Industrial Disputes Act, 1947 - Section 10(2)
1. This is a reference by the Government of Bombay under S. 10(2) of the Industrial Disputes Act, 1947, for the adjudication of a dispute between International Tyre Service (Private), Ltd., Bombay, and the workmen (excluding clerical staff) employed under it at Bombay over the following demand :-
'Every workmen should be paid adequate and unconditional bonus for each of the financial years 1958 and 1959 subject to a minimum of three months' wages for each of the years.'
The reference was made by Government on the joining application of the company and the Engineering and General Employees' Union Bombay.
2. In the statement of claim filed on behalf of the workmen by the union it is stated that the company has a long standing of 28 years. Prior to 1948 it was a partnership concern. The company deals in tyre repairs, servicing of tyres, vulcanizing, tube repairing, etc. It has up-to-date machinery and its financial position is sound.
3. The company has in its written statement stated that details given by the union about the history of the company are incorrect. It has denied that its financial position is sound, and has submitted that, according to the bonus formula as approved by the decisions of the Supreme Court, there is no available surplus to permit any bonus for either of the years 1958 or 1959.
4. There was a dispute between the company and the workmen with regard to wage-scales, gratuity, etc., [Reference (I.T.) No. 398 of 1958]. In that award made on 29 February, 1960, the learned tribunal, Sri I. G. Thakore, has stated that this company is about ten years' standing, that in comparison with other concerns of its type the company is equipped with up-to-date machinery, that it pays consolidate wages to its workmen, the minimum being Rs. 75 and the maximum Rs. 140. The learned tribunal fixed wage-scales for the unskilled, semi-skilled and skilled workers. He directed that the existing workmen should be adjusted in these wage-scales by giving the workmen who were drawing Rs. 120 or more per month an addition of Rs. 5, and to those drawing less than Rs. 120 per month, an addition of Rs. 3. A gratuity scheme was awarded, but it was directed that on the introduction of a provident fund scheme the gratuity scheme would automatically stand terminated.
5. The company has submitted its audited balance sheets and profits and loss accounts for the two years with a request that they be kept confidential. I shall therefore not be giving any figures in this award.
6. Both the parties have filed their calculations. According to the calculations filed by the Union at Exs. U. 1 and U. 2 there is enough surplus to justify payment of two months' consolidated wages as bonus. According to the company's calculations at Exs. C. 3 and C. 4 there is a deficit and no available surplus to justify payments of any bonus. It might be mentioned here that the company voluntarily paid bonus equal to one month's consolidated salary to the clerical staff for both the years.
7. The difference in the calculations made by the company and the union is largely to the effect that the union has in its calculations not included an item of expenditure in the balance sheet for both the years which comprises commission to the managing director. This is a private limited company, and the only shareholders are the three brothers who are all directors. The managing director Sri Surhid Chandra Chaudri has filed and affidavit in the course of which he has stated that he has about 35 years' experience in the business of repairing tyres and selling new tyres. He began his business career as a manual worker and served International Tyres and Motors, Ltd., at Calcutta and Bombay for about eleven years. In 1931 he started his own independent business and thereafter his two brothers joined him in business. He carried on business as sole proprietor up to 1947, and his two brothers continued to serve with him. In 1947 he converted the proprietary concern into a private limited company. The shares of the company have been held by himself and his two brothers. Originally one Sri Mitra (a distant relative of the brothers) was also one of the shareholders. Sri Mitra retired in 1959 selling his shares to the managing director Sri Surhid Chaudri. He has further stated that he and his brothers do full-time work for the company. He has in his affidavit described the work done by his two brothers and their experience in the line. On consideration of the facts stated in the affidavit I am satisfied that the salary paid to the managing director and his two brothers is not excessive, and the union has also not seriously suggested that the salary should not be allowed as expenditure. The dispute centres round the large commission drawn by the managing director. The company has produced Ex. C. 1 which is an agreement dated 14 December, 1951. The agreement purports to be in pursuance of a resolution passed by the board of directors on 12 December, 1951. By this agreement Sri Surhid Chaudri was to hold the office of managing director for twenty years and during this period he was to draw a certain salary and also commission at the rate of 5 per cent on the total gross sales of the company including sales of service and repair jobs. The question that has to be decided is whether this remuneration by way of commission is excessive and only a portion of it should be allowed as expenditure in computing the profits for the purpose of the bonus formula. Sri Joshi for the company has argued that the tribunal cannot disallow any such expenditure. He has relied on a decision of the Supreme Court in the case of Crompton Parkinson (Works) (Private), Ltd., Bombay v. Their workmen wherein their lordship observed :
'The only other question which calls for our decision is the correctness of the tribunal's award as to the service fees. The conclusion of the tribunal on that point is founded on the ground that the test of 'commercial necessity' applied by the incometax authorities for determining whether the expenditure was allowable under S. 10(2)(xv) of the Indian Income-tax Act should also be applied by the tribunal. The tribunal evidently overlooked the fact that the incometax authorities are entitled to apply the test of commercial necessity by reason of the express provisions of S. 10(2)(xv) which authorize them to arrive at the taxable income, profits and gains making allowance for expenditure laid out and expended wholly and exclusively for the purpose of the business. There is no such provisions in the Industrial Disputes Act. In the absence of cogent and compelling evidence leading to the definite conclusion and finding that a purported expenditure was sham or had been made with the express object of minimizing the profits with a view to deprive the workmen of their bonus, it is no part of the duty of an industrial tribunal to substitute its own judgment as to what was or was not commercially justified in the place of the judgment exercised by the company and its directors in whom in law the management of the company is confided.'
In my opinion, that case can be distinguished, for the ratio decidendi would not be applicable to the facts of the present case. That case was of a private limited company which was a hundred per cent subsidiary of a British public limited company by name Crompton Parkinson, Ltd. In the present case the private limited company consists of three shareholders who are brothers. Although in law it is different type of unit from a partnership, it is in reality a family concern. It is well-established by a number of decisions of the Labour Appellate Tribunal that in the case of partnerships and family concerns the tribunal need not allow excessive remuneration to the persons in management for the purposes of the bonus formula. It will be sufficient to cite only two cases. In the cases of the Workmen employed under Bharat Timber Industries v. Bharat Timber Industries, Bombay 1957 L.A.C. 462, the Labour Appellate Tribunal observed that one of the prior charges is a reasonable remuneration to the partners for their personal labour further went on to observe :
'The correct test is what, considering the size of the business, the nature of the work done, it value to the concern, the time devoted by the partner, the remuneration received by others performing similar work in the industry and so on, would be a fair remuneration.'
In the case of the E. A. G. Minerals Supply Mazdoor Union, Calcutta v. E. A. G. Minerals Supply Mine-owners and Pulverizers), Calcutta 1957 L.A.C. 425, the Labour Appellate Tribunal observed that in a proprietary concern it is all the more necessary to examine the accounts carefully and further observed :
'The workmen have a right to challenge the accounts; otherwise there would be no sense in saying that they would be entitled to bonus if there is surplus and at the same time not give, them an opportunity to challenge the accounts ............ In a particular concern it is all the more necessary to examine the accounts carefully, because in a public limited company the auditors are appointed by the shareholders to examine the working of the managing directors and exercise their independent judgment. But in a proprietary concern the same person who runs the concern appoints the auditors.'
In that case the facts were that the magnitude of the concern did not justify the payment of Rs. 2,000 per month as remuneration to the working partner; the labour Appellate Tribunal held that the bonus could be given out of the fictitious or highly exaggerated figure of Rs. 24,000 shown as remuneration to the working partner. Now it may be noted that before the enactment of the Indian Companies Act, 1956, it was permissible for directors, managing agents, secretaries and treasures and managers to draw remuneration in the shape of a percentage on sales. The Companies Act of 1956 brought an end to this position and it was enacted by S. 198 that in the case of a public company or a private company which is a subsidiary of a public company, the total remuneration paid by the company to its directors, managing agents or secretaries or treasures or managers should not exceed 11 per cent of the profits of the company computed in the manner laid down by Ss. 349, 350 and 351. This was subject to a certain minimum remuneration not exceeding a certain amount, as the company considers reasonable. By the Companies Act of 1956 the legislature put an end to the practice of managing agents, directors, etc., taking a percentage on sales, a practice at some places which had led to excessive remuneration being paid, notwithstanding that such payment was authorized by the articles of association. Now S. 198 of the Companies Act is not applicable to private limited companies. The public is not much concerned with any arrangement in a private limited company by which excessive remuneration is paid to the directors and so naturally the Companies Act has not extended S. 198 to private limited companies. But workmen who have a right to share in the prosperity of a concern so that the gap between their actual wage and the living wage can be shortened would be seriously affected if in a family concern the remuneration allowed by way of commission to the member of the family managing the concern is excessive. In the present case the managing director in addition to his salary is allowed 5 per cent on the total gross sales of the company including the receipts from service and repair jobs. The amount for the last two yeas is so large that it wipes out the available surplus. As the company requested that the accounts be kept confidential, I am not giving the figures but it is sufficient to say that the amount of commission for the year 1958 comes to over nine times the total monthly basic salary paid to the workmen concerned in this reference, and for the year 1959 it comes to more than eleven times. The commission is about five and a half times the net profit for the year 1958 and about six times the net profit for the year 1959. Taking into consideration the work done by the managing director and the remuneration drawn by others performing similar work in the industry, I would not allow, for the purpose of the bonus formula, more than 3 per cent of the gross sales including receipts from service and repair jobs. If calculation is made on this basis, the available surplus is quite sufficient to allow a month's earnings as bonus to the workmen concerned in this reference. The calculations made by me are at Confdl. Ex. T. 1. It might be mentioned here that it is no disputed that since the limited company was formed, the workmen concerned in this reference were given regularly one month's wages as bonus. Taking into consideration the wages of the workmen, the profit made and other relevant factors, I am of the opinion that the bonus which I propose to award, viz., one month's earnings (consolidated wages) would be reasonable.
8. There is also another aspect of the matter from which the payment of one month's earnings as bonus to the workmen concerned in this reference is justified. It is admitted that the company has paid to the clerical staff for both the years 1958 and 1959 bonus at the rate of one month's wages. No reason is given for this discrimination; it seems that the operative staff have not been given bonus because they have incurred the displeasure of the management by raising an industrial dispute with regard to wages, etc., which was referred to adjudication of Sri. I. G. Thakore (cited above), but the tribunal cannot permit workmen to be penalized in this way. A faint attempt was made to show that the contribution of the operative staff to the profits of the concern is negligible. Sri Chaudri has in his affidavit stated that out of the gross receipts of the company more than 65 per cent are form sales of new tyres to which the workmen in the factory do not contribute. But at the hearing it was admitted that the operative staff have to do the work of removing the old tyres from cars, do the spray painting of rims in respect of new tyres and fix new tyres. It is also not disputed that in the repairs service section the workmen do vulcanizing, etc. On the whole the contribution of the operative staff to the profits of the company is not less, if indeed it is not more, than the clerical staff. There is therefore unfair discrimination in the management giving one month's wages as bonus to the clerical staff and not paying any bonus to the operative staff. On this ground also the award of bonus equal to one month's wages to the workmen concerned in this reference would be justified.
9. I direct the company to pay to the workmen concerned in this reference bonus equivalent to one-twelfth of the annual earnings (excluding overtime) for the years 1958 and 1959 within a period of six weeks from the date this award becomes enforceable subject to the following conditions :-
(a) Any workman who has been dismissed for misconduct resulting in financial loss to the company shall not be entitled to bonus to the extent of the loss caused.
(b) Persons who are eligible for bonus but who are no longer in the service of the company on the date of payment shall be paid the same provided that they make a written application for the same within three months of publication of this award. Such bonus shall be paid within one month of receipt of application provided that no claim can be enforced before six weeks from the date this award becomes enforceable.