# THE EMPLOYERS OF AZAM JAHI MlllS LTD v. THE WORKMEN

- **Citation:** [1967] 2 S.C.R. 520
- **Court:** Supreme Court of India
- **Decided:** 1967-01-30
- **Case number:** Civil Appeals Nos. 971 and 972 of 1965
- **Bench:** M. H!Dayatullah, V. BHARGAVA A~D G. K. M1nrn
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-employers-of-azam-jahi-mllls-ltd-v-the-workmen-4002
- **Pages:** 8

## Headnote

lndust~ial Dispute-Bonus agreed to be paicl 011ly on availabi<· surplus
-:--calcu/atron of sru J!fu$--Whe1IJ.!r gratuity and retrenchment co11Jpensat1on 10 be deducted "J one year or spread o'•er 1nore-Whe1her deduction
of a1nount i11 respect of idle rnachinery from notional amount uf normal
depreciation justified-Rehabilitation clrarges-Nllture of evidence r~quir
ed to illJtify deduction.
The appellanls and their workmen had entered into an agreement in
February 1960 which provided that a claim for bonus would only arise
tf there should be an available surplus after malting a provision for all
lbc prior charges including a fair return on paid up capital and on reserves
utilised towards the working capital in terms of the .Full Bench formula
In a dispute between the appellants and their workmen relating to the
paymenl of bonus for the years 1960-61 and 1961-62, the lnd11<trial Tribunal found lhat !here was an available surplus for the first year but none
!or the second. and therefore directed payment of bonllS of one week's
wages to all the workmen over and above the two weeks' bonus which
fhe employees had agreed to pay irrespeclive of any profils made hy the
company.
In lhe appeal before this Coun it was coniended, inter a/ia, on behalf
of the appellants 1ha1 in the calculation of the ~oss profits, the entire
amount in rcs~ct of gratuity and retrenchment paid by the company during lhe year 1960-61 should have been excluded as it had to be paid out
of the profits of lhc company curing the relevant year and lhe Tribunal
had wrongly de~~ided that it should be spread over five years; that in calculaling prior charges, the Tribunal had wrongly deducted a sum Qf
Rs. I.SO Jakhs in respect of idle machinery from the figure of notional
normal depreciation ancl some of the olher prior charges were not dealt
with in accordance with the terms of the agreement between the parties;
and that if calculation~ were made on a correct basis there
would
be
no available surplus.
HELD : On a recalculation of the gra<s profits and prior charges. that
the Trib11nal was not right in finding that there wu an available surplus
for calculation of bonus for the year I 960-61. [527 A-Bl
Graluity would have to be paid year afler year to workmen who rellre
or leave the company's service in term'\ of the scheme of gratuity and
retrenchment compensation may have to be paid in any year if there be
modemisalion of the plant or for any other reason ·which renders any
workmen surplus. The Tribunal's decision that the amount on this aeeo11nt
should be ~pread over five years was therefore erroneous and the ,.-ass
profit as calculalcd by the appellants was the correct figure. [523 A-CJ
Britannia Engineering Co. V. Tlieir Workmen (1965] n L.L J.
144;
ref'errcd to.
The depreciation taken into account bein!l. in accordance with well
settled principlC", a nolional amount of normal depreciation, the Tribunal
was not juslifled in deducting lherefrom a fllnher sum in respect of idle
r.iachiner. [523 H; 524 C-D]
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AZAM JAHI MILLS v. WORKMEN (Mitter, J.)
521
U.P. Electric Supply Co. Lta. v. Their Workmen [1955) II L.L.J. 431;
Surat Electricity Compa11y's Staff Union v. Surat Electricity Co. Ltd.
[1957) II L.L.J. 648; The Associated Cement Companies Ltd. v.
Its
Workmen [1959] S.C.R. 925, 960; referred io.
On the facts, thore was sufficient evidence to show the need for rehabilitation and there was no force in the contention that there •.vas no. basis
for calculation of the provision for rehabilitation because no rutperts were
examined before the Tribunal. [526 CJ
MI s Peirce Ledie & Co. Ltd. Kozhikode v. Their Workmen [1960) :\
S.C.R. 194 Aluminium Corporation of India, Ltd. v. Their
Workmen,
(1963}-II L.L.J. 629, distinguished.

## Text

THE EMPLOYERS OF AZAM JAHI MlllS LTD.
A
v.
THE WORKMEN
(January 30, 1967)
[M. H!DAYATULLAH, V. BHARGAVA A~D G. K. M1nrn. JJ.]
lndust~ial Dispute-Bonus agreed to be paicl 011ly on availabi<· surplus
-:--calcu/atron of sru J!fu$--Whe1IJ.!r gratuity and retrenchment co11Jpensat1on 10 be deducted "J one year or spread o'•er 1nore-Whe1her deduction
of a1nount i11 respect of idle rnachinery from notional amount uf normal
depreciation justified-Rehabilitation clrarges-Nllture of evidence r~quir
ed to illJtify deduction.
The appellanls and their workmen had entered into an agreement in
February 1960 which provided that a claim for bonus would only arise
tf there should be an available surplus after malting a provision for all
lbc prior charges including a fair return on paid up capital and on reserves
utilised towards the working capital in terms of the .Full Bench formula
In a dispute between the appellants and their workmen relating to the
paymenl of bonus for the years 1960-61 and 1961-62, the lnd11<trial Tribunal found lhat !here was an available surplus for the first year but none
!or the second. and therefore directed payment of bonllS of one week's
wages to all the workmen over and above the two weeks' bonus which
fhe employees had agreed to pay irrespeclive of any profils made hy the
company.
In lhe appeal before this Coun it was coniended, inter a/ia, on behalf
of the appellants 1ha1 in the calculation of the ~oss profits, the entire
amount in rcs~ct of gratuity and retrenchment paid by the company during lhe year 1960-61 should have been excluded as it had to be paid out
of the profits of lhc company curing the relevant year and lhe Tribunal
had wrongly de~~ided that it should be spread over five years; that in calculaling prior charges, the Tribunal had wrongly deducted a sum Qf
Rs. I.SO Jakhs in respect of idle machinery from the figure of notional
normal depreciation ancl some of the olher prior charges were not dealt
with in accordance with the terms of the agreement between the parties;
and that if calculation~ were made on a correct basis there
would
be
no available surplus.
HELD : On a recalculation of the gra<s profits and prior charges. that
the Trib11nal was not right in finding that there wu an available surplus
for calculation of bonus for the year I 960-61. [527 A-Bl
Graluity would have to be paid year afler year to workmen who rellre
or leave the company's service in term'\ of the scheme of gratuity and
retrenchment compensation may have to be paid in any year if there be
modemisalion of the plant or for any other reason ·which renders any
workmen surplus. The Tribunal's decision that the amount on this aeeo11nt
should be ~pread over five years was therefore erroneous and the ,.-ass
profit as calculalcd by the appellants was the correct figure. [523 A-CJ
Britannia Engineering Co. V. Tlieir Workmen (1965] n L.L J.
144;
ref'errcd to.
The depreciation taken into account bein!l. in accordance with well
settled principlC", a nolional amount of normal depreciation, the Tribunal
was not juslifled in deducting lherefrom a fllnher sum in respect of idle
r.iachiner. [523 H; 524 C-D]
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AZAM JAHI MILLS v. WORKMEN (Mitter, J.)
521
U.P. Electric Supply Co. Lta. v. Their Workmen [1955) II L.L.J. 431;
Surat Electricity Compa11y's Staff Union v. Surat Electricity Co. Ltd.
[1957) II L.L.J. 648; The Associated Cement Companies Ltd. v.
Its
Workmen [1959] S.C.R. 925, 960; referred io.
On the facts, thore was sufficient evidence to show the need for rehabilitation and there was no force in the contention that there •.vas no. basis
for calculation of the provision for rehabilitation because no rutperts were
examined before the Tribunal. [526 CJ
MI s Peirce Ledie & Co. Ltd. Kozhikode v. Their Workmen [1960) :\
S.C.R. 194 Aluminium Corporation of India, Ltd. v. Their
Workmen,
(1963}-II L.L.J. 629, distinguished.
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 971 and
972 of 1965.
Appeals by special leave from the Award dated December 21,
1963 of the Industrial Tribunal, Andhra Pradesh, Hyderabad in
Industrial Dispute No. 28 of 1963.
A. K. Sen, R. V. Pillai and B. K. Seshu, for the appellant (in
C.A. No. 971 of 1965) and the respondent (in C.A. No. 972 of 1965)
M. K. Ramamurthi, for the respondent (in C.A. No. 971 of
1965) and the appellant (in C.A. No. 972of1965).
The Judgment of the Court was delivered by
Mitter, J. This is an appeal against an award dated December
21, 1963 in Industrial Dispute No. 28 of 1963 of the Industrial
Tribunal, Andhra Pradesh, Hyderabad on special leave granted by
this Court.
The dispute which. was referred to the Industrial Tribunal related to the question of payment of bonus for the years 19.60-61
and 1961-62 demanded by the workers of Azam Jahi Mills, Warrangal. The Tribunal found that there was an available surplus for
the first year but none for the second. It directed payment of bonus
of one week's wages to all the workmen over and above the two
weeks' bonus which the employers had agreed to pay irrespective of
any profits made by the company. In appeallbefore us the appellants contend that as there was no available surplus, if properly
quantified, the question of payment of borius in addition to that for
the two weeks already agreed upon, does not arise.
It is to be
noted that the parties had entered into a settlement on February 22,
1960 which was to be operative for a period of five years commencing
on October I, 1958 and ending on September 30, 1963. By that
settlement, it was provided that the claim for bonus would only
arise if there should be an available surplus after making a provision
for all the prior charges including a fair return on paid-up capital
and on reserves utilised towards the working capital in terms of the
Full Bench formula laid down by the Labour Appellate Tribunal in
Mil/owners' Association v. Rashtriya Mills Mazdoor Sangh, Bombay. The agreement also provided that prior charges would include
(a) statutory depreciation and development rebate, (b) taxes, (c'
522
SUPllEMB COtJltT llEPOR.TS
[1967) 2 S.C.R.
reserve for rehabilitation, replacement and modernisation of Block
as calculated by the Industrial Court (basic year 1947) and (d) a
fair return at 6 % on paid up capital in cash or otherwise including
bonus shares and 2 % on reserves employed as working capital.
It was also a term of the agreement that the amount of the total
gross profits of the mill for the year shall be the amount of profits
as disclosed in published balance sheets of the company without
making a provision for depreciation and for bonus, but after deducting .from
it the amount of extraneous income (like interest
from investments, rent from property) which is unrelated to the
efforts of the workers. With regard to statutory depreciation and
development rebate, the parties agreed that if in any year the total of
these two exceed the .amount of reserve for rehabilitation, the full
amount of statutory depreciation and development rebate would
be adoi;~ed as a prior charge and noextra provision would be made
for rehabilitation in that year. Further, in terms of the agreement,
the workers would be entitled to an amount equivalent to I /24th
of the basic wages if the mill had an available surplus of profits
after providing for all prior charges on the basis of the Full Bench
formula as described above, up to an amount equivalent to 2S %
of the total basic wages earned during the year.
The contention of the appellanis before us is that in working out
the available surplus the Tribunal went beyond the Full Bench formula and the settlement between the parties.
Our task was considerably lightened by counsel for the appellants handing over a
table showing the figures for the working out of the Full Bench
formula, as found by the Tribunal compared to those propounded
by the Management and the workers. There is no dispute that the
net profits as disclosed by the balance sheet for the year 1960-61 Wl!S
Rs. 9,03,378/-. The only difference between the management and
the Tribunal with regard to the calculation of gross profits relates to
the figure Rs. 5,39,963/- for gratuity and retrenchment compensation
paid by the company during the year in question. According to the
Tribunal, this sum should be spread over five years while according
to the company, this sum should not be included at all as it had to
be paid out of the profits of the company during the relevant year.
Mr. Sen, counsel for the appellants, relied on s. 37(1) of the
Income-tax Act, 1961 for the purpose of showing that any expenditure (not being expenditure of the nature described in sections 30 to
36 and not being in the ·nature of capital expenditure or personal
expenses of the assessee) laid out or expended whoHy and exclusively for ihe pupose of ihe business or profession of the assesseo
has to be
allowed in
computing
the income
chargeable
under the head 'profits and gains of business or profession'. He
argued that gratuity is to be paid every year to the workmen who
retire and retrenchment compensation has to be paid as and when
workmen are retrenched and that there could be little doubt that
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AZ.AM JAHI MILLS v. WORKMEN (Mitter,].)
523
these expenses were incurred exclusively for the purpose
of the
business of the company. He also drew our attention to a judgment of this Court in Britannia Engineering Co. v. Their Workmen()
where it was laid ·down that the amount of provident fund contribution and gratuity payments were not to be added back to the net
profits disclosed by the balance sheet of the company for fixing
the amount of gross profits in working out the Full Bench formula.
The Tribunal apparently recognised the force of the contention of the
employers but observed that the amount should be distramted over
a number of years which it fixed as five in this case. This finding
of the Tribunal is erroneous inasmuch as gratuity wi!l have to be
paid year after year to workmen who retire or leave the company's
services in terms of the scheme of gratuity and retrenchment compensation may have to be paid in any year if there be modernisation
of the plant, 0r for any other reason which renders any workmen
superfluous. It seems to us, therefore, that the gross profits as calculated by the employers at' Rs. 19,05,496/- is the correct figure.
Coming next to the ascertainment of prior charges, the material
discrepancy between the figures adopted by the company and those
by the Tribunal arises thus-we find that the notional normal de·
preciation has been taken to be Rs. 6,44,351 /· in both sets of charts
but the Tribunal has deducted therefrom a sum of Rs. 1,50,000/·
in respect of idle machinery. We are unable to accept this view of the
Tribunal. It is well settled that depreciation allowed under the
Income-tax Act after 1948 was to consist of the statutory normal
depreciation as well as initial depreciation and additional depre·
ciation. The Full Bench formula of the Labour Appellate Tribunal
decided in U.P. Electric Supply Co. Ltd. v. Their Workmen(2) that
the depreciation which should be deducted from the gross profits
in working the formula was normal depreciation including the multi·
pie shift depreciation but excluding the initial depreciation and
additional
depreciation allowable under the Income-tax Act.
This decision was followed by another Labour Appellate Tribunal
of India in Surat Electricity Company's Sta.ff Union v. Surat Electricity Co. Ltd.(3).
There it was pointed out that the deduction
allowed under the head of depreciation in the early years of the use
of the machinezy was rather heavy under the provisions of the
Indian Income-tax Act which would have the effect of unduly lessen·
ing the available surplus under the bonus formula to the prejudice of
workers even in a year of prosperity and that is why the Full Bench
postulated for a more even distribution of depreciation over a
period of years. This accounted for the ignoring of the initial and
additional depreciation in working out the bonus formula. The
net result was that the depreciation to be taken into account for
working out the bonus formula was a notional amount of normal
(1) (1965] Il L.L.J. 144.
(2) [1955] ll L.L.J. 431.
(3) [1957] II L.L.J. 648.
524
SUPREME COURT REPORTS
(1967] 2 S.C.R
depreciation.
No objection can be taken to this because the bonus
formula itself is theoretical one. Both these decisions were referred
to in The Associated Cement Companies Ltd. v. Its Workr:ien('), and
the latter decision was approved of by this Court (see at page
960).
We find by referring to Schedule E of the accounts of the company for the year 1960-61 that depreciation for the year was calculated at Rs. 16,03,149/-. This is also referred to in the Director's
Report. Deducting therefrom the sum of Rs. 9,58, 798/- which is
referred to in the profit and loss account for the year ended 30th
September 1961 as balance provision for depreciation to comply
with s. 205 of the Companies Act of 1956, we get the figure of Rs.
6,44,351/- which is to be found in the chart both under the table of
figures adopted by the management as also by the Tribunal. The
figure being a notional figure for working out the bonus fonnula,
the Tribunal was not justified in deducting therefrom a further sum
of Rs. 1,50,000/- in respect of machinery which was said to be
idle.
In terms of the agreement between the panics, the prior charges
must include the development rebate as well unless the statutory
depreciation and development rebate added up to a higher figure
than the figure for reserve and rehabilitation. It therefore itppears
to us that the Tribunal was not justified in excluding the amount of
the development rebate reserve. There is no dispute that the figure
for income-tax should be Rs. 4,74,020/- or that for the return on
raid-up capital should be Rs.
4,32,000/-. The workmen in
their chart have calculated rhe return at 4% on Rs. 72 lakhs which is
not justified. Both the Tribunal and the company calculated ·~<urn
on reserves used as working capital at Rs. 49,678/-. This, in our
view, is not justified as we find from a reference to schedule E, (fixed
assets of the company for the year 1960-61) that a sum of !ts.
14,49,664/- was spent for addition of new plant and machinery. On
a reference to schedules A, B. C and D for the year in question
and the corresponding figures for the previous year, we find that the
figure of reserves and surplus in schedule A has gone down by Rs.
1,00,000/-. The figure for secured loans in schedule C remains the
same while the current liabilities as shown in schedule D has gone
up by Rs. 3,50,()()(1/- in the year in question as compared to the previous year and loans secured from banks show a reduction of Rs.
13,22,000/-. Thus the liability in respect of the loans has been reduced approximetely by Rs. 10 lakhs. Setting off the diminution
the overall liability was diminished by Rs. 9 lakhs. We also find
from a reference to Schedules F, G, Hand I (of investments, current
assets and loans by the company) that the total thereof has gone down
hy Rs. 8 lakhs from the figure of the previous year. The net
(I) lt9l91 S. C.R. 925.
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AZAM JAHI MILLS v. WORKMEN (Mitter, J.)
525
result seems to be that the reduction of liability when set off against
the reduction in the value of the assets and investments gives a deficit
of Rs. 1,00,000/-approximately. As the company has not incurred any
fresh loans for the purpose of buying plant and machinery we can
proceed on the basis that Rs. 14,49,6641- and Rs. I lakh have come
out of the working capital. Consequently, the reserves used as
working capital should be approximately Rs. 24,83,000/- as shown
by the company less Rs. 15,49,664/- i.e. Rs. 8,34,000/- and the return
thereon at 2 % would be approximately Rs. 16,000/- in place of
Rs. 49,678/-. Further, we find that the Tribunal was not right in
including Rs. 1,07,992/- as gratuity and retrenchment compensation
among its list of prior charges.
On the basis of the above, it seP.ms to us that deducting the
prior charges from the gross profits irre>pective of the question of
the amount to be deducted for rehabilitation, modernization etc.,
comes to the figure arrived at is Rs. 80,000/- vr there about only.
The.re was a good deal of controversy between the parties with
reg·\rd to the correct amount of the figure for rehabilitation. In
this connection, our attention was drawn to the evidence on record.
The Chief Engineer of the Company stated before the Tribunal
th~t the machinery had been purchased in 1932, that its condition
was bad due to fatigue and that it was costing more and more
every year for repairs even up to Rs. 2! lakhs. According to him,
it required replacement, the average life of a textile mill being no
more than 25 years. The witness also said· that one half of the
entire machinery had been purchased and installed between 1948 and
1952 and the cost in 1952 was five times that of the 1932 figure.
The other witness examined on behalf of the employers was the
Secretary of the mill. He stated that the provision for rehabilitation
was Rs. 93,30,000/-, tne working capital being Rs. 24,83,904/-.
He gave certain figures to show how the figure of Rs. 93,30,000/-
was arrived at. He stated further that the company had approached
the Government for a loan of Rs. 56 lakhs for replacement of the
spinning machinery and part of the weaving machines. The application for loan is not in dispute before us. As a matter of fact, thP
Tribunal
accepted
the evidence that the age of the textile
mill machinery was about 25 years and more than ha!f the
machinery
had passed that age.
This
justified
the need
for rehabilitation. The Tribunal referred to a
letter of t1'e
company to the Government dated October 10, 1963 according
to which
several
experts had
opined that
the
amount
required for replacement of the old machinery was Rs. 56 lakhs.
The Tribunal added thereto the sum of Rs. 2 lakhs for replacement
of the buildings and thus arrived at the total figure of rehabilitation
of Rs. 58 lakhs. In our opinion, the figures arrived at by the Tribunal are acceptable but we have to deduct therefrom the amount.
of the reserves of the company. According to us, as already shown,
526
SUPREME COURT REPORTS
(1967] 2 S.C.R.
the reserves which could he used as working capital were no more
than Rs. 8,34,000/-. Thus the total for rehabilitation comes to Rs.
50 Iakhs approximately.
The Tribunal accepted the divisior 5 to
give effect to the bonus formula on the basis that the cost of rehabilitation should be spread over five years.
In our opinion, the
Tribunal proceeded on the right basis except on the figure of reserves
which bas to be deducted.
Dividing Rs. 50 lakhs by five, we get a
figure of Rs. 10 lakhs. In terms of the bonus formula therefore,
there was no available surplus for the year 1960-61 hut there was a
deficit.
We were not impressed by the argument on behalf of the respondents that as no experts were examined before the Tribunal,
there was no basis for calculation of the provison for rehabilitation.
In this connection our attention was drawn to a judgment of this
Court in M/s Peirce Leslie Co. Ltd. Kolizikode v. Their Workmen (1).
It appears that in support of its claim in that case the company
produced a number of statements prepared by witnesses who claimed
to be experts showing the replacement value of buildings, machinery,
furniture etc.
We were also referred to the judgment of this Court
in Aluminium Corporation of India, Ltd. v. Their Workme11(2).
On the facts of that case, it was observed by this Court that as there
was no evidence adduced by the employer to substantiate its claim
for the amount of rehabilitation, the same must be rejected. In our
view, the Tribunal must consider all the evidence before it and then
proceed u ascertain the figure to be adopted for rehabilitation purposes. If the company had no scheme for rehabilitation, then of
course its claim on that bead must be rejected. Again, the claim
made by the company cannot be accepted unless substantiated by
evidence.
In this case, we find that half the machinery was o .er
25 years old, that it required over Rs. 2 lakhs every year for repairs
according to the evidence of the Chief Engineer and that its effi-
<:icncy had dwindled considerably. We also sec no reason to reject
the evidence adduced before the Tribunal that the company had applied for a loan of Rs.
56 lakhs from the
Government for
rehabilitation purposes and we accordingly are of the view that the
Tribunal proceeded on the correct basis so far as rehabilitation
(;barges are concerned.
There remains the point about the working capital of the company. No case is here made that the reserves of the company were
being used for any purpose other than the business of the company.
The accounts of the company show that its secured liability exceeded
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Rs. 1,16,00,000/- and its unsecured loans exceed Rs. 28,00,000t-.
Unless therefore there is evidence to show that the reserves were
H
non-existent or they were being utilised for a purpose other than
Cl) J196~]J s·.c.R:-i94.-- -
(2l[I96JJ ll L.L.J. 629.
.
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AZAM JAID MILLS v. WORKMEN (Mitter, /.)
52T
the business of the company, it is reasonable to assume that the
reserves were being utilised as working capital of the company.
In our view, therefore, the Tribunal was not right in finding
that there was available surplus for calculation of bonus for the year
1960-61 and the appeal No. 971 of 1965 must be allowed and the
award set aside.
The other appeal No. 972 of 1965 which is by the workmen for
enhancement of the bonus consequently must be dismissed. The
first appeal is therefore allowed with costs and the second appeal is
dismissed, but, without any order as to costs.
R.K.P.S.
Appeal 972 of '65 dismissed.
Appeal 971 of '65 allowed.