CROMPTON PARKINSON (WORKS) PRIVATE LTD., BOMBAY v. ITS WORKMEN AND OTHERS

Citation: [1959] SUPP. 2 S.C.R. 936; 1959 INSC 64

Court: Supreme Court of India

Bench: SUDHI RANJAN DAS , NATWARLAL HARILAL BHAGWATI, S.K. DAS, P.B. GAJENDRAGADKAR, K.N. WANCHOO

Judgment date: 1959-05-06

Case summary

1959 INSC 64. Supreme Court of India judgment dated 1959-05-06. CROMPTON PARKINSON (WORKS) PRIVATE LTD., BOMBAY v. ITS WORKMEN AND OTHERS. Read the judgment...

Judgment text

936 SUPREME COURT REPORTS [1959] Supp. CROMPTON PARKINSON (WORKS) PRIVATE LTD. , BOMBAY v. ITS WORKMEN AND OTHERS (S. R. DAS, c. J. , N. H. BHAGWATI, s. K. DAS, P. B. GAJENDRAGADKAR and K. N. WANOHOO, . T. J. ) I nditstrial Dispute-Bonus-Gross Profits-E xpenditt OttTS ! }43 company's invaluable services under the said agreement. According to Shri V. V. Dhume the service fee , • paid by the company to the Parent company const1- Parkinson tutes, in a substantial measure, a mere reimbursement of expenses incurred by the latter in the maintenance and operation of its research department and rendering of facilities to the company. Shri V. V. Dhume further stated that, had the company to maintain its own research department to provide such service and facilities, the annual expense of the company would have far exceeded the service fee actually paid by it to the Parent company. It also appears from the affidavit of Shri V. V.

Dhume that the independent share-holders of the company who had acquired 26% shares of the company about the time when the "Technical Aid Agreement" was executed had willingly accepted that agreement. Apart from the fact that the agreement had received the approval of the Government of India in the Ministry of Finance as well as in the Ministry of Commerce and Industry, the income-tax authorities have from year to year allowed the full amount of the service fee paid by the company to the Parent company as an expenditure incurred wholly and exclusively for the purposes of the company's business. Likewise every payment and remittance made by the company representing the service fee to the Parent company has been sanctioned by the Reserve Bank of India ever since 1947.

The payment of the service fee no doubt represents a binding con- , tractual obligation on the company which can be legally enforced against it and a breach thereof on the part of the company may well lead to the cancellation thereof by the Parent company as a result whereof the company will be deprived of the services and facilities obtained by it under the agreement and may even be prevented from carrying on its business. There was no serious cross-examination of Shri V. V. Dhume regarding these matters by counsel appearing for the workmen and no substantive evidence on these questions was led by the workmen. The Tribunal made its award in both the References on January 8, 1957. As regards the service fee, the Tribunal held (i) that the amount of service fee paid by the company to the Parent company was . .

(Works) excessive and beyond the reqmrements of commercial necessity and was allowable as an expense only as to one quarter thereof and (ii) that in any event even if the commercial necessity of the payment could not bo challenged, a large part of the payment was in the nature of capital expenditure and that only the balance, being in fact a quarter thereof, was allowable as revenue expense for the purpose of determining the surplus available for the payment of bonus to the workmen. Thus, as regards the service fee, the Tribunal in its award proceeded to "prune it down". In the actual calculations made by the Tribunal for determining the available surplus according to the bonus formula appearing in what has been marked as confidential exhibit T-1, the Tribunal ha. s allowed only Rs. 2 lacs out of the total of Rs. 7•67 lacs actually paid as service fee and added back Rs. 5·67 lacs to the profits.

It will also be noticed from that confidential exhibit T-1 that the Tribunal has deducted as a first charge 4~ months' basic wages as bonus before depreciation as well as tax, on no better ground than that, in the view taken by it, income-tax should not be deducted as a prior charge on the gross profits in preference to bonus. In so doing the Tribunal has not, quite clearly, followed but has made variations in that formula. The bonus formula enjoins the Tribunals to arrive at the available surplus after provid-ing for certain prior charges mentioned therein and then to determine, after taking into consideration all material circumstances, how that available surplus should be distributed between the three interests, namely, the industry, the shareholders and the workmen. To deduct bouus as a prior charge even before the recognised itums of prior charges appears to us to put the cart before the horse.

Such a process is certainly not giving effect to the bonus formula but amounts to ad hoc determination which may vary according to the length of the proverbial foot of the Lord Chancellor and is bound to h~ad to chaos and industrial unrest. The boi;rns formula was evolved by the Labour Appellate Tribunal as far back as 1950 and it has been generally approved by this Court in more decisions than one and what is more it has Parki;s worked fairly satisfactorily. In our judgment in the appeals of Associated Cement Companies Ltd. v. Its Workmen (1) we have deprecated such departure from the bonus formula by individual Tribunals, for clearly such departure is not conducive to the harmonious and peaceful relations between the workmen and their employers. 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 income-tax 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 income-tax authorities are entitled to apply the test of commercial necessity by reason of the express provisions of s. 10(2)(xv) which authorise them to arrive at the taxable income, profits and gains after making allow-ance for expenditures laid out and expended wholly and exclusively for the purpose of the business. There is no such provision in the Industrial Disputes Act.

In the absenc~ of cogent and compelling evidence leading to the definite conclusion and finding that a purported expenditure was sham or had been made 'Yith the express object of minimising 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 commer-cially 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. The Tribunal has completely overlooked the fact that the company's accounts had been duly audited by its auditors who were duly appointed by the company and that the said auditors had duly certified (r) [1959] S. C. R 925. u9 in the manner provided for by the Indian Companies Act, that the said accounts had been drawn (Works) up in conformity with the law and exhibited a true and correct view of the state of the company's affairs.

The Tribunal has paid no attention to the fact, appearing in the evidence on record before him, that the income-tax department had allowed such service fee as legitimate revenue expense and the entire amount of the service fee was allowed as a deduction by income-tax authorities every year as a revenue expenditure wholly and exclusively incurred as a matter of commercial necessity of the company's business. Nor does the Tribunal appear to have adverted to the fact that the remittances to the Parent company were allowed by the Reserve Bank which always exercises close scrutiny on - every payment made to non-residents with a view to prohibit pay-ments which are not justified. Nor has the Tribunal taken note of the fact that the Ministry of Finance and the Ministry of Commerce and Industry have approved of the payment of the service fee as provided in the agreement.

A conclusion drawn by the Tribunal without adverting to the evidence before it amounts to an error of law and cannot possibly be sustained. Further, the Tribunal appears to have been led away by three facts, namely, (i) that the company did not pay any service fee during the period 1937-47, (ii) that the agreement was executed on August 12, 1947, that is to say, three days before the attainment of our independence and (iii) that at the date of the agreement the company was a 100% subsidiary of the Parent company. As regards the first reason, the explanation may well be that during the period 1937 to 1947 the company was still in a stage of development and growth. In any case the fa_ct that no fees had been charged during a particular period when the company was 100% subsidiary of the Parent company cannot reasonably be taken as a reason for not allow-ing them in future.

It will be recalled that negotiations were going on for the acquisition of a consider-able block of shares by an Indian company simultane-ously with the negotiations for the execution of t]J. e agreement and that in fact 26% of the shares were itcquirnd by Messrs. Greaves Cotton Co. Ltd. Further, such service fee has been paid year after year from P _ . . . 1947 right up to the bonus year rn question. The second reason is equally unsustainable. The fact that a great constitutional change was envisaged may well and properly have been the reason for placing the legal relationship between the company and the Parent company on a firmer and permanent legal footing. The Tribunal seems to have overlooked the fact stated by Shri V. V. Dhume, that "the payment of the service fee for the services of this nature is quite a common feature in India".

The reasonableness and legality of the payment of such fee is also supported by the fact that the income-tax authorities and the Reserve Bank of India have not taken any exception to such payment. The last reason adopted by the Tribunal clearly overloo~s the fact that shortly after the execution of the agreement about 26% of shares in the company were acquired by an Indian company and year after year ever since then these independent shareholders of the Indian company had willingly accepted the service agreement. Finally the award does not disclose any basis on which the Tribunal has purported to " prune it down" to one quarter of the amount actually paid by the company. After a careful consideration of the evidence on record we have come to the conclusion that this part of the award concerning disallowance of the major portion of the service fees cannot be supported or upheld.

The Tribunal in the award itself has pointed out, as alreadv stated, that in case the whole of this service fee is to be allowed, as we think it should be, then on that basis the available surplus would permit the payment of bonus of one month's basic wag~ to the workmen. The company has no objection to payment of bonus to the workmen amounting to one month's basic wages, subject to the conditions laid down in the award in this behalf and indeed it has done so since the date of the award. The result, there-fore, is that we allow these appeals to the extent that the award of the Tribunal be varied and modified by n. llowing only one month's basic wages to its workmen who are respondents to these appeals instead of 2i th ' b . "d d . h d b • (Wo>ks) mon s as10 wages as prov1 e m t e awar , su Ject, of course, to the conditions laid down in the awn. rd. Be it noted here that the company has paid this bonus to the respondents and nothing remains due and payable for bonus for 1954-55.

Considering all circumstances of these appeals, we r. lirect each party to bear its own costs of these appeals. Appeal allowed ·in part. THE INDIAN HUME PIPE CO. , LTD. , v. THEIR WORKMEN (S. R. DAS, c. J. , N. H. BHAGWATI, s. K. DAS, P. B. GAJENDRAGADKAR and K. N. WANCHOO, JJ. ) Inditslrial Dispute-Boniis -Available Surplus - Previous losses written off-Expenditure on patents written off-Debenture redemption reserve-If proper prior charges-Preference shares. return on-Calcitlations 011 All-India basis, whether proper. The appeliant manufactured hume pipes and had factories in different parts of India, Pakistan and Ceylon. For determining the available surplus for the payment of bonus for the year 1954-55 the appellant claimed deductions as prior charges on account of (i) losses suffered on the Lahore factory written off, (ii) expenditure on patents written off, and (iii) debenture redemption reserve. It also claimed 6% retnrn on the preference shares as return on paid up capital.

The losses on the Lahore factory had been incurred in the previous years which had been carried forward from year to year and had been written off ~s irrecoverable in the bonus year. The amounts spent on the purchase of the patents which had been worked off in the previous years had also been written off in the bonus year. The appellant had issued debentures in 1942-43 redeemable in 1962-63 and claimed Rs. 3,50,000 as the annual contribution towards the redemption reserve. The appellant had issued preference shares on which the share-holders, under the terms of the issue, were not entitled to more than 5%, but the appellant claimed a return of 6% on these shares also as return on paid up

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