(2) S.C.R. SUPHEME COURT RE.POH, TS 923

with proper questions, and it seems th<tt similar questions on these aud other points were not put to the witness out of deference (as it is now suggested) to the ruling of the Court.

The accused c<rn only blame themselves, if they did not.

The learned Judges of the High Court r1 !led out from their consideration that these two cirnumstances made it possible for the witnesses to recognise the accused, but held that there was ample opportunity even otherwise for the witnesses to do so.

The High Court was justified in so doing, and there being ample evidence on which they could come to the conclusion that the witnesses had, in fact, recognised the accused, it must inevitably be regarded as one of fact in regard to which this Court does not interfere.

Since 110 other point was argued, the appeal must fail, and we agree that it be dismissed.

Appeal dismis8ed.

THE TH, U~TEES OJ!' THE CIIARlTY HUND,

ESPLANADE l~OAD, .FORT, BOMBAY

THE COMMU3SIONEL~ OF INCO:'vlE-TAX,

BOMBAY

(S. g, DAS, C. J., N. H. BHAGWA'l'l aml

M. HrnAYA'I'ULLAH, JJ.)

Incumc-tax--Public charitable trust--Exemption- -Test-Indian Income-tax Act, r922 (XI of r922), s. 4(3)(i).

The appellants were the trnstees of a charity fund known as "The Charity Fund founded by Sir Sassoon David, Baronet of Bombay". Clause 13 of the deed of trust, after declaring that the trnstees should apply the net income for all or any of the following purposes, namely, (a) the relief antl benefit of the poor ;111d indigent members of Jewish or any other community of Bombay or other parts of lndia or of the world either by making payments to them in cash or providing them with food and

Tahsild'" Singh

0 .d not her

He Stal~ of Utt:lr J>1 adesh

Hid , y, tullah ] .

I959

May 5.

I95Y

924 SUPREME COURT REJ'ORTS [1959] Supp.

clothes and/or lodging or residential quarters or in giving education including scholarships to or setting them up in life or in such The J'rustecs of the other manner as to the said Trustees may seem proper or ........ .

Chudty Fund,

(b) the institution maintenance and support of hospitals Esplanade lload, and schools1 colleges or other educational institutions or ........... .

Forl Bombay · f '

(c) the relief of any distress caused by the elements o

C v. . . nature such as famine, pestilence, fire, tempest, flood, earthquake The ommissioner . or any other such calamity or .............. . of Income-tux,

Bombay

(d) the care and protection of animals useful to mankind or ................. .

(e) the advancement of religion or .............. .

(f) other purposes beneficial to the community not falling under any of the foregoing purposes .............. ., added by way of provisos (1) that in applying the net income for the purposes mentioned in sub-cl. (a) the trustees must give preference to the poor and indigent relations or members of the family of Sir Sassoon David, including distant and collateral relatives, (2) that for the said purpose the trustees must apply not less than half of the income for the benefit of the members of the Jewish community of Bombay only, including the said relatives of Sir Sassoon David and Jewish objects. The question for determination was whether the income from the trust fund was exempt from taxation under s. 4(3)(i) of the Indian Income-tax Act. The High Court came to the conclusion that the trust fund could not be said to be held, wholly or partly, for religious or charitable purposes involving an element of public utility and answered the question in the negative.

Held, that there could be no doubt that each one of the primary purposes mentioned in the deed of trust, including the one mentioned in sub-cl. (a), properly construed, involved an element of public utility and thus they constituted a valid charitable trust.

Although it was open to the trustees to spend the entire income for the purpose mentioned in sub-cl. (a), that could not detract from the validity of the trust since the relations or family members of the founder did not come in directly under any of the other purposes and could do so only under sub-cl. (a) as preferential beneficiaries to be selected from out of the class of primiary beneficiaries prescribed by it, in terms of the provisos. The test of the validity of such a public charitable deed of trust should be whether or not at the primary stage of eligibility it could be said to possess that character.

In re Koettgan's Will Trusts, [1954] Ch. 252, applied.

Trustees of Gordhandas Govindram Family Charitable Trust v.

Commissioner of Income-tax (Central), Bombay, [1952] 21 I.T.R- 231, distinguished and held inapplicable.

The circums\ance that in selecting the actual beneficiaries

from the primary class of beneficiaries under sub-cl. (a), the z959 trustees had to give preferece undr the provisos,_ to the rela- - 1 th tions or members of the family of Sir Sassoon David, could not The Trustee~ 0 8 therefore affect the public charitable trust constituted under Charity lund, sub-cl. (a) and the income from the trust properties was entitled Esplanade Road, to exemption under s. 4(3)(i) of the Indian Income-tax Act.

Pott, Bombay v.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. The Commissioner 396 of 1957. of Income-tax,

Bombay Appeal from the Judgment and Order dated the 21st February, 1956, of the Bombay High Court in Income-tax Reference No. 32 of 1954.

R. J. Kolah, J. B. Dadachanji and S. N. Andley, for the appellants.

K. N. Rajagopal Sastri and D. Gupta, for the respondent.

1959. May 5. delivered by The Judgment of the Court was

D.as, C. J.-This is an appeal brought on a certificate Das c. J. granted on September 19, 1956, by the High Court of Bombay under s. 66(A)(2) of the Indian Income Tax Act (hereinafter referred to as " the said Act ") against its order dated February 21, 1956, in Incometax Reference No. 32 of 1954 answering in the negative two questions of law referred to it under s. 66(1) of the said Act at the instance of the appellants.

The appellants are the trustees of a charity fund known as "The Charity Fund Founded by Sir Sassoon David, Baronet of Bombay". The said Sir Sassoon David, Bart. and four other persons, who were holding certain securities of the value of Rs. 24,25,000 for the purpose of charity and had been applying the same for and towards charitable purposes, executed, on June 8, 1922, a Deed of Declaration of Trust declaring that the said trust fund would be held by them on trusts more specifically therein mentioned. Clause 13 of the said deed, on the true construction of which depends the answer to the referred questions, runs as follows:-

" 13.

The Trust Fund shall be held by the Trustees upon the Trusts to apply the net income thereof

926 SUPHEME COURT ltEPURTS [1959] Supp.

' 959 after providing for all necessary expenses in relation

The Trustees of"" to the management of the Trust :Funds for all or any

Charity Fund, of the following purposes, that is to say, Esplanade Road,

(a) the relief and benefit of the poor and indigent lort, IJombay members of Jewish or any other community of Bom-

2., c v. . . bay or other parts of India or of the world either by 11e 01nmissioner . . . . of Income-tax. makmg payments to them m cash or prov1d111g them Bombay with food and clothes and/or lodging or residential quarters or in giving education including scholarships Das c. /. to or setting them up in life or in such other manner as to the said Trustees may seem proper or ............. ..

(b) the institution maintenance and support of hospitals and schools, colleges or other educational institutions or .............. . (c} the relief of any distress caused by the elements of nature such as famine, pestilence, fire, tempest, flood, earthquake or any other such calamity or .......... ..

(d) the care and protection of animals useful to mankind or .......... ..

(e) the advancement of religion or .......... ..

(f) other purposes beneficial to the community not falling under any of the foregoing purposes .........

Provided always that in applying the income as aforesaid the Trustees shall give preference to the poor and indigent relations or members of the family of the said Sir Sassoon David, Bart., including therein distant and collateral relations; provided further that in tho application of the income of the said Charitable Trust l<'und the said Trustees for the time being shall observe the following proportions, viz.: that not less than half the income of the said funds shall at all times be applied for the benefit of the members of the Jewish Community of Bombay only (including the relations of Sir Sassoon David, Bart. as aforesaid) and Jewish objects and particularly in giving donations to the members of the Jewish Community of Bombay on the anniversary of the death of the said Sir Sassoon David, Bart. and his wife Lady Hannah David which falls on the Twenty.second day of" June and the remaining income for the benefit of all persons and objects including Jewish persons an~ objects and in

such proportions as the said Trustees may think proper. r959 Provided further that if the income of t?e Trus.t Funds The Tt-;:;;; es of the for any year shall not be wholly applied durrng that charitv Fund, year on the Trusts aforesaid such surplus income may Esplan; de Road, be carried forward to the subsequent year or years Fort, Bombay and be applied as the income arising during that year v ... or vears.

Provided also that during the life-time ofT!ze 1c0""ms 1s•oner

S . .J S D 'd B . h l' t' f l of ncomeax, 1r assoon av1 , art., m t e app ica 10n o tie Bombay said income the Trustees shall have regard to the wishes of the said Sir Sassoon David, Bart., who shall Das c. J. also be entitled to direct if he so desires that the income of the time being of the Trust-Funds or any part thereof may be applied to such charitable object or objects as the said Sir Sassoon David, Bart., shall direct and in such case the Trustees shall so apply the income".

This Deed of Declaration of Trmit was, on June 4, 1953, registered under the Bombay Public Trusts Act., 1950.

The Trust fund had been invested by the trustees in inter alia 3~% Government Securities. In the year 1930 a certificate was issued by the Income-tax Officer, A Ward, Bombay, whereby the Reserve Bank of India was authorised not to deduct at source the tax on the interest on the said securities so held by the trustees. It was mentioned in the said certificate that it was to enure till its cancellation. In 1946 the 3~% Government Securities were redeemed by the Government of India and were converted into 3% Conversion Loan, 1946.

Accordingly in February, 1948, the said certificate of exemption was cancelled, as

the securities covered thereby had been redeemed by the Government. The trustees thereupon asked for a fresh certificate of exemption from the Income-tax Officer, Bombay Refund Circle in respect of the 3%

Conversion Loan, 1946.

But the said Income-tax Officer refused to issue such certificate on the ground that the income from the trust fund in question was not exempt from taxation under s. 4(3)(i) of the said Act which, at the material time, was as follows:-

" 4(l) 0 0 0 • e 0 o o 0 • t 0 o 0 0 0 t t t 0 o 0 0 0 0 t t 0 t o 0 0 0 0 0 0 o 0 t t t 0 o I I 0 o t 0 0 0 0 t o 0 0 t

ti ftl II I It fl It I I It I I It I tit Ill tttttt t It t ttt I flt 11 It tit I ti

r959 (2)

The T.-ustees of the · ' ': '' '''' · •' ··'''''' · ' ·.''' '' ·· ··· ' •''':' ''' Cha.ity Fund, (3) Any mcome, profits or gams falling w1th- Esp!anade Road, in the following classes shall not be included in total

Fo.t, Bombay income of the person receiving them :-

v. . .

(i) Any income, derived from property held under The Commissio"''trust or other legal obligation wholly for religious or of Income-tax, I . bl d h f h Id Bombay c iar1ta e purposes, an mt e case o property so e

Das C. ]. in part only for such purposes, the income applied, or finally set apart for application, thereto:

" Upon the fact of the withholding of the certificate by the Income-tax Officer, Refund Circle, being intimated to the Income-tax Officer, A-V Ward, Bombay, the latter Officer started proceedings against the appellants under s. 34 of the .said Act in respect of the assessment years 1944-45 to 1947-48. He also started regular proceedings for the assessment year 1948-49 and the succeeding years up to 1952-53.

In the assessment proceedings for those nine years the Income-tax Officer took the view that the income from the trust fund was not exempt from taxation under s. 4(3)(i) and accordingly he assessed the appellants for the first four assessment years (1944-45 to 194 7-48) on the ground that the income for those years had escaped assessment. He also assessed the appellants to tax for the subsequent five years (1948- 49 to 1952-53). On appeal the Appellate Assistant Commissioner confirmed the said assessments.

On further appeal by the appellants, the Income-tax Appellate Tribunal set aside the assessments for the first four years (1944-45to 1947-48) holding thats. 34 had been wrongly invoked, for it was only a case of difference of opinion of one Income-tax Officer from his predecessor on the same set of facts. The department did not take any further steps in the matter and accepted that view of the Tribunal as regards the assessjlleBts of those years and we are not in this appeal concerned with them. As regards the assessments for the five years (1948-49 to 1952-53) the Tribunal upheld the decision of the Appellate Assistant

Commissioner who had confirmed the assessments r959 made by the Income-tax Officer.

Th T h 0 1. . b . d b th ll d e rustees of t e n app icat10n emg ma e y e appe ants, un er .Charity Fund s. 66( l) of the said Act, the Tribunal drew up a state- Esplanade Road, ment of case and referred two questions of law arising Fort, Bombay out of its order to the High Court for its opinion.

v. . .

The said questions are as follows :- The Commissioner

1) Wh h h T . h Id h ll of Income-tax ( et er t e rust property is e w o y Bombay ' for religious or charitable purposes within the meaning of section 4(3)(i) of the Indian Income-tax Act ?

Das c. J.

(2) If the answer to question (1) is in the negative, whether the trust property is held in part only for religious or charitable purposes ?

The said reference came up for hearing before the said High Court and both the referred questions were answered in the negative. The High Court, however, gave the appellants a certificate of fitness for appeal to this Court and the present appeal has been filed on the strength of such certificate.

A perusal of cl. 13 of the deed shows that the trust fund is declared to be held by the trustees upon trusts to apply the net income thereof for all or any of the six purposes enumerated therein. It was conceded before the High Court-and it has not been disputed before us-that if there was nothing else in this clause, then each of these six purposes would have to be upheld as a charitable purpose involving an element of public utility and consequently within the protection of s. 4(3)(i). The fact that the trustees could expend the net income on any of the six purposes to the exclusion of the other five purposes would not, it is also conceded, have made the slightest difference in the matter of such exemption from income-tax. For instance, if the trustees spent the net income solely and wholly for the purposes mentioned under sub-cl. (a) to the exclusion of those mentioned in sub-els. (b) to (f) such income would still be exempt from taxation under s. 4(3)(i). The High Court, however, took,, the view that cl. 13 should be read as a whole along with the provisos and that so read the trust is primarily for the benefit of the relations or members of the family

z959 of Sir Sassoon David, Bart. It is pointed out that in

Th T - fth applying the net income for the purposes mentioned ' rnstees o ' . b 1 h b h Charity Fund m su -c . (a), t e trustees are ound, under t e first Esplanade Roa~. proviso, to give preference to the poor and indigent

Fo•t. Bombay relations or members of the family of the said Sir

v. . .

Sassoon David, Bart. including therein distant and The Comm.ssion" collateral relations. The second proviso, it is urged, of ;;;;;; ax. makes it further clear that in the application of the income for the said purpose, the trustees are enjoined Das c. J. to apply not less than half the income for the benefit of the members of the Jewish community of Bombay only "including the relations of Sir Sassoon David, Bart., as aforesaid" and the Jewish objects. Emphasis is laid on the words " not less than half" as indicating that it is permissible for the trustees to spend more than half and indeed the whole of the not income for the benefit of the said relations or members of the family of the said Sassoon David, Bart.

It is also pointed out that, although the remaining income, if any, has to be spent for the benefit of all persons and objects including Jewish persons and objects, the trustees could, if they so wished, spend the same also for the relations or members of the family of Sir Sassoon David, Bart. as Jewish persons.

The argument, which found favour with the High Court, is that the provisos impose a mandatory obligation on the trustees (i) to give preference to the poor and indigent relations or members of the family of Sir Sassoon David, Bart. and (ii) to spend not less than half the income, which may extend to the entire income, for the benefit of the relations or members of the family of Sir Sassoon David, Bart. The High Court points out that in view of the language of cl. 13 of the deed read as a whole, it is open to the trustees, without being guilty of any breach of trust, to spend the entire net income of the trust fund for the purpose of giving relief to the poor and indigent relations or members of the family of the said Sir Sassoon David, Bart., incfuding therein the distant and collateral relations and such being the position, the High Court came to the conclusion that it could not be said that the property was held wholly or partly for religious or

charitable purposes involving an clement of public z959 utility. The High Court accordingly held that the Th r - 1

h • e rustees o t e income from the trust fund was not exempt from taxa- Charity Fund, tion under s. 4(3)(i) and answered both the questions Esplanade Road, in the negative. The problem before us is whether Furt, Bombay the High Court was right in so answering the ques-.

v. . . tions.

The Commissioner In coming to the decision that it did, the High Court

01 n:~::; tax, relied on its own earlier decision in the case of Trustees of Gordhandas Govindram Family Charitable Trust Das c. J.

v. Commissioner of Income-tax (Central), Bombay (1 ).

The facts in that case, however, were somewhat different from the facts now before us. In that case the trust was significantly enough described as " Gordhandas Govindram Family Charitable Trust". Clause 2 of that trust deed provided for the application of the net income in giving help or relief to such poor V aishyas and other Hindoos as the trustees might consider deserving of help in the manner and to the extent specified in the said trust deed and subject to the conditions and directions stated in the next following clauses. Sub-clause (a) of cl. 3 provided that Vaishya Hindoos who were members of Seksaria family should be preferred to poor Vaishyas not belonging to the said family. Maintenance had to be provided under sub-cl. (b) for the poor male descendants of the settlor and under sub-cl. ( c) for the poor female descendants of the settlor. Marriage expenses were provided under sub-cl. (d) for the poor male descendants and under sub-cl. (e) for the poor female descendants of the sett.lor.

There were other subclauses providing for payment of money to the poor male or female descendants of the other members of the Seksaria family. In the present judgment now under appeal, the High Court recognises that the particular trust they were dealing with in the earlier case "was a fairly blatant illustration of a settlor trying to benefit his own family and his own relations" and states that in the earlier case it had pointed out "that the benefit to the public was too remote and too illusory and accordingly held that that was

(1) [1952] 21 I.T.R. 231.

'959 not a trust which had for its object a general public The T;;;;;;,5 of the utility". Such, however, cannot be said of the provi-

Cha•ity Fimd, sions of the present Deed of Declaration of Trust.

Esplanade lload, Under cl. 13 the trustees are at liberty to hold the

Fo•t, Bombay trust fund and to apply the net income thereof for all

v. . . or any of the six purposes mentioned therein. The The Commissioner . b f . . . of Ineome-tax, relations or mem ers 0 the family of the said Sir Sas- Bombay soon David, Bart., including therein distant and collateral relations do not figure as direct recipients of any Das c. J. benefit under sub-els. (b) to (f) and, therefore, in so far as those purposes are concerned the trust certainly involves an element of public utility. We are not unmindful of the fact that it is open to the trustees to spend the net income entirely for the purpose referred to in sub-cl. (a) to the exclusion of the other clauses. But the very fact that the relations or members of the family do not come in directly under any of those latter sub-clauses cannot be ignored, for they certainly have some bearing on the question as to who or what were the primary objects of the trust as a whole. In the next place, the purpose of sub-cl. (a) is the "relief and benefit of the poor and indigent members of Jewish or any other community of Bombay or other parts of India or of the world". It is conceded by learned counsel that this sub-clause clearly expresses a general charitable intention involving an element of public utility. It follows, therefore, that sub-cl. (a) constitutes a valid public charitable trust having as its beneficiaries the several classes of persons referred to therein. This is the first position.

We then pass on to the provisos. The first proviso opens with the words "in applying the income as aforesaid". This takes us back to sub-cl. (a).

The meaning of the proviso obviously is that in applying the income for the purpose of sub-cl. (a), the trustees shall give preference to the poor and indigent relations or members of the family of Sir Sassoon David, Bart. The proviso does not operate independently but comes into play only "in applying the income as aforesaid".

The provision for giving preference involves the idea of selection of some persons out of a bigger class envisaged in subcl. (a). The poor and indigent relations or members of

(2) S.C.R. SUPREME COUHT REPOHTS 933

the family can claim to participate in the benefits 1959 under the trust only if they come within one of the ., r - ,, h d . b l ) T l 1 "° rustces o, t e several classes enumerate m su -c . (a . o tarn an chaiity Fund extreme example : If a poor and indigent relation of Esplanade Road, Sir Sassoon David, Bart. abjures the faith held by the Fort, Bombay Jewish community and does not adopt any other faith v ... and thus ceases to be a member of the Jewish commu- The Comnmswner b d b b f h of Income-ta>< rnty ut oes not ecome a mem er o any ot er com- 130111bay ' munity, he will certainly not be entitled to the benefits of sub-cl. (a) although he is a poor and indigent relation Das c. J. or member of the family of Sir Sassoon David, Bart. within the meaning of the first proviso. In other words, sub-cl. (a) prescribes the primary class of beneficiaries out of which the actual beneficiaries are to be selected by the application of the provisions of the provisos, that is to say, by giving preference to the relations or members of the family of the said Sir Sassoon David, Bart. The case of In re Koettgan's Will Trusts (1) appears to us, on the facts, to be more in point than the case of Gordhandas Govindram Family Charity Trust case (2) relied on by the High Court. In the last mentioned English case the testatrix bequeathed her residuary estate upon trust for the promotion and furtherance of commercial educa- - tion. The persons eligible as beneficiaries under the fond were stated to be "persons of either sex who are British born subjects and who are desirous of educating themselves or obtaining tuition for a higher com: mercial career but whose means are insufficient or will not allow of their obtaining such education or tuition at their own expense ... " The testatrix further. directed that in selecting the beneficiaries "it is my wish that the ... trustees shall give preference to any employees of John Batt & Co. (London) Ltd. or any members of the families of such employees; failing a sufficient number of beneficiaries under such description then the persons eligible shall be any persons of British birth as the trustees may select provided that the total income to be available for benefiting the preferred beneficiaries shall not in' any one year be more than 75% of the total available income for that

(1) [1954] Ch. 252, 257.

(2) [1952] 21 I.T.R. 23r.

1959 year". It was held, on a construction of the will,

T -,- ., 11 that the gift to the primary class from which the e rtts ecs o1 re • , Cha, ity Fund, trustees could select the beneficiaries contained the E<plauod' lload. necessary element of benefit to the public and that it

Fo.t, Bombay was when that class was ascertained that the validity v. of the trust had to be determined, so that the subsen~ 1C0>nmissiou" quent direction to prefer, as to the 75% of the income,

;;:~:ox, a limited class did not affect the validity of the trust which was accordingly a valid and effective charitable

Dos c. J. trust. Referring to the first part of the will U pjobn, J., at p. 257 said:-

" If the will concluded there, the trust would clearly be a valid charitable trust, having regard to the admission that a gift for commercial education is for the advancement of education." Tlien after stating that the next task was to make a selection from that primary class of eligible persons, the learned Judge continued:-

" It is only when one comes to make a selection from that primary class that the employees of John Datt & Co. and the members of their families come into consideration, and the question is, does that direction as to selection invalidate the primary trust ? In -my judgment it does not do so."

Further down be said:-

"In my judgment it is at the stage wlien the primary class of eligible persons is ascertained that the question of the public nature of the trust arises and falls to be decided, and it seems to me that the will satisfies that requirement and that the trust is of a sufficiently public nature." The learned Judge then concluded:-

" If, when selecting from that primary class the trustees are directed to give a preference to the employees of the company and members of their families, that cannot affect the validity of the primary trust, it being quite uncertain whether such persons will exhaust in any year 75%. On the true construction of this will, that is not (as to 75%) primarily a trust for persons connected with Joh.n Batt & Co., and the class of persons to benefit is not " confined " t; o them, and in my judgment the trust contained in clauses 7

and 8 of the will of the testatrix is a valid charitable r959 trust" • The Trustees of the It is true that this is a judgment of a Single Judge but Charity Fund, it does not appear to have been departed from or over- F!splanade Road, ruled in any subsequent case and appears to us to be Fort, Bon.bay based on sound principle. Applying this test, there Th c v ... • • • e mnmissioner can be no quest10n-mdeed it has been concededof Income-tax, that the earlier part of cl. 13, omitting the provisos, Bombay constitutes a valid public charitable trust. The circumstance that in selecting the beneficiaries under sub- Das c. J.

cl. (a) preference has to be given, under the provisos, to the relations or members of the family of Sir Sasoon David, Bart., cannot affect that public charitable trust.

In our judgment, the facts of this case come nearer to the facts of the English case referred to above than to the facts of the earlier decision of the Bombay High Court in Gordhandas Govindram Family Charity Trust case (1).

As we have already stated the relations or members of the family are clearly not the primary object contemplated by sub.els. (b) to (f).

The first part of sub-cl. (a), omitting the provisos, is not said to be too wide or vague and unenforceable. The provision for giving preference to the poor and indigent relations or the members of the family of Sir Sassoon David, Bart., cannot affect the public charitable trust constituted under sub-cl. (a).

In our opinion the income from the trust properties comes within the scope of s. 4(3)(i) and is, therefore, entitled to exemption. Therefore the negative answer given by the High Court to question No. I cannot be supported and that question should be answered in the affirmative.

In this view of the matter, question No. 2 does not arise and needs no answer. The result is that this appeal must be allowed and the question No. I must be answered in the affirmative. The appellants will have the costs of the reference in the High Court and of this appeal in this Court.

Appeal allowed,

(1) [1952] 21 I.T.R. 23r.

DAS

s. 4(3)(i)

Clause 13

s. 4(3)(i)

Income-tax Act

s. 4(3)(i)

Income-tax Act

s. 66(A)(2)

s. 66(1)

Clause 13

s. 4(3)(i)

s. 34

s. 4(3)(i)

s. 66( l)

section 4(3)(i)

Income-tax Act

cl. 13

s. 4(3)(i)

s. 4(3)(i)

cl. 13

cl. 13

s. 4(3)(i)

Clause 2

cl. 3

cl. 13

cl. 13

s. 4(3)(i)


r959

May 6.

936 SUPREME COURT REPORTS [1959] Supp.

CROMPTON PARKINSON (WORKS) PRIVATE

LTD., BOMBAY

ITS WORKMEN AND OTHERS

(S. R. DAS, c. J., N. H. BHAGWATI, s. K. DAS, P. B. GAJENDRAGADKAR and K. N. WANOHOO, .T.J.)

I nditstrial Dispute-Bonus-Gross Profits-E xpenditt<rc, when may be disallowed-Service Fee-TFhether allowable expcnditure-

Available Surpl1's-Bon1ts, deducted as prior charge-Propriety of.

Initially the appellant was a roo% subsidiary of the British company, Crompton Parkinson Ltd.

In 1947 an agreement called " Technical Aid Agreement" was concluded between the two companies under which the appellant agreed to pay to the parent company 5% of the net value of its sales every year as service fee for the use of their patterns, valuable designs, technical aid, benefit of research and ancillary services and facilities.

As the appellant obtained the benefit of the parent company's technical kno\v1edge and research it did not maintain a separate research establishment on which it \vould otherwise have had to spend far more than the service fee it paid.

The agreement had received the approval of the Govern1nent; the incon1e-tax authorities had, every year, allowed the service fee as legitimate expenditure; and the remittances to the parent company had been sanctioned by the Reserve Bank of India.

In the claim for bonus by the workmen, the Tribunal, in calculating the gross profits, pruned down the allowable expenditure on account of the service fee to one fourth on the grounds that the amount of service fee paid was excessive and beyond the requirements of commercial necessity and that a large part of the pay1nent was in the nature of capital expenditure. In calculating the available surplus the Tribunal deducted as a first charge 4! months basic wages as bonus before deducting depreciation and incometax contrary to the terms of the l'ull Bench formula.

Held, that the entire amount of service fee paid ought to have been allowed as proper expenditure. Unless• it was definitely found that a purported expenditure was sham or had been made with the express object of minimising the profits with a vie\v to deprive the workmen of their bonus, the Tribunal could not substitute its own judgment as to what was or was not commercially justified in place of that of the appellant and its directors. 1'he service fee was a genuine expenditure and represented a binding contractual obligation which could legally be enforced against the appellant and a breach thereof may have had serious consequences affecting its business.

Held further, that the Tribunal acted wrongly in deducting

bonus as a prior charge even before the recognised items of prior 1959 charges. Such departures from the Full Bench Formula by Tribunals were to be deprecated.

Crompton d C C k C Parkinson (Works) Associate ement ompanies Ltd. v. Its Wor men, .A. Nos.

P . 1 d 459 4nd 460 of 1957, decided on 5-5-59, followed. rBivaleb_t ' . om ay

CIVIL

APPEI, LATE JURISDICTION: Civil Appeals v.

Nos. 756 & 757 of 1957.

Its Workmm

Appeal by special leave from the Award dated January 8, 1957, of the Industrial Tribunal, Bombay, in I. T. Ref. Nos. 109 and 147 of 1956.

0. K. Daphtary, Solicitor-General of India, N. A.

Palkhivala and S. N. Andley, for the appellant.

Rajani Patel and Janardan Sharma, for the respondents.

1959. May 6.

The Judgment of the Court was delivered by

&· Others

DAS, C. J.-These are appeals by special leave filed Das c. J. by Crompton Parkinson (Works) Private Ltd. (hereinafter referred to as the company) against that part of the award made in References (IT) Nos. 109 and 147 of 1956 by the Industrial Tribunal, Bombay, on January 8, 1957, which concerns the demand of its workmen for bonus for the company's financial year 1954-55. That award was published in the Bombay Government Gazette of January 17, 1957, in Part IL at pages 351-364.

The material facts and circumstances leading upto the said award, as they appear from the evidence placed on record before the Tribunal, may shortly be stated as follows:- The company was incorporated in India in the year 1937. The registered office of the company is at Bombay. The authorised capital of the company is Rs. 75 lacs divided into 75,000 ordinary shares of the value of Rs. 100 each. Out of the authorised capital, shares of the value of Rs. 60 lacs have been issued, subscribed and fully paid. At its inception the company was 100% subsidiary of the well known British company named Crompton Parkinson Ltd. (hereinafter called the arent company). In 1937

1 959 the company commenced its business which was and is to manufacture electrical equipment such as trans- Crompton .c • h Parkinrnn (Wo•ks) 1ormers, motors, fans, starters and sw1tc gears and to

Pdvate Ud, sell the same in the market. All the goods, which the

11ombay company manufactures, are manufactured wholly in v. accordance with patterns, designs, specifications and

nn;;,;,:~·· technical processes developed by and belonging to the Parent company which the latter makes available to

Das c. J. the company. The company's products are sold under the trade names and marks belonging to the Parent company, namely, "Crompton Parkinson", "Crompton"," Parkinson" and" C. P. ". Between 1937 and 1947 the company's business is said to have been in a stage of development and progress and it is admitted that the Parent company made no charge for the several services and facilities given by it to the company. fo the year 1947, after the company's business had been. established on a firm footing, an agreement wa.s concluded between the two companies in order to provide, on a long term basis, for the continuance of the technical assistance and service and other facilities afforded by the Parent company on which the company was wholly dependent. That agreement, which is said to be of a type commonly executed between the manufacturing and industrial concerns in India and their respective associates, parents or affiliates abroad and generally known as " Technical Aid Agreements" is said to have received the approval of the Government of India to promote the industrial development of the country. That agreement was actually executed on August 12, 1947, and provided that for a period of 20 years the Parent company would. render to the company various facilities and services, including, amongst others, the following :-

( l) the use of the latest designs, manufacturing information and production methods discovered and developed by Crompton Parkinson Ltd . ;

(ii) the fullest information and ad vice as to the most suitable machine tools and production machinery and equipment and as to the correct operation and use thereof;

(iii) the supply at cost of machinery, equipment,

raw materials and manufacturing parts. Under this r959 facility the appellants obtain the benefit of bulk purc h d h• h C p k' Ltd rompton c ase terms un er w IC rompton at' mson Parl<insoii (Works) purchase their raw materials; Private Ltd.,

(iv) the benefit of the knowledge an<.1 experience Bombay of Crompton Parkinson Ltd.'s executive in all matters v.

Its IV or Ii men relating to technical, mechanical and financial manage- & others ment;

(v) the service of the Crompton Parkinson Ltd.'s Das c. J. experts and technical personnel ;

(vi) facilities for training of selected employees of the petitioners in Crompton Parkinson Ltd.'s Works, and

(vii) licence to use on the appellants' products the world-famous trademarks, "Crompton Parkinson", •· Crompton", "Parkinson" and "C. P." belonging to Crompton Parkinson Limited.'' In lieu of all royalties, licence fees and other considerations usually allowed for services and facilities of this kind, the company agreed to pay to the Parent company service fee calculated at the rate of 5% of the net value of the sales made by the company from year to year. ]'or the year 1954-55 the company had actually paid the amount of service fee and the same, after deducting the Indian income-tax, had been remitt_s1d to the Parent company. Shortly after the execution of the aforesaid agreement, 26% of shares of the company were acquired by Messrs .. Greaves Cotton Co. Ltd., which is an Indian Company and the company ceased to be a 100% subsidiary of the Parent company. It is said that when negotiations for the aforesaid agreement were going on negotiations were also in progress for the transfer of shares to the Indian company and that the latter was apprised of the terms of the proposed agreement and approved of the terms of payment of 5% of the net value of sales.

On August 25, 1955, the General Engineering Employees Union representing the workmen who are respondents Nos. 1 and 2 submitted certain demands to the company. No agreement having been arrived at, the matter was referred to the Conciliation Officer. As

1959 no settlement was arrived at as a result of the conciliation proceedings, the Conciliation Otticer submitted c,-on1pto11 h' G f B b Pa•ki,, son (Wo•ks) IS report to the overnment o om ay under sub-s. 4 l"ivat• Ud, of s. 12 of the Industrial Disputes Act, 1947. The Bombay Government of Bombay, after considering the said

v. report and in exercise of the powers conferred on it by Its Wo•kmen sub-s. 5 of s. 12 of the Industrial Disputes Act, 1947, & Othets made an order on August 6, 1956, referring the dis-

Das c. J. putes between the company and its workmen (other than those of the Watch and Ward staff) over their demands mentioned in the schedule to that order for adjudication to the Tribunal from whose award the present appeals have been filed.

This reference was marked as (IT) No. 109 of 1956.

By another order made on October 10, 1956, the Government of Bombay referred the disputes between the company and its workmen belonging to the Watch and Ward staff over the latter's demands mentioned in the schedule to that order for adjudication to the same Tribunal.

That reference was marked as (IT) No. 147 of 1956.

On September 10, 1956, a statement of claim was filed by the General Secretary, General Engineering Employees Union, on behalf of the workmen (other than those of the Watch and Ward staff) in Reference (IT) No. 109 of 1956 claiming, inter alia, tbat all workmen should be given bonus either (i) equivalent to 33?3% of their earnings during 1954-55 or (ii) a pro-rata bonus equivalent to their six months' basic wages, basic wage being calculated at the daily rate of pay which the workmen drew on June 30, 1955, and bonus being given without atta.ching any conditions. In the statement of claim the Union contended: (i) that during the year 1954-55 the company had made huge profits,

(ii) that the company's business had expanded by leaps and bounds and production had mounted up very much and the company had made huge profits and (iii) that the wages paid to its employees fell terribly short of the living wage standard and extremely out of any reasonable proportion to the tremeudously high salaries paid to the company's officers. The Union requested the Tribunal to take into consideration the company's practice, inter alia, of writing off

(2) S.C.R.

SUPREME COURT REPOI~TS 941

of very substantial amounts' as service fees to the Par- 1959 ent company. c The company filed its written statement in reply to Patki1~:0: r; otk•) the statement of claim filed by the Union in Reference Private Ltd,, No. (IT) 109 of 1956. While agreeing that .it had made Bombay reasonable progress, the company did not admit that v. the progress had been as rapid or phenomenal as the Its Workmen

&- Others Union had suggested. The company stated that it had been able to accumulate only small reserves, that, Das c. J. in spite of its increased turnover, its profit for the year in question was quite low on account of stiff competition, that the wages paid to the workmen compared favourably with those paid by similar concerns, that they paid to the Parent company a service fee as consideration for the use of their patterns, valuable designs, technical aid, benefit of research and ancillary services and facilities.

F'•r Lhe purposes of the reference, the company filed a copy of its audited balance-sheet and profit and loss account for the year 1954-55 as a confidential exhibit. In the said profit and loss account, service fee of 5% so paid for the year was shown as an item of expenditure.

The Union on behalf of the workmen belonging to the Watch and Ward staff filed a statement of claim in Reference (IT) No. 147 of 1956 regarding certain special claims of those workmen to which the company replied by its written statement. It is not necessary to refer to that statement of claim by the Union or the company's written statement, for they are not relevant to the question of bonus.

In the course of hearing of the References, which were taken up together, the workmen, through their counsel, submitted to the Tribunal, amongst other things, that the payment of the said service foe by the company was not justified and that the same should be disallowed as an item of expenditure for the purpose of calculating bonus payable to the workmen for the year 1954-55. The Tribunal thereupon called upon the company to bring on record by an affidavit all relevant facts and circumstances relating to the payment of service fee.

The company submitted that it was not open to the workmen to question an item of

942 SUPREME COURT HEPORTS [1959) Supp.

• 95J expenditure actually incurred and paid in the course of business or to request that such an item already

Pa.k~;;~:''<~o, ks) debited to the accounts, which had duly been audited

T>iva" Ltd, and passed, should be disallowed. The company sub-

JJombay mitted that in any event the said payment was fully

v. justified and reasonable.

However, in compliance Its WMkmen with the Tribunal's directions, the company on Decem-

& 01""' ber 18, 1956, filed an affidavit affirmed on Decem her Das c. 1. 14, 1956, by Shri V. V. Dhume, the Secretary to the Company setting forth the relevant facts and circumstances relating to the payment of the said service fee.

At the further direction of the Tribunal, a copy of the agreement dated August 12, 1947, was also filed by tho company. Shri V. V. Dhume was examined before the Tribunal and his oral testimony was also recorded.

The material provisions of the said agreement ha Ye already been summarised above. Efom the affidavit and the oral evidence of Shri V. V. Dhumo referred to above, it is clear that all the goods which the company manufactures are manufactured wholly in accordance with the patterns, designs, specifications and technical processes developed by and belonging to the Parent company which it makes available to the company and that the company's products are sold exclusively under the trade names and marks belonging to the Parent company. There can be and is no dispute that the company has thus at its disposal the benefit of the Parent company's accumulated knowledge and experience, technical data and good will and the reputation attaching to its products. It is clear upon the evidence on record that the manufacture of specialised electrical goods and equipment of the types produced by the company is a highly specialised business of a very competitive nature requiring the use of the most up to date technique. In order to keep abreast with the latest development in the field of manufacture of this kind of equipment, the company will ordinarily have to maintain its own research laboratories and specialised staff to develop new methods and innovations and processes. The company, however, - does not maintain a separate research establishment of its own but obtains the benefit of the Parent

(2) s.c.tt. SUPREME COtJRT REl>OttTS !}43

company's invaluable services under the said agreer959 ment. According to Shri V. V. Dhume the service fee c , • rompton paid by the company to the Parent company const1- Parkinson (Works) tutes, in a substantial measure, a mere reimbursement Private Ltd., of expenses incurred by the latter in the maintenance Bombay and operation of its research department and rendering v. of facilities to the company. Shri V. V. Dhume fur-

11~

~~;:C~"' ther stated that, had the company to maintain its own research department to provide such service and Das c. J. facilities, the annual expense of the company would have far exceeded the service fee actually paid by it to the Parent company. It also appears from the affidavit of Shri V. V. Dhume that the independent shareholders of the company who had acquired 26% shares of the company about the time when the "Technical Aid Agreement" was executed had willingly accepted that agreement. Apart from the fact that the agreement had received the approval of the Government of India in the Ministry of Finance as well as in the Ministry of Commerce and Industry, the income-tax authorities have from year to year allowed the full amount of the service fee paid by the company to the Parent company as an expenditure incurred wholly and exclusively for the purposes of the company's business. Likewise every payment and remittance made by the company representing the service fee to the Parent company has been sanctioned by the Reserve Bank of India ever since 1947. The payment of the service fee no doubt represents a binding con- , tractual obligation on the company which can be legally enforced against it and a breach thereof on the part of the company may well lead to the cancellation thereof by the Parent company as a result whereof the company will be deprived of the services and facilities obtained by it under the agreement and may even be prevented from carrying on its business.

There was no serious cross-examination of Shri V. V. Dhume regarding these matters by counsel appearing for the workmen and no substantive evidence on these questions was led by the workmen.

The Tribunal made its award in both the References on January 8, 1957. As regards the service fee,

r959 the Tribunal held (i) that the amount of service fee

C Pt paid by the company to the Parent company was rom on . .

Parkinson (Works) excessive and beyond the reqmrements of commercial

Pduate Ltd., necessity and was allowable as an expense only as to Bombay one quarter thereof and (ii) that in any event even if

v. the commercial necessity of the payment could not bo

11~ ri.;:;,:~•n challenged, a large part of the payment was in the nature of capital expenditure and that only the Das c. J. balance, being in fact a quarter thereof, was allowable as revenue expense for the purpose of determining the surplus available for the payment of bonus to the workmen. Thus, as regards the service fee, the Tribunal in its award proceeded to "prune it down". In the actual calculations made by the Tribunal for determining the available surplus according to the bonus formula appearing in what has been marked as confidential exhibit T-1, the Tribunal ha.s allowed only Rs. 2 lacs out of the total of Rs. 7•67 lacs actually paid as service fee and added back Rs. 5·67 lacs to the profits. It will also be noticed from that confidential exhibit T-1 that the Tribunal has deducted as a first charge 4~ months' basic wages as bonus before depreciation as well as tax, on no better ground than that, in the view taken by it, income-tax should not be deducted as a prior charge on the gross profits in preference to bonus. In so doing the Tribunal has not, quite clearly, followed but has made variations in that formula.

The bonus formula enjoins the Tribunals to arrive at the available surplus after providing for certain prior charges mentioned therein and then to determine, after taking into consideration all material circumstances, how that available surplus should be distributed between the three interests, namely, the industry, the shareholders and the workmen. To deduct bouus as a prior charge even before the recognised itums of prior charges appears to us to put the cart before the horse. Such a process is certainly not giving effect to the bonus formula but amounts to ad hoc determination which may vary according to the length of the proverbial foot of the Lord Chancellor and is bound to had to chaos and industrial unrest. The boi; rns formula was evolved by

the Labour Appellate Tribunal as far back as 1950 r959 and it has been generally approved by this Court in c more decisions than one and what is more it has Parki; s

0 ;;; P~orks) worked fairly satisfactorily. In our judgment in the Private Ltd., appeals of Associated Cement Companies Ltd. v. Its Hombay Workmen (1) we have deprecated such departure from v. the bonus formula by individual Tribunals, for clearly Its Workmen

0- Others such departure is not conducive to the harmonious and peaceful relations between the workmen and Das c. 1. their employers.

The only other question which calls for our decision is the correctness of the Tribunal's award as to the service fees.

The conclusion of the Tribunal on that point is founded on the ground that the test of "commercial necessity" applied by the income-tax authorities for determining whether the expenditure was allowable under s. 10(2)(xv) of the Indian Income-tax Act should also be applied by the Tribunal. The Tribunal evidently overlooked the fact that the incometax authorities are entitled to apply the test of commercial necessity by reason of the express provisions of s. 10(2)(xv) which authorise them to arrive at the taxable income, profits and gains after making allowance for expenditures laid out and expended wholly and exclusively for the purpose of the business. There is no such provision in the Industrial Disputes Act. In the absenc~ of cogent and compelling evidence leading to the definite conclusion and finding that a purported expenditure was sham or had been made 'Yith the express object of minimising the profits with a view to deprive the workmen of their bonus, it is no part of the duty of an Industrial Tribunal to substitute its own judgment as to what was or was not commercially justified in the place of the judgment exercised by the company and its Directors in whom in law the management of the company is confided. The Tribunal has completely overlooked the fact that the company's accounts had been duly audited by its auditors who were duly appointed by the company and that the said auditors had duly certified

(r) [1959] S.C.R 925.

' 959 in the manner provided for by the Indian Com- Crompton panies Act, that the said accounts had been drawn rarkinson (Works) up in conformity with the law and exhibited a true

I'rfoate Ltd., and correct view of the state of the company's Bombay affairs. The Tribunal has paid no attention to the v. fact, appearing in the evidence on record before him, Its Workmen

& Others that the income-tax department had allowed such service fee as legitimate revenue expense and the Das c. J. entire amount of the service fee was allowed as a deduction by income-tax authorities every year as a revenue expenditure wholly and exclusively incurred as a matter of commercial necessity of the company's business. Nor does the Tribunal appear to have adverted to the fact that the remittances to the Parent company were allowed by the Reserve Bank which always exercises close scrutiny on - every payment made to non-residents with a view to prohibit payments which are not justified. Nor has the Tribunal taken note of the fact that the Ministry of Finance and the Ministry of Commerce and Industry have approved of the payment of the service fee as provided in the agreement.

A conclusion drawn by the Tribunal without adverting to the evidence before it amounts to an error of law and cannot possibly be sustained. Further, the Tribunal appears to have been led away by three facts, namely, (i) that the company did not pay any service fee during the period 1937-47,

(ii) that the agreement was executed on August 12, 1947, that is to say, three days before the attainment of our independence and (iii) that at the date of the agreement the company was a 100% subsidiary of the Parent company. As regards the first reason, the explanation may well be that during the period 1937 to 1947 the company was still in a stage of development and growth. In any case the fa_ct that no fees had been charged during a particular period when the company was 100% subsidiary of the Parent company cannot reasonably be taken as a reason for not allowing them in future. It will be recalled that negotiations were going on for the acquisition of a considerable block of shares by an Indian company simultaneously with the negotiations for the execution of t]J.e

agreement and that in fact 26% of the shares were r959 itcquirnd by Messrs. Greaves Cotton Co. Ltd. Further, such service fee has been paid year after year from P krompt(olVn k l _ . . . a1 inson or s 1947 right up to the bonus year rn question. The Private Ltd., second reason is equally unsustainable. The fact that Bombay a great constitutional change was envisaged may well v. and properly have been the reason for placing the Its Workmen legal relationship between the company and the & Others Parent company on a firmer and permanent legal Das c. J. footing.

The Tribunal seems to have overlooked the fact stated by Shri V. V. Dhume, that "the payment of the service fee for the services of this nature is quite a common feature in India". The reasonableness and legality of the payment of such fee is also supported by the fact that the income-tax authorities and the Reserve Bank of India have not taken any exception to such payment. The last reason adopted by the Tribunal clearly overloos the fact that shortly after the execution of the agreement about 26% of shares in the company were acquired by an Indian company and year after year ever since then these independent shareholders of the Indian company had willingly accepted the service agreement. Finally the award does not disclose any basis on which the Tribunal has purported to " prune it down" to one quarter of the amount actually paid by the company.

After a careful consideration of the evidence on record we have come to the conclusion that this part of the award concerning disallowance of the major portion of the service fees cannot be supported or upheld. The Tribunal in the award itself has pointed out, as alreadv stated, that in case the whole of this service fee is to be allowed, as we think it should be, then on that basis the available surplus would permit the payment of bonus of one month's basic wag~ to the workmen. The company has no objection to payment of bonus to the workmen amounting to one month's basic wages, subject to the conditions laid down in the award in this behalf and indeed it has done so since the date of the award. The result, therefore, is that we allow these appeals to the extent that the award of the Tribunal be varied and modified by

'959 n.llowing only one month's basic wages to its workmen

C who are respondents to these appeals instead of 2i rompton th ' b . "d d . h d b • Parkiuson (Wo>ks) mon s as10 wages as prov1 e m t e awar , su Ject, Private Ltd., of course, to the conditions laid down in the awn.rd. Be Bombay it noted here that the company has paid this bonus to

v. the respondents and nothing remains due and payable Its Workmen for bonus for 1954-55. Considering all circumstances & Others of these appeals, we r.lirect each party to bear its own Das c. J.. costs of these appeals.

'959

May 5.

Appeal allowed in part.

THE INDIAN HUME PIPE CO., LTD., v.

THEIR WORKMEN

(S. R. DAS, c. J., N. H. BHAGWATI, s. K. DAS, P. B. GAJENDRAGADKAR and K. N. WANCHOO, JJ.)

Inditslrial Dispute-Boniis -Available Surplus - Previous losses written off-Expenditure on patents written off-Debenture redemption reserve-If proper prior charges-Preference shares. return on-Calcitlations 011 All-India basis, whether proper.

The appeliant manufactured hume pipes and had factories in different parts of India, Pakistan and Ceylon. For determining the available surplus for the payment of bonus for the year 1954-55 the appellant claimed deductions as prior charges on account of (i) losses suffered on the Lahore factory written off,

(ii) expenditure on patents written off, and (iii) debenture redemption reserve.

It also claimed 6% retnrn on the preference shares as return on paid up capital. The losses on the Lahore factory had been incurred in the previous years which had been carried forward from year to year and had been written off s irrecoverable in the bonus year.

The amounts spent on the purchase of the patents which had been worked off in the previous years had also been written off in the bonus year.

The appellant had issued debentures in 1942-43 redeemable in 1962-63 and claimed Rs. 3,50,000 as the annual contribution towards the redemption reserve. The appellant had issued preference shares on which the share-holders, under the terms of the issue, were not entitled to more than 5%, but the appellant claimed a return of 6% on these shares also as return on paid up

ITS WORKMEN AND OTHERS

S. R. DAS

N. H. BHAGWATI

P. B. GAJENDRAGADKAR

s. 4

s. 12

Industrial Disputes Act, 1947

s. 5

s. 12

Industrial Disputes Act, 1947

s

0

s. 10(2)(xv)

Income-tax Act

s. 10(2)(xv)

s 1947


948 SUPREME COURT REPORTS [1959] Supp.

'959 n.llowing only one month's basic wages to its workmen

C who are respondents to these appeals instead of 2i rompton th ' b . "d d . h d b • Parkiuson (Wo>ks) mon s as10 wages as prov1 e m t e awar , su Ject, Private Ltd., of course, to the conditions laid down in the awn.rd. Be Bombay it noted here that the company has paid this bonus to

v. the respondents and nothing remains due and payable Its Workmen for bonus for 1954-55. Considering all circumstances & Others of these appeals, we r.lirect each party to bear its own Das c. J.. costs of these appeals.

'959

May 5.

Appeal allowed in part.

THE INDIAN HUME PIPE CO., LTD., v.

THEIR WORKMEN

(S. R. DAS, c. J., N. H. BHAGWATI, s. K. DAS, P. B. GAJENDRAGADKAR and K. N. WANCHOO, JJ.)

Inditslrial Dispute-Boniis -Available Surplus - Previous losses written off-Expenditure on patents written off-Debenture redemption reserve-If proper prior charges-Preference shares. return on-Calcitlations 011 All-India basis, whether proper.

The appeliant manufactured hume pipes and had factories in different parts of India, Pakistan and Ceylon. For determining the available surplus for the payment of bonus for the year 1954-55 the appellant claimed deductions as prior charges on account of (i) losses suffered on the Lahore factory written off,

(ii) expenditure on patents written off, and (iii) debenture redemption reserve.

It also claimed 6% retnrn on the preference shares as return on paid up capital. The losses on the Lahore factory had been incurred in the previous years which had been carried forward from year to year and had been written off s irrecoverable in the bonus year.

The amounts spent on the purchase of the patents which had been worked off in the previous years had also been written off in the bonus year.

The appellant had issued debentures in 1942-43 redeemable in 1962-63 and claimed Rs. 3,50,000 as the annual contribution towards the redemption reserve. The appellant had issued preference shares on which the share-holders, under the terms of the issue, were not entitled to more than 5%, but the appellant claimed a return of 6% on these shares also as return on paid up

capital as provided in the Full Bench formula. The dispute 1959 regarding bonus had been raised by the workmen of the \Vadala factory alone, the workmen of other factories having settled The btdian Hume the matter had been paid the agreed bonus. The respondents Pipe Co., Ltd., claimed that the bonus calculations should not be made on the v. basis of All-India figures but on the basis of the actual amounts Their Workmen paid or payable by the appellant under the settlements.

Held, that the losses on the Lahore factory and the patents written off could not be allowed as prior charges as they were merely debits in connection with the working of previous years.

Nor could the amount on account of the debenture redemption reserve be allowed as a prior charge as no such charge was envisaged by the Full Bench formula of the Labour Appellate Tribunal ; but this amount could be taken into consideration when distributing the available surplus among the various interests entitled thereto. In determining the available surplus the Full Bench formuta must be adhered to in its essential particulars as otherwise there would be no stability or uniformity of practice.

A deduction of more than 5% return on the preference shares could not be allowed as that was the maximum return which the share-holders could get on these shares. Even though the Full Bench formula mentioned 6% return on paid up capital it was not to be literally construed and the Tribunal could, if the circumstances warranted, increase or decrease the i; ate.

In calculating the actual amount of bonus to be paid calculations had to be made on the basis of All-India figures otherwise the respondents would have an advantage over those workmen with whom settlements had been made and would get larger amounts of bonus merely by reason of the fact that the appellant had managed to settle the claims of those workmen at lesser figures.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 54 of 1958.

Appeal by special leave from the Award dated January 14, 1957, of the Industrial Tribunal at Bombay in Reference (I. T.) No. 75 of 1956.

M. 0. Setalvad, Attorney-General for India and J. N.

Shroff, for the appellants.

N. V. Phadke, T. S. Venkataraman, K. R. Sharma and K. R. Ohaudhury, for respondent No. 1 and the Intervener.

1959. May 5.

The Judgment of the Court was delivered by

19~ BHAGWATI, J.-This appeal with special leave chalne 1,, dian llum.lenges the award made by the Industrial Tribunal,

Pipe co. Ltd .• Bombay, in lteference (IT) No. 75 of 1956 between the v. appellant and the respondents whereby the Industrial Their Workmen Tribunal awarded to the respondents 4~ months' basic wages as bonus for the year 1954-55 (year ending lJhagwati J • June 30, 1955).

The appellant is a subsidiary of the Premier Construction Co., Ltd., and manufactures Hume Pipes. l t has factories in different parts of India, Pakistan and Ceylon. The respondents are the workers employed in the appellant's factory at Antop Hill, Wadala, Bombay.

In October 1955, respondent 1 who arc workmen represented by the Engineering Mazdoor Sabha made a <lemand for the payment of six-months' wages as bonus for the year 1954.55. The matter was also referred to the Conciliation Officer requesting him to initiate Conciliation Proceedings. The Conciliation Proceedings went on before the Conciliation Officer upto March 23, 1956, on which date both the parties arrived at and executed an Agreement to refer the matter to an Industrial Tribunal for adjudication.

Accordingly, on April 30, 1956, both the parties drew up and signed a joint-application for referring the dispute for adjudication to a Tribunal and the Government of Bombay thereupon in exercise of the powers conferred by sub-s. (2) of s. 10 of the Industrial Disputes Act, 1947, by its order dated June 11, 1956, referred the following dispute to the Tribunal :-

"DEMAND: Every Workman (daily rated) Hhould be paid bonus for the year 1954-55 (year ending 30th June, 1955) equivalent to six-months' wages without attaching any condition thereto".

ltespondent No. 1 filed their statement of claim before the Tribunal on June 29, 1956. They alleged that the profits of the appellant during the year 1954- 55 were higher than those during the year 1953-54 for which year the appellant had paid four months' basic wages as bonus.

They also alleged that the wages paid to them by the appellant fell short of the living wage and therefore the appellant should pay them six months' basic wages as bonus for the relative year,

The appellant filed its written statement in answer r959 on August 14, 1956. The appellant submitted that, Tl

I -;;:- II after providing. for " the prior charges" according t.o ; ipen ~;',' u~'~" the formula laid down by the Labour Appellate Triv. bunal the profits made during the year under con- Their Wmtanen sideration did not leave any surplus and the respondents were not entitled'to any bonus. It denied that Rhagwlfi J. it had made huge profits during the year in question and submitted that the profits made were not evqn sufficient to provide for "the prior charges", etc.

The Tribunal after hearing the parties came to the conclusion that even if payment of a bonus equal to 4! months' basic wages were made a fair surplus would be left in the hands of the appellant to the tune of Rs. 3·30 lacs and therefore awarded the same subject to the following conditions :- (a) Any employee who has been dismissed for misconduct resulting in financial loss to the company shall not be entitled to bonus to the extent of the loss caused. (b) Persons who are eligible for bonus but who are no longer in the service of the company on the date of the payment shall be paid the same provided that they make a written application for the same within three months of publication of this award. ' Such bonus shall be paid within one month of receipt of application provided that no claim can be enforced before six weeks from the date this award becomes enforceable.

Being aggrieved by the said award of the Tribunal, the appellant applied for and obtained from this Court special leave to appeal against the same under Art. 136 of the Constitution and hence this appeal.

The formula evolved by the Full Bench of the Labour Appellate Tribunal in Millowners' Association, Bombay v. Rashtreeya Mill Mazdoor Sangh, Bombay (1) is based on this idea that "as both labour and capital contribute to the earnings of the industrial concern, it is fair that labour should derive some benefit, if there is

a surplus after meeting" prior or necessary charges".

The following were prescribed as the first charges on

(1) (1950) L.L.J. 1247.

r959 gross profits, viz., (1) Provision for depreciation ; -.-

(2) reserves for rehabilitation; (3) a return at 6% on The Indian Hume h 'd 1 ( k' Pipe co., Ltd., t e pat up capita ; 4) a return on the wor mg v. capital at a lesser rate than the return on paid up Th•lr Wo•hmm capital and (5) an estimated. amount in respect of the

payment of income-tax. The surplus that remained Bhagwati J. after making the aforesaid deductfons would be available for distribution among the three sharers, viz., the shareholders, the industry and the workmen [See Muif Mills Co., Ltd. v. Suti Mills Mazdoor Union, Kanpur (1) and Sree Meenakshi Mills Ltd. v. Their Workmen(')].

This Full Bench Formula has been working all throughout the country since its enunciation as aforesaid and has been found to be, in the main, fairly satisfactory. It is conducive to the benefit of both labour and capital and even though certain variatiOns have been attempted to be made therein from time to time the main features thereof have not been substantially departed from. We feel that a formula which has been thus adopted all throughout the country and has so far worked fairly satisfactorily should be adhered; to, though there is scope for certain flexibility in the working thereof in accordance with the exigencies of the situation.

In the working of the said formula, however, regard must be had both to the interests of capital and labour. In any given industry there are three interests involved, viz., the shareholders, the Company and the workmen and all these interests have got to get their proper share in the surplus profits ascertained after due provision is made for these "prior charges".

The shareholders may look to largr dividends commensurate with the prosperity of the industrial concern, the company would, apart from rehabilitaticm and replacement of buildings, plant and machinery, look forward to expansion and satisfaction of other needs of the industry and the workmen would certainly be entitled to ask for a share in the surplus profits with a view to bridge the gap between the wages earned by them and the living wages. _All those interests

(1) [1955] I S.C.R. 991, 998.

have, therefore, got to be duly and properly provided r959 fordhaving regar 1 d to thefi princpl lebsl off soc 1 al .Jbusice The Indian Hum~ an once surp us pro ts ava1 a e or c istri ut10n Pife co., Ltd., amongst these respective interests are determined v. after making due provision for the "prior charges" as Their Workmen aforesaid the Industrial Tribunal adjudicating upon the dispute would have a free hand in the distribution Bha.gwati J. of the same having regard, of course, to the considerations mentioned hereinabove. But so far as the determination of the surplus profits is concerned the formula must be adhered to in its essential particulars as otherwise there would be no stability nor uniformity of practice in regard to the same.

It may be noted, however, that in regard to the depreciation which is a prior charge on the gross profits earned by a concern there is always a difference in the method of approach which is adopted by the income-tax authorities and by the industrial tribunals.

It was pointed out by us in Sree Meenakshi Mills Ltd.

v. Their Workmen (1) that the whole of the depreciation admissible under the Income-tax Act was not allowable in determining the available surplus. The initial depreciation and the additional depreciation were abnormal additions to the income-tax depreciation and it would not be fai1 to the workmen if these depreciations were rated as prior charges before the available surplus was ascertained.· Considerations on which the grant of initial and additional depreciations might be justified under the Income-tax Act were different from considerations of social justice and fair apportionment on which the Full Bench Formula in regard to the payment of bonus to workmen was based. This was the reason why we held in that case that only normal depreciation including multiple shift depreciation, but not initial or additional depreciation should rank as prior charge. We approved of the decision of the Labour Appellate Tribunal in U. P. Electric Supply Go., Ltd. v. Their Workmen (2 ) in arriving at the above conclusion and disallowed the claim of the company there to deduct the initial or additional depreciation as prior charge in bonus calculations.

(r) [r958] S.C.R. 878,

(2) (1955) L, A, C. 65g. 120

1959 When this decision was reached we had not before

Th I -a H us the decision of the -Labour Appellate Tribunal in e n '"" ume S El · C

' S ,/!I' U . h S Pipe co., Ltd., urat ectricity ompany s taJJ nion v. T e urat v.

Electricity Co., Ltd.(') where a Bench of the Labour Their Workmen Appellate Tribunal had negatived the contention that if only the "normal " depreciation allowed by the In- Bhagwati J. come-tax law were allowed a company would be able to recoup the original cost of the assets and observed that:

"For the purpose of bonus formula the initial and additional depreciation, which are disallowed by that formula, must be ignored in fixing the written down value and in determining the period over which the normal depreciation will be allowed. The result will be a notional amount of normal depreciation ; but, as we have said repeatedly the bonus formula is a notional formula."

We have already expressed in the judgment delivered by us in Associated Cement Co., Ltd. v. Its Workmen (2) that for the purpose of the bonus formula the notional normal depreciation should be deducted from the gross profits calculated on the basis adopted in Surat Electric Supply Co. Staff Union v. Surat Electricity Co., Ltd.(') and not merely the normal depreciation including multiple shift depreciation allowed by the income-tax authorities as stated in U. P. Electric Supply Co., Ltd. v. Their Workmen (3).

It is well settled that the actual income-tax payable by the company on the basis of the full statutory depreciation allowed by the income-tax authorities for the relevant accounting year should be taken into account as a prior charge irrespective of any set off allowed by the Income-tax authorities for prior charges or any other considerations such as building up of income-tax reserves for payment of enhanced liabilities of income-tax accruing in future. It is also well settled that the calculations of the surplus available for distribution should be made having regard to the working of the industrial concern in the releyant

(1) (1956) L.A.C. 443.

(2) [1959] S.C.R. 925.

(3) (1955) L.A.C. 659.

accounting year without taking into consideration the

I959 credits or debits which arereferable to the working of 1.h 1 -d. H . f f e n ian ume the previous years, e.g., the re undo excess profits tax Pipe co .. Ltd., paid in the past or loss of previous years carried forv. ward but written off in the accounting year as also Their Workmen any provision that may have to be made to meet future liabilities, e.g., redemption of debenture stock, Bhagwati f. or provision for Provident Fund and Gratuity and other benefits, etc., which, laowever, necessary they may be, cannot be included in the category of prior charges.

If regard be had to the principles enunciated above it is clear that the items of Rs. 1·14 lacs representing the Lahore factory balance written off, Rs. 0·34 lacs being patents written off, and Rs. 0·09 lacs shown as loss on sale of Tardeo property cannot be allowed as proper deductions from the gross profits for the purposes of bonus calculations. The first two items represented debits in connection with the working of previous years.

Loss of the Lahore factory had been incurred during the three previous accounting years and had been carried forward from year to year and the only thing which was done during the year under consideration was that it was then written off as irrecoverable. The patents also had been worked off in previous years and the amounts spent in the purchase thereof were therefore to be written off bnt had reference to the working of the company during the previous years. The last item of Rs. 0·09 lacs was trivial and was therefore not pressed with the result that all these three items were rightly added back in the calculations of the gross profits of the appellant and the figure of gross profits taken at Rs. 36·21 lacs was correctly arrived at by the Tribunal.

The depreciation allowed by the Tribunal was

s. 9.82 lacs which was the full statutory depreciation allowed by the Income-tax authorities. That should not have been done and the only depreciation allowed should have been the notional normal depreciation which was agreed between the parties before us at Rs. 6·23 lacs.

Working the figure of income-tax deducted by the

x959 appellant on the basis adopted in Shree M eenakshi

7 h I -d. H Mills Ltd. v. 'l'heir Workmen (1) the income-tax on the e n, ian unze l'ipe co .. Ltd., gross profits of Rs. 36·21 la.cs less the statutory deprev. ciation allowed by the income-tax authorities, viz.,

Thefr Workmen Rs. 9·82 lacs would be equivalent to 7 annas in the rupee on Rs. 26'39 lacs, i.e., Rs. 11·55 lacs thus leav- J'Jhagwati 1 ing a balance of Rs. 16·82 lacs from which the other prior charges would have to be deducted in order to ascertain the distributable surplus. 6% return on the ordinary share capital and 5% return on the preference share capital would come to Bs. 4·30 lacs. The appellant, however, claimed that even on the preference shares 6% return should be allowed and not 5% even though preference shareholders were not entitled to anything beyond 5% under the terms of issue.

The appellant obviously relied upon the wording of the formula: "return at 6% on the paid up capital" and contended that the preference shares also being paid up capital it would be entitled to a return of 6% on the preference shares for the purposes of the bonUli formula even though in fact it would have to pay only 5% return on the same. "Ve cannot accept this contention. Even though the bonus formula is .a notional one we cannot ignore the fact that in no event would the appellant be bound to pay to the preference shareholders anythipg beyond 5% by way of return. The Full Bench Formula cannot be so literally construed. There is bound to be some flexibility therein, the 6% which is prescribed there as th'e return on paid up capital is not inexorable, and the Tribunals could if the circumstances warrant vary the rate of interest either by increasing or decreasing the same. On the facts of this case however there is no warrant for allowing anything beyond 5% return on preference share capital and the amount of Rs. 4•30 lacs should therefore be deducted ail another prior charge from the grsos profits of the appellant. 4% return on reserves used as working capital was calculated merely at a figure of Rs. 0·29 lacs worked out on a total figure of Rs, 7,42,139.

The Tribunal

(1) [195i) S.C.R. 878,

(2) S.C.R. SUPREME COURT REPOHTS 957

did not take into consideration another sum of z959 Rs. 41,81,196 which represented the depreciation fund The Indi;;. llume

which according to the appellant had been used as Pipe co., Ltd., working capital during the year. If that had been v. allowed a further sum of Rs. 1.67 lacs should have Their Workmen been added to Rs. 0·29 lacs and the total amount of d k. • l ld Bhagwati ]. 4% return on reserves use as wor mg capita wou have amounted to Rs. 1·96 lacs.

Two arguments were advanced against this contention of the appellant. One was that there was nothing like a depreciation fund, that it merely represented a credit item introduced in the balance-sheet as against the value of the fixed capital at its original cost and would have disappeared as such if the proper accounting basis had been adopted, viz., the fixed block had been showed at its depreciated value after deducting the amount of depreciation from the original cost.

Such book entries, it was contended, did not convert that credit item into a depreciation fund available to the company and there was therefore no basis for the contention that such a depreciation fund ever existed and could be used as working capital in the business. The other waR that there was nothing on the record to show that such a depreciation fund, if any, had been, in fact, used as working capital in the business during' that year.

The answer furnished by the appellant in regard to both these contentions was that on a true reading of the balance-sheet Rs. 41,81,196 were reserves used as working capital, vide calculations in Exhibit C-12.

Provision for depreciation was Rs. 1,10,29,954 and the paid up capital was Rs. 80,00,000 thus totalling to Rs. 1,90,29,954. The total capital block as shown in page 5 of the balance-sheet for the year ending June 30, 1955, was Rs. 1,48,48,758 and the working capital therefore was Rs. 41,81,196. This was apart from Rs. 7,42,139 which was the total of the three items at page 4 of the balance-sheet: Rs. 98,405 capital reserves, Rs. 4, 73, 734 other reserves and Rs. 1, 70,000 provision for doubtful debts as also the investments, cash and bank balance. This being the true position it follows on the facts of the present case that this

1959 amount was available for use as working capital and

The Indfon linme the balance-shee~ sh_owed that it w~.s in _fact so used.

Pipe co., Ltd., Moreover, no obiect10n was urged m this behalf nor v. was any finding to the contrary recorded by the Tri- 1.,1ei'r JVorkmen bunal.

We are, therefore, of the opinion that the reasoning Hhagwati J. adopted by the Tribunal was not correct and the appellant was entitled to 4% return on the reserves nsed as working capital including the sum of Rs. 41,81,196.

The appellant was thus entitled to Rs. l 96 lacs as the 4% return on reserves used as working capital and not merely Rs. 0·29 lacs as allowed by the Tribunal.

The provision for rehabilitation had been claimed by the appellant at Rs. 1·10 lacs on the basis of 10% of the net profits relying upon para. 20 of the Report of the Committee on Profit Sharing in which the Committee had proposed that 10% of the net profits should compulsorily be set aside for reserves to meet emergencies as well as for rehabilitation, modernization and reasonable expansion.

No evidence was at all led by the appellant before the Tribunal showing the cost of the machinery as purchased, the age of the machinery, the estimate for replacement etc., in order to srlbstantiate this claim for rehabilitation and the appellant was content merely to rely upon this recommendation of the Committee on Profit-sharing. This was rightly considered by the Tribunal as insufficient to support the appellant's claim, though it allowed for rehabilitation, in addition to the statutory depreciation, the amount for which the appellant had actually made provision, viz., the sum by which the depreciation written off for the year exceeded the statutory depreciation (i. e., Rs. 10,00,000 minus Rs. 9,82,799- Rs. 17,201). The amount was really small and did not affect the bonus to be awarded. The Tribunal, in fact, allowed the same, though it appears that in the absence of evidence of the nature above referred to even that sum of ls. Ol 7 lacs ought not to have been allowed. In this state of affairs it is really impossible for us to allow the appellant's claim for rehabilitation in anything beyond the sum of Rs. 0 17 lacs actually

allowed by the Tribunal and the claim of the appellant x959 for any further provision for rehabilitation must be Th 1 -a H . • e n ian ume disallowed for the purpose of the bonus calculat10ns Pipe co., Ltd., for the year under consideration. It will however be v. open to the appellant to claim higher rehabilitation for Their Workmen subsequent years if it can substantiate its claim by adducing proper evidence.

Bhagwati J.

In addition to these various sums allowed to the appellant by way of prior charges against the gross profits earned during the accounting year the Tribunal also allowed to the appellant Rs. 2·50 lacs by way of provision for debenture redemption fund.

The claim of the appellant was for a sum of Rs. 3·50 lacs for the same and it arose under the following circumstances.

The. appellant had issued debentures of the value of Rs. 30 lacs in the year 1942-43 and they were redeemable in the year 1962-63. No annual provision had been made from profits for redemption of the same inasmuch as until the year 1949 the appellant was not working at a profit. Such provision was made only thereafter. For the year 1950-51, the appellant made a provision for Rs. 75,000 for debenture redemption fund, for 1951-52, Rs. 1,50,000, for 1952-53 Rs. 1,50,000, for 1953-54 Rs. 75,000 and further provision had to be made for redemption of debenturesin a sum of Rs. 24,50,000. In so far as 7 more years were left before the due date for redemption the appellant claimed Rs. 3,50,000 as the annual sum to be set apart, though as a matter of fact in the balance-sheet only a provision of Rs. 2,50,000 had been made by it for debenture redemption reserve. The Tribunal pointed out that when the appellant had in its accounts appropriated Rs. 2,50,000 for the debenture redellj.ption fund the claim to have Rs. 3,50,000 for the purposPs of bonus formula was clearly untenable. It however was of the opinion that a reasonable provision for redemption fund should be allowed as a prior charge and actually allowed the sum of Rs. 2,50,000 which had been actually provided for the purpose in the balance-sheet1 negativing the contention of the respondents that no provision should be allowed for debenture redemption fund in the bonus formula;

'959 We are of the opinion that the Tribunal was not

I -d. H justified in allowing the sum of Rs. 2,50,000/- for T" Jn •an unie d b d f d h h Pipe co .. Ltd., e enture re empt10n un as a pr10r c arge m t e v. bonus calculations. The Full Bench Formula does Thefr Wo'1nnen not envisage any such prior charge. It is no doubt, true that capital is shy and it would not be practicable Bhagwati f. for the industrial concern to raise large amounts by way of fresh debentures when they become due. It is also true that the debentures do not stand on a par with other debts of a concern because the debentureholders would in a conceivable situation be able to enforce their security by bringing the industry to a stand-still by taking over charge of the whole concern.

It would therefore appear that the redemption of these debentures would be one of the primary obligations of the industrial concern and due provision has of necessity to be made for redemption thereof on due date.

This however does not mean that in the calculations of the distributable surplus the provision for such redemption should be given the status of a prior charge, though of course that would be a relevant consideration while distributing the available surplus between the various interests entitled thereto. We are therefore of opinion that the Tribunal was wrong in allowing Rs. 2,50,000/- as a prior charge in the bonus calculations.

This disposes of all the contentions which have been urged on behalf of both the parties and calculating the figure on that basis we arrive at the following:-

Gross Profit as per Tribunal's calculations Less : Notional Normal Depreciation

Less: Tax @ 7 as. in a rupee

Rs.

Less: 6% return on ordinary share capital

in lacs.

36·21

6•23

29·98. 11·55

18·43

and 5% on preference share capital 4·30

14•13

Less: 4% Return on reserves used as working capital: 7,42,139 29 + 41,81,196 1•67

The Indian Hum6

Pipe Co., Lid.,

v. 49,23,335 l •96 Their Workmen

Less : Provision for Rehabilitation

12•17

0·17

Available Surplus 12·00 This would bring the available surplus for distribution to a sum of Rs. 12 lacs and this would be distributable amongst the shareholders, the company and the workmen concerned.

It is not feasible to lay down any rigid formula as to what the proportion of such distribution amongst these various interests should be. The shareholders as well as the company would both be naturally interested inter alia in providing the debenture redemption reserves as also meeting the needs of the industry for further expansion. The workmen would no doubt be interested in trying to bridge the gap between their actual wage and the living wage to the extent feasible.

This surplus of Rs. 12 lacs would have to be distributed amongst them having regard to the facts and circumstances of the case, of course bearing in mind the various considerations indicated above.

Before we arrive at the figure of the actual bonus which it will be appropriate in the circumstances of this case to allow to the workmen, we may advert to one argument which was pressed before us on their behalf and that was that the bonus calculations should not be made on the basis of the All-India figures which were adopted by the Tribunal but on the basis of the actual amounts which the appellant had paid and would have to pay to the workmen concerned. It was pointed out that the respondents here were only the workmen in the Wadala Factory of the appellant. The appellant had, however, paid to the various workmen elsewhere as and by way of bonus sums varying between 4 % and 29% of the basic wages for the year in question. The sum of Rs. 1,23,138/- only had been

Bhagwali J.

z959 paid in full and final settlement to t.he workmen in

T ' 1 d--:-- II some of the factories and the bonus calculations on an '" " zan

"'"' AJ d" b Id h Pipe co., Ltd., I-In ia as1s wou t us work to the advantage of v. the a ppellaut in so far as they would result in saving Their Workmen to the appellant of the difference between the amounts to which those workmen would be entitled on the basis Bhagwati f. of the All-India figures adopted by the Tribunal and the amounts actually paid to them as a result of agreements, conciliation or adjudication. It was therefore contended that the calculations should be made after taking into account the savings thus effected by the appellant and only a sum of Rs. 1,23,138/- which was the actual sum paid to those workmen should be taken into account and no more. We are afraid, we cannot accept this contention. If this contention was accepted the respondents before us would have an advantage over those workmen with whom settlements have been made and wonld get larger amounts by way of bonus merely by reason of the fact that the appellant had managed to settle the claims of those workmen at lesser figures. If this contention of the respondents was pushed to its logical extent it would also mean that in the event of the non-fulfilment of the conditions imposed by the Tribunal in the award of bonus herein bringing in savings in the hands of the appellant, the respondents would be entitled to take ad vantage of those savings also and should be awarded larger amounts by way of bonus, which would really be the result of the claimants entitled to the same not receiving it under certain circumstances-an event which would be purely an cxtraneo~ one and unconnected with the contribution of the respondents towards the gross profits earned by the appellant. Tho Tribunal was, therefore, right in calculating the bonus on an All-India basis.

By our order dated April 12, 1957, the appellant was ordered to pay to the respondents within a fortnight from the date thereof bonus for the year 1954-55 equivalent to two months' basic wages; that amount has already been paid and works out at Rs. 3·39 lacs on an All-India basis. 'The only.question which therefore survives is what further bonus, if any, would the respondents be entitled

to from the distributable surplus of Rs. 12 lacs. The r959 sum of Rs. 3·50 lacs required for building up the - d b d . . ll • d The Indian Hume e enture re empt10n reserve is an a -engrossmg nee rp c Ltd of the appellant and that is a factor which must of ' e :.·· ·• necessity be taken into consideration while arriving at Their Worhinen the ultimate figure, particularly because such redemption of the debentures would enure not only for the Bhagwati J. benefit of the Company and its shareholders but also of the workmen employed therein.

Having regard to all the circumstances of the case, we feel that an award of four months' basic wages as aggregate bonus for the year 1954-55 (which by the way was the bonus awarded for the previous year 1953-54 also) would give a fair share to the labour in the distributable surplus, leaving to the shareholders and the company a balance of Rs. 5·22 lacs to be utilised by them not only towards building up of the debenture redemption reserve but also for building up other reserves, which would be utilised for various other purposes indicated above.

The appellant would no doubt get also the refund of the income-tax on the bonus payments made by it.

This rebate would also go towards the fulfilment of the very same objectives, which would ultimately enure both for the benefit of the capital as well as labour.

we have, therefore, come to the conclusion that the appellant should pay to the respondents, in addition to the two months' basic wages already paid to them in pursuance of this Court's order dated April 12, 1957, an additional sum equivalent to two months' basic wages by way of bonus for the year 1954-55 subject to the same conditions as were laid down in the award of the Tribunal above referred to, all the dates mentioned therein being calculated from the date of this judgment.

We accordingly allow the appeal, modify the award of the Industrial Tribunal to the extent mentioned above, but in the circumstances of the case we make no order as to costs, each party bearing and paying its own costs thereof. - Appeal allowed.

THE INDIAN HUME PIPE CO., LTD

THEIR WORKMEN

N. H. BHAGWATI

P. B. GAJENDRAGADKAR

K. N. WANCHOO, JJ.

s. 10

Industrial Disputes Act, 1947

Art. 136

Income-tax Act

Income-tax Act

s. 9