1. In both these references the parties are the same. In Adjudication No. 24 of 1956 the demand is for bonus for the year 1954, and in Adjudication No. 89 of 1956 the demand is for bonus for the year 1955. As the same points arise for decision in both these adjudications, common evidence was heard, and I am disposing of both these references by a common award.
2. The factory at Bhavnagar appears to have been constructed in 1933-34, though no definite evidence was produced before me on this point. The manager has given evidence and he has stated that the buildings were constructed and the plant was installed in 1933 or thereabout. Thereafter, the factory was working for about two or three years, and was then closed as it was not possible for the factory to market the finished goods outside Saurashtra because of the customs cordon at Viramgam. According to the manager, the factory was not working for several years, and ultimately it was rented by the company in 1943. The company appears to have been formed also in 1943. From 1943 to 1945 the factory was working intermittently, and almost continuously from 1945 to 1947. Towards the end of 1947 the factory was acquired as a going concern in 1947 by the company. After 1947 the factory is working continuously. Originally, the factory was producing canvas footwear, but after three, four years the company has started producing automobile components and other mechanical rubber goods. For producing the additional items, the company has made certain additions to the original plant during the period from 1948 to 1953. No dispute about bonus was ever raised before by the workmen, but it was stated by the manager in the course of his evidence that bonus was paid in some years. There is also no dispute that for the years 1954 and 1955 bonus at the rate of fifteen days' basic earnings has been paid to all the workmen. But the workmen have claimed higher bonus on the ground that during these two years the company has made substantial profits. It would appear from the statements submitted by the union that bonus equivalent to four months' basic earnings is claimed for both these years by the workmen.
3. The company has contended in its written statements in both the references that the company has not been making profits regularly, and that substantial provision for rehabilitation of the plant will have to be made in the next few years, as the plant acquired from the Bhavnagar State in 1947 is very old and requires to be replaced in the course of the next three to seven years. It is urged in the written statement that annual provision of Rs. 1.33 lakhs will have to be made for the replacement and rehabilitation of the plant and buildings. If this provision is made for both these years, it is urged, there will be no surplus left from which bonus can be paid to the workmen. In support of this contention the company has produced the report of Mr. Dalal about the present condition of the plant and about its estimated future life. On the basis of this report which is Ex. 15, the company has submitted statement Ex. 12 in which the machinery is divided into three groups :
(1) the machinery acquired from Bhavnagar State in 1947,
(2) additions made during 1948 to 1950, and
(3) additions made during 1951 to 1953.
According to this statement, the company has claimed a provision of Rs. 2 lakhs annually for rehabilitation and replacement of the plant. The company has also produced the report of the architects Jamnadas and Bhide, in order to show the future life of the buildings and the amount required at current cost for replacing them. On the basis of this report the company has submitted the statement Ex. 11. On the basis of this statement the company claims an annual provision of Rs. 14,306 for replacement of buildings. A third statement Ex. 13 is submitted by the company in which Rs. 15,986 are claimed annually for replacement of tools, moulds, furniture, motor car, etc. According to these statements, more than Rs. 1.33 lakhs would be required every year for replacement of the plant, buildings, tools, moulds, motor cars, furniture, etc. However, it was stated at the hearing that the company would be content if an annual provision of Rs. 1.33 lakhs were made on this account.
4. It appears from the statements submitted by the company that no incometax had to be paid for the year 1954, as there were loses in the previous years. It was therefore contended on behalf of the union that no provisions for incometax should be made for the year 1954. On behalf of the company it was urged that provision for income tax should be made even if no incometax was actually paid for the year, as according to the bonus formula such provision has to be made irrespective of the fact that income-tax was actually payable or not.
5. It appears that in the year 1954 arrears of dividend for two years on preference shares were paid, and this amount is claimed to be included as prior charge. On behalf of the union it was contended that the dividend payable for the year in question can only be included as a prior charge in the bonus formula. From what is stated in the foregoing paragraphs about the respective contentions of the parties it would appear that the principal question for consideration is as regards the provision for rehabilitation is as regards the provision for rehabilitation of the plant and buildings. The other two questions which arise for decision are, whether provision for incometax should be made for the year 1954, and whether the company is justified in claiming arrears of divided on preference shares as a prior charge.
6. I will take up the last two contentions first. On the question as to whether provisions should be made for incometax, even if no incometax is paid in a particular year, there is a preponderance of authority in favour of the view that such a provision should be made. In a number of decisions this view has been taken by the Labour Appellate Tribunal. Only Mr. M. R. Meher has taken a different view in the dispute between Kirloskar Oil Engines, Ltd., Kirki v. Workmen employed under them 1957 I.C.R. 731. But in a recent decision Sri S. Taki Bilgrami has taken a different view from the one taken by Mr. Meher, and has followed the earlier decisions of the Labour Appellate Tribunal. This decision is in Bombay Government Gazette, for 12 September 1957 at p. 3906. But it appears to me that there is no longer any room for controversy on this point, as the Supreme Court, in the dispute between Sri Meenakshi Mills, Ltd., and another and their workmen : (1958)ILLJ239SC , has given expression to its view on this point, though at the same time it is stated in the judgment that no definite opinion was being expressed on the question. However, after referring to several decisions of the Labour Appellate Tribunal on this point, they have observed as follows :-
'It would thus appear from the decisions cited before us that industrial tribunals have consistently taken the view that incometax calculated on the trading profits for the relevant years must be deducted as a prior charge from the gross profits even though the employer may be entitled to claim exemption under the Incometax Act in view of the fact he had suffered losses during the previous year. Prima facie it may be said that, if the essential basis for deciding the workmen's claim for bonus in a given year is the existence of the net surplus available for that year, it may not be permissible to question the propriety for the provision for incometax made by the employer solely on the ground that in view of his previous year's losses he may not be called upon to pay incometax during the year in question. After all in this connexion the calculations are made by reference to the financial position of the employer during the particular year only and in these calculations considerations relevant under the Incometax Act in regard to the financial losses of the employer in the previous year would not be allowed to enter. However, in the present appeals we are not called upon to consider the correctness of the view taken by the Appellate Tribunal in these case and so we need not pursue the matter any further.'
7. From the observations above quoted, it would appear that the view expressed in the earlier decisions of the Labour Appellate Tribunal is prima facie correct, and therefore provision for incometax has to be made before arriving at surplus for the purpose of bonus, even though actually no incometax was payable for that year. In this view, the contention urged on behalf of the union is untenable, and provision for incometax must be made at 7 annas in the rupee for the year 1954 even when no income tax was actually payable for that year because of the losses in the previous years.
8. As regards the claim for inclusion in the bonus formula of provision for arrears of dividend on preference shares, it was urged on behalf of the company that dividend on preference shares has to be paid whether there are profits or not, and when there were substantially good profits in a particular year, the arrears of such dividend should be provided for from such profits. In support of this contention reference was made to the decision of the Labour Appellate Tribunal in 1956 I L.L.J. 155 between National Electrical Industries, Ltd., and its workmen. In this decision the representative of the union had agreed that such arrears should be spread over a period of four years, but here the arrears were only for two years, and the company seeks to include the whole amount for the arrears as a prior charge in one year. I do not think this can be allowed, because ordinarily for the purpose of arriving at surplus, from which bonus can be claimed by the workmen, the trading results of that particular years should be considered. If there is a claim on the company for payment of such amount by way of arrears of dividend, that amount should be spread over a reasonable period, so that the claim of the workmen for bonus for a particular year may not be wholly defeated. But it is not necessary to go into this question at any length, as after making provision for depreciation, etc., and without even making provision for the arrears of dividend on preference share, no surplus would be left from which bonus can be paid to the workmen.
9. The next question, and to my mind the most important question, for consideration is about the annual provision that should be made for rehabilitation of the plant and buildings. As I have already shown, the plant and buildings were acquired from the former Bhavnagar State in 1947. As that time the company had paid Rs. 2 lakhs as the price of the plant and buildings. It is therefore clear that Rs. 2 lakhs which were paid by the company as the price of the factory do not represent the real cost price of the plant and buildings. What the real cost price of the plant and buildings was, is not shown by any oral or documentary evidence. It would therefore be necessary to determine the current price of the plant in order to ascertain as to what amount would be required to replace the plant. It would also be necessary to estimate the future life of the different machines installed in the factory in order to arrive at the amount required annually for replacement of the plant. But before I proceed to consider the question about the provision for rehabilitation of the machinery, I think it appropriate to consider the question about the provision for replacement of the buildings first. According to the statement Ex. 11 submitted by the company, the current cost of the buildings estimated by the architects towards the end of 1956 is Rs. 6.31 lakhs. The architects have estimated the future life of some of the buildings at 30 years, of one building at 20 years and of two buildings, which were constructed in 1948, at 42 years. On this basis the annual provision of Rs. 14.306 is claimed by the company. It is also shown in the statement Ex. 11 that the depreciation on the buildings written off till 1953 was Rs. 1.13 lakhs. But in this statement the original cost of the buildings is not given. The annual provision of Rs. 14,000 is claimed on the estimated cost of similar buildings if newly constructed in 1956. In my view this would not be a proper basis on which provision for replacement of the buildings can be made. The buildings will be required to be replaced of the buildings will be required to be replaced after about thirty years. What the prices of raw materials would be after thirty years, it is not possible to ascertain. It is very likely that the prices of building materials may go down considerably after thirty years. As the industries expand, more and more cement and steel would be available at cheaper price, and one can reasonably expect that in thirty years' time nearly all the building materials would be available in India at prices lower than what they are today. I therefore think that on the current estimated cost of the buildings, it would be unreasonable to determine the annual provision for the replacement of these buildings after thirty years. I am therefore of the opinion that nothing more than the amount allowed as depreciation on buildings under the incometax Act should be provided every year for replacement of the buildings. The amounts of depreciation allowed under the incometax Act on buildings for year's 1954 and 1955 are Rs. 14,892 and Rs. 13,596 respectively.
10. As I have already stated, the machinery in the factory is divided in the statement Ex. 12 in three groups. Taking the first groups of machines that were installed in the factory before 1947, the statement shows the book value of these machines at Rs. 1.37 lakhs. The different machines are mentioned in the statement Ex. 12. They are Nos. 1 to 19. Their book value is shown at Rs. 1.01 lakhs. The remaining machines valued at Rs. 36,124 are not shown in detail. But regarding those machines also, it is claimed in the statement Ex. 12 that their replacement value should be taken at four times their book value. The statement Ex. 12 also shows the current cost of similar new machines. The prices of similar new machines are shown on the basis of quotations received from different manufacturers. According to this statement Ex. 12, the current price of new machines similar to items 1 to 19 is Rs. 8.42 lakhs. This would show that the current price of machines similar to items 1 to 19 of Ex. 12 is eight times their book value. If to this amount of Rs. 8.42 lakhs is added Rs. 1.44 lakhs, the estimated current price of the remaining machines which were in existence in 1947, the total current price of the machines that were acquired from the former Bhavnagar State in 1947 comes to about Rs. 9.86 lakhs according to the statement Ex. 12. This would show that the estimated current price of the machines which were in existence in 1947 is nearly ten times their book value. On behalf of the company it was explained that such a great difference in the book value and the current price of the plant that was in existence in 1947 arises because of the fact that the plant was acquired by the company in 1947 at a price which was much below the market price. According to the manager of the factory, as the factory was not working for a number of years, and as the plant was installed several years before, the company could purchase the plant for only Rs. 1.38 lakhs. It was further urged on behalf of the company that in estimating the provision for rehabilitation for the plant, the book value of the plant should be disregarded, and the current price of similar new plant should be taken into consideration. On behalf of the union it was urged that the provision for rehabilitation should be made solely on the basis of the book value of the plant and at the most for arriving at the figure for rehabilitation, the book value may be multiplied by 2.7. But it is obvious that in the textile award and in other awards the multiplier 2.7 was adopted, because it was found on evidence that the prices of the machinery had gone up considerably after the last world war. At the same time the multiplier 2.7 was adopted on the basis that the original plant which has to be replaced was not a second-hand plant obtained at price much below the market price, but new plant installed in the years before the war when prices were lower. It would therefore appear that for the purpose of making provision for rehabilitation, the rise in price of the plant after the plant was installed was taken into consideration. At the same time it would be unreasonable to allow the company to make full provision for rehabilitation of the plant from the profits, when the company had not invested the full amount necessary for installation of the new plant. When as in this case the plant was purchased second-hand, the provision for rehabilitation of similar plant would be possible only if the current price of similar second-hand plant can be ascertained. In a case such as this therefore, it would be unreasonable to make full provision for installation of the new plant from the profits alone. If that is done, in no year any surplus would be left for payment as bonus to the workmen. In such cases it would be reasonable that the company should meet half the cost of the rehabilitation of the plant from other sources, either by increasing its share capital, or from other reserves that may have accumulated in the course of years. This was the course adopted by Sri Naik, the Industrial Tribunal at Bombay in the award in the dispute between Recondo (Private), Ltd., and the workmen employed under it published in the Bombay Government Gazette, Part I-L, dated 14 November 1957, at p. 4974. Sri Meher, it appears from this award, had adopted the same course. I am therefore of the opinion that the company is not entitled to have full provision made for rehabilitation of the plant from the profits alone.
11. The next question to consider is as to whether the current price of the plant shown in the statement Ex. 12 should be accepted as correct. Statement Ex. 12 is prepared on the basis of the quotations received from the manufacturers. The letters of these manufacturers have been produced. The manager and the chief engineer have given evidence and they have stated that the prices shown in the statement Ex. 12 are the current prices of the different machine. As against this evidence produced by the company, no evidence was produced by the union. Nothing was also elicited in the course of cross-examination of the witnesses examined by the company which would show that the prices shown in the statement Ex. 12 are incorrect. In this state of evidence I must accept the current prices shown in the statement Ex. 12 as correct.
12. About the estimated life of the different machines, the company has produced the report of Mr. Dalal. The chief engineer has given evidence in support of the report of Mr. Dalal. According to the chief engineer. Mr. Dalal had visited the factory towards the end of 1956, and he had examined the condition of all the machines and had fixed their estimated future life in consultation with him. But Mr. Dalal has given no reasons in his report for estimating the future life of these machines. The company has also not examined him, and has thus not given the opportunity to the union to test the correctness of the report by his cross-examination. In view of this circumstance the value of report of Mr. Dalal is very little, and I have to rely on the evidence of the chief engineer only about the estimated future life of the different machines installed in the factory. The chief engineer has stated in his evidence that he has joined the service of the company in 1947. He has therefore no knowledge as to when these machines were installed in the factory, and for how many years they were worked. Even the manager of the company was not able to say from personal knowledge as to when the machines were installed, and for how many years they were working before 1943. It was only in 1943 that the factory was obtained on lease by this company. But the chief engineer has stated in his evidence that if these machines are new when installed, their life would be between 12 to 15 years. He has further stated that none of of the machines which were in existence in 1947, when he had joined as the chief engineer, have been replaced so far, though he has stated about two or three machines that they would have to be replaced in the course of next year or two. From the statement Ex. 12 it appears that the future life of the machines No. 1 to 19 is estimated to be from 3 to 7 years. If the ordinary life of these machines would be 12 to 15 years, and if as stated by the manager in his evidence, the factory was never working continuously till 1945, it would not be wrong to estimate the average future life of the machines Nos. 1 to 20 at 12 years from the end of 1947. I am constrained to adopt this course, because the expert on basis of whose report the statement Ex. 12 is prepared, has not given evidence in this case.
13. The current price of the machines items 1 to 20 in Ex. 12 is shown at Rs. 9.86 lakhs. As I have already held that provision for replacement of this amount to the extent of 50 per cent only should be made from profits, and the remaining amount should be provided from other sources by the company, about Rs. 4.93 lakhs minus the breakdown value on 9.86 lakhs should be provided in 12 years from 1948 for replacement of items 1 to 20 of Ex. 12. Out of the amount of Rs. 4.93 lakhs Rs. 0.49 lakh being the breakdown value at 5 per cent on 9.86 lakhs should be deducted. Thus Rs. 4.44 lakhs have to be provided over a period of 12 years from the end of 1947. The annual provision for replacement of items 1 to 20 of Ex. 12 would thus come to Rs. 0.37 lakh. I have not adopted the method followed by the union in its statement dated 12 March 1958 in which the block at the end of 1947 is shown as Rs. 2.98 lakhs and applying the multiplier 2.7, the replacement value is shown as Rs. 3.05 lakhs from which amount the surplus of Rs. 1.96 lakhs arrived at by deducting the block of Rs. 2.98 lakhs from paid-up capital, depreciation and reserves amounting to Rs. 4.94 lakhs, is deducted and the replacement value is shown as Rs. 6.09 lakhs from which breakdown value at 5 per cent is deducted, thus arriving at the replacement value of Rs. 6.01 lakhs. According to the union, this amount should be provided over a period of 15 years. I have not followed this method, as I have allowed only 50 per cent of the current price as provision for rehabilitation from profits and the remaining 50 per cent to be provided from other sources. Consequently, the surplus of Rs. 1.96 lakhs shown in the statement submitted by the union can legitimately be utilized by the company towards meeting 50 per cent of the replacement value. Moreover, the block valued at Rs. 2.98 lakhs includes also buildings for which I have held that provision for depreciation under the Incometax Act is adequate. But breakdown value at 5 per cent on Rs. 9.86 lakhs should be allowed. This would come to Rs. 0.49 lakh. Thus Rs. 4.44 lakhs should be provided over a period of 12 years from profits. I have estimated the future life of this pre-1948 plant at twelve years on the ground that the factory is working continuously from 1945 and the normal life of new machines is about 15 years as stated by the chief engineer in his evidence.
14. Provision for rehabilitation claimed for the machinery purchased during the period from 1948-50 is to the extent of Rs. 18,000 per year over a period of nine years. The original cost of the machinery purchased during this period is shown in Ex. 12 at Rs. 1.35 lakhs, and the current price of this machinery is shown at Rs. 2.04 lakhs. The company has therefore claimed that the current price is 1.5 times the book value of the machinery. But the company has shown in the statement Ex. 12 the current price of only two items. There is no satisfactory evidence to show that the current price has gone up to the extent claimed by the company. I am therefore of the opinion that only book value should be considered for making provision for replacement.
15. As regards the machinery purchased during the period from 1951-53, the current price is shown to be the same in the statement Ex. 12, as the book value. But provision is claimed for replacement of this machinery on the basis that the normal life would be twelve years. The book value is shown as Rs. 1.14 lakhs. As regards the machinery installed during the period from 1948 to 1955, no additional provision for rehabilitation is required to be made, as the depreciation allowed under the Incometax Act is adequate. This will be apparent from the assessment orders for 1954 and 1955. The depreciation allowed for 1954 and 1955 for this machinery is Rs. 0.14 lakh and Rs. 0.12 lakh respectively.
16. The company has also submitted statement Ex. 13 to show what amount would be required annually to replace loose tools. furniture, moulds, motor cars, laboratory equipment, etc. According to this statement, Rs. 15,986 would be required annually over a period of six years. But in my view no additional provision for replacement is required to be made in the case of loose tools, furniture, etc., because it appears from the assessment orders filed by the company that the provision for depreciation allowed according to the Incometax Act would be adequate for their replacement. It appears from the statement Ex. 52 about depreciation appended to the assessment order for 1954, that depreciation is allowed on moulds at the rate of 40 per cent and on tools at the rate of 12 per cent. Actually according to this statement Rs. 12.572 are allowed as depreciation on these articles. In my view this is an adequate provision for replacement, and nothing more can be allowed to the company. In the result, Rs. 0.14 lakh allowed as depreciation on buildings under the Incometax Act, Rs. 0.37 lakh for the machinery existing in 1947, Rs. 0.14 lakh allowed as depreciation under the Incometax Act, on machinery installed after 1947, and Rs. 0.12 lakh for tools, furniture, etc., should be allowed for the year 1954 by way of provision for rehabilitation and replacement of the plant, buildings, tools, etc. The total of these items would come to Rs. 0.77 lakh.
17. It appears from the statement Ex. 52 appended to the assessment order that for the year 1954 Rs. 60,554 were allowed by the incometax authorities as depreciation. On this basis the calculations for the purpose of bonus for the year 1954 would be as under :-
Rs. 1.003 lakhs net profit. add 0.750 lakhs depreciation shown in the profit and loss account. add 0.003 lakhs donations. add 0.024 lakhs tax for 1951. ------- Total ... 1.780 lakhs. less 0.605 lakhs statutory depreciation. ------- 1.175 lakhs. less 0.085 lakhs bonus equivalent to 15 days' basic wages. ------ 1.090 lakhs. less 0.476 lakh incometax at 7 annas in the rupee. ------ 0.614 lakh. less 0.170 lakh additional provision for rehabilitation. ------ 0.444 lakh. less 0.170 lakh dividend on preference shares. ------ 0.274 lakh. less 0.310 lakh dividend on ordinary shares at 6 per cent. ------- No surplus
18. Thus there was no surplus from which bonus can be paid to the workmen. The monthly basic wage bill for that year was Rs. 17,000, and bonus equivalent to fifteen days' basic earnings has already been paid by the company. This would mean that about Rs. 8,500 have been paid to the workmen as bonus for this year. If this amount is taken into consideration, it is obvious that no surplus is available for payment of any additional bonus for the workmen. The claim of the workmen for additional bonus for the year 1954 is therefore rejected.
19. The annual provision for rehabilitation of the 1947 plant would be the same for the year 1955. Only the amounts of depreciation on buildings, post-1947 plant, and tools, etc., would be different. From the statement Ex. 10 appended to the assessment order for the year 1955, it appears that the incometax authorities had allowed depreciation on buildings to the extent of Rs. 0.13 lakh, on machinery installed after 1947 to the extent of Rs. 0.12 lakh, and on tools, moulds, motor cars, and furniture to the extent of Rs. 9,570. Thus the total provision for rehabilitation for the year 1955 would be to the extent of Rs. 0.72 lakh. It appears from the balance sheet for the year 1955 that Rs. 97,388 were provided as depreciation in the profit and loss account. The profit and loss account also shows that loose tools and equipment valued at Rs. 20,858 were written off. But it appears that the value of the loose tools and equipment is not shown on the right-hand side of the profit and loss account. They are shown as assets in the balance sheet on the right-hand side. The depreciation allowed by the incometax authorities also includes the depreciation on loose tools, etc. In my view, therefore, Rs. 20,858 should be added to the net profit for the purpose of bonus formula. The monthly basic wage bill for this year was Rs. 19,000. For this year also the workmen have been paid bonus equivalent to fifteen days' basic earnings. After making provision for prior charges it appears to me that in this year there was sufficient surplus to pay bonus equivalent to three months' basic earnings to the workmen. This amount would come to Rs. 57,000. Allowing bonus at this rate the calculations would be as under :-
Rs. 0.971 lakh net profit as per balance sheet. add 0.973 lakh depreciation provided as per profit and loss account. add 0.010 lakh donations. add 0.013 lakh value of footwear supplied free to Balvikas Samiti, Rajkot. add 0.208 lakh value of loose tools and equipment written off. add 0.22 lakh provision for bonus. ------- Total ... 2.395 lakhs. less 0.496 lakh statutory depreciation. ------- 1.899 lakhs. less 0.570 lakh bonus equivalent to three months' basic earnings. ------ 1.329 lakhs. less 0.576 lakh income tax at 7 annas in the rupee. ------ 0.753 lakh. less 2.230 lakhs additional provision for rehabilitation. ------ 0.523 lakh. less 0.165 lakh dividend on preference shares. ------- 0.358 lakh. less 0.310 lakh dividend on ordinary shares at 6 per cent. ------- 0.048 lakh.
20. The above calculations would show that there was sufficient surplus in the year 1955 to pay bonus equivalent to three months' basic earnings to the workmen. The workmen should therefore be paid bonus equivalent to one-fourth of their basic earnings for the year. It is directed that the workmen shall be paid bonus equivalent to one-fourth of their basic earnings in the year 1955 within two months from the date of publication of this award subject to following conditions :-
(a) Any employee dismissed for misconduct resulting in financial loss to the company shall not be entitled to bonus to the extent of the loss.
(b) Workmen, eligible for bonus, but not in the employment of the company on the date of payment, shall be paid on their making a written application within three months from the date of publication of the award, and they shall be paid within two months from the date of application.