# • .JALAN TRADING CO. (PRIVATE LTDJ) v. MILL MAZDOOR UNION

- **Citation:** [1967] 1 S.C.R. 15
- **Court:** Supreme Court of India
- **Decided:** 1966-08-05
- **Bench:** K.N. Wanchoo, M. Hidayatullah, J.C. Shah, S.M. Sikri, V. Ramaswami
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/jalan-trading-co-private-ltdj-v-mill-mazdoor-union-3806
- **Pages:** 53

## Headnote

Constitution of India, 1950, Arts. 14, 31(1)-Payment of Bo11us Act,
1965, ss. 10, 33, 36, 31-Sections whether discrimi11atory-Section ao
whether deprivation of property.
During the pendcncy before the Industrial Tribunal, Bombay, of a
reference under s. 73-A of the Bombay Industrial Relations Act, 1946,
which arose out of a dentancl for the payment of bonus for the years 1961
and 1962 the Payment of Bonus Ordinance 3 of 1965 was promulgated
by the President on May 29, 1965 with immediate effect. The representatives of the workmen claimed that even if the plea of the employers
that the profit and loo; account of establishment for the years in question
disclosed a loss, was correct, the ordinance governed the dispute and that
the employees were entitled to receive bonus at the minimum rate of 4% of
the salary or wages or Rs. 40 whichever was higher, The Industrial Court
upheld the plea of the workmen and directed the employers subject to
the provisions of the Bonus . Ordinance, 1965 to pay to each employee
bonus for the, year 1962 equivalent to 15 days' of the salary or wages or
Rs. 40 whichever was higher. With special leave the employers appealed to this Court and challenged the validity of the payment of Bonus Act,
1965, which repealed Ordinance 3 of 1965 and especially of the pro,isions
under which bonus at minimum rate was
made
payable
under the
Act.
HELD : (i) The impugned legislation was within the legislrutive competence of Parliament and therefore not a colourable exercise of power or
a fraud on the Constitution. [27 BJ
Express Newspapers (Private) Ltd. v. Union of India, [1959] S.C.R.
12 and K. C. Gajapati Narayan De.o & Oi·s. v. State of Orissa, [1954] S.C.R.
1, referred to.
(ii) The power to exempt certain establishments from the operation
of the Act given to the appropriate Government. ll!'der s. 36 was n~ :in
unguided power because the Government was en101ned to take pubhc in·
terest, the :financial p6sition of the establishment, and other relevant circumstances into consideration before ex.ercising the said power. There was
therefore no excessive delegation of legislative authority by s. 36 and the
section was valid, [31 F-GJ
(iii) Per Wanclloo·, Shah and Sikri, JJ.-Section 10 is an integral part
of a scheme for providing for. a payment of bonus at rates which do not
juctuate from year to year.
It is not in the interest cf capital or labour
that there should be wide fluctuation in the payment of bonus by an
establishment from year to year. [33 HJ
The object of the Act being to maintain peace and harmony b.etween
labour and capital by alloWing the employees to share ,the prospenty of
15
16
SUPREME COURT REPORTS
(1967] I S.C.R.
the est~blishment reflecled by the profils <>med by the conlribu1ions made
A
by cap1lal, management and labour, Parliament has provided 1ha1 bonus
in a given year s~all not exceed .1(5th and shall not be less 1han I/25th
of the total earning of each mdiv1dual employee and bas directed that
th~ excess shall be carried forward to the next y.,;.r, and 1hat the amount
paid by. way of mlDlmum bonus not absorbed by the available profits shall
he c~rncd to the n.ext year and be set. off against the profits of the
succccd1ag years.
Thts scheme of .rrescnbing maximum and minimum rate~
of bO!JUS together with the scheme of 'set off' and 'set on' not only secures
B
the right of labour to share in the prospertity of the establishment hut
:1150 ensures ~' reasonable degree of uniforn1ity. [34 (~-DJ
Equal protection of the laws is denied if in achieving a certain object
persons, objects or transattions similarly circumstanced are differently
•
I rcatet! by l3w and the principle underlying that different trca1ment ha.,;
no rational relation to the object sought to be achieved by the law.
ExaC
mined in the light of the object of the Act and the scheme of set off
•.nil 'set on:.
_the provision for payment of minimum bonus cannot be
s1ad to be d1scnm1natory between diffcrcru cstahlishmcnts which arc unable on

## Text

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.JALAN TRADING CO. (PRIVATE LTDJ)
v.
MILL MAZDOOR UNION
August 5, 1966
(With Connected Petitions)
[K.N. WANCHOO, M. HIDAYATULLAH, J.C. SHAH, S.M. SIKRI
AND V. RAMASWAMI, JJ.]
Constitution of India, 1950, Arts. 14, 31(1)-Payment of Bo11us Act,
1965, ss. 10, 33, 36, 31-Sections whether discrimi11atory-Section ao
whether deprivation of property.
During the pendcncy before the Industrial Tribunal, Bombay, of a
reference under s. 73-A of the Bombay Industrial Relations Act, 1946,
which arose out of a dentancl for the payment of bonus for the years 1961
and 1962 the Payment of Bonus Ordinance 3 of 1965 was promulgated
by the President on May 29, 1965 with immediate effect. The representatives of the workmen claimed that even if the plea of the employers
that the profit and loo; account of establishment for the years in question
disclosed a loss, was correct, the ordinance governed the dispute and that
the employees were entitled to receive bonus at the minimum rate of 4% of
the salary or wages or Rs. 40 whichever was higher, The Industrial Court
upheld the plea of the workmen and directed the employers subject to
the provisions of the Bonus . Ordinance, 1965 to pay to each employee
bonus for the, year 1962 equivalent to 15 days' of the salary or wages or
Rs. 40 whichever was higher. With special leave the employers appealed to this Court and challenged the validity of the payment of Bonus Act,
1965, which repealed Ordinance 3 of 1965 and especially of the pro,isions
under which bonus at minimum rate was
made
payable
under the
Act.
HELD : (i) The impugned legislation was within the legislrutive competence of Parliament and therefore not a colourable exercise of power or
a fraud on the Constitution. [27 BJ
Express Newspapers (Private) Ltd. v. Union of India, [1959] S.C.R.
12 and K. C. Gajapati Narayan De.o & Oi·s. v. State of Orissa, [1954] S.C.R.
1, referred to.
(ii) The power to exempt certain establishments from the operation
of the Act given to the appropriate Government. ll!'der s. 36 was n~ :in
unguided power because the Government was en101ned to take pubhc in·
terest, the :financial p6sition of the establishment, and other relevant circumstances into consideration before ex.ercising the said power. There was
therefore no excessive delegation of legislative authority by s. 36 and the
section was valid, [31 F-GJ
(iii) Per Wanclloo·, Shah and Sikri, JJ.-Section 10 is an integral part
of a scheme for providing for. a payment of bonus at rates which do not
juctuate from year to year.
It is not in the interest cf capital or labour
that there should be wide fluctuation in the payment of bonus by an
establishment from year to year. [33 HJ
The object of the Act being to maintain peace and harmony b.etween
labour and capital by alloWing the employees to share ,the prospenty of
15
16
SUPREME COURT REPORTS
(1967] I S.C.R.
the est~blishment reflecled by the profils <>med by the conlribu1ions made
A
by cap1lal, management and labour, Parliament has provided 1ha1 bonus
in a given year s~all not exceed .1(5th and shall not be less 1han I/25th
of the total earning of each mdiv1dual employee and bas directed that
th~ excess shall be carried forward to the next y.,;.r, and 1hat the amount
paid by. way of mlDlmum bonus not absorbed by the available profits shall
he c~rncd to the n.ext year and be set. off against the profits of the
succccd1ag years.
Thts scheme of .rrescnbing maximum and minimum rate~
of bO!JUS together with the scheme of 'set off' and 'set on' not only secures
B
the right of labour to share in the prospertity of the establishment hut
:1150 ensures ~' reasonable degree of uniforn1ity. [34 (~-DJ
Equal protection of the laws is denied if in achieving a certain object
persons, objects or transattions similarly circumstanced are differently
•
I rcatet! by l3w and the principle underlying that different trca1ment ha.,;
no rational relation to the object sought to be achieved by the law.
ExaC
mined in the light of the object of the Act and the scheme of set off
•.nil 'set on:.
_the provision for payment of minimum bonus cannot be
s1ad to be d1scnm1natory between diffcrcru cstahlishmcnts which arc unable on the profits of the accounting year to pay bonus merely because a
uniform standard of minimum rate of bonus is applied to them. [34 FJ
Kunna:that Thathunnl Moopil Nair v. State of Kera/a and Another,
[1961] 3 S.C.R. 77, distinguished.
D
Section 10 undoubtedly places in the same class e-;tahlishmcn1s ,~·hich
have made inadcqua~c. profits not justifying payment of bonu:-..
establish·
meats which have suliered n1arginal loss, and establishments \\"hich have
suffered bea><y Joos.
The classification so made is not unintelligible as
;1!I establishments which are unable to pay bonus under the scheme
of
the Act, on the result of the working of the establishment,
are grouped
together. [35 FJ
E
Section. 10 therefore is not open to a1tack on the ground of Ucnial of
equality under Ari. i4. [36 CJ
Nor was the atlack under Art. 31(1) well founded.
The article guarantees the right against deprivation of property otherwise than by auth<>-
rity of law.
Compelli.lig an employer to pay sums of money to his ernpolyccs which be has not contractually rendered himself liable to pay may
F
amount to deprivation of property : but the protection under An. 31( I)
;, available only if the deprivation is not by authority of law. There was
hov.·cver d~privatiun by authority of Jaw in the present case. 136 F-HJ
Per 1-lidayatullah, (Ramasiw·ami, J, concurring)
Taking
the
provision for minimum bonu~ with the provision for set off it can hardly be
said that the section is so exorbitant that it amounts to deprivation of
the prope-rty of the employers with a view to giving it to the ...,·orkmcn.
G
[56 E-FJ
The observations in Moopil Nair's case, \i.ride as they may appear, must
not be extended by analogical application to a case of minimum bonus
which is intended to promote industrial peace and to be a first step
towards the goal of need-based wage.
Even if the payment of minimum
honus is vie\ve.d an compulsory payment of "'age, the pD\\'Cf to impose it
H
as pan of minimum wage is not lacking. It must not be forgotten that
the fixation of minimum wage was also criticised
along the same Jina..
but was held justified. The differentials, the paying capacity of establish·
mcnts or ab.ence of profit made no difference. [S6 G-HJ
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JALAN TRADING CO. V. MAZDOOR UNION
17
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Kunnathat Thathunni Moopif Nair v. Stat,e of Kenila & Anr., [19611
3 S. C. R. 77, distinguished.
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Edward Mills Co. Ltd. Beawar v. State of Ajmer, [1955]1 S.C.R. 735,
Bijay Cotton Mills Ltd. v. State of Ajmer, [ l 955] l S.C.R. 752, Express
Newspapers (Pvt.) Ltd. & Anr. v. Union of India & Ors., [1959] S.C.R.
12 dnd U. Unichoyi & Ors. v. State of Kera/a, [1962] 1 S.C.R. 946, relied
on.
The provision for payment of 15 days' wages to workmen as bonus
irrespective
of profits is a measure well-designed to keep industrial
peace and to make way for the need-based wage which the Tripartite
Conference emphasiz(..d
Some unequal treatment can always be made to
appear wlien laws apply uniformly. Two establishments cannot be entirely
alike.
Differences n1ust exist but that does not prevent the making- of
uniform laws for them provided the law made has a rational relation to
the object sought to be achieved and
the inequality is trivial or hypothetical.
Classification can only be insisted upon if it is possible to classify
and a power to classify need not always be exercised when classification
is not reasonably possible.
Section I 0 does not lead to such inequality
as may be called dhcrimination. L57 D-E]
(iv) Per Wanchoo, Shah and Sikri, JJ.-Application of the Act retrospectively under s. 33 depends upon the pendency immediately before May
29, 1965, of an industrial dispute regarding payment of bonus relating
to any accounting year Mt earlier than the year ending on any eey in
1962. If there be no such dispute pending immediately before the date
on which the Act becomes operative, an establishment will be governed
by the Full Bench Formula and will be liable to pay bonus only if there
be adequate profits which would justify payment of bonus. If however a
dispute is pending immediately before May 29, 1965 the scheme of the
Act will apply not only for the year Jor which the dispute is
pending
but even in respect of subsequent years. Assuming that the classification
was founded on son1e intelligible differential which distinguish an establishment from other establishments the differentia has no rational relation
to the object sought to be achieved by the statutory provision viz., of ensuring peaceful relations betweea capital and labour by making an equitable
distribution of the surplus profits of the year Arbitrariness of the
classification becomes more pronounced when it is remembered that in
.respect of the year subsequent to the year for which the dispute is pendin~, liability prescribed unde.r the Act is
attracted even
if for
such
subsequent years no dispute is pending, whereas to an establishment in
r.Spect of which no dispute is pending immediately before May 29, 1965,
no such liability is attractecl.
Therefore two establishments similarly cir·
cumstanced having no dispute penc!ing relating to bonus between the employers and the workmen in• a particular year would be liable to be dealt
with differently if in respect of a previous year (covered bys. 33) there
is a dispute pending between the employer and the workmen in
one
establishment and there is no such dispute pending in the other. [40 C-G]
LH!bility imposed by the Act for payment of bonus is more onerou•
than the liability which bad arisen under the Full Bench Formula prior
to the date of the Act. Imposition of this onerous liability depending solely
upon the fortuitous circumstance thait a Dispute relating to bonus is
pending between workmen or some of 'them immediately before May 29,
1965, is plainly arbitrary and classification made on that basis is not
reasonable. [40 HJ
Discrimin3tion also results from the distinction
made in the section
between a dispute pending before, this Court or the High Court and one
18
SUPREME COURT REPORTS
(1967] l S.C.R.
pending before the Industrial Tribunal or the appropriate CJQvemment, the
A
former not being trea1ed as a pending dispute for the purpose of the section.
There is no logical basis for the distinction. [41 CJ
Per Hidayatullah and Ramaswami, JJ. (disse11ting) :
Se.:tions 33 by
providing uniformly for all cases pending on May 29, 1965, without any
discrimination between them,. has established a rational classification. The
section therefore cannot be said to be invalid by reason of inequality, [64
E-F]
B
In s. 33 no note was taken of cases pending before the High Court
and Supreme Court becai"c the jurisdiction of the High Courts and the
Supreme Court is either supervisory or appellate and the intention was to
cover cases in which no decisions of the authori1ieo; appointed under the
,.,
law relating to indu:-.trial disputes \Vas yet made. Disputes prior to 1962
were not taken note of because a date line had to be fixed anC
196~
v..·as the r:itional date to fix becau.sc the Bonus
Commission began
its
C
delih~rations that year. [63 GJ
In several statutes a date is generally selected to demarcate pending
<:ascs and the selection of the date has never been challenged successiully
if there is some rational ground
for its selection.
If the rcsolulion of
the dispute by the instrumentality of the Act was contemplated, the Act
had also to say which dispute would be so resolved and the only rational
date to select v.·as the date on which the Ordinance was promul!!atcd.
D
Thus the pendency of disputes with reference to the Ordinance and reopening of accowlling years up to the year in v.•hich lhe Bonus Con1n1is.-
sion began its deliberation was logical and not arbitrary, [63 HJ
The provision with rcg;i rd to 1be reopening of the intcrv~ning accoun1
years for re-fixation of bonus was also logical. If the 1fapute re~arding
1962 or a later year was decided by the application of the Act 11
was
imperative to reconsider the subsequent years even though lhcre was no
di.pule in those years. The process of the Act is an integrated one and
E
by the principle of set on and set off four accounting years are involved
to avoid extraordinary results. [64 E]
By the different treatment of those establishments where a dispute is
pending there is no violation or equality. The fact· that in one there is a
dispute and in the other there is not, clearly distinguishel; the two establishments.
The distinguishing feature of the pendency of the dispute on
the date of the promulgation of the Ordinance clearly demarcates a distinct
tr
class of cases and the classification made by rhe Act is a rational °'"'·
No doubt the liability for bonus under the Act may be more in some
cases hut it is likely to be less in others. The Act docs not make any
difference in the treal'ment within the class it deals "'ith. All establishments in which disputes were~ pending are treated alike. [64 C-E]
(v) Per Wanchoo, Shah and Sikri, JJ.-section 34 imposes a special
liability to pay bonus determined on the gross profits of the base year on
G
an assumption that the ratio which dctennines the allocable surplus i! the
nonnal ratio not affected by any special circumstance and perpetuates for
the duration of the Act that ratio for determining the minimum allocable
surplus each year. If bonu.\ contemplated to
be paid under the Act i•
intended to make an equitable distribution of the surplus profits of a
particular year, a scheme for computing labour's share which cannot be
Jess than the 3mount determined by the application of a ratio derived
H
from the working of the base year without taking into consideration the
special circumstances governing that determination is printa facie arbitrary
and unreasonable.
It mav be that the ratio was intended to stabilise the
previous grant of bonus 3nd mainlain in favour of labour whate\·er "'~
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JALAN TRADING CO. V. MAZDOOR UNION (Shah, J.)
19
achieved by collective bargaining in the b3lSe year.
But the validity of
a statute is subject to judicial scrutiny in the context of fundamental freedoms guaranteed to employers as well as employeeis and the freedom of
equal protection of the Jaws becomes. chimerical if the only ground in
support of the validity of a statute ex facie discriminatory is that the
Parliament intended inconsistently with the very concept of bonus evolved
by it to maintain for the benefit of labour an advantage which labour had
obtained in an earlier year based on special circumstances of that year,
without any inquiry whether that advantage may reasonably be granted
in subsequent yea.rs according to the principles evolved by it and for
securing the object of the Act. If the concept of bonus as allocation of an
equitable share of the surplus profits of an establishment to the workmen
who have contributed to the earning has reality, any condition that th•
ratio on which the share of one party computed. on the basis of the
working of an earlier year, without taking into consideration the special
circumstances which had a bearing on the
earning of the
profits and
payment of bonus in that year, shall not be touched,
is arbitrary and
unreasonable.
The vice of the provision lies in the imposition of an
arbitrary ratio governing distribution of surplus profits.
Section 34(2)
is invalid on the ground that it infringes Art. 14 of the Constitution. [45
H-46 F]
Per Hidayatullah and Ramaswami,
JJ.
(dissenting)
Section
34(1)
which is criticised because it sacrifices all principles which this Court had
established in the past and fixes a ratio for all time to come is also not
invalid. The Act was passed to make for greater certainty, for improving
relations between the employers and the workmen and for the avoidance
of disputes. It must not be forgotten that in many establisllments the
payment of bonus in the past was the result of
collective bargaining
and the advantage which Jabour has so achieved was not likely to be given
up so readily.
Any legislation te> be successful had to preserve as far as
possible what labour considered to be its right in a particular establishment. By establishing a base . year and by insisting that the same proposition should be maintained in the payment of bonus the establishment
knew with certainly what their liabilities in respect of bonous would be in
the future years. If extraordinary circumstances appear set on and set off
will make them less onerous for the employers or employees. The existence of a rigid ratio which applies
to-all establishments
which come
under s. 34(2) does not therefore create inequality. [64 F.65 CJ
(vi) Per Wanchoo, Shah ·and Sikri, JJ.---Section 37 authorises the Govenunent to determine for itself what the purposes of the Act are and to
make provisions for the removal of doubts or difficulties. This in substance
amounts to exercise of legislative authority which cannot be delegated to
an executive authority. Sub-section (2) of s. 37 which purports to make
the order of the Central Government in such cases final accentuates the
vice in sub-s. ( 1) since by enacting thati provision the Government is
made the sole judge whether difficulty or doubt had arisen in givirig e.ffect
to the provisions of the Act, whether it is necessary or expedient to
remove the doubt or difficulty, and whether the provision enacted is not
inconsistent with the purpose of the Act.
Section 37 therefore is invalid.
[32 A-CJ
Per Hidayatullah and Ramaswami. JJ.
(dissenting)
The fum:tions
exercised . under s. 3 7 are not legislative functions at all but are intended
to advance the purpose which the Legislature bad in mind. Apprehending
that in the application of the new Act de>ubts and difficulties might arise
and not lea\'ing their solution to the courts with the attendant delays and
expense, Parliament has chosen to give power to the Central Government
to remove doubts arid differences by a suitable order. The order of course
20
SUPREME COURT REPORTS
(1967] l S.C.R.
would be passed within the four corners of the parliamentary legislation
and would only apply the A.ct to concrete cases as the courts do when
they consider the application of the Act.
The order of the Central
(Jovemmcnt is made final for the JeJson that it is hardly practical to
give pawer to the Ccntial Government and yet to leave the matter to
be lihgated further. The fact that in the Goverrunent of Iridia Act, 193~
and in the Constitution such a power was and is contemplated and it
has been conferred in various Acts without a challenge before, shows
amply that the argwnent that the section amounts to delegation of legis·
Iative powers on the Central
Government is
erroneous.
Accordingly
s. 37 is valid.
[As to tile validity of s. 32 with reference to Art. 14 of
the Constitution the Court found that there was not enough materi:ll on
record 10 decide the issue.] [58 H-59 f]
Ctvu.
APP~Ll.ATf. JURISDWTIO:\
Civil Appeal No. 187 of
1966
Appeal by special leave from the Award Part I dated the
July 21, 1965 of the Industrial
Court, Maharashtra, Bombay in
Reference (JC) No. 78 of 1963.
AND
Writ Petitions N<,s. 3 and 32 of 1966.
Petition under Art. 32 of the Constitution of India for the
enforcement of fundamental rights.
N.A. Palkhi1·ala, R. J. Ko/ah, B. Dutta, C. C. Jain, Bhuvnesh
Kumari and J. B. Dadac/za1!ii, for the appellant (in C.A. No. 187 of
A
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1966).
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H. K. Su11"G11i. K. Rajendra Chaudhuri and K. R. Chaudhuri,
for the respondent.
M. C. Seta/rad, (i. /J. Pai, P. K. Kurai11, 8. Dutta, !Ju1'11esh
Kumari and J. B.
Dadacha11ji,
for the appellant (in W.P.
No. 3 of 1966).
F
Niren De, Addi. Solicitor-Genera/, N. S. Bi11dra, R. H. Dlzehar
and B. R. G. K. Aclwr. for respondent '.'lo. l.
V. A. Seyid Muhammad, Advocate Ge11era/,
Kera/a,
A. G.
Puddissery and M. R. K. Pillai, for respondents Nos. 2 and 3.
A. K. Sen and K. L. llathi, for respondent No. 4.
G
N. Sreekanta11 Nair, for respondent No. 8.
G. B. Pai, B. Dutta, Buvneslz Kumari and J. B. Dadachanji,
for the petitioner (in W. P. No. 32 of 1966).
Niren De, Addi. Solicitor-General, N. S. Bindra. R. H.
Dhebar
and R. N. Sachthey, for respondents Nos. 2 and 3.
H
V. _A.
Seyid Muhammad. Advocate-Genera/, Kera/a and
M. R. K Pillai, for respondents Nos. 2 and 3.
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JALAN TRADING CO. V. MAZDOOR UNION (Shah, J.)
21
Janardan Sharma, for respondent No. 4.
A. K. Sen, and K. L. Hathi, for respondent No. 4A.
H. K. Sowani and K. R. Chaudhuri, for intervener No. 1.
K. Rajendra Chaudhuri and K. R. Chaudhuri, for intervener
No. 2 .
Niren De, Addi. Solicitor-General,
N. S. Bindra,
R. H.
Dhebar and B. R. G. K. Achar, for intervener No. 3.
N. A. Palkhiva/a, J. B. Dadachanji, for interveners Nos. 6, 9,
II and 15.
N.M. Barot, Officer, Textile Union (in person) intervener No. 5.
I. N. Shroff, for intervener No. 7.
J. P. Goyal, for intervener No. 8.
S. R. Vasavada, for intervener No. IO.
D
N. C. Chatterjee, R. K. Garg, M. K. Ramamurthi, Jitendra Sharma
and Janardan Sharma and Satish Loomba, for intervener No. 12
(in C.A. No. 187 of 1966 and W.P. No. 3 of 1966).
R. J. Ko/ah, B. Narayanswami and J. B. Dadachanji, for intervener No. 13.
&
M. C. Setalvad, R. J. Ko/ah, and J. B. Dadachanji, for interG
H
vener No. 14.
I. M. Nanavati, 0. P. Malhotra and J. B. Dadachanji, for intervener
No. 16.
Vitha/bhai B. Patel and /. N. Shroff, for interveners Nos. 18
and 19.
The Judgment of w ANCHOO, SHAH and SIKRI, .JJ was delivered
by SHAH, J. The dissenting Opinion of HIDAYATULLAH and RAMASWAMI, JJ. was delivered by HJDAYATULLAH, J.
Shah, J. During the pendency, before the Industrial Court,
Bombay, of a referenc~ under s. 73A of the Bombay Industrial
Relations Act, 1946, which arose out of a demand for payment
of bonus for the years 1961 and 1962, the Payment of Bonus Ordinance 3of1965 was promulgated by the President on May 29, 1965,
with immediate effect. The representatives of the workmen claimed
that even if the plea of the employers that the profit and loss
account of the establishment for the years in question disclosed a
loss, was correct, the Ordinance governed the dispute and that
the employees were entitled to receive bonus at the minimum rate
of 4 % of the salary or wages or Rs. 40/- whichever is higher. The
22
SUPREME COURT REPORTS
[J 967] I S.CR.
Industrial Court upheld the plea of the workmen and directed
the employers subject to the provisions of the Bonus Ordinance,
1965, to pay to each employee bonus for the year 1962 equivalent
to 15 days of the salary or wages or Rs. 4-0/- whichever is higher.
With special leave, the employers have appealed to this Court
and they challenge the validity of the Payment of Bonus Act, 1965,
which replaced Ordinance 3 of 1965, and especially of the provisons
under which bonus at minimum rate rs made payable under the
Act.
Writ Petitions Nos. 3 of 1966 and 32 of 1966 are filed by two
public limited companies. They challenge diverse provisions of
the Act and contend that they are not liable to pay bonus under the
machinery prescribed by the Act.
A synopsis of the development in the industrial Jaw which led
to the enactment of the Payment of Bonus Act, 1965 will facilitate
appreciation of the questions argued at the Bar. Claims to receive
bonus, it appears, were made by industrial employees for the first
time in India in the towns of Bombay and Ahmedabad, after the
commencement of the First World War when as a result of inflationary trends there arose considerable disparity between the living
wage and the contractual remuneration earned by workmen in the
textile industry. The employers paid to the workmen increase in
wages, initially called "war bonus" atid later called "special allowance". A Committee appointed by the Government of Bombay
in 1922 lo consider, inter alia, "the nature and basis" of this bonus
payments, reported that the workmen had a just claim against the
employers to receive bonus, but the claim was not "customary,
legal or equitable". During the Second World War the employers
in the textile industry granted cash bonus equivalent to a fraction
of actual wages (not including dearness allowance) but even this
was a voluntary payment made with a view to keep labour contented.
In the dispute for payment' of bonus for the years 1948 and
1949 in the textile industry in Bombay, the Industrial Court expressed the view that since labour as well as capital employed in
the industry contribute to the profits of the industry, both are
entitled to claim a legitimate return out of the profits of an establishment, and evolved a formula for charging certain prior liabilities on the gross profits of the accounting year, and awarding a
per~entage of the balance as bonus to the workmen. In adjudicating
upon the claim for bonus, the Industrial Court excluded establishments which had suffered loss in the year under consideration
from the liability to pay bonus, In appeals against the award
relating to the year 1949, the Labour Appellate Tribunal broadly
approved
of the method for computing bonus as a fraction of
surplus profit.
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JALAN TRADING CO. V. MAZDOOR UNION
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According to the formula which came to be known as the
"Full Bench Formula", surplus available for distribution had to
be determined by debiting the following prior charges against gross.
profits:
(1) Provision for depreciation ;
(2) Reserve for rehabilitation;
(3) Return of 6 % on the paid-up capital;
(4) Return on the working capital at a lower rate than the
return on paid-up capital;
and from the balance called "available surplus" the workmen were'
to be awarded a reasonable share by way of bonus for the year.
This Court considered the applicability of this formula to
claims for bonus in certain decisions: Muir Mills Co, Ltd. v. Suti
Mills Mazdoor Union, Kanpur;(') Baroda Borough Municipality v.
Its Workmen;(2) Sree Mennakshi Mills Ltd. v. Their Workmen:(')
and The State of Mysore v. The Workers of Kolar Gold Mines.(')
The Court did not commit itself to acceptance of the formula in
its entirety, but ruled that bonus is not a gratuitous payment made
by the employer to his workmen, nor a deferred wage, and that
where wages fall short of the living standard and the industry makes
profit part of which is due to the contribution of labour, a claim for
bonus may legitimately be made by the workmen. The Court
however did not examine the propriety nor the order of priorities
as between the several charges and their relative importance, nor
did it examine the desirability of making any variation, change or
addition in the Formula. Tliese problems were for the first time
elaborately considered by this Court in the Associated Cement
Companies Ltd. v. Its Workmen.(5) Since that decision numerous
cases have come before this Court in which the basic formula has
been accepted with some elaboration. The principal incidents of
the formula as evolved by the decisions of this Court may be briefly
stated: Each year for which bonus is claimed is a self-contained
unit and bonus will be computed on the profits of the establishment in that year. In giving effect to the formula as a general rule
from the gross profits determined after debiting the wages and
dearness allowances paid to the employees, and other items of
expenditure against total receipts, as disclosed by the profit and
loss account are accepted unless it appears that the debit entries
are not supported by recognized accountancy practice or are posted
ma/a fide with the object of reducing gross profits. Debit items
which are wholly extraneous to or unrelated to the determination
(I) (1955] 1S.C.R.991.
(2) [1957] S.C.R .. 33.
(3) [1958] S.C.R. 878.
(4) [1959] S.C.R. 895.
(5) [1959] S. C.R. 925.
SUPREME COl:RT REPORTS
( 1967] I S.C.R..
of trading profits are ignored.
Similarly income which 1s wholly
extraneous
to the conduct of the business e.g. book profits
on account of revaluation of assets may not be included in the gross
profits.
Against the gross profits so ascertained the following
items are charged as prior debits: (I) Depreciation: such depreciation being· only the normal or notional depreciation; (2) Incometax payable for the accounting year on the balance remaining after
deducting statutory depreciation. The income-tax to be deducted is
not the actual amount, but the notional amount of ta.x at the rate
for the year, even if on assessment no tax is determined to be pay-
.able.
For the purpose of the Full Bench
Formula income-lax at
the rate provided must be deducted, but in the computation of
income-tax statutory depreciation under the Indian Income-tax
Act only may be allowed.
(3) Return on paid-up capital at 6 %
.and on reserves used as working capital at a lower rate.
In the
Associated Cement Companies' case(') it was suggested that this
rate should he 2 % in later cases 4 % on the working capital was
regarded as appropriate. (4) Expenditure for rehabilitation which
includes replacement and modernisation of plant, machinery and
buildings, but not for expansion of building, or a<lditions to the
machinery.
It is not open to the Tribunal in ascertaining the available
surplus to extend by analogy the prior charges to he debited to
grnss profits.
Therefore for example (a) allocations for debenture
redemption fund; (b) losses in previous years which are written off
at the end of the year; (cl donations to a political fund arc not
-Oeducted from gross profits.
Rebate of income-tax available to the employer on the amount
of bonus paid to the workmen cannot he added to the available
surplus of profits determined in accordance with the Full Bench
Formula which should he taken into account only in distributing
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The formula it is clear was not based on any strict theory of
legal rights or obligations: it was intended to make an equitable
division·of distributable profits after making reasonable allocations
for prior charges.
Attempts made from time to time to
secure revision of the
Formula failed before this Court.
In the Associated
Cement
Companies' case,( 1) this Court observed:
"The plea for the revision of the formula raised an issue
which affects all industries; and before any change is mnde in
it, all industries and their workmen would have to he heard
and their pleas carefully considered.
It is obvious that wHi!c
dealing with the present group of appeals, it would be ditlicult,
unreasonable and inexpedient to attempt such a task."
(l) [19591 S.C.R. 925.
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JALAN TRADING CO. V. MAZDOOR UNION (Shah, J.)
25
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But the Court threw out a suggestion that the question may be
"comprehensively considered by a hig!i,-powered Commission'',
this suggestion was repeated. in The Ahmedabad Miscellaneous
Industrial Workers' Union v. Ahmedabad Electricity Co. Ltd.(1)
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The Government of India then set up a Commission on December 6, 1961 inter alia to define the concept of bonus, to consider in
relation to industrial employments the question of payment of
bonus based on profits and to recommend principles for computation of such bonus and methods of payment, to determine what the
prior charges should be in different circumstances and how they
should be calculated, to consider whether there should be lower
limits irrespective of losses in particular establishments and upper
limits for distribution in one year, and if so, the manner of carrying
forward profits and losses over a prescribed period, to suggest
an appropriate machinery and method for the settlement of bonus
disputes. The Commission held an elaborate enquiry and reported
that "bonus" . was paid to the workers as a share in the prosperity of
the establishment and recommended adherence to the basic scheme of
the Bonus Formula viz. determination of bonus as a percentage
of gross profits
reduced by certain prior charges, viz.
normal
depreciation admissible under the Indian Income-tax Act including
multiple shift allowance, income-tax and super-tax at the current
standard rate applicable for the year for which bonus is to be calculated (but not super profits tax), and return on paid-up capital
raised by issue of preference shan;s at the actual rate of dividend
payable, on other paid-up capital at 7 % and on reserves used as
capital at 4 % but not provision for rehabilitation. The Commission
recommended that sixty per cent of the available surplus should
be distributed as bonus, the excess being carried forward and taken
into account in the next year: the balance of forty per cent., should
remain with the establishment into which would merge the saving
in tax on bonus payable, and the aggregate balance thus left to the
establishment may be intended to provide for gratuity,
other
necessary reserves, rehabilitation
in addition to the provision
made by way of depreciation in the prior charges, annual provision
required for redemption of debentures, return of borrowings, pay- .
ment of super-profits tax and additional return on capital. They
recommended that the distinction between basic wages and dearness allowance for the "purpose" of expressing the bonus quantum"
should be abolished and that bonus should be related to wages
and dearness allowance taken together: that minimum bonus should
be 4 % of the total basic wage and dearness allowance paid during
the year or Rs. 40/- to each worker, whichever is higher, and in
the c~se of. children the minimum· should be eqilivalent to 4 %
of thelf basic wage and dearness allowance, or Rs. 25/- whichever is
higher, subject to reduction pro rata for employees who have not
(1) [196212 S.C.R. 934.
Ml4 Sup. C.I./66-3
26
SUPREME COURT REPORTS
(1967] I S.C.R.
worked for the whole year, and that the maximum bonus should be
equivalent to 20% of the total basic wage and dearness allowance
paid during the year : that the bonus formula proposed should be
deemed to include bonus to employees drawing a total basic pay
and dearness allowance up to Rs. 1600 per month regardless of
whether they were "workmen" as defined in the Industrial Disputes
Act or other relevant statutes, but subject to the proviso that the
quantum of bonus payable to employees drawing total basic pay
and dearness allowance over Rs. 750 per month shall be
limited to what it woul<l be if their pay and dearness allowance were
only Rs. 750 per month. It was proposed that the general formula should not apply to new establishments until they had recouped all early losses including all arrears of normal depreciation admissible under the Income-tax Act, subject to a time limit of
six years. They also suggested that the scheme recommended
should be made applicable to all bonus matters relating to the
accounting year ending on any day in the calendar year 1962 other
than those matters in which settlements had been reached or decisions had been giv~n.
The Government of India accepted a majority of the recommendations and the President issued on May 29, 1965 the Payment
of Bonus Ordinance, 1965, providing for payment of bonus to
all employees drawing salary not exceeding Rs. 1600 under the
formula devised by the Commission. It is not necessary to set out
the provisions of the Ordinance, for the Ordinance was replaced,
by the Payment of Bonus Act 21 of 1965 and bys. 40(2) it was
provided that notwithstanding such repeal, anything done or any
action taken under the Payment of Bonus Ordinance, 1965, shall
be deemed to have been done or taken under the Act as if the Act
had commenced on May 29, 1965.
Since the action taken under
the Ordinance is to be deemed to have been taken under the Act,
in these cases validity of the provisions of the Act alone need
be considered.
It may be broadly stated that bonus which was originally a voluntary payment out of profits to workmen to keep them contented,
acquired the character, under the Bonus Formula, of a right to
share in the surplus profits, and enforceable through the machinery
of the Industrial Disputes Act.
Under the Payment of Bonus Act,
liability to pay bonus has become a statutory obligation imposed
upon employers covered by the Act.
Counsel for the Jalan Trading Company urged that the Act
was invalid in that it amounts to fraud on the Constitution or otherwise is a colourable exercise of legislative power. That argument
bas no force.
It is not denied that the Parliament has power to
legislate in respect of bonus to be paid to industrial employees.
By enacting the Payment of Bonus Act, the Parliament has not
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JALAN TRADING CO. V. MAZDOOR UNION (Shah, J.)
27
attempted to trespass upon the province of the State Legislature .
It is true that by the impugned legislation certain principles declared by this Court e.g. in Express Newspapers (Private) Ltd, and
Anr. v. The Union of India and Ors.(1) in respect of grant .of
bonus were modified, but on that account it cannot be said that
the legislation operates as fraud on the Constitution or is a colour·
able exercise of legislative power. Padiament has normally power
within the frame-work of the Constitution to enact legislation which
modifies principles enunciated by this Court as applicable to the
determination of any dispute, and by exercising that power the
Parliament does not perpetrate fraud on the Constitution. An
enactment may be charged as colourable, and on that account void,
only if it be found that the legislature has by enacting it trespassed
upon a field outside its competence: K. C. Gajapati Narayan Deo
and Ors. v. The State of Orissa(2).
The provisions of the Act and its scheme may now be summarised. The Payment of Bonus Act was published on September
25, 1965.. By s.1(4) save as otherwise provided in the Act, the
provisions of the Act shall, in relation to a factory or other establishment to which the Act applies, have effect in respect of the
accounting year commencing on any day in the year 1964 and in
respect of every subsequent accounting year. Section 2(4) defines
"allocable surplus" as meaning (a) in relation to an employer,
being a company (other than a banking company) which has not
made the arrangements prescribed under the Income-tax Act for
the declaration and payment within India of the dividends payable
out of its profits in accordance with the provisions of s. 194 of that
Act, sixty-seven per cent of the available surplus in an accounting
year; (b) in any other case, sixty per cent of such available surplus,
and includes any amount treated as such under sub-s. (2) of s.34.
"Available surplus" is defined in s. 2( 6) as meaning the available
surplus computed under s. 5."Employee" is defined in s. 2(13) as
meaning any person (other than an apprentice) employed on a
salary or wage r Jt ~xceeding one thousand and six hundred rupees
per mensem in any industry to do any skilled or unskilled manual,
supervisory, managerial, administrative, technical or clerical work
for hire or reward whether the terms of employment be express .or
implied. By s. 2(21) "salary or wage" is defined as meaning all
remuneration (other than remuneration in respect of overtime
work) capable of being expressed in terms of money, which would,
if the terms of employment, express or implied, were fulfilled, be
payable to an employee in respect of his employment or of work
done in such employment and includes dearness allowance (that is
to say, all cash payments, by whatever name called, paid to an
employee on account of a rise in the cost of living), but does not
include certain specified allowances, commissions, valueofamenities
(I) [1959) s.c.R. 12.
(2) [1954) S.C.R. 1.
28
SUPREME COURT REPORTS
[1967] I S.C.R.
etc. Section 4 provides for computation of gross profit in the manner
provided by the First Schedule in the case of a banking company
and in other case in the manner provided by the Second Schedule.
By s.