Full Judgment Text
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PETITIONER:
MANAGEMENT OF SHRI CHALTHAN VIBHAG KHAN UDYOG SAHAKARIMANDAL
Vs.
RESPONDENT:
B.S. BAROT MEMBER, INDUSTRIAL COURT, GUJARAT, AND ANR. ETC.
DATE OF JUDGMENT04/09/1979
BENCH:
KAILASAM, P.S.
BENCH:
KAILASAM, P.S.
FAZALALI, SYED MURTAZA
SEN, A.P. (J)
CITATION:
1980 AIR 31 1980 SCR (1) 509
1979 SCC (4) 622
CITATOR INFO :
D 1981 SC 905 (4)
ACT:
Labour law-Dearness allowance to workers-Its nature-If
could he given at 125% of increase in the cost of living-
Depreciation, if should be a first charge in arriving at the
capacity of the industry to pay wages.
HEADNOTE:
The respondent workmen who were employees of Sugar
mills in the State of Gujarat demanded grant of dearness
allowance, among certain other benefits, on the basis of
revised scales for sugar factories in Uttar Pradesh. The
Industrial Court, Gujarat increased the dearness allowance
on a graded scale spread over three years.
On appeal the High Court set aside the award by the
Industrial Court in respect of phasing but confirmed the
award in regard to dearness allowance and directed that the
U.P. pattern should be given full effect with retrospective
effect from The date mentioned in the award.
The employers questioned the correctness of the High
Court’s judgment on the ground that (I) grant of
neutralization of variable dearness allowance at 125% is far
in excess of what is permissible under the industrial law
and (2) the High Court failed to take into account
depreciation in arriving at the financial capacity of the
industries while fixing the wage structure.
^
HELD: 1. (a) Variable dearness allowance cannot be more
than 100% neutralization. [517D]
(b) The purpose of dearness allowance is to neutralise
a portion of the increase in the cost of living due to rise
in prices. Neutralization may be such as to neutralize fully
the increase in the cost of living or may be restricted to
only a portion of the increase. Cent percent neutralization
can be achieved if the increase in the cost of living is
fully compensated so that the pay of the workers is not
adversely affected. But an award of more than 100% of
increase in the cost of living would be more than
neutralization and would in effect give the worker an
increased wage. The result would be that the worker would be
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getting an increased wage packet whenever there is a price
rise, a result which would not have been envisaged in making
provision for grant of dearness allowance. [516D-G]
Clerks of Calcutta Tramways v. Calcutta Tramways Co.
Ltd., [1956] S.C.R. 772, Kamani Metals and Alloys Ltd. v.
Their Workmen [1967] 2 S.C.R. 463, Bengal Chemical and
Pharmaceutical Works Ltd. v. Its Workmen, A.I.R. 1969 S.C.
360, Silk & Art Silk Mills Association Ltd. v. Mill Mazdoor
Sabha, [1973] 1 S.C.R. 277 and Killick Nixon Ltd. v. Killick
JUDGMENT:
followed.
510
(c) It is not correct to say that neutralization of
more than 100% dearness allowance is based on the seasonal
nature of employment in the industry. The retention
allowance provided to seasonal workers in sugar industry is
to mitigate the hardship of unemployment during the off
season. [517A-B]
2. (a) Section 66(1) of the Gujarat Cooperative
Societies Act 1961 requires that taxes and depreciation
should be deducted from gross profits for arriving at net
profit. That does not mean that wages and dearness allowance
could only be determined after the net profits are arrived
at. The sub-section itself provides that contributions
towards provident fund and gratuity even of its employees
should all be deducted from the gross profits for arriving
at the net profits. The provision for deducting depreciation
occurs after providing for contribution towards provident
fund and gratuity. The determination of the net profits
under the section is for different purpose, namely, for
appropriation of the net profit as provided for in tie Act
and does not in any way support the contention of the
appellant. [518E-F]
(b) It is settle law that in fixing far wages or
dearness allowance or making contribution to provident fund
or providing for gratuity the financial capacity of the
industry to bear the additional burden will have to be taken
into account. On principle of social justice with the
development of industrial law it has now been accepted that
when the industry can bear the burden, pro vision should be
made for provident fund and gratuity schemes. In determining
the financial capacity of an industry all relevant facts
will have to be taken into account. The principles followed
in arriving at the profit and loss account for income-tax
and other purposes may not be conclusive. The claim of he
employer to a reasonable profit, that of the shareholders
for a fair dividend the interest of consumer and other
relevant factors and circumstances will have to be taken
into account. It is necessary to take into account all the
facts and circumstances relating to the industry for
determining the financial capacity of the industry to pay.
[519-G]
Ahmedabad Mills owners’ Association etc. v. The Textile
Labour association, [1966 1 S.C.R. 382, Gramophone Company
Ltd. v. Its Workmen, [1964] 2 LL.J. 131, Indian Link Chain
Manufacturers Ltd. v. Their Workmen, [1972] 1 S.C.R. 790 and
Bharatkhand Textile Mfg. Co. Ltd. and ors. v. The Textile
Labour Association, Ahmedabad, [1960] 3 S.C.R. 329;
followed.
(c) The facts that have to be taken into account in
determining an overall picture of the financial capacity are
the financial condition of the employer his profit making
capacity, the profits earned by him in the past, extent of
the reserves and the chances of his replenishing them as
well as the claim for capital invested by him. [521F-G]
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Hindustan Antibiotics Ltd. v. The Workmen and ors.,
[1967] 1 S.C.R. 652. referred to.
(d) An employer claiming depreciation allowance is only
entitled to the actual or probable depreciation of the
machinery etc. for the period due to wear and tear. The
depreciation cannot be computed on an actuarial basis or on
the profit and loss account furnished by the company. In the
instant cases, the accounting was far the purpose of
minimising the profits to deprive are
511
workers their due. Such depreciation cannot be allowed. If
the inflated figures are left out of account the industry
has the capacity to bear the additional burden. [524A-B, E]
(e) Even though the wages were fixed on industry-cum-
region basis it is open to industry to plead that it has not
the financial capacity to hear the increased burden. When
such a plea is specifically raised, it is the duty of the
industrial court to determine whether the increased burden
could be borne by the particular industry. [525 F-G]
&
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 146/78.
Appeal by Special Leave from the Award dated 22-2-77 of
the Industrial Court, Gujarat in Ref. I.C. No. 53/75.
AND
CIVIL APPEAL NOS. 322-324 OF 1979.
Appeals by special leave from the Order dated 18-10-
1978 of the Gujarat High Court in SCA No. 1036/77.
AND
SPECIAL LEAVE PETITION (CIVIL) NO. 2939/79.
From the Judgment and Order dated 30-1-1979 of the
Gujarat High Court in SCA No. 311/78.
Dr. Anand Prakash, Laxmi Anand Prakash, Arun B. Desai
and H. K. Puri for the Appellant in CA 146/78 and 323/79.
F. S. Nariman, H. K. Puri, Arun B. Desai and Mrs. Laxmi
Anand for the Appellants in CA 322/79.
A. K. Sen, Arun B. Desai, V. K. Behl, H. K. Puri and
Mrs. Laxmi Anand for the Appellant in CA 324/79.
M. K. Ramamurthy and Promod Swarup for the Respondents
in C.A. 146/78 and C.A. 322/79.
S. S. Khanduja and Miss Kusum Chowdhry for the
Respondent in C.A. 146/78 and 323-324/79.
J. G. Shah (CA 322) M. K. Ramamurthi (SLP. 2939 and CA
322) and A. K. Srivastava and Vineet Kumar for the
Respondents in C.A. 322 and for the Petitioner in SLP.
2939/79.
The Judgment of the Court was delivered by
KAILASAM, J. All these appeals and special leave
petition are by the management of five cooperative sugar
factories in Gujarat State. The demand of the workmen of the
factories in Gujarat was for pay-
512
ment of the U.P. Government revised scales for sugar
factories in U.P. regarding pay, dearness allowance and
other benefits.
The second Wage Board for the sugar industry gave its
report in 1970. The Wage Board’s report was due to expire on
31st October, 1974. The Government of U.P. on 31st October,
1974, issued the U.P. Pattern Scales of Wages and Dearness
Allowance for workmen employed in all sugar factories
working by vacuum Pan Manufacturing Process. The Labour
Minister gave the award and as a result of that award, an
order was passed under section 3 sub-clause (b) of the U.P.
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Industrial Disputes Act, 1947. This order relating to U.P.
Pattern of Pay, Graduated Dearness Allowance, Variable
Dearness Allowance came into force from 31st October, 1974
and effect was to be given to these pay-scales and dearness
allowance from 1st October, 1974. As the sugar factories
were seasonal factories a retention allowance for unskilled
seasonal workmen for off-season at the rate of 10% of the
basic wage and dearness allowance payable during the
crushing year 1974-75 was also provided for. The demand put
forward by the workmen in all these appeals is for payment
according to the U.P. Pattern.
The Industrial Court, Gujarat, increased the graduated
dearness allowance of the unskilled employees from Rs. 21 to
Rs. 40. But this increase was not given at one stage but was
spread over in three stages, the first stage being from 1st
July, 1976 to 30th June, 1977, the second stage being from
1st July, 1977 to 30th June, 1978 and the third stage being
from 1st July, 1978 to 30th June, 1979 and onwards. The
increased graduated dearness allowance for the first period
would be Rs. 32 per month; for the second period Rs. 36 per
month and for the third period Rs. 40 per month. The
existing basic wage for the unskilled employee is Rs. 110.
The variable dearness allowance of Rs. 151 per month is
being paid and the Court found that there was no dispute as
raised in demand No. 2(c). Regarding variable dearness
allowance demand Nos. 3, 4 and 5 the Court revised the rates
from 83 paise per point on the rise over 301 points of All
India Average Consumer Price Index Number for Industrial
Workers (Base 1960-100) at Re. 1.00 per point for skilled B
operatives and for clerks drawing upto Rs. 150 per month as
asked for in demand 5(i) (b) and from Re. 0.95 to Re. 1.12
for All India Average Consumer Price Index for other
employees as per demand No. 5(i)(d). This increase was also
spread over for a period of three years i.e. 7 paise for the
first period from 1st July, 1976 to 30th June, 1977; 5 paise
for the second period from 1st July, 1977 to 30th June,
1978; and 5 paise for the third period from 1st July, 1978
to 30th June, 1979 and
513
onwards. Regarding demand No. 7 relating to retaining
allowance to be paid to the unskilled seasonal employees at
the rate of 10 per cent of the basic wage and dearness
allowance payable during the crushing season 1974-75 and for
subsequent years, the Court found that the demand was
justified. The Court gave a retention allowance of 10%, as
demanded, of the basic wage and dearness allowance payable
during the crushing season 1974-75 and also for the three
subsequent years.
On appeal the High Court passed an order on 18th
October, 1978 as follows stating that reasons will be given
later.
"(1) The impugned award is hereby quashed and set
aside.
(2) There is no justification for the phasing
awarded by the Industrial Court and hence,
the phasing is quashed and set aside.
(3) x x x x
(4) x x x x
(5) The respective cooperative sugar societies
will pay the costs of the other side. Costs
quantified at Rs. 300/- in each matter. Rule
is made absolute accordingly in Special Civil
Applications Nos. 1136 of 1977, 1148 of 1977,
602 of 1978 and 311 of 1978, Special Civil
Applications Nos. 1036 of 1977 and 1505 of
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1977 are dismissed."
By this order the Court quashed the award and set it aside.
It also found that there was no justification for phasing as
awarded by the Industrial Court and therefore quashed it and
set it aside. It confirmed with retrospective effect the
award as given by the Industrial Court. The High Court also
directed that U.P. Pattern will be given full effect with
retrospective effect from the date mentioned in the award.
The reasons were given by the High Court by its judgment
dated 30th January, 1979.
The judgment of the High Court is assailed on the
following grounds:-
1. The grant of neutralisation of variable
dearness allowance at 125% is far in excess
of what is permissible under the industrial
law.
2. The High Court erred in not taking into
account depreciation of the sugar factories
in arriving at the
514
financial capacity of the industry for the
purpose of fixing the wage structure. In any
event, it was submitted that as the
administration of the sugar factories is
governed by the Gujarat Cooperative Societies
Act, 1961, those provisions will have to be
followed in arriving at the net profits and
for determining the financial capacity of the
factories to pay.
3. It was submitted that the Industrial Court
and the High Court erred in following the
U.P. Pattern on the ground that it has been
accepted by the other States in the South
zone without taking into account the relevant
circumstances relating to individual
factories.
4. Lastly it was contended that the High Court
after quashing the impugned award and setting
it aside erred in passing a new award.
We ignore the last ground as we feel it is purely technical.
Though the High Court may not be right in stating that it
quashed and set aside the award, the intention is clear from
the subsequent clauses of the award. We will now proceed to
deal with the other three objections.
It is strongly urged on behalf of the appellants that
the High Court and the Tribunal were in error in allowing
neutralisation of variable dearness allowance of 125% which
is beyond the permissible limits of the industrial law.
It is common ground that 100% neutralisation would be
achieved by granting an increase of 83 paise for rise in one
point in the cost of living index. By granting an increase
of one rupee for increase of one point the neutralisation is
by 125%. Dearness Allowance was primarily intended as a
protection of persons whose salaries are at the subsistence
level to protect them against the adverse effects of the
rise in prices. The Commission on Dearness Allowance in May,
1967 stated that historically dearness allowance was
regarded as applicable to those employees whose salaries are
at the subsistence level or at a little above in order to
enable them to face the increase in dearness of essential
commodities. The National Commission on Labour, 1969,
observed that unless money wages rise as fast as consumer
prices it will result in an erosion of real wages. But the
extent of its impact will depend on the margin of erosion
available at different levels of income. The Commission
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recommended that 95% neutralisation
515
should be granted against rise in cost of living to those
drawing minimum wage in non-scheduled employments.
In a series of decisions, this Court has expressed the
same view. It has been held that cent per cent
neutralisation cannot be allowed as it would lead to a
vicious circle and add to the inflationary spiral. It was
observed that there was no reason why the industrial worker
should not make sacrifices like all other citizens. In
Clerks of Calcutta Tramways v. Calcutta Tramways Co. Ltd(1)
this Court said "We can now take it as settled that in
matters of the grant of dearness allowance except to the
very lowest class of manual labourers whose income is just
sufficient to keep body and soul together, it is impolitic
and unwise to neutralise the entire rise in the cost of
living by dearness allowance. More so in the case of the
middle classes". The same view was expressed in the
Hindustan Motors’(2) case and was reaffirmed in Hindustan
Times Ltd. New Delhi v. Their Workmen,(3) where it was
observed that the whole purpose of dearness allowance being
to neutralise a portion of the increase in the cost of
living it should ordinarily be on a sliding scale and
provide for an increase on rise in the cost of living and a
decrease on a fall in the cost of living. In Kamani Metals
and Alloys Ltd. v. Their Workmen,(4) it was held that 100%
neutralisation is not advisable as it will lead to inflation
and therefore dearness allowance is often a little less than
one-hundred per cent neutralisation. In Silk & Art Silk
Mills Association Ltd. v. Mill Mazdoor Sabha(6) it was laid
down that in considering a claim for dearness allowance or
revision of dearness allowance amongst other factors it
should be borne in mind (1) Full neutralisation is not
normally given, except to the very lowest class of
employees; (2) The purpose of dearness allowance being to
neutralise a portion of the increase in the cost of living,*
should ordinarily be on a sliding scale and provide for an
increase on the rise in the cost of living and a decrease on
a fall in the cost of living. In Silk & Art Silk Mills
Association Ltd. v. Mill Mazdoor Sabha(6) a grant by the
Industrial Tribunal of 99% neutralisation of increase in the
cost of living was confirmed as the workmen cannot be denied
their subsistence wage at its real level because some other
comparable concern is paying at a lower rate. In Killick
Nixon Ltd. v. Killick &
516
Allied Companies Employees Union(1) this Court after
approving the propositions laid down in Bengal Chemical case
(supra) proceeded to state at p. 467: "There is, however,
one thing which we must point out lest there should be some
misconception about it and that is that so far as the lowest
paid employees at or just above the subsistence level are
concerned, they are entitled to 100% or at any rate not less
than 95% neutralisation of the rise in the cost of living
and hence there should be no ceiling on dearness allowance
payable to employees within the slab of first Rs. 100,
unless it can be shown by the management that the rate of
neutralisation in their case is more than 100 per cent. The
decision is authority for the proposition that the rate of
neutralisation cannot be more than 100% even in the case of
lowest paid employees. The proposition laid down in the
decision cited above were reiterated and followed in Shivraj
Fine Art Litho Works v. State Industrial Court, Nagpur &
Ors.(2)
The law is thus clear that dearness allowance is
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intended to neutralise a portion of the increase in the cost
of living. Though 100% neutralisation is not advisable as it
will lead to inflation, full neutralisation may be
permissible only in the case of the lowest class of
employees. The management is entitled to complain if the
neutralisation is more than 100%.
The purpose of grant of dearness allowance is to
neutralise the increase in the cost of living due to rise in
prices. Neutralisation may be such as to neutralise fully
the increase in cost of living or may be restricted to
neutralise only a portion of the increase. Full or cent per
cent neutralisation can be achieved if the increase in the
cost of living is fully compensated so that the pay of the
worker is not adversely affected. But an award of more than
100% of an increase in the cost of living would be more than
neutralisation and would in effect gives the worker an
increased wage. The result would be the worker would be
getting an increased wage packet whenever there is a price
rise a result which would not have been envisaged in making
provision for grant of dearness allowance.
Mr. M. K. Ramamurthi learned counsel for the
respondents submitted that the permissible limit of 100%
neutralisation is not applicable to cases where persons are
seasonally employed. The learned counsel pointed out that
the sugar industry does not function for the whole year and
for months it is closed and the workers are left without
employment during the off-season. In order to give some
relief to such sea-
517
sonal workers he submitted, that the award of equalisation
of more than 100% is justified. This plea cannot be accepted
for the award of equalisation of more than 100% in these
cases is not based on seasonal employment. To mitigate the
hardship of unemployment during the off-season a retention
allowance has been provided for the seasonal workers. The
plea that the neutralisation of more than 100% is based on
seasonal employment was not taken in the pleadings or raised
before the courts below.
Demand No. 7 relates to claim for payment of retaining
allowance for the unskilled seasonal employees in the off-
season at the rate of 10% of their basic wage and dearness
allowance payable during the crushing season 1974-75. The
Industrial Court as regards demand No.7 directed that the
unskilled seasonal employees be paid retaining allowance for
the season 1975 at the rate of 10% of the basic wage and
dearness allowance payable during the crushing season 1974-
75. The claim regarding the variable dearness allowance is
demand No. 2(c) and 5(1) (a) (b). There is no reference in
the proceedings before the Industrial Court or the High
Court that the variable dearness allowance of more than 100%
equalisation was awarded due to the seasonal employment of
the workers. In the result we accept the contention of the
appellants that variable dearness allowance cannot be more
than 100% neutralisation.
The second contention raised on behalf of the
appellants is that in fixing fair wages and dearness
allowance financial capacity of the cooperative societies
should be arrived after taking into account the
depreciation. Mr. Nariman the learned counsel submitted that
in order to keep an industry running it is necessary to make
provision for depreciation as otherwise when the machinery
gets worn out the industry would grind to a halt. The
learned counsel submitted that though there are certain
observations by this Court in Unichem Laboratories Ltd. v.
The Workmen(1), and Indian Link Chain Manufacturers Ltd. v.
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Workmen,(2) that depreciation could not be taken into
account in fixing the gross profits, they do not rule out
taking into account the depreciation in all cases in
determining the financial capacity of the Industry to bear
the increased burden.
Before considering the decisions which bear on the
question we will refer to the plea of the appellants that
financial capacity of sugar industry functioning under the
Cooperative Societies Act should only be decided according
to the provisions of s. 66 of the Gujarat Co-
518
operative Societies Act, 1961, Act X of 1962. Section 66(1)
runs as follows:-
"A society earning profit, shall calculate its
annual net profits by deducting from the gross profits
for the year, all accrued interest which is overdue for
more than six months, establishment charges,
contributions, if any, towards the provident fund and
gratuity fund of its employees, interest payable on
loan and deposits, audit fees, working expenses
including repairs, rents, taxes and depreciation, and
after providing for or writing off bad debts and losses
not adjusted against any fund created out of profits. A
society may, however, add to the net profits for the
year, interest accrued in the preceding years, but
actually recovered during the year. The net profits
thus arrived at, together with the amount of profits
brought forward from the previous year shall be
available for appropriation."
Relying on the provisions of the section which requires
that taxes and depreciation should be deducted from gross
profits for arriving at net profits, it was submitted that
in determining the financial capacity of the industry the
net profits as prescribed in the section would have to be
determined. We do not read the section as meaning that wages
and dearness allowance could only be determined after the
net profits are arrived at. The sub-section itself provides
that contributions towards provident fund and gratuity fund
of its employees should all be deducted from the gross
profits for arriving at the net profits. The provision for
deducting depreciation occurs after providing for
contribution towards provident fund and gratuity. The
determination of the net profits under the section is for a
different purpose, namely for appropriation of the net
profits as provided for in the Act and does not in any way
support the contention of the appellants.
In deciding the financial capacity of an industry this
Court has laid down in Ahmedabad Mills Owners’ Association
etc. v. The Textile Labour Association,(1) that "Industrial
adjudication must take into account the problem of
additional burden which such wage structure would impose
upon the employer and consider whether the employer can
reasonably be called upon to bear such burden. .... It is a
long-range plan and in dealing with the problem, which is
difficult and delicate the financial position of the
employer and the future prospects of the industry and the
additional burden which may be imposed on the consumer must
be carefully examined." This Court after referring to the
Reserve Bank Bulletin about the financial position of the
industry
519
and about cotton textile industry and other authorities on
determining the financial capacity of an industry observed
that "industrial adjudication cannot lean too heavily on
such single-purpose statements or adopt any one of the tests
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evolved from such statements, whilst it is attempting the
task of deciding the financial capacity of the employer in
context of the wage problem." The financial capacity of the
industry will have to be decided in the context of the wage
problems and the methods adopted in determining financial
capacity of the industry for other purposes need not be
followed. While examining the financial capacity in detail
we must ultimately base our decision on a broad view which
emerges from a consideration of all relevant factors, such
as financial position of the employer, the interests of the
consumer etc.
The wages due to a worker are in the nature of expenses
just like payment for raw materials. In this sense the wages
are expenses which have to be met whether the company works,
makes a profit or not. So far as the minimum wages due to a
worker are concerned, the law requires that they should be
paid first and if the industry cannot pay them it may as
well close. The payment of dearness allowance as prescribed
under the Minimum Wages Act should also be provided for in
any event. It is settled law that in fixing fair wages or
dearness allowance or for making contribution to provident
fund or providing for gratuity the financial capacity of the
industry to bear the additional burden will have to be taken
into account. On principle of social justice with the
development of industrial law it has now been accepted that
when the industry can bear the burden provision should be
made for provident fund and gratuity scheme. In determining
the financial capacity of an industry all relevant facts
will have to be taken into account. The principles followed
in arriving at the profit and loss account for income-tax
and other purposes may not be conclusive. The claim of the
employer to a reasonable profit, that of the shareholders
for a fair dividend and the interest of consumer and other
relevant factors and circumstances will have to be taken
into account. It is necessary to take into account all the
facts and circumstances relating to the industry for
determining the financial capacity of the industry to pay.
We will now proceed to refer in detail to the three
decisions of this Court which are relied on as authority for
the proposition that depreciation should not be taken into
account in fixing the wage structure. In Gramophone Company
Ltd. v. Its Workmen(1) this Court had to
520
examine the financial capacity of the employer for
determining whether the industry could bear the burden of a
gratuity scheme. The court found on examination of the
financial position of the company that the profits that were
made by the company were Rs. 7.6 lakhs in 1956-57, Rs. 7.2
lakhs in 1957-58, Rs. 1.6 lakhs in 1958-59, Rs. 1.49 lakhs
in 1959-60 and Rs. 6.04 lakhs in 1960-61. On behalf of the
company it was submitted that the introduction of the
gratuity scheme would throw a great burden on the industry
involving an initial fund of Rs. 33 or 34 lakhs and that if
provision is made for income-tax payable and development
rebate it will be seen that the company is running at a
loss. The Court found that the financial position of the
industry showed that the burden of payment of gratuity and
provident fund can be made without undue strain on the
financial position of the employer. The court observed that
the introduction of a gratuity scheme will not require an
initial fund of Rs. 33 or 34 lakhs but only involve an
additional burden of Rs. 1.5 lakhs at the most. Though the
introduction of the gratuity scheme may involve an
expenditure of Rs. 1.50 lakhs a year the actual burden will
be Rs. 60,000 as there will be a reduction of the income-tax
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payable by about 63%. Regarding the plea of the company that
if the amounts due to income-tax and development rebate are
taken out, it would show that the company has suffered a
loss, the Court observed that the provisions for income-tax
and reserves must take a second place as compared to
provisions for a wage structure. In declining to accept the
contention that provision for taxation and reserves should
have precedence, the Court proceeded to base its decision on
the finding that the financial capacity of the industry was
such that it could bear the burden. This Court held that if
the industry is in a stable condition and the burden of
provident fund and gratuity does not result in loss to the
employer that burden will have to be borne by the employer
like the burden of wage-structure in the interest of social
justice.
The statement that provision for income-tax and
development rebate taking only a second place may not be
understood as holding that they should on no account be
taken into consideration or that a wage increase would be
permissible if it would result in reduction of income-tax.
The decision is based on the finding that the company is in
a position to bear the burden and the observations were
incidental and made on the facts of the case. It may be
noted that there is no reference about taking into account
of depreciation allowance. The judgment should be understood
as negativing the plea that the income-tax and development
rebate should be taken into account to the extent of showing
that the industry is running at a loss.
521
The second decision is Indian Link Chain Manufacturers
Ltd. v. Their Workmen.(1) The question arose whether in the
matter of determining surplus the Tribunal was justified in
taking the figures of depreciation allowance and development
rebate from the balance sheet and not from the income-tax
assessment orders in which the figures were higher and
whether for determining the return on reserves the figures
at the end of the year or the beginning of the year had to
be taken. It was held by this Court that there was no
justification for the rejection of the company’s claim for
depreciation and development rebate and the same be allowed
as per income-tax assessment. The Court allowed depreciation
allowance and development rebate. In determining the
financial position of the company the court observed that it
would not be appropriate to approach its capacity to bear
the burden from an investors point of view. The over-all
picture of the soundness of the undertaking and its future
prospects must be taken into account.* The Court adopted the
principles laid down in the Bharatkhand Textile Mfg. Co.
Ltd. & Ors. v. The Textile Labour Association, Ahmedabad(2)
which are as follows:-
"It is not disputed that the benefit of gratuity
is in the nature of retiral benefit and there can be no
doubt that before framing a scheme for gratuity
industrial adjudication has to take into account
several relevant facts; the financial condition of the
employer, his profit making capacity, the profits
earned by him in the past, the extent of his reserves
and the chances of his replenishing them as well as the
claim for capital invested by him, these and other
material considerations may have to be borne in mind in
determining the terms of the gratuity scheme."
(Emphasis supplied).
Thus the facts that have to be taken into account in
determining an overall picture of the financial capacity are
the financial condition of the employer his profit making
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capacity the profits earned by him in the past, the extent
of his reserves and the chances of his replenishing them as
well as the claim for capital invested by him. After
referring to the decision in the Hindustan Antibiotics Ltd.
v. The Workmen & Ors., (3) at p. 809 the Court made the
following observations:-
"It is pertinent to notice that gratuity and wages
in industrial adjudication are placed on the same
footing and have priority over Income-tax and other
reserves, as such in consi-
522
dering the financial soudness of an undertaking for the
purposes of introduction of a gratuity scheme the
profits that must be taken into account are those
computed prior to the deduction of depreciation and
other reserves."
As already pointed out in Gramophone Company’s case
there is no reference to deduction of depreciation. In the
case under consideration i.e. Indian Link Chain Ltd., the
Court at p. 807 allowed the claim of the company for a
deduction on account of depreciation and development rebate
at Rs. 1,61,054 and Rs. 5,822 instead of Rs. 80,190 and Rs.
3,970. On the facts of the case it is found that the
industry was in a position to bear the burden.
In Unichem Laboratories Ltd. v. The Workmen(1) it was
found that the average gross profits of the company exceeded
Rs. 40 lakhs and the additional financial burden by the
revision of the wage structure was Rs. 5.55 lakhs. On the
facts the court held that the Tribunal was justified in
computing gross profits without deducting tax, depreciation
and development rebate. The court accepted the plea on
behalf of the company that the decision in Gramophone
Company Ltd. had no occasion to consider whether
depreciation reserve can be deducted or not.
Scrutinising the figures given at p. 581 of the Reports
the Court found that the average net profit worked out to
Rs. 13,84,691.00. The depreciation that was claimed was Rs.
5,44,918 for 1965-66, Rs. 5,55,035 for 1966-67, Rs. 7,84,824
for 1967-68, Rs. 11,11,775 for 1968-69 and Rs. 9,16,719 for
1969-70. On the facts the Court found that the company had
the financial capacity. The inclusion or exclusion of the
depreciation allowance would not have made any difference to
the capacity of the industry to bear the additional burden.
The decision may not be understood as laying down a
principle of law that in no case the depreciation could be
taken into account.
It may be remembered that in Bharatkhand Textile Mfg.
Co. Ltd. (supra) the guidelines that were indicated were
that in determining the capacity to pay by the industry the
financial condition of the employer, his profit making
capacity, the profits earned by him in the past, the extent
of his reserves and the chances of his replenishing them as
well as the claim for capital invested by him*. these and
other material considerations may have to be borne in mind.
Thus the extent of the reserves the chances of replenishing
them as well as the claim for capital
523
invested by him and as observed in Ahmedabad Millowners’
Association v. Textile Workers,(1) will have to be taken
into account. The position of the industry should be
examined in detail and the decision should be based on a
broad view which emerges from a consideration of all
relevant factors such as whether the employer can reasonably
be called upon to bear the burden and whether the additional
burden imposed on the consumer is justified would also have
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to be carefully examined. As pointed out in the Ahmedabad
Millowners Association case (supra) "It is a long-range plan
and in dealing with the problem, which is difficult and
delicate the financial position of the employer and the
future prospects of the industry and the additional burden
which may be imposed on the consumer must be carefully
examined."
It may be that for prudent management of an industry it
will be desirable to take into account to some extent the
depreciation of the machinery for otherwise after lapse of
years the machinery may get worn out and without provision
for replacement the industry itself will come to a stop.
Whether provision for such depreciation should be made and
if so to what extent will depend upon the facts of the case.
Depreciation allowance to the extent of making out a loss
need not be accepted but reasonable provision should be
made. The three decisions of this Court referred to were
given on the particular facts of the case and may not be
understood as laying down that under no circumstances
deduction for depreciation, reserves etc. could be made. It
is of utmost importance that the industry must be kept going
as long as it could pay the minimum wages. It may sometimes
be necessary for the workers to make some sacrifice to keep
the industry going. It is not wise to kill the goose that
lays the golden eggs. The capacity of the industry to bear
the burden will have to be taken into account in determining
whether provision could be made for fixing a wage structure
including provision for contribution to provident fund,
gratuity etc. In determining the capacity of the industry to
bear the burden all relevant facts will have to be taken
into account and actual state of affairs determined. The
procedure adopted by the industry to determine the financial
capacity for other purposes may not be relevant. It cannot
be taken as a hard and fast rule that provision for
depreciation, provision for development rebate, tax
liabilities should never be allowed. While the preservation
of the industry is paramount the attempts of the management
to show that the company is running at a loss by boosting
the depreciation allowance etc. should not be permitted. In
short the real capacity of the industry to bear the extra
burden will have to be determined.
524
An employer claiming depreciation allowance is only
entitled to the actual or probable depreciation of the
machinery, tools etc. for the period due to wear and tear.
The depreciation cannot be computed on any notional basis or
on the profit and loss account furnished by the company. In
the cases before use the management has claimed by way of
depreciation the cost of purchase of machinery for expansion
of the manufacturing plant. In the matter relating to
Chalthan Sugar Mills in the profit and loss account for the
year ending June 30, 1975 Rs. 1,07,56,523 is claimed by way
of depreciation at the end of the year. The balance brought
forward on this account from the previous year is Rs.
79,11,066. During the year, an amount of Rs. 28,45,457 is
added. In the profit and loss account for the year ending
June 30, 1977 the depreciation fund increased from Rs.
1,07,56,523 to Rs. 1,30,24,742. In the profit and loss
account for the year ending June 30, 1977 an amount of Rs.
22,97,553 is added to the depreciation fund. The figures
furnished by the other sugar factories follow the same
pattern. During the course of arguments the appellants
admitted that the amount shown as depreciation actually
represented the cost of purchase of new machinery and
balance for expansion of the manufacturing units. These
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amounts relate to expansion of the industry and should be
shown in the capital account and cannot be claimed as
deduction due to depreciation. The accounting of the sugar
factories concerned is for the purpose of minimising the
profits and showing loss for the purpose of depriving the
workers their due. Such depreciation cannot be allowed. But
as pointed out by us the actual depreciation which should be
deducted in the interest of the industry can be taken into
account. In the cases before us if the inflated figures
should be left out of account we feel that the industry has
the capacity to bear the additional burden.
The High Court after referring to the decisions of this
Court in Gramophone Co. and Indian Link Chain Manufacturers
and the Shivraj Litho Works (supra) came to the conclusion
that gross profits before allowance is made for depreciation
has to be taken into account for the purpose of considering
the paying capacity of the industry. The High Court added
the amount of depreciation to the net profits as shown in
the balance sheet and found that large profits were
available as gross profits. The High Court was of the view
that the position of the three factories in South Gujarat,
namely Gandevi, Bardoli and Madhi is not at all gloomy so
far as their financial prospects are concerned. The High
Court found that though the price of sugarcane was fixed for
delivery at the factory, it has paid the price to the
growers ex-sugarcane field, thus bearing the charges for
cutting sugarcane and for carrying it to the factory
premises from the field. This payment was unjustified
525
and was intended for the benefit of the members of the
cooperative society and resulted in showing of a ’Paper
Loss’. We are unable to agree with the conclusion of the
High Court that this payment is unjustified and is for the
purpose of benefiting its own members. It is submitted on
behalf of the factories that the sugar factories pay an
extra amount to the growers to induce them to cultivate
sugarcane for a profit and thereby preventing them from
cultivating other crops and reducing the area under
sugarcane cultivation. The finding of the High Court that
this extra payment is to benefit the members of the society
itself is also not borne out as there are members who are
not growers of sugarcane. The benefits by way of giving
fertilizers at a discount etc. will not profit members who
are not growers. The High Court has not estimated the likely
increase in profits due to increase in the price of sugar
levy along with the increase in expenditure due to the
revision of the wage structure which it has estimated at
about Rs. 5 lakhs. Further as pointed out by us earlier the
High Court erred in adding back the depreciation and other
reserves without determining as to what extent such
allowances are permissible on the facts of the case. For the
reasons stated we feel that the financial capacity of the
industry has not been determined in the manner in which it
ought to have been done.
The wages are normally fixed on the basis of industry-
cum-region. The U.P. Pattern was fixed by the Uttar Pradesh
Government on an agreement between the parties under section
3(b) of the U.P. Industrial Disputes Act, 1947(U.P. Act No.
18 of 1947). The order under sec. 3 (b) is provisional in
character. Section 3 (d) provides for fixing the wages after
proper adjudication. No such adjudication took place in U.P.
after the passing of the order under sec. 3(b). Even though
normally the wages are fixed on the industry-cum-region
basis it is open to the industry to plead that it has not
the financial capacity to bear the increased burden. When
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such a plea is specifically raised it is the duty of the
Industrial Court to determine whether the increased burden
could be borne by the particular industry. The reason given
by the Industrial Court and the High Court for following the
U.P. Pattern is that it has been accepted by various sugar
factories in the southern region and a neighbouring factory
Kodinar Sugar Factory and hence there is no reason for not
applying the same rates to the appellant factories. On
behalf of the appellant it was pleaded that it is not
admitted that all the sugar factories in the southern region
have accepted the U.P. Pattern. It was submitted that the
case of the Kodinar is different because it was established
long time ago and is a flourishing concern.
526
In view of the order we propose to make we do not feel
called upon to examine in detail the financial capacity of
the various factories or to remit it to the Industrial Court
for that purpose. We have found that the order of the
Industrial Court and the High Court relating to the
provision for variable dearness allowance of more than 100%
neutralisation is not sustainable in law and will have to be
set aside. Regarding the award relating to the retention
allowance of the unskilled workers at 10% of the basic wage
and the dearness allowance payable during the crushing
season, it was not challenged before the High Court. The
only question therefore which is in dispute is the increase
of graded dearness allowance from Rs. 21 to Rs. 40 with
effect from the date of the award. We do not think that the
increase in burden under this head would be beyond the
financial capacity of the factories especially as we are
satisfied that the claim for depreciation is highly
exaggerated. Taking all the circumstances relating to the
financial capacity of the factories we are satisfied that
the increase in the burden due to the increase in the
graduated dearness allowance will be within the capacity of
the industry. We therefore find no reason for remitting the
matter back to the Industrial Court. We set aside the award
relating to the grant of graduated dearness allowance at
more than 100% but direct that it will be confined to 83
paise for increase of one point i.e. limited to cent per
cent neutralisation. So far as the increment of the
graduated dearness allowance from Rs. 21 to Rs. 40 from the
date of the award and the retention allowance at 10% of the
basic wage and dearness allowance payable during the
crushing season to the unskilled workers is concerned, it is
confirmed.
The appeals are disposed of accordingly. The Appellant
will pay costs of the respondents one set of Rs. 2000/-which
will be divided amongst the respondents.
N.K.A Appeals allowed partly.
527