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TMI Blog1959 (5) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... d Cement Companies Ltd., Dwarka Cement Works, Dwarka, was similarly faced with a demand of its workmen for bonus equivalent to 50% of total earnings or six months' total earnings. This dispute was referred to the same tribunal and was numbered 1. T. No. 13 of 1956. By consent of parties both the references were heard together and evidence was recorded and documents tendered in the first reference. By its award delivered on November 30, 1956, the tribunal directed the companies to pay their workmen drawing a basic pay or wages up to ₹ 500 per month bonus equivalent to 1/3 of their basic wages or pay (less bonus already paid for the year 1953-54) subject to the conditions specified in the award. It is against this award that the respective companies have preferred the two appeals by special leave. In this judgment the said companies will hereafter be described as the appellant and their workmen as respondents. The A. C. C. is the principal company concerned in the dispute. The Cement Marketing Company of 931 India Ltd., (hereafter -called the C. M. I.) has been separately registered under the Indian Companies Act as a Joint Stock Company; but it is a hundred per cent. subsidiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the appellant for rehabilitation and replacement in the dispute for the year 195152 included not only the amount required for rehabilitation and replacement but also expansion; and so, according to them, the appellant was not entitled to any amount for rehabilitation purposes in the year in dispute. They also alleged that the appellant was not entitled to claim. interest at more than 4% on paid-up capital and 2 % on working capital. Thus the respondents urged that if all the relevant facts are taken into account it would be found that the claim for bonus made by them in the two respective references was just and proper. In support of their case the respondents filed several statements which, they claimed, had been prepared in accordance with the Full Bench formula, and they also crossexamined Mr. Tongaonkar who gave evidence on behalf of the appellant. This claim was resisted by the appellant. It was urged on its behalf that the points raised by the respondents in the present references bad been heard and finally decided in the previous adjudication (Ref. I. T. No. 115 of 1953) which dealt with their claim for bonus for the preceding year; and it was alleged that the responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amongst other documents a statement (Ex. C-10) showing the cost of the assets of the merging companies on July 31, 1936, as taken over by the appellant and the statement (Ex. C-29) showing the capital expenditure from 1936-37 to 1953-54 on expansion, modernisation, rehabilitation, replacement, sundry capital jobs, etc. 934 In addition a statement was filed by the appellant (Ex. C23) showing that the calculations made under the Full Bench formula would show a substantial deficit and that would support its case that there was no available surplus for the relevant year from which any bonus could be claimed by the respondents. Ex. C-2 is a statement prepared by Mr. Tongaonkar showing the original cost of the block to be replaced and the approximate replacement cost. This statement has been prepared on the basis that the approximate cost to the merging companies of their assets as on 31-7-1936 was 5.73 crores. It is admitted that this statement has lumped together all the properties of the appellant including plant and machinery, as well as buildings, roads, bridges and railway-sidings and has classified them into four categories. The statement contains 9 columns. The first column giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riate divisors mentioned in col. 6 of Ex. C-2. The result is the sum of ₹ 284.48 lakhs, and that is claimed by the appellant as the provision for rehabilitation under the formula. In his evidence Mr. Tongaonkar has given reasons in support of the respective multipliers and divisors adopted by him in making his calculations in Ex. C-2. 119 119 936 He has also given several details on all the relevant and material points in support of the appellant's case. Naturally the respondents have cross-examined him at length. One of the questions in controversy between the parties in the present appeals centres round the appreciation of Mr. Tongaonkar's evidence and the value to be attached to the statements prepared by him. On the contentions raised by the parties before it the tribunal framed ten issues for determination and it has made its findings on them in the light of the evidence adduced before it. It has held that the appellant had not inflated the capital invested by the merging companies while taking them over in 1936. It has allowed 6% interest on the entire paid-up capital of ₹ 1267.59 lakhs, and 4% interest on the working capital. In regard to the claim for depreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in preference to the prices prevailing in a particular year as was done by Mr. Tongaonkar. The tribunal subjected Mr. Tongaonkar's evidence on the question of replacement, rehabilitation and modernisation to a close examination and held that the method adopted by Mr. Tongaonkar in distinguishing between modernisation and expansion was of a purely subjective estimate " which does not bear the scrutiny of an objective test ". On the whole the tribunal was not prepared to accept Mr. Tongaonkar's evidence at its face value and it was not prepared to treat Ex. C-2 and consequently Ex. C-23 as reliable. It is relevant to point out at this stage that the tribunal has not made any finding about the life of the machinery nor has it recorded any conclusion as to a proper divisor. In fact it has completely left out of consideration Exs. C-2 and C23 while determining the amount which should be allowed for the appellant's claim for rehabilitation for the relevant year. The tribunal then examined the principle underlying the Full Bench formula and held that, it was not 938 intended to be worked out as a rigid mathematical formula. " We must make it ", says the tribunal, & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim then made by the appellant was no more than ₹ 192 or 193 lakhs, the present claim for ₹ 284 lakhs, the tribunal thought,' was obviously inflated and unreal. Similarly the tribunal emphasised the fact that the programme earlier submitted by the appellant to the Tariff Commission was in turn more modest than the claim made in the said adjudication proceedings. It appears that in the said programme the appellant had made out a case for the estimated expenditure of ₹ 18.36 crores to be spread over a period of ten years from 1-8-1952 to 31-7-1962 and that works out approximately at the figure of ₹ 184 lakhs per year. It was on these facts that the tribunal held that " if the A.C.C. estimated its annual requirements of rehabilitation, replacement and modernisation at ₹ 192 lakhs per year during the period of ten years commencing from 1-8-1952, 1 do not think that it should be allowed to depart from it now". In substance, according to the tribunal, the present claim for rehabilitation was very much inflated, it had no relation to realities, and so the appellant should not be allowed to make such a claim. That is why it did not think it necessary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sometimes the employers voluntarily paid bonus to their workmen; and where disputes arose they were decided by the tribunals in the light of the circumstances of each case without relying on any broad consideration of policy or without attempting to lay down any general principles. In 1948 a bonus dispute arose between the Mill Owners Association, Bombay and its employees, and it was referred for adjudication to the Industrial Court. In considering this dispute the Industrial Court went elaborately into the matter, laid down certain principles and awarded to the workmen bonus equivalent in amount to 3/8 of the total basic earnings of each workman subject to certain conditions. In the subsequent year a similar dispute arose between the same parties; and it was again referred to the Industrial Court for adjudication. The Court made its award on July 7, 1950, directing 55 mills of the Association to pay to their workmen, whether permanent or temporary, 1/6 of the basic earnings of each of them as bonus. This award was challenged by the Association before the Labour Appellate Tribunal. It was urged on behalf of the Association that the wage structure in the textile industry had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation allowed by the income-tax authorities is only a percentage on the written-down value the depreciation fund set apart on that basis would not be sufficient for the purposes of rehabilitation and an extra amount would have to be annually set apart nationally under the heading of 'reserves' to make up the deficit. This position was apparently not disputed by the employees. The claim made by the industry that a fair return on the paid-up capital must be secured and that ordinarily it should be paid at the rate of 6% per annum was also not disputed. The employees, however, challenged the claim of the industry that reserves employed as working capital should carry any interest; but their objection was overruled and it was held that working capital also would be entitled to interest though at a much lower rate than that on the paid-up capital. Then the question of taxes was considered and it was agreed that a provision had to be made for taxes which would be payable on the amount determined after deducting depreciation from the gross profits less any bonus which may be awarded. In the result the appellate tribunal laid down the manner and method in which the available surplus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the four prior charges and their relative importance nor their content was examined by this Court in that case; and though the formula has subsequently been generally accepted by this Court in several reported decisions (Baroda Borough Municipality v. Its Workmen ([1957] S.C.R. 33, 39.), Sree Meenakshi Mills, Ltd. v. Their Workmen ([1958] S.C.R. 878, 884) and The State of Mysore v. The Workers of Kolar Gold Mines ([1959] S.C.R. 895. 945) the question about the adequacy, propriety, or validity of its provisions has not been examined nor has the general problem as to whether the formula needs any variation, change or addition been argued and considered. It is for the first time since 1950 that, in the present appeals, we are called upon to examine the formula carefully and express our decision on the merits of its specific provisions. As we have already indicated, in dealing with the present dispute the tribunal has held that, in working out the formula, it could relax its provisions even though the proposed relaxation may mean a material variation of the formula itself. On behalf of the appellant Mr. Kolah has taken strong exception to this approach. He has argued that, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ope of the enquiry before the Tariff Commission, the report made by the appellant had to be restricted to the urgent jobs which it wanted to undertake during the execution of its ten year programme; and so it would not be reasonable to hold that the figure of annual rehabilitation expenses which can be deduced from the said report has any relation to the claim for rehabilitation made by the appellant in terms of the working of the formula. Then again the appellant's claim for rehabilitation 946 in the earlier proceedings has also been satisfactorily explained by Mr. Tongaonkar. The respondents have placed considerable reliance on the statement filed by Mr. Tongaonkar in the said proceedings (Ex. U-8). This document has been produced by the respondents in support of their contention that it purports to make a claim for ₹ 192 lakhs per year 'for rehabilitation. That no doubt is true ; but in terms the document purports to show the estimated expenditure required during the ten year period there specified; and as Mr. Tongaonkar has stated, it does not include a full statement of the claim in regard to the rehabilitation of all the blocks belonging to the appellant. In considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . C-3. Thus there can be no doubt that neither the report submitted by the appellant before the Tariff Commission nor the estimate given by Ex. U-8 was prepared under the formula; and so any disparity in the amounts claimed in the two earlier documents cannot be seriously pressed into service against the appellant when it seeks to make a claim for rehabilitation strictly in accordance with the formula. We must, therefore, hold that the tribunal was in error in coming to the conclusion that by reason of its previous conduct the appellant could not be allowed to place its claim for rehabilitation at a figure higher than ₹ 192 lakhs in the relevant year. In this connection it would be pertinent to remember that in dealing with the employer's claim for rehabilitation the tribunal is called upon to assess respective values of the relevant factors on hypothetical and empirical considerations, and so it may generally not be useful or wise to take recourse to strict legalistic principles like estoppel in deciding this question and indeed all material questions in industrial adjudications. Does the formula need to be revised, and should it be revised and reconstructed ? That is the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r actuality of the need of rehabilitation; and that needs to be corrected. Besides, it is said, that the theory that the trading profits of the industry must provide for the whole of the rehabilitation expenses is not universall accepted by enlightened and progressive businessmen and economists. In this connection reliance is placed on the observations of F.R. M. de Paula in his " Principles of Auditing " that " the object of depreciation is the replacement of original investment capital and that an increase in replacement cost is an important matter and means that additional capital is required in order to maintain the original earning capacity " It is also pointed out that the Institute of Chartered Accountants in England and Wales, in its recommendations made in 1949 under the heading " Rising price levels in relation to accounts " has pointed out that " the gap between historical and replacement costs might be too big to be bridged by a provision made for replacement spread over a period of years either by way of supplementing the depreciation charges or by setting up in lieu of depreciation a provision for renewals based on estimated replace ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur in management ". The Committee recognised that putting back profits into the industry is one of the most useful forms of capital investment and this should be encouraged and it recommended that a figure of 20% for reserves should be generally aimed at, though it considered that, as a first charge, 10% of the net profits should be compulsorily set aside for reserves, leaving it to the good sense of the management to allocate the balance or more out of their own share of surplus profits. In regard 951 to the labour's share in the surplus profits, the Committee stated that, having due regard to the conditions prevailing in the industry selected for an experiment in profitsharing, it had come to the conclusion that labour's share should be 50% of the surplus profits of the undertakings. It is a matter of common knowledge that so far Government have not thought it desirable, expedient or possible to legislate in this matter in the light of the recommendations made by this Committee; but it is suggested that these recommendations afford a rational basis for reconstructing the formula. It may be conceded that there is some force in some of the arguments urged in support of the pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple has been that the main object of providing for the depreciation of wasting assets is to recoup the original capital invested in the purchase of such assets. As part of the capital of the concern has been invested in the purchase of these assets, therefore, when their working life comes to an end, the earning capacity of these assets ceases. Thus they will become valueless for the purposes of the business, and the original capital sunk in their acquisition, less any scrap value, will have been lost. Hence, in order to keep the original capital of a business intact, if any part thereof is invested in the purchase of' wasting assets, revenue must be held back by means of depreciation charges to profit and loss account, in order to replace the capital that is being lost by reason of the fact that it is represented by assets that are being consumed or exhausted in the course of trading or seeking to earn income It is also stated by the same author that " in all cases where One of the direct causes of earning revenue is gradually to consume fixed assets of wasting nature, the depreciation of such assets should be provided for out of revenue " (3). It is true (2) F.R.M. de P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave to be heard and their pleas carefully considered. It is obvious that while dealing with the present group of appeals it would be difficult, unreasonable and inexpedient to attempt such a task. That is why we think that labour's claim for bonus should be decided by tribunals on the basis of the formula without attempting to revise it. Whilst we are not prepared to accede to the argument that the formula should be revised, we wish to emphasise that the formula is elastic enough to meet reasonably the claims of the industry and labour for fairplay and justice. In its broad features it recognises the claims of the industry and tabulates them under different items as prior charges, and then provides for the distribution of available surplus between the labour, the industry and the shareholders. The items specified in the formula have to be worked out notionally on theoretical grounds; in determining the content of each one of the items it is therefore essential to scrutinise and weigh carefully all the relevant and material facts. If the content of each item is determined objectively in the light of all relevant and material facts, the tribunals would generally find it possible to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o examine carefully this aspect of the matter. We have already noticed that the formula for awarding bonus to workmen is based on two considerations; first that labour is entitled to claim a share in the' trading profits of the industry because it has partially contributed to the same; and second that labour is entitled to claim that the gap between its actual wage and the living wage should within reasonable limits be filled up. The concept of labour's contribution to the profits of the industry has reference to the contribution made by the employer and the workmen taken together as a class; and so it would 956 not be relevant to, inquire which sectionof labour has contributed to what share of the profits.The board idea underlying this concept is that the capital invested by the employer and labour contributed by workmen jointly produce the profits of an industry. This does not necessarily mean that, in theindustry in question, labour must actually manufacture or produce goods, though, in the case of manufacture and,production of goods contribution of labour. is patent and obvious. In the Burma Shell Oil Storage and Distributing Co., of India Pd. v. Their, Workmen(1953) 11, L.L.J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s either on the credit or on the debit side on the ground that the impugned items are. Wholly extraneous and entirely unrelated to the trading profits of the year. In considering such a plea the tribunal must resist the temptation of dissecting the balance-sheet too minutely or of attempting to reconstruct it in any manner. It is only glaring cases, where the impugned item may be plently and obviously extraneous that a plea for its exclusion should be entertained. Where the employer makes profits in the course of carrying on his trade or business, it would be unreasonable to inquire whether each one of the, items of the said profit is related to the contribution made by labour. In such matters, the tribunal must take an overall, practical and commonsense view. Thus it ma be stated that as a rule the gross profits appearing at the foot of the statement of the profit, and loss account should be taken a,% the basic figure while working out the formula. In, working out the formula the other important fact which should not be ignored is, that the formula proceed's to deal with the labour's claim for bonus on the basis that the relevant year for which bonus is claimed is a selfsufficient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r's profits must be treated as logical and sound. Having ascertained the amount of gross profits, the first item of deduction relates to depreciation. The propriety of this deduction was not questioned before the Labour Appellate Tribunal which evolved the formula; but the content of the item of depreciation became a matter of controversy subsequent to 1950. After 1948, s. 10 (2) (vi) of the Income-tax Act has provided for initial and additional depreciation besides the statutory depreciation which was already admissible. In other words, depreciation allowed under the Income-tax Act now consists of what may be called the statutory normal depreciation calculated under r. 8 as well as initial depreciation and additional depreciation. The allowance of these depreciations is an exception to the general rule that the income has to be taxed without reference to the diminution in the value of the capital. Under the amended provision of s. 10 (2) (vi) of the Income-tax Act the employers began to claim that from the gross profits all the depreciations admissible under the Income-tax Act should be debited; and this claim was upheld by some tribunals and rejected by others. This conflict of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciation from the gross profits is then taken as the amount on which calculations have to be made about the income-tax payable for the bonus year. This item gives rise to a controversy between the parties. It is urged for the employers that in determining the amount payable by way of income-tax on this balance the tribunal should not take into consideration allowances which are made under the relevant provisions of the Income-tax Act. There is no doubt that in taxing the employer for the bonus year the Income-tax Act would make allowance not only for the normal depreciation but also for the initial and additional depreciations; but the argument is that the income-tax should be determined nationally without reference to the said allowances. In support of this argument it is further urged that though the employer may obtain credit for the two further depreciations for some years, later on the said allowances will not be made and his liability' to pay tax would be correspondingly increased. It is but fair, so the argument runs, that the employer should be allowed to create a fund of income-tax reserve from which he would be able to bear his tax liability in future as and when it is bou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployer by s. 10(2)(vi) it would work no hardship to the employer, for the simple reason that in future years when these concessions cease to be operative and his liability to pay the tax correspondingly increases, he would be entitled to claim the amount of income-tax which would then be payable by him. This method of calculating income tax is thus fair to both the parties and it has besides the merit of being consistent with the basic character of the formula. It would be relevant in this connection to remember that, though in most of the industries workmen continue to be employed from year to year, nationally and on principle, the claim for bonus for a particular year is made on behalf of workmen employed during the said year; and in that sense, the relevant calculations have to be made with the bonus year as a unit. That is why considerations of future tax liability of the employer are foreign to the calculation under the formula. We would, therefore, bold that in calculating the amount of tax payable for the bonus year the tribunals should not take into account the concessions given by the Income-tax Act to the employers under the two more depreciations allowed under s. 10(2)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resented by bonus shares for the year in which such shares were issued and ,)served that ,for subsequent years no distinction between it and other paid-up capital represented by paid-up shares should be made ". Similarly, in regard reserves or depreciation used as working capital interest has been allowed either at 4% or at 3% or ,Ten at 2% according to the relevant circumstances. in the Mill Owners Association, Bombay v. The Rashtriya Mill Mazdoor Sangh (1952) 1 L.L.J. 518. 522) the Labour Appellate Tribunal has observed that " as we have said before, there is no fixed rule as to the rates of such return (on capital) and each case must depend on its individual acts. We have in appropriate cases given as high as % but in case of the mills the Full Bench has considered that the equivalent of 2% would be reasonable nd we propose to retain it at that level for the present ". In Tea and Coffee Workers Union v. Brooke Bond (India) (Private) Ltd. (1958) 1 L.L.J. 645) the Industrial Tribunal as considered the previous decisions on the question of the return on working capital and held that, in the case before it, it would be an adequate return on the working capital if 3% i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermined they have to be treated as prior charges in the calculation of available surplus under the formula. The original formula referred to replacement, rehabilitation and modernisation of the plant and machinery. Soon after the formula was evolved a dispute arose as to whether the industry was entitled to claim rehabilitation for its buildings as well and it was held that " a claim for rehabilitation for buildings had to (1) (1955) II L.L.J. 431. 966 be treated as a prior charge just like the claim for the rehabilitation of plant and machinery " (1). :This position is not disputed before us, and we think rightly. That takes us to the item of rehabilitation and it is this item which poses a very difficult problem. We have already noticed that the object of providing depreciation of wasting assets in commercial accounting is to recoup the original capital invested in the purchase of such assets; but the amount of depreciation which is allowed under the formula can hardly cover the probable cost of replacement. That is why the formula has recognised the industry's claim for rehabilitation in addition to the admissible depreciation. Since the Second World War prices of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry determination of the probable cost of replacement. What the tribunal has to do in determining such cost is to project the price level into the future and this can be more satisfactorily done if the price level which has to be projected into the future is determined not only in the light of the prices prevailing during the bonus year but also in the light of subsequent price levels. It seems to us that in order to enable the tribunal to make an estimate in this matter as near actualities or realities as possible it is necessary that the tribunal should be given full discretion to admit all relevant evidence about the trend in price levels. The price level during the bonus year would no doubt be admissible; but that alone should not be taken as the basis for decision. That is the view which the tribunals have taken in a majority of cases in dealing with the question of rehabilitation and we do not think that there is any justification for disturbing the usual practice in that behalf. The problem of determining the probable cost of replacement itself is very difficult; but the difficulty is immeasurably increased when it is remembered that the claim for rehabilitation covers not o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevant for the tribunal to consider in an appropriate case whether it would be possible to apportion expenses on the basis that it is a case of partial modernisation and partial expansion. If, however, the increased production is not of a significant order it may be regarded as incidental to replacement or modernisation and the question of apportionment may not arise. We have set out these considerations in order to emphasise the fact that in dealing with the problem of rehabilitation the tribunal must carefully examine the evidence and consider the employer's claim in all its aspects before determining the amount which should be allowed by way of rehabilitation as a prior charge in the relevant year. The decision on the question of the probable cost of rehabilitation is always reached by adopting a suitable multiplier. This multiplier is based on the ratio between the cost price of the plant and machinery and the probable price which may have to be paid for its rehabilitation, replacement or modernisation. Since there has been a continuous rise in the prices of industrial plant and machinery the older the plant which needs rehabilitation the higher is the multiplier. That is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the working of the formula. " It would thus be clear that the decision of this major item in the working of the formula presents many difficulties; and in the last analysis its decision depends upon several hypothetical and empirical considerations. It is, therefore, not surprising that in the case of Metal Box Co. of India, Ltd. v. Its Workmen ([1952] L.A.C. 315, 321) the Labour Appellate Tribunal has observed that " It is unfortunately too true that all our calculations as to rehabilitation may be disproved by subsequent events; it is impossible to say what the trend of world prices would be in the next fifteen years or which circumstances will intervene before that period to upset such calculations one way or the other, and no calculations of this kind are capable of mathematical accuracy. We have to take a commonsense view of these matters and make an allowance' for rehabilitation to the best of our ability and in accordance with our formula ". It has also been observed by the Labour Appellate Tribunal that if an appropriate multiplier and divisor are determined " they are generally used because the tribunals take the view that the reconsideration of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry that the tribunal should require the employer to give clear and satisfactory evidence about all the relevant facts on which it can make the requisite estimate. The questions which the tribunal has to consider under this item are essentially questions of fact and its final decision on them is bound to be hypothetical, since it would be based on a fair evaluation of several circumstances which are by no means certain and which cannot be predicated with any amount of precision or even definiteness. That is why it is of the utmost importance that all relevant and material evidence should be adduced by the employer and it should be properly tested by cross-examination. When that is done the tribunal must do its best to consider the said evidence objectively and reach its final decision in a judicial manner. Once the amount of rehabilitation is thus determined the available surplus for the bonus year is ascertained and the final stage is reached when the tribunal has to give directions for the distribution of the said available surplus. It is not seriously disputed that three parties are entitled to claim a share in this available surplus; labour claims bonus from it, the industry cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay of bonus. If the formula is thus worked reasonably it would in a large majority of cases succeed in achieving its principal object of doing justice both to labour and industry. Before we part with the question of working the formula it is necessary to observe that the practice adopted by some tribunals in giving the amount of bonus a priority in the calculations is not justified. Logically it is only after all the prior charges have been determined and deducted from the gross profits that available surplus can be ascertained; and it is only after the available surplus is ascertained that the question of awarding bonus can be considered. Some tribunals seem to work out nationally the amount of bonus which they think can be awarded and place that amount higher up in the process of making calculations before the incometax payable is determined. The inevitable consequence of this procedure is to make the amount of tax proportionately less. We wish to make it clear that this procedure should not be followed. As we have already pointed out, in directing the distribution of the available surplus the tribunal has to take into account the rebate of income-tax to which the employer is ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent for such overwork. If in addition to such payment they are allowed to include the said payment in their wages in calculating bonus to which they are entitled, obviously the gap between their actual wage and the living wage would be filled up to a larger extent than in the case of other workmen who do not receive such additional overtime payment. Besides, if the payment of bonus proceeds on the broad consideration that it is due to the workmen for their contribution to the profits it would be unreasonable to make 124 976 a distinction between workmen and workmen on the ground that some have contributed more to the profit than others; and that is exactly what would follow if overtime workers are allowed to claim a larger amount of bonus than their other colleagues. That is why we think that the tribunal was not justified in directing that the calculations of bonus should be made on the basis that overtime payments constituted a part of the basic wages of the employees. The next point to consider relates to the return on paid-up capital to which the appellant is entitled. The tribunal has awarded to the appellant return at the rate of 6% on paid-up capital and at 4% on the working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to the employer's claim to treat the amount in the gratuity fund as a prior charge; and this claim has been allowed by the tribunal. It appears that in M/S. Metro Motors v. Their Workmen (1) the Labour Appellate Tribunal observed that it was desirable in all cases to create a separate reserve fund for the payment of gratuity and it directed that the modest fund claimed by the employer for the year in question was a proper deduction from its profits. The question which we have to decide is whether the allowance on this account should be treated as a prior charge in making the calculations under the formula. There can be no doubt that, in a sense, the gratuity fund is created for the benefit of workmen and there should be no difficulty in recognising the appellant's claim for the deduction of an appropriate amount on this account; but we think on principle it is desirable that no addition should be made to the list of prior charges recognised by the formula. Even so when the available surplus is determined the tribunal ought to take into account the employer's claim on account of the gratuity fund created for the benefit of his workmen and the amount which the tribunal may regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pporting the claim for rehabilitation which the appellant has decided to make. According to Mr. Tongaonkar, the average future life of the plant and machinery existing in 1939 would' be approximately seven years from 1-8-1954. Similarly, the approximate future life of the three other categories of blocks would be 13, 15 and 20 years respectively. He has stated that in calculating the life of machinery, it is necessary to take into consideration, first the mechanical condition of the machinery, second whether it is efficient or has been rendered obsolete because new machinery of modern design with a considerably better efficiency has come into the market. In other words, the probable useful life of the machinery may be prematurely determined by the emergence of more efficient machinery. In support of this statement he has given some instances where the appellant's plant or machinery had to be changed mainly for the reason that a new corresponding plant or machinery was more efficient and gave more satisfactory results. However, stated generally,in the opinion of the witness, the average life of a cement plant taken as a whole would be 25 years if it is properly maintained. Mr. Ton ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... multiplier of 4.28 is really made up of two multipliers. Certain portion of the plant and equipment which is obtained from abroad is estimated at 60% of the total cost and the expenditure on the remaining items is estimated at 40% of the total cost. The multipliers of these two groups are estimated at 4.8 and 3.5 respectively, and by calculations it has been noticed that the average ratio comes to 4.28. This is the 981 genesis of, and the justification for, the adoption of 4.28 as the multiplier. He has also added that the proportion of 60% and 40% which he had mentioned was based on his experience of building a number of cement factories and of carrying out extension and modernisation of existing cement factories. The multiplier was based, said the witness, on the state, of comparative quotations of plant and machinery received in 1939 and quotations received of similar machinery recently. It would thus be clear that in devising the multiplier and divisor, Mr. Tongaonkar has drawn very largely on his experience and has drawn inferences which he thought were reasonable. Besides in making the relevant calculations he has not dealt with the plant and machinery and the buildings and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tend to cloud rather than clarify the points which the tribunal has to consider. We feel inclined to hold that is what has happened to some extent in the present case. But that by itself cannot obviously be said to introduce any infirmity in the evidence given by the expert or affect its credibility. It only means the tribunal has to analyse his statements, examine them carefully in the light of his cross-examination and decide how far it would be justified in acting on them. It has been urged before us by the respondents that the claim made by Mr. Tongaonkar in regard to the rehabilitation of the pre-1939 block should be rejected. The contention is that, this block must have been completely replaced before 1953 and no claim for its rehabilitation can be entertained. This argument was based substantially on the assumption that a part of ₹ 997.42 lakhs must have been utilised for the purpose of replacing the said block. Mr. Tongaonkar has stated that prior to 1-8-1954 the total amount spent on modernisation, replacement and rehabilitation and other sundry jobs, but excluding' expansion, was approximately ₹ 9.97"crores, and in support of this 'statement he produced E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... document 1(a). But Mr. Kolah contends, and it is not disputed by the respondents either, that even if the whole of the disputed item 5 is excluded, the remaining items on Ex. 1 give a fairly satisfactory explanation about the work of rehabilitation, replacement and modernisation on which the bulk of ₹ 997.42 lakhs must have been spent. In view of this statement we must hold that the assumption made by the respondents that the said amount of ₹ 997.42 lakhs must have been utilised for replacing the pre-1939 block is not well-founded. It is then contended that there is no justification for keeping the pre-1939 block still alive in view of the estimate made by Mr. Tongaonkar about the life of the cement plant and machinery. The suggestion is that the oldest block is deliberately kept alive in order to enable the appellant to claim a higher multiplier in calculating the rehabilitation amount. It cannot be said that there is no force at all in this criticism. In fact Mr. Tongaonkar himself has admitted that a given portion of this block could have been discarded earlier, but he added, that a part of it had been rehabilitated as a temporary measure in order to carry on. That ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its life. This question also was disallowed, and the respondents naturally make a serious grievance that they were not given an opportunity to show that Mr. Tongaonkar's estimate about the life of the plant and machinery was a gross under statement. The respondents have then objected to the inclusion of several items in the approximate cost of rehabilitation mentioned in col. 8 of Ex. C-2. The new additional packing machine in regard to the factory at Banmore as well as the crane storage are, it is urged, not items of rehabilitation, but of expansion. Similar 986 criticism is made in regard to the dust-collector plants, coal-handling plants, items in regard to the fluidification system, diesel engine shunting locomotive and similar other items. The respondents' grievance is that by including these items which are really matters of expansion, the amount of approximate cost of rehabilitation has been unduly increased. We are unable to say if the grievance is justified. In regard to the multiplier adopted by Mr. Tongaonkar, the criticism is that it is based on hypothetical considerations determined by him in a subjective manner. It is also pointed out that the failure of the witness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The more scientific and satisfactory method of dealing with the question of rehabilitation is to treat the plant and machinery separately from the buildings and other assets that need rehabilitation. In fact we asked Mr. Kolah to give us a statement showing the cost of the plant and machinery and the buildings and other assets separately in order to enable us to have a clearer picture about the extent of the rehabilitation needs of the appellant. He has accordingly filed a statement, Ex. F (a). There is yet another point on which Mr. Tongaonkar's evidence has been criticised by the respondents. It is argued that this evidence shows that under his concept of modernisation several items of expansion can be included. Mr. Tongaonkar has stated that by ' modernisation' he meant 'a composite scheme comprising replacement of the part of the old machinery by new machinery, installation of additional machinery because the layout of the composite modernisation scheme is different from the previous layout and rehabilitation of the remaining machinery as a short term measure'. By ' rehabilitation' he ment 'alterations to a machine or machinery, installation for improving its mechanical perfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a very large increase in production. In this connection the respondents have relied on Ex. H. 0. C-2 which, according to them, shows considerable increase in production, and that, it is urged, is the result of expansion and not of rehabilitation. Mr. Tongaonkar has suggested in his evidence that it is the intention of the employer that decides the character of the transaction. If the employer wants to instal new machinery solely with the object of expanding his business, that is expansion; but if he purchases new machinery for business reasons and not for the purposes of expansion, it would be rehabilitation notwithstanding the fact that the new machinery gives rise to increased production. This approach, in our opinion, gives undue importance to the intention of the employer and we think that, on a proper occasion, the question may have to be considered by the application of some objective tests. In this connection it would be relevant to bear in mind the fact that the steps taken by the appellant for rehabilitating, replacing or modernising its machinery are a part of its plan of expanding its business so as to meet the growing demand for cement in our country. In deciding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sufficiently tested in crossexamination and, on the whole, it appears to err a little too much on the side of a conservative estimate ; and if that is so his divisor may need revision; it is also probable that in the items included by him under rehabilitation may have been included some which are more of the character of expansion than rehabilitation, replacement or modernisation. Besides, it is not unlikely that the steps taken by the appellant ostensibly for rehabilitation, replacement and modernisation of the machinery have appreciably increased its production, and that may partly be due to the fact that the general plan of expansion adopted by the appellant has been in operation for some time past. It is in the light of these facts that we have to examine the appellant's claim for rehabilitation. In doing so, we have taken Ex. C-2, Ex. C-23 and Ex. F (a) as a basis for our calculations. It is somewhat unfortunate that in making its claim for rehabilitation Mr. Tongaonkar did not make calculations separately in respect of plant and machinery as distinct from buildings, roads, bridges and railway sidings. It is true that at our instance a statement Ex. F (a) has been filed before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l cost of Multiplier Total Less breakdown as requirement in Ex. C-2 Balance Life of machinery Yearly (in Yrs.) (1) (2) (3) (4) (5) (6) (7) (8) (approx.) UP to 1939 353.91 x3.5 1238.68 65.92 1172.767 167.54 1940-44 37.53 x2 75.06 4.66 70.401 35.41 1945-47 140.78 x2 281.56 11.19 270.3715 18.02 1948-54 811.34 x1 811.34 42.84 768.5020 38.42 Total 229.39 Then we would deal with the buildings, roads, bridges and railway-sidings., These may be given an average life of 30 years for all blocks in order to compensate for cases where they have to be demolished on account of modernisation. According to the previous statements of the appellant the life of factory buildings was about 35 years and residential 993 areas 50 years. Even so we propose to take the average life of 30 years in making our calculations in respect of these blocks. The multipliers may be taken as 2.25 for pre-1939 blocks, 1.5 for 1940-47 blocks, 1 for 1948-54 blocks. The Bombay block has been taken as in Ex. C-2: Chart III. Period Life Multiplier Total Cost Less at 5% of cost Balance break down valued Yearly requirement (1) (2) (3) (4) (5) (6) (7) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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