closure of the business. It is noteworthy that the earlier award by the Industrial Court was rendered only two days before the company’s licence expired and the business was taken over by the Bombay Electricity Board. The award now under appeal was issued more than a year after the company had closed its business. The primary argument raised in support of the appeal is that the Tribunal was not justified in imposing a gratuity scheme on the company when it had already ceased to carry on its business. It is contended that gratuity schemes are intended to be long‑term arrangements, based on the principle that an employer should provide retirement benefits to employees as they retire over the years. Therefore, framing a gratuity scheme when an industry is on the verge of closure, or after it has closed, is argued to be wholly unjustified.

In this case the respondent argued that it was unreasonable to require a company that was about to close, or had already ceased, to create a gratuity scheme for its employees. The Court observed that this contention possessed considerable merit, yet it also noted that earlier decisions of this Court had already clarified that a statutory requirement to pay retrenchment compensation does not prevent the institution of a gratuity scheme. The matter had been examined in detail in Indian Hume Pipe Co. v. Its Workmen, where the Court explained that gratuity is intended to support workers after retirement, regardless of the reason for retirement, whereas retrenchment compensation is meant to provide temporary relief to a person whose employment is terminated abruptly and unexpectedly. The Court further pointed out that in Bharatkhand Textile Mfg. Co. Ltd v. Textile Labour Association it had been held that the presence of a Provident Fund Scheme does not stop the addition of a gratuity benefit. Counsel for the respondent seemed to contend that these rulings supported the view that an impending or actual closure of an industry was no obstacle to devising a gratuity scheme. The Court, however, found no basis in those judgments for such a proposition. Neither the cited cases nor any other authority known to the Court addressed the situation where a gratuity scheme is contemplated for an industry that is about to cease or has already ceased operations. Moreover, the Court was aware of no instance in which an Industrial Tribunal had ever framed a gratuity scheme for a business that was not expected to continue or had already stopped trading. All previously decided matters involving gratuity schemes concerned enterprises that were projected to remain in operation for a reasonably long period.

One of the principal considerations in determining whether a gratuity scheme is appropriate is the ability of the enterprise to bear the additional financial load. The Court reiterated that this assessment must take into account the yearly burden, measured against the average number of retirements that are likely to occur each year. In the Bharatkhand Textile case the Court outlined the relevant factors, stating that before drafting a gratuity scheme an industrial adjudicating body must examine several facts, including the employer’s financial condition, profit‑making capacity, past earnings, the extent of reserves, prospects for replenishing those reserves, and the claims relating to capital invested. The Court emphasized that the decision must be based on a long‑term view of the employer’s financial health, without giving undue weight to temporary prosperity or temporary hardship. These observations underscore that gratuity schemes are normally devised with the expectation that the industry will continue to function for an extended period. The Court also noted that gratuity schemes are not founded on any specific statutory enactment; rather, they have evolved through industrial adjudication as a means of achieving social justice.

Other material considerations must also be taken into account when the terms of a gratuity scheme are being determined, and it is well recognized that the grant of a gratuity claim must depend upon the employer’s ability to bear the financial burden over the long term. However, the Court stated that it would be inappropriate to give undue weight to either a temporary period of prosperity or a temporary period of adversity experienced by the employer. In formulating a long‑term scheme, a long‑term perspective of the employer’s financial condition must therefore be adopted, and it is only on that basis that the question of whether a gratuity scheme should be framed can be decided.

These observations highlight that gratuity schemes are always created with the expectation that the industry will continue to operate for a substantial future period. The Court noted that the provision for a gratuity scheme is not derived from any statutory enactment; rather, it has been developed by industrial adjudication as a measure intended to achieve social justice. In reaching this conclusion, industrial adjudication has relied on the premise that only a small percentage of workmen retire in any given year, and consequently the obligation to pay gratuity to retiring workers would ordinarily not constitute an unreasonable burden for the employer.

The Court observed that the situation changes materially when an industry is expected to close in the immediate future or has already ceased operations. In such circumstances, the entire body of workmen would retire simultaneously, and the effect of a gratuity provision would, in substance if not in name, become equivalent to granting retrenchment compensation in addition to the benefits already provided for by statute. The Court found no justification for this outcome within the principles of social justice.

Accordingly, the Court concluded that the Industrial Court had acted erroneously in directing that the Company should pay gratuity to its employees. The appeal was therefore allowed, the award made by the Industrial Court was set aside, and no order as to costs was made.