Podar Plastics(P) Ltd vs Its Workmen on 19 December, 1963
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: Supreme Court of India
Case Number: Civil Appeal No. 496, of 1963
Decision Date: 19 December, 1963
Coram: P.B. Gajendragadkar, K.C. Das Gupta
In this matter the Supreme Court recorded that the petitioner was Podar Plastics (P) Ltd and the respondents were its workmen. The judgment was delivered on 19 December 1963 by a bench consisting of P B Gajendragadkar and K C Das Gupta. The citation of the case appears as 1964 AIR 1040 and 1964 SCR (6) 15. The dispute arose under the Industrial Disputes Act, 1947, and concerned the calculation of bonus for the year 1959. The workmen claimed that they were entitled to a bonus equal to three months’ salary, including dearness allowance. The employer, Podar Plastics, asserted deductions in accordance with the Full Bench Formula. Specifically, the employer sought to deduct Rs 60,000 as notional remuneration for Mr K R Podar, who was a director of the company. The employer contended that Mr Podar devoted his entire time to supervising and managing the concern and therefore was justified in charging a remuneration of Rs 5,000 per month. In addition, the employer made a claim for rehabilitation. The Industrial Tribunal examined these contentions and ultimately directed the employer to pay the workmen a bonus calculated at the rate of half a month’s basic wages, excluding allowances and overtime, for the relevant year. Disagreeing with that award, the employer filed an appeal before the Supreme Court.
The Court held that where a director of a concern genuinely spends his time supervising and managing the affairs of the concern, it is reasonable for him to receive remuneration. However, in the present case the Court observed that Mr Podar had not actually drawn any remuneration, and consequently the employer could not rely on a notional charge that had never been paid or recorded in the books of account. The Court noted that the Full Bench Formula, while admittedly having a notional element, could not be rendered even more notional by allowing deductions based on purely hypothetical or fictional charges. Accordingly, the Tribunal was not justified in accepting the employer’s claim for deduction on the basis of Mr Podar’s notional remuneration. The Court referred to the authorities Gujarat Engineering Co. v. Ahmedabad Miscellaneous Industrial Workers’ Union (1961) 11 L.L.J. 660 and Kodaneri Estate v. Its Work‑men (1960) 1 L.L.J. 273 in support of this view. Regarding the claim for rehabilitation, the Court rejected the proposition that a second‑hand machine must be replaced only by another second‑hand machine. It observed that the Tribunal’s finding on rehabilitation was based on its appreciation of the evidence presented by the employer and therefore could not be disturbed. The decision relied on SouthIndia Millowners“Association v. Coimbatore District Textile Workers’ Union (1962) 1 L.L.J. 223. The Court further clarified that it had not approved the ad‑hoc basis adopted by the Tribunal in the South India Millowners case. Moreover, the Court stated that it would be unreasonable to require the Tribunal to award any rehabilitation on a purely hypothetical basis when the employer’s evidence had been evaluated and rejected. Finally, the Court affirmed the established principle that an employer may deduct income‑tax and wealth‑tax when computing bonus, but it noted that the record contained no material enabling the determination of the amount of wealth‑tax paid. Consequently, no relief could be granted to the employer on that ground.
In this case the Court clarified that it had not approved of or affirmed the ad hoc basis that the Tribunal had adopted in the South India Millowners’ Association case. The Court further explained that it would be unreasonable to suggest that when an employer fails to produce sufficient evidence to justify a claim for rehabilitation, and the Tribunal is prepared to reject the evidence that has been produced, the Tribunal must nevertheless grant some rehabilitation on a purely hypothetical and imaginary ad hoc basis. In the present matter the employer did adduce evidence in support of rehabilitation, but the Tribunal rejected that evidence. The Court also noted that it has consistently held that, for purposes of calculating bonus, an employer may deduct income‑tax as well as wealth tax. However, the Court observed that in the present case there is no material to determine the amount of wealth tax that was charged or paid, and consequently no relief could be granted to the appellant on that ground.
The judgment was delivered in the civil appellate jurisdiction in Civil Appeal No 496 of 1963, which was filed by special leave against the award dated 26 August 1961 of the Industrial Tribunal, Maharashtra, in Reference (IT) No 43 of 1961. Counsel for the appellant included the Additional Solicitor‑General of India and another counsel, while counsel for the respondents appeared for the workmen. The judgment was pronounced on 19 December 1963 by Justice Gajendra Gadkar. The appeal arose from an industrial dispute between the appellant, Podar Plastics (P) Ltd., and its workmen, concerning a claim for bonus for the year 1959. The respondents contended that for the relevant year they should receive a bonus equivalent to three months’ salary, including dearness allowance. After hearing both sides and considering the evidence adduced, the Tribunal directed that the appellant should pay the respondents a bonus calculated at half a month’s basic wages, excluding allowances and overtime, for that year. The appellant challenged that award before this Court by way of special leave.
Podar Plastics (P) Ltd. is a private company with its registered office at Podar Chambers, Parsee Bazar Street, Fort, Bombay, and it operates a factory on Supari Baug Road where it manufactures plastic products. Before the Tribunal, the appellant argued that if accounts were prepared in accordance with the Full Bench Formula, there would be no surplus from which any bonus could be paid to the respondents. The respondents, on the other hand, argued that applying the Formula would show a substantial surplus sufficient to pay a bonus equal to three months’ wages. The dispute, as is typical in such cases, focused on prior charges that the appellant claimed should be deducted from gross profits. A particular point of contention concerned whether depreciation to be deducted as a prior charge should be statutory depreciation or notional normal depreciation. The profit figure was admitted to be Rs 2.70 lacs. The Tribunal prepared alternative calculations based on these differing depreciation approaches, a matter that continued to be examined in the subsequent portion of the appeal.
The Tribunal prepared two alternative profit calculations. The first calculation deducted only statutory depreciation as a prior charge and resulted in an available surplus of Rs. 0.44 lakh. The second calculation deducted notional normal depreciation, as claimed by the appellant, and produced an available surplus of Rs. 0.33 lakh. For the purpose of the present appeal, the Court accepted the latter calculation that relies on the deduction of notional normal depreciation. The learned Additional Solicitor‑General for the appellant conceded that this calculation contained two errors. First, the amount recorded as notional normal depreciation was Rs. 0.78 lakh, whereas the correct figure should have been Rs. 0.73 lakh. Second, the amount shown as income‑tax was Rs. 0.96 lakh, whereas the correct amount should have been Rs. 0.95 lakh. These two discrepancies together amount to approximately Rs. 6,000 and were in favour of the appellant. After correcting these errors, the available surplus is reduced to Rs. 0.39 lakh. This corrected surplus forms one aspect of the matter that the Court must keep in mind while disposing of the appeal.
The principal issue raised by the learned Additional Solicitor‑General concerns the appellant’s claim to deduct a sum of Rs. 60,000 as a prior charge for notional remuneration payable to Mr K. R. Podar, one of the company’s directors. The appellant is a private limited company in which four of the major shareholders belong to the Podar family—namely R. A. Podar, G. R. Podar, K. R. Podar and B. J. Podar. The remaining shareholders are M/s Podar Trading Co. Private Ltd., Jay Agents Private Ltd., National Traders Private Ltd. and Ratilal B. Desai. According to the appellant, Mr K. R. Podar devoted his entire working time to the supervision and management of the company’s affairs and therefore was entitled to a remuneration of Rs. 5,000 per month. To support this claim, the manager of the concern, Mr Gupta, executed an affidavit and submitted himself for cross‑examination. In his affidavit, Mr Gupta stated that Mr Podar attended the factory from nine a.m. to one p.m. and again from two‑thirty p.m. to six‑thirty p.m. During cross‑examination it emerged that when the previous director received a monthly remuneration of Rs. 1,000, a board resolution had been passed to that effect, but no such resolution had been adopted for the remuneration of Mr K. R. Podar. Moreover, the appellant asserted that Mr Podar had not actually drawn any remuneration because the company’s financial position was unsatisfactory and he had chosen to forgo his salary to conserve expenses. It may be conceded that in a concern such as the appellant’s, if a director spends his time supervising and managing the affairs of the concern, he would be entitled to charge a reasonable remuneration.
In this case the Court observed that where a director devotes his time to supervising and managing the affairs of a concern, he is entitled to receive a reasonable remuneration, a principle that cannot be disputed in view of the decisions of this Court in Gujarat Engineering Company v. Ahmedabad Miscellaneous Industrial Workers’ Union (1) and Kodaneri Estate v. Its Workmen and Another (2). Relying on those decisions, the appellant contended that the Tribunal erred by refusing to allow any deduction for remuneration payable to Mr K R Podar. The Court, however, held that the appellant could not seriously challenge the Tribunal’s finding because it was conceded that Mr Podar had, in fact, not drawn any remuneration. The Court noted that although the operation of the Formula is admittedly notional in certain respects, it would be impermissible for an employer to render it even more notional by introducing claims for prior charges on a purely hypothetical and almost fictional basis. The Court explained that if Mr Podar had been regularly paid remuneration and the payments had been properly reflected in the books of account, the appellant could have made a claim for such remuneration, and the Industrial Tribunal could have examined the claim for reasonableness before allowing it. Since, for whatever reason, no remuneration was ever charged by Mr Podar, allowing a deduction on that basis would be unfair. The Court referred to the authorities (1) [1961] 11 L.L.J. 660 and (2) [1960] 1 L.L.J. 273 to support the view that the Formula’s notional character does not justify inserting an item solely to depress the available surplus. Moreover, the Tribunal appeared not to have accepted the evidence of Mr Gupta and made a significant observation that Mr Podar himself had not taken the witness stand to claim his remuneration. When asked whether Mr Podar would give evidence, Mr Gupta answered in the negative. Consequently, in the circumstances proved, the Tribunal was justified in refusing to allow the appellant’s claim for a deduction based on the notional remuneration of Mr Podar, and the appellant could not sustain a serious grievance on that point.
The other point of controversy concerned the Tribunal’s direction that the appellant was not entitled to claim rehabilitation. The Tribunal seemed to adopt the view that, because the appellant commenced its business with second‑hand machinery, it could not claim rehabilitation on the basis of replacing that machinery with brand‑new equipment. In other words, the Tribunal appeared to hold that where an employer operates with second‑hand machinery, the rehabilitation amount should be calculated on the assumption that the second‑hand machinery would be replaced by similar second‑hand machinery rather than by new machinery.
The Court observed that the Tribunal had taken the view that when a piece of machinery is replaced, the replacement must also be second‑hand rather than new. That approach had previously been rejected by this Court in South India Millowners’ Association and Ors. v. Coimbatore District Textile Workers’ Union and Ors. (1). Consequently, the appellant was correct in arguing that the Tribunal’s method of dealing with the rehabilitation issue was wrong. Nevertheless, the appellant’s argument did not assist its position because, in the present matter, the Tribunal had examined the testimony of Mr Dinshaw, who had appeared for the appellant, to justify a rehabilitation claim of approximately Rs ‑8,84,629. One of the Tribunal’s reasons, as recorded, was that the appellant could not sustain a rehabilitation claim on the ground that it would purchase new machinery to replace the old equipment. However, the Tribunal also cited several other reasons. Those additional reasons demonstrated that the Tribunal was not convinced of the correctness or reliability of Mr Dinshaw’s statements. In addition, the appellant had advanced an unusual claim that the value of its dead stock should be included as part of the rehabilitation sum, and the Tribunal rejected that particular claim. As a result, the Tribunal’s finding rested on its own assessment of the evidence presented by the appellant, and, given the material that was on record, that finding could not be altered. The Tribunal also added a precautionary note stating that if the appellant were to produce better evidence at a later stage, the rehabilitation claim would have to be reconsidered on its merits and that the present decision would not act as a barrier to any future claim. The Court accordingly held that, in respect of the present appeal, no further relief could be granted.
The learned Additional Solicitor‑General then argued that the Tribunal should have allowed some amount of rehabilitation on an ad hoc basis and, to support this contention, referred to observations made in the South India Millowners’ Association case (1). In that earlier case, the appellant mill had failed to produce evidence concerning the original cost and the depreciation of the machinery before it was purchased by the appellant. Acting on the limited evidence available, the Tribunal had therefore adopted an ad hoc approach. No objection was raised against the ad hoc method itself; the sole grievance concerned the Tribunal’s observation that when the existing machinery is second‑hand, rehabilitation should be calculated using second‑hand replacement machinery. This Court had held that such an observation did not reflect the correct position. It would therefore be mistaken to assume that this Court endorsed or affirmed the ad hoc basis that the Tribunal employed in that particular case. The material upon which the Tribunal relied for its ad hoc determination was not known, and it would be unreasonable to suggest that a tribunal, faced with insufficient evidence, must nevertheless award rehabilitation on a purely speculative or imaginary basis. The appropriate course, as taken by the Tribunal in the present case, was to preserve the employer’s opportunity to produce stronger evidence in the future.
The Court observed that the material upon which the Tribunal had adopted an ad hoc approach was not known, and it would be unreasonable to suggest that when an employer fails to produce sufficient evidence to justify a claim for rehabilitation and the Tribunal is inclined to reject the evidence already placed before it, the Tribunal must nevertheless grant some form of rehabilitation on a purely hypothetical and imagined basis. In such circumstances the Tribunal’s only viable option was to protect the employer’s position by allowing him a further opportunity to produce more satisfactory evidence at a later stage, and the Tribunal indeed acted in this manner in the case presently before it. After this, the learned Additional Solicitor General sought to obtain a deduction of the wealth tax. The Court reiterated its settled position that, for the purpose of calculating bonus, an employer is entitled to deduct both income‑tax and wealth tax, but emphasized that in the present matter there was no material on record that could establish the amount of wealth tax that had been charged or paid. Consequently, the Court could not grant any relief to the appellant on the ground of a wealth‑tax deduction. In view of these considerations the appeal was rejected, the appellant was ordered to pay costs, and the appeal was dismissed.