Holding

The Court held that for co‑operative societies, "capital" means any amount classified as capital, permitting deduction of up to 8.5% of such invested capital and of all sums transferred to a reserve fund under the Co‑operative Societies Act, and that the Explanation to the Third Schedule does not apply to them, leading to a bonus rate of 18.78% for 1975‑76 and 20% for the subsequent years.

Summary

The Jackson Co‑operative Credit Society appealed against a Bombay High Court order that directed it to pay bonus to its employees at 20% of total annual earnings for the years 1975‑76, 1976‑77 and 1977‑78. The Society contended that the High Court erred by ignoring deductions permissible under Section 6(d) of the Payment of Bonus Act, 1965 and Item 4 of the Third Schedule, specifically the 8.5% deduction on capital invested and amounts transferred to a reserve fund under the Maharashtra Co‑operative Societies Act. The Supreme Court interpreted "capital" in its ordinary sense, allowing deduction of up to 8.5% of any amount classified as capital and of all sums carried forward to a reserve fund under Section 66 of the Co‑operative Societies Act. It held that the Explanation to the Third Schedule does not apply to co‑operative societies. Consequently, the Court corrected the bonus rate for 1975‑76 to 18.78% (instead of 20%) and affirmed the 20% rate for the subsequent two years, dismissing the appeal.

Issues considered

Whether "capital" under Item 4 of the Third Schedule of the Bonus Act includes all amounts classified as capital for a co‑operative society.
Whether sums transferred to a reserve fund under Section 66 of the Maharashtra Co‑operative Societies Act are deductible from gross profits under the Bonus Act.
Whether the Explanation to the Third Schedule of the Bonus Act is applicable to co‑operative societies.
Whether the High Court erred in directing the Society to pay bonus without accounting for the above deductions and the correct bonus rate for 1975‑76.

Legislation cited

Maharashtra Co-operative Societies Act, 1954s. Rule 54
Maharashtra Co-operative Societies Act, 1960s. 66
Payment of Bonus Act, 1965s. 6(d), s. Third Schedule Item 4

Subjects

Bonus ActCo‑operative societyDeduction from gross profitsCapital definitionReserve fundSection 6(d)Third ScheduleSection 66Maharashtra Co‑operative Societies ActBonus calculation

Judgment

J_
JACKSON CO-OPERATIVE CREDIT SOCIETY LIMITED
A
v.
CO-OPERATIVE BANKS & SOCIETIES EMPLOYEES'
FEDERATION & ORS.

MARCH 31, 1989
t
[MURARI MOHON DUTT AND T.K. THOMMEN, JJ.I

Payment of Bonus Act, 1965---Section 6(d) and Third Schedule
>
Item No. 4-For rate of Bonus-Sums deductible from gross profits- ~

What are-In respect of a Co-operative Society.
c The appellant-Co-operative Society has filed this appeal by special )
leave against the High Court's order passed in a writ petition filed by it
whereby the High Court set aside the award of the Industriai Tribunal.
The High Court in the impugned order held that the appellant Is liable
to pay to its employees bonus at the rate of 20 per cent of its total annual
p earnings for the years 1975-76, 1976-77 and 1977-78.

The appellant contends that the High Court went wrong in direct-
ing the appellant to pay bonus with regard to various amounts invested
by it as permitted by the relevant provisions of the Maharashtra Co- -.+-_
operative Societies Act 1960, and the amounts carried forward to its
E reserve fund. According to tbe appellant, the High Court neither read
the provisions of Sec. 6(d) of the Bonus Act 1965 correctly nor was it
justified in relying on the Explanation to the 3rd Schedule to the Bonus
Act.

F
Dismissing the appeal subject to the modification indicated in the
judgment bereinbelow, this Court,
r-
HELD: The expression "capital" is not defined under the Bonus ...,'
Act. It must therefore be understood in the sense in which that expres- I

sion is generally understood. That means all amounts which are clas-
sified 11s capital in contrast to revenue must qualify for deduction sub-
' ject to the limit of 8.5 per cent, provided such capital is invested by the
G ~
Society in Its establishment as evidenced by its books of accounts at the
commencement of the accounting year. Any such capital upto 8.5 per
cent is thus deductible. Furthermore, all sums which have been carried
forward in respect of the relevant accounting year to a reserve fund as
required under any law applicable to Co-operative Societies for the time
H being in force are also deductible from gross profits. [2698-D I
266
CREDIT SOCIETY v. EMPLOYEES' FEDERATION ITHOMMEN, J.] 267
)._
Accordingly all such amounts held by the Society as reserve fund
A
in terms of Sec. 66 of the Co-operative Societies Act must qualify
for deduction. [2690)

If larger amounts are carried forward fo the reserve fund in tetms
of Sec. 66, all such amounts will come within the ambit of item (4) of the
3rd Schedule to the Bonus Act and qualify for deduction. [270A-B) B
i
'{
, . CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4042
of 1988.

From the Judgment and Order dated 17.12.1987 of the Bombay
High Court in W.P. No. 1048 of 1982.
c
~- S.C. Gupta and M.N. Shroff for the Appellant.

Anil Dev Singh, Ms. Nayana Buch, M.J. Paul, Kailash Vasdev,
Ms. Subhashini and Mrs. Kitty Kumarmangalam for the Respondents.
D
The Judgment of the Court was delivered by

THOMMEN, J .. This civil appeal by special leave is directed
....\-
. against judgment dated 17 .12.1987 of the High Court of Bombay in
Writ Petition No. 1048 of 1982 instituted by the appellant, which is a
Co-operative Credit Society. The 1st respondent is a Federation repre- E
senting the employees of the appellant amongst others.

Setting aside the award of the Industrial Tribunal, the High
Court held that the appellant was liable to pay its employees bonus at
the rate of 20 per cent of its total annual earnings for the years 1975-76,
1976-77 and 1977-78. F

f The principal contention urged at the Bar against the impugned
judgment is that the High Court went wrong in directing the appellant
to pay bonus without regard to various amounts invested by it as
permitted under the relevant provisions of the Maharashtra Co-
)( operative Societies Act, 1960 (the "Co-operative Societies Act") and G
other amounts carried forward to _its reserve fund. The appellant's
counsel contends that the High Court did not correctly read the provi-
sions of Section 6(d) of the Payment of Bonus Act, 1965 (The "Bonus
Act") and item (4) ·of the Third Schedule to the said Act. Counsel
further contends that the High Court was not justified in. placing
reliance on the Explanation to the Third Schedule to the Bonus Act as H
268 SUPREME COURT REPORTS [1989) 2 S.C.R.

it has no relevance to co-operative societies. The Explanation, he says,
A is relevant only to items(!), (2) and {3) of the Third Schedule to the
Bonus Act.

We shall now read the relevant provisions. Section 6 of the
Bonus Act refers to various sums which are deductible from gross
B profits. It reads:

"6. Sums deductible from gross profits.-The following
sums shall be deducted from the gross profits as prior
>.
charges, namely:

c
(d) such further sums as are specified in respect of the
J
employer in the Third Schedule.;'

The employer in question being a co-operative society, it is item
.{) ( 4) of the Third Schedule to the Bonus Act that is applicable. That
reads:

Item Category of employer Further sums to be deducted.
No.
E
(!) (2) (3)

4. Co-operative Society (i) 8.5 per cent of the capital
invested by such society in
its establishmeni as
F evidenced from its books
of accounts at the
commencement of the
accounting year;

(ii) such sums as has been
carried forward in res- ';
pect of the accounting
year to.a reserve fund
under any law relating
to co-operative societies
for the time being in force.
H

\
CREDIT SOCIETY v. EMPLOYEES' FEDERATION (TIIOMMEN, J.) 269

In column (3) of item (4), two types of amounts are deductible A
from the gross profits as prior charges. Firstly, 8.5 per cent of the
capital invested by a co-operative society in its establishment is
deductible. Secondly, amounts carried forward to a reserve fund in
compliance with any provisions of law relating to co-operative
societies are also deductible. (The expression 'capital' is not defined
under the Bonus Act. It must, therefore, be understood in the sense in B
which that expression is generally understood. That means all amounts
which are classified as capital in contrast to revenue must qualify for
deduction subject to the limit of 8.5 per cent, provided such capital is
invested by the society in its establishment as evidenced by its books of
accounts at the commencement of the accounting year. Any such capi-
tal upto 8.5 per cent is thus deductible. Furthermore, all sums which C

t- have been carried forward in respect of the relevant accountfng year to
a reserve fund as required under any law applicable to co-operative
societies for the time being in force are also deductible from gross
profits.) This means that reserve fund created in terms of Section 66 of
the Co-operative Societies Act is deductible under item (4) of the
Third Schedule to the Bonus Act. Section 66 reads. D

"66. (1) Every society which does, or can, derive a profit
from its transactions shall maintain a reserve fund.

(2) Every society shall carry at least one-fourth of the net
profits each year to the reserve fund; and such reserve fund E
may subject to the rules made in this behalf, if any, be used
in the business of the society or may, subject to the provi-
sions of section 70, be invested, as the State Government
may by general. or special order direct, or may, with the
previous sanction of the State Government, be used in part
- for some public purpose likely to promote the objects ofthis F
. Act, or tor some such purJ>ose of the ·state, or of local
interest:
i'
Provided that, the Registrar may, having regard to the
financial _position of any society or class of societies, fix the
contribution to be made to the reserve fund under this G
sub-section at a IOwer rate, but not lower than one-tenth of
the net profits of the society or societies concerned."

Accordingly, all such amounts held by the society as reserve fund
in terms of Section 66 of the Co-operative Societies Act must qualify
for deduction. The minimum reserve fund that_ is required to be H !
270 SUPREME COURT REPORTS [1989) 2 S.C.R.

A maintained by Section 66 of the Co-operative Societies Act is one-
fourth of the net profits of each year. (If larger amounts are carried
forward to the reserve rlind in terms of .Section 66, all such amounts
will come within the ambit of item (4) of the Third Schedule to the
Bonus Act and qualify for deduction.) Accordingly, we hold that 8.5
B per cent of the capital invested by the society in its establishment, as
disclosed by its books of accounts, together with amounts carried
forward to a reserve fund in compliance with Section 66 and other
provisions of the Co-operative Societies Act read with the rules made
thereunder (See Rule 54 of the Maharashtra Co-operative Societies
Act, 1954) will be deductible in terms of Section 6 of the Bonus Act.

C We must, however, point out that the High Court was not justi-
fied in placing any reliance on the Explanation to the Third Schedule .,j
to the Bonus Act for that has, as rightly pointed out by the appellant's - ·
counsel, no relevance to a co-operative society.

In this connection, we place on record that counsel on both sides
D agree that reference to 20 per cent in paragraph 11 of the judgment
was wrong in respect of the year 1975-76. They agree that for that year,
the correct figure is 18.78 per cent. Accordingly, we hold that refer-
ence to 20 per cent in paragraph 11 of the impugned judgment must be
read as 18. 78 per cent for the year 1975-76 and 20 per cent for the -J.-
succeeding two years. -
E
Subject to what we have stated above, we hold that the High
Court was right in directing the appellant society to pay bonus to its
employees. The society is liable to pay bonus at the rate of 20 per cent
for the years 1976-77 and 1977-78 and 18.78 per cent for the year

F
1975-76. >
In the circumstances, the appeal must fail and is accordingly
dismissed. The parties shall bear their respective.costs.

Y. Lal Appeal dismissed

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