Holding

Variable dearness allowance cannot exceed 100% neutralisation and depreciation cannot be used to reduce the industry’s financial capacity for wage fixation.

Summary

The Supreme Court examined the award of dearness allowance granted to workers of five cooperative sugar factories in Gujarat. The Industrial Court had increased the graduated dearness allowance and allowed a variable dearness allowance at 125% neutralisation, which the High Court later set aside. The Court held that variable dearness allowance cannot exceed 100% neutralisation because any amount above that amounts to an increase in wages, not mere compensation for cost‑of‑living rise. It also ruled that depreciation claimed by the factories could not be used to diminish the industry’s financial capacity for wage fixation, as depreciation is a capital expense, not a wage‑bearing cost. The Court affirmed the increase in graduated dearness allowance from Rs. 21 to Rs. 40 and the retention allowance of 10% for seasonal workers, finding the industry capable of bearing these costs. The award granting more than 100% neutralisation was set aside, while the rest of the award was confirmed.

Issues considered

The permissibility of granting variable dearness allowance at 125% neutralisation.
Whether depreciation should be taken into account when assessing the financial capacity of an industry for wage fixation.
Whether the U.P. pattern of wages and dearness allowance can be applied to Gujarat cooperative sugar factories.
Whether the High Court erred in quashing the Industrial Court's award and passing a new award.

Legislation cited

Gujarat Cooperative Societies Act, 1961s. 66(1)
U.P. Industrial Disputes Act, 1947s. 3(b), s. 3(d)

Subjects

dearness allowanceneutralisationvariable dearness allowancedepreciationfinancial capacityindustrial adjudicationwage fixationretention allowancesugar industrycooperative societiesphasingU.P. pattern

Judgment

509

MANAGEMENT OF SHRI CHALTHAN VIBHAG ~HAN A .
UDYOG SAHAKA"RI MANDALI LTD. ETC.
~.

B. S. BAROT MEMBER, INDUSTRIAL COURT, GUJARAT,
AND ANR. ETC.
September 4, 1979 B

[S. MURTAZA FAZAL ALI, P. S. KAILASAM AND A. P. SEN, JJ.]
LAbour law-Dearnes.s allowance to workers-Its nature-If could be
given at 125% of incroose in the. cost of living-Depreciation, if should be a
fir!t charg~ in arriving at .the capacity of the industry to pay wages.
c
The respondent workmen who were employees of Sugar mills in the State of
Gujarat demanded grant of dearness allowance, among certain other benefits,
<Jn the basis of revised scales for sugar factories in Uttar Pradesh. The Indus-
trial Court, Gujarat increased the dearness allowance on a graded scale spread
over three years.

On appeal the High Court set aside the award by the Industrial Court in D
respect of phasing but confirmed the award in regard' to dearness allowance
and directed that the U.P. pattern should be given full effect with retrospective
.effect from the date mentioned i~ the award.

The employers questioned the correctness of the High Court's judgment on
the ground that (1) grant of neutralization of variable dearness allowance at
125% is far in excess of what is permissible under the industrial Jaw and (2) E
. the High Court failed to take into account depreciation in arriving at the
financial capacity of the industries while fixing the wage structure.

IHELD : 1. (a) Variable dearnessc allowance cannot be more than 100%
neutralization. [5170]

(b) The purpose of dearness allowance is to neutralise a portion of the
increase in the cost of living due· to rise in prices. Neut~alization may be F
such as to neutralize fully the increase in the cost of living or may be restricted
to only a portion of the increase. Cent percent neutralization can be achieved
if the increase in the cost of living is fully compensated so that the pay of the
·workers is not adversely affected. But an award of more than 100% of· increase
in the cost of living would be more than neutralization and would in effect
-give the worker an increased wage. The result would be that · the worker
would be getting an increased wage packet whenever there is a price rise, a G
result which would not have been envisaged in making provision for grant of
dearness allowance. '[5160-GJ ·

Clerks of Calcutta Tramways v. Calcutta Tramways Co. Ltd., [1956] S.C.R.
'772, Ka,mani Metals and Alloys Ltd. v. Their Workmen [1967] 2 S.C.R. 463,
fJengal Chemical and Pharmaceutical Work, Ltd. v. ltl Workmen, A.I.R.
1969 S.C. 360, Silk & Art Silk Mills Association1 Ltd. v. Mill Mazdoor Sabha, • H
[1973] 1 S.C.R. 277 and Killick Ni'xon Ltd. v. Killick & Allied Companies
Employees Union, [1'975] Supp. S.C.R. 453; followed,
14-531SCI/79
510 SUPREM;E COURT REPORTS [1980] 1 s.c.tt.

A (c) It is not correct to say that neutralization of more than 100%. dearnw
allowance is based on the seasonal nature of employment in the industry. The
retention allowance provided to seasonal workers in sugar industry is 1<>
mitigate the hardship of unemployment during the off season. [517A-B}

2. (a) Section 66(1) of the Gujarat Cooperative Societies Act lll61
requires .t hat taxes and depreciation should be deducted from gross profits for

• arriving 'at net profit. -That does not mean that wages and dearness allowance
could only be determined after the net profits are arrived at. The sub-sectioa
itself provides that contributions. towards provident fund and gratuity even of
its employees should all'be deducted from the gross profits for arriving at the
net profits. The provisibn for deducting depreciation occurs after providing
• for contn"bution towards provident fund and gratuity. The determination of
the net profits under the section is for different purpose, namely, for appro~
c prlation of the net profit as provided for in the Act and does not in any way
support too contention of the appell!tnt. [518E-F1

(b) It is settled law that in fixing fatr wages or dearileliS allowance or for
making contribution to provident fund or providing for gratuity the financial
capacity of the industry to bea'r the additional burden will have to be takea
into account On principle of social justice with the development of industrial
D law it bas now been accepted that when the industry can bear the burden, pro-
vision should be made for provident fund and gratuity schemes. In determin-
ing the financial capacity of an industry all relevant facts will have to be taken
into account. The principles followed in arriving at . the profit and loss
account for income-tax and other purposes may. not be conclusive. The claim
of the employer to a reasonable profit, that of the shareholders for a fair divi-
E dend the interest of consumer and other re~vant factors and circumstances will
have to be taken into account. It is necessary to take into account all the
facts and circumstances relating to the industry for determining the financiPl
capacity of the industry to pay. [519D-Gl

.A.hmedizbad Mill! Owneri Auociation etc. v, The Textile Labour .A.ssocill~
lion, [1966] 1 S.C.R 382, Gramophone Company Ltd. v. lt! Workmen, [1964] z
LL.J. 131, Indian Link Chain Manufacturers Ud. v. Their Workmen, [1972] 1
F S.C.R. 790 and Bharatkhand Textile Mfg. Co. Ltd. and Ors. v. The Textile Lab011r
Association, Ahmedabad, [1960] 3 S.C.R. 329; followed.

(c) The facts that have to be taken into account in determining an overall
picture of the financial capacity are the financial condition of the employer his
profit making capacity, the profits earned by him in the past. extent of the
reserves and the chiances of his replenishing them as welt' as the claim for capital
G invested by him. [521F-G]

Hindustan Antibiotics Ltd. v. The Workmen and Ors., [1961}1 S.C.R. 652.
referred to. ·
(d) An employer claiming depreciation allowance is only entitled to ~e 1
• actoal or probable depreciation of the machinery etc. for the period ·due to
D wear and tear. '!"he depr'eciation Cannot be computed on an acturial basis or
on the ·profit and loss account i'urnisbed by the company. In the instant ca~e~,
the accotintin& was for the PUI'pOie of min.i.mising· the profits to deprive the
CHALTHAN VIBHAG v. INDUSTRIAL COURT (Kailasam, J.) 511
-
workers their due. Such depreciation cannot be allowed. If the inflated
figures are left out of account the industy has/ the capacity to bear the additional
burden. [524A-B, E].

(e) Even though the wage! were fixed on industry-cum-region basis it is
open to industry to plead that it has not the financial capacity to bear the
increased burden. When such a plea is specifically raised, it is the duty of the
industrial court to determine whether the increased bnrd~n could be borne by B
the particular industry. [525 F-G]

· CiyiL ApPELLATE JURISDICTION: Civil Appeal No. 146/78.
Appeal by Special Leave from the Award dated 22-2-77 of the .
Industrial Court, Gujarat in Ref. lC. No. 53/75.
c
.4.ND
CIVIL APPEAL NOS. 322-324 OF 1979.
Appeals.by special leave from the Order dated 18-10-1978 of the
Gujarat High Court in SCA No. 1036/77.
AND
SPECIAL LEAVE PETITION (CIVIL) NO. 2939/79.
From the Judgment and Order dated 30-1-1979 of the Gujarat
High Co~rt in SCA No. 311/78.
Dr. Anand Prakash, Lwcmi Anand Prakash, A run B. Desai and E
H. K. Puri for the Appellant in CA 146/78 and 323/79.
F. S. Nariman, H. K. Puri, Anm B. Desai and Mrs. Laxmi Anand
for the Appellants'in CA 322/79. ·
A. K. Sen, Arm~ B, pes(li, V. K. Behl, H. K. Puri and Mrs. Laxmi
Anand for the Appellant in CA 324/79. F
M. K. Ramamurthy and, Promod~ Swarup for the Respondents in
C.A. 146/78 and C.A. 322/79.
S. S. Khanduja and Miss Kusum Chowdhry for the Respondent in
GA. 146/78 and 323-324/79 ..
G
J. G. Shah (CA 322) M. K. Ramamurthi (SLP. 2939 and' CA
~22) and A. K. Srjvastava and Vineet Kumar for the Respondents
in C.A. 322 and for the Petitioner in -5LP. 2939/79.
The Judgment of the Court was delivered by
l
KAILASAM, J .. AJl. these appeals and special leave petition are by n
t~e management of five cooperative sugar factories in Gujarat State .
. The demand of the workmen of the factories in Gujarat was for pay-;

.[

', .. ·.'
.' ~; . - 4

512 SUPREME COURT REPORTS {1980] 1 S.C.R,

/· A ment of the U.P. Government 1-evised scales for sugar factories in U.P.
regarding pay, dearness allowance and other benefits.

The second Wage Board for the sugar industry gave its report in
1970. The Wage Board's report was due to expire on 31st October,
1974. The Government of U.P: on 31st October, 1974, issued the
B U .P. Pattern Scales of Wages and Dearness Allowance for workmen
employed in all sugar. factories working by vacuum Pan Manufacturing
. Process. The Labour Minister gave the award and as a result of that
award, an order was passed under section 3 sub-clause (b) of the
U.P. Industrial Disputes Act, 1947. This order relating to U.P.
Pattern of Pay, Graduated Dearness Allowance, Variable Dearness
~ Allowance came into force from 31st October, 1974 and effect was to
be given to these pay-scales and dearness allowance from 1st October,
1974. As the sugar factories were seasonal factories a retention
. anowance for unskilled seasonal workmen for off-season at the rate of
10% of the basic wage and dearness allowance payable during the
crushing year 1974-75 was also provided for. The demand put for-
D ward by the workmen in all these appeals is for p~yment according to
· the U .P. Pattern.

The Industrial Court, Gujarat, -increased the graduated dearness
allowance of the unskilled employees from Rs. 21 to Rs. 40. But this
increase was not given at one stage but was spread ' over in three
stages, the first stage being from 1st July, 1976 to 30th June, 1977~
the second stage being from 1st July, 1977 tp 30th June, 1978 and the
third stage being from 1st July, 1978 to 30thJune, 1979 and onwards.
The increased graduated dearness allowance for the first period would
be Rs.. 32 per month; for the second period Rs. 36 per month and for
the third period Rs. 40 per month. The existing basic wage for the
unskilled employee is Rs. 110. The variable dearness allowance of
Rs. 151 per month is being paid and the Court found that there was
no dispute as raised in demand No. 2(c). Regarding variable dearness
allowance demand Nos. 3, 4 and .5 the Court revised the rates from
83 paise per point on the rise over 301 points of All India Average
G Consumer Price Index Number for Industrial Workers (Base
1960=100) at Re. 1.00 per point for skilled B operatives and for .
clerks drawing upto Rs. 150 per month as aske'd for in demand 5 (i)
(b) and from Re. 0.95 toRe~ 1.12 for All India Aver.age Consumer
Price Index for other employees as per demand No. 5(i)(d). This
increase was also spread over for a 'period of three years i.e. 7 paise
8 for the first period from 1st July, 1976 to 30th June, 1977; 5 paise for
the second period from 1st July, 1977 to 30th June, 1978; and 5 paise
1for the third period f,rom ; 1st July, 1978 to 30th June, 1979 and
CHALTHAN VffiHAG V. INDUSTRIAL COURT (Kailasam, J.) 513

onwards. Regarding demand No. 7 relating to retaining allowance to
A:
be paid to the unskilled seasonal employees at the rate of ·10 per cent
of the basic wage and dearness allowance payable during the crushing
season 1974-75 and for subsequent years, the Court found that the
demand was justified. The Court gave a retention allowance of 10%,
as demanded, of the basic wage and dearness allowance payable
B
during the crushing season 1974-75 and also for the three subsequent
years.

On appeal the High Court passed an order on 18th October, 1978
as follows stating that reasons will be given later.
"(1) The impugned award is hereby quashe~ and set aside. C
(2) There is no justification for the phasing awarded by
the Industrial Court and hence, the phasing is quashed
. and set aside.
(3) X X X

(4) X X X X

( 5) The respective cooperative sugar societies will pay
the costs of the other side. Costs quantified at
Rs. 300/- in each matter. .RuJe is made absolute
accordingly/in Special Civil Applications Nos. 1136
of 1977, 1148 of 1977, 602 of 1978 and 311 of E
1978, Special Civil Applications Nos. 1036 of 1977 .
and 1505 of 1977 are dismissed."

By this order the Court quashed the award and set it aside. It also
found that there was no justification for phasing as awarded by the
Industrbl Court and therefore quashed it and set it aside. It con-
firmed with retrospective effect the award as given by the Industrial
Court. The High Court also directed that U.P. Pattern will be given
j_ full effect with retrospective effect from the da~e mentioned in the
award. The reasons were given by the High Court by its judgment
dated 30th January, 1979.
G
The judgment of the High Court is ·assaile<;l on the following
grounds:-
1. The grant of neutralisation of variable dearness
allowance at 125% is far in excess of what is permis-
sible under the industrial law.
H-
2. The High Court erred in not taking' into account
depreciation of the sugar factories in arriving at the
514 SUPREME COURT I.EPORTS [1980] l S.C.R.

A
financial capacity of the industry for the purpose of·.
fixing the wage structure. In any event, it was sub-
mitted that as the administration of the sughr factories
is governed by thel Gujarat Cooperative SOcieties Act.
1961, those provisions will have to be followed in .

• arriving at the net profits ·and for determining the
financial capacity of the facto~es to pay.

3. It was submitted that the Industrial Court and the Hisk
Court erred in following the U.P. Pattern on the ground
that it has been accepted by ·the· other States in the
c South zone without taking into account the relevant
circumstances relating to individual factories. ··

4. Lastly it was contended that the High Court after
quashing the impugned award and setting it aside
erred in passing a new award.
D
We ignore the last &Iound as we feel it is purely technical. Though
the Higll Court may not be right in stating that it quashed and set a8ide
the a~ard, the intention is clear from the subsequent clauses of the
award. We will now proceed to deal with the other three objections.

11 is strongly urged on behalf of the appellants tb~t the High Cowt
and the. Tribunal were in error in allowing neutralisation of variable
dea~ess allowance of 125% which is beyond the permissible limits of
the industrial law. -

It is common ground that 100% neutralisation would be achieved
I' by granting an increase of 83 paise for rise in one point in the cost of
living index. By granting an increase of o~ rupee for increase of
one point the neutralisation is by 125%. Dearness Allowance .was ·
primarily intended as a protection of persons whose salaries are at the
subsistence level to protect them against the adverse effects of the rise
G in prices. ~e Commission on Dearness Allowance in May, 1967
stated that historically dearness allowance was regarded as applicable
to lhose employees whose salaries are at the subsistence level or at a
little: above in order to enable them to face the increase in dearness of
essential commodities. The National CQmtnission on Labour, 1969,
observed that unless money wages rise as fast as consumer prices it
B will result in an erosion of .real wages. But the extent of its impact
" will depend on the :maigin of erosion available at different levels of
income. The Commission . recommended that 95% neutralisation

_....._, ;.. :_
. .: ':; :- :

CHALTHAN VIBHAG V, INDUSTRIAL COURT (Kailasam, ],) 5'15

A
shoulEl be ~anted agai'nst rise in cost of living to those drawing minimum
wage in non-scheduled employments.
In a series of decisions, this Court has expressed the same view. It
has been held that cent per cent neutralisation cannot be allowed as
it would lead to a vicious tircle and add to the Urllationary spiral. It
was observed that there was no reason why the industrial worker should B
not make sacrifices like all other citizens. In Clerks oj Calcutta Tram-
ways v. Calcutta Tramways Co. LtdC) this Court said "We can now
take it as settled that in matters of the .grant of dearness allowance ex-
cept to the very lowest cla.ss of manual labourers whose income is just
sufficien,t to keep boqy and soul together, it is impolitic and unwise to.
. neutralise the entire rise i'n the. cost of living by dearness allowance.
c
More so in the ca.se of the middle classas". The .same view was ex-
._ pressed in the Hindustan Motors'(2) case and was reaffirmed in Hindus-
tan Times Ltd. New Delhi v. Their Workmen,(3) wh~re it was ob-
served that the whole purpose of dearness allowance being to neutralise
a portion of the increase in the cost of living it should ordinarily be o'n D
a sliding scale and provide for an increase on rise in the cost of living
and a decrease on a fall in the cost of living. In Kamani Metals and
Alloys Ltd. v. The,ir Workmen,(4-) it was held that 100% neutralisa-
tion is not advisable as it will lead to inflation and therefore dearness
allowance is often a little less than one-hundred per cent neutralisation.
In Silk & Art Silk Mills Association Ltd. v. Mill Mazdoor Sabha(') E
it was laid down that i'n considering a claim for dearness allowance or
revision of dearness allowance amongst other factors it should be borne
in mind (1) Full neutralisation is not normally given, except to the
very lowest class of employees; (2) The purpose of dearness allowance
being to neutralise a portion of the increase in the cost of living,* should
ordinarily .be on a sliding scale and provide for an increase on the F
rise in the cost of livin'g and a decrease on a fall in the cost of living.
In Silk·& Art Silk Mills Association Ltd. v. Mill Mazdoor Sabha(~)
a grant by the Industrial Tribunal of 99% neutralisation of increase In
the cost of living was confirmed as the workmen cannot be denied their
subsistence wage at its real level because some other comparable con~
G
cern is paying at a lower rate. In Killick Nixon Ltd. v. Killick. &

(1) [1956) S.C.R. 772.
(2) 1962-II L.L.J, 352 (SC>:
(3) [1964]1 s.c:R.234.
(4) [1967] 2 S.C.R. 463.
(5) A.J.R. 1969 S.C. 36(),
*Emphasis Supplied
(6) [1973] l S.C.R. 277.
.~

516 SUPREME COURT REPORTS [1980] 1 S.C.R.

A AUied Companies Employees Union( 1) this Court after approvii!g the
propositions laid down in Bengal Chemical case (supra) proceeded to
state at p. 467 : "There is, however, one thing which we must point out
lest there should be some misqonception about it and that is that s.o
.,
far as the lowest paid emplo~s at or just above the subsistence level
are concerned, they .are_ entitled to 100% or at any rate not less than
•• 95% neutralisation of the rise in the cost of living and hence there
should be no ceiling on dearness allowance payable to employees within
the slab of first Rs. 100, unless it can be shown by the. management
that the rate of neutralisation in their case is more than .100 per cent.
Th~ decision is authority for the proposition that the rate of neutralisa·
c tion cannot be more th~n 100% even in the case of lowest paid empla.
y~s. The proposition laid down in the decision cited above were reiter-
ated and followed in Shivraj Fine Art Litho Works v. State Industrial
Court, Nagpur & Ors.(')

The law is thus clear that dearness allowance is intended to neut-
D ralise a, portion of the increase in the cOst of living. Though 100%
neutralisation is not advisable as it will lead to inflation, full neutralisa·
tion may be permissible only in the case of theJ lowest class of employees.
The management is entitled to complain if the n~utralisation is more ·
than 100%-.

E The purpose of grant of dearness allowance is to neutralise the
increase in the cost of living due to rise in prices. Neutralisation may
be such as to neutralise fully the increase in cost of living or may be
restricted to neutralise only a portion of the increase. Full or cent
per cent neutralisation ca'n be achieved if the increase in the cost of
living is fully compensated so that the pay of the worker is not adversely
F affected. But ail award of more than 100% of an increase in the
cost of living would be more than neutralisation and would in effect ·
gives the· worker an increased wage. The result would be the worker
•
would be getting an increased wage packet whenever there is a prire
rise a result which would not have been envisaged in making provision
· for grant of dearness allowance.

Mr. M. K. Ramamurthi learned counsel for the respondents submit·
ted that the permissible limit of 100% neutralisation is not applicable
to cases where persons are seasonally employed. The learned counSel
pointed out that the sugar industry does not function for the whole year
and for months it is closed and the workers are left without employ-
( B ment during the off..,season. In order to give some relief to such sea~
(l) [1975] Supp. S.C.R. 453.
(2) . [19781 3 S.C.R. 411.

~: :J
.,
'~- ~- :~: .

•
CHALTHAN VIBHAG V. INDUSTRIAL COURT (Kaifasam, J.) 517

sonal workers he submitted, that the award of ~qualisation of more A.
than 100% is ·justified. TI).is plea ca1,1not be accepted for the award
of equalisation of more than 100% in these cases is not based on sea-
sonal employment. To mitigate the hardship of u'nemployment during
the off-season a retention allowance bas been provid·~d for the seasonal
workers. The plea that the neutralisation of more than 100% is based
B
on seasonal employment was not taken_ in the pleadings or raised be-
fore the courts below.
Demand No. 7 relates to claim for payment of retaining allowance
for the uf!sk.illed seasonal employees in the off-season at 'the rate of
10% of their basic wage and dearness allowance payable during the
crushing season 1974-75. The Industrial Court as regards demand c
No. 7 directed that the unskin~d seasonal employees be paid retaining
allowance for the season 1975 at the rate of 10% of the basic wag~ atid
dearness allowance payable during the crushing season 1974-75. The
claim regarding the variabl·~ dearness allowance is demand No. 2( c)
and 5 ( 1) (a) (b) . There is no reference: in the proceedings before the
D.
Industrial Court or the High Court that the variable <;earness allowance
of more thap 100% equalisation was awarded due to' the seasonal
employment of the workers. In the result we accept the contention of
the appellants tha.t variable dearness allowance cannot be more than
100% neutralisation.

The second ~ontention raised on ~half of the appellant~ is that i'n E.
fixing fair wages and dearness allowance financial capacity of the co- ../'
operative societies should be arrived after taking into account the depre-
ciation. Mr. Nariman th~ learned counsel submitted tliat i'n orderto
.keep an industry running it is necessary to make provision for depreci-
..._ ation as otherwise when the machinery gets worn out the industry would F
grind to a halt. The learned counsel submitted that though there are
certain observations by this Court in Unichemi,Laboratories Ltd. v. The

••
f
WorkmenC), and Indian Link Chain Manufacturers Ltd. v. Work-
men, C) that depreciation could not be taken into account in fixing the
gross profits, they do not ruk out ta1cing into account the depreciation
in all cases in determining the financial capacity of the Industry to bear , G
the increased burden.

~
Before considering the decisions which bear on the question w~
will refer to the plea of the appellants that financial capacity of sugar ·
~' industry functioning under the Cooperative Societi·~s Act should only
,, be deci,dcd according to the provisions of s. 66 of the Gujarat Co-

m [1972] 3 S.C.R. 567.
(2) [1972] 1 S.C.R. 790.
I •

s1s
. ..
SUPREME COURT REPORTS [1980] 1 S.C.R.

A operativ<> Societies Act, 1961, Act X of 1962. Seetion 66(1) runs as .. ~·
follows :-
"A society earning profit, shall calculate its annual net
profits by deducting from the gross profits for the year, all
accrued interest· which is overdue for more than six months,
B establishment charges, contributions, if any, towards the pro-
vident-fund and gratuity fund of its emplo~s, interest pay-
able on loan and deposits, audit fees, working expe'nses includ-
ing repairs, rents, taxes and depreciation, and after providing
for or writing off bad debts and loss.;:s not adjusted against
any fund created out of profits. A society may, however,
c add to the net profits for the year, interest accrued in lhe pre~
cedi'ng years, but actually recoveree during the yeat The ,•':
,.
net profits thus arrived at, together with the amount of profits
~rought forward from the previous year shall be available for
appropriation."

D Relying .on the provisions of the section which requires that taxes
and depreciation should be deducted from gross profits for arriving at
net profits, it was submitted that in determining the financial capacity

,
of the industry the 'net profits as prescribed in the section would have
to be determined. We do not read the section as meaning that wages
and dearness allowance could only be determined after the net profits
E are arrived at The sub-section itself provides that eontributions to-
wards provident fund and gratuity fund of its employees should all be
deducted from the gross profits for arriving at the net profits. The provi- -::-
sion for de<.lucting depreciation occurs after providing for contribution
towards provident fund and gratuity. The determination of the net
profits under the section is for a different purpose, namely for appro-
F priation of the net profits as provided for in the· Act a'nd does not irr

..
ff
any way support'the contention of the appellants.
In deciding the financial capacity of an industry this Court has laid
down in Ahmedabad Mills Owners' Association etc. v. The Textile
Labour Association,C) that "It1Pustrial adjudication must take into ac-
G count the problem of additional burden which such wage structure
would impose upon the employer and consider whether the employer 'It

can reasonably be called upon to bear sqcb burden. . ... It is a
long-range plan and i'n dealing with the problem, which is difficult and
delicate the financial position of the employer and! the future prospects
• ..
of the industry and the additional burden which may be imposed on the -~ ·
H consumer must be carefully examined." This Court after referring
to the Reserve Bank Bulletin about the fina'ncial position of the industry
(1) [1966] 1 S.C.R. 382
CHALTHAN VIBHAG V. INDUSTRIAL COURT (Kailasam, J.) 519

and about cotton textile industry and other. authorities on determining A
the financial capacity of an industry observed that "industrial adjudica-
tion cannot lean too heavily o'n such single-purpose statements or adopt
any one of the tests evolved from such statements, whilst it is attempt-
ing the task of deciding the financial capacity of the empLoyer in context
of the wage problem." The financial capacity of the industry will have . B
to be decided in the context of th~ wage problems and the methods
adopted i'n determining financl.ai capacity of the industry for other
purposes need not be followed. While examining the financial capa-
city in detail we must ultimately base our decision on a broad view which
emerges from a consideration of all relevant factors, such as financial
position of the employer, the interests of the consumer etc. c
The wages due to a worlo~r are in the nature of expenses just like
payment for raw materials. In this sense the wages are expenses
which have to be met whether the company works, malres a profit or
not. So far as the rni'nimurn wages due to a worker. are concerned,
the law requires that they should be paid first and if the industry cannot D
pay them it mly as well clooe. The payfl!ent of dearness allowance
as prescribed under the Minimum Wage<t Act should also be provided
for in any event. It is settled law that in fixing fair wages m dearness
allowance or for making contribution to provident fund or providing for
gi:atuity the financial capacity of the industry to bear the additional
burden will have to be take·n· into account. On principle of social E
justice with the development of industrial law it has now been accepted
that when the industry can h~ar the burden provision should be made
for provident fund and gratuity scheme. In determining the financial
capacity of an industry all relevant facts will have to be taken into ac"
count. The principles followed in ·arriving at the profit and loss ac-
p
count for income-tax and other purposes may not be conclusive. The
claim of the employer to a reasonable profit, that of the shareholders
for a fair dividend and the interest of consumer and other relevant
factors and circumstances will have to be taken into account. It is
necessary to take into account all the facts and circumstances relating
., to the industry for determining the financial capacity of the industry to
pay. . G

We will now proceed to refer in detail to the thr=e decisions of this
Court which are relied on as authority for the proposition that depreci-
ation should 'not be taken' into account in fixing the wage s:tructure. In
Gr'amophone Company Ltd. v. Its Workmen(!) this Court had to
(I) [1964] (2) L.L.J. 131.
520 SUPREME COURT REPORTS [1980] 1 s.c.R, . j

~-
examine the financial capacity of the employer for determining whether . : ( •',, .i
A
the industry could bear the burden of a gratuity scheme. The court
.
.
'
'

found on examination of the financial position of the company that the
profits that were made by the company were Rs. 7.6lakhs in 1956-57,
Rs. 7.2 lakhs in 1957-58, Rs. 1.6lakhs in 1958-59, Rs. 1.491akhs in
1959-60 and Rs. 6.04 lakhs in 1960-61. On behalf of the company
B it was submitted that the introduction of the gratuity scheme would
throw a great burden on the industry involving an initial fund of Rs. 33-
or 34 lakhs and that.if provision is made for income-tax payable · and
development rebate it will be seen that the company is running at a
loss. The Court found that the financial position of the industry showed
that the burden of payment of gratuity and provident fund can be made
c without undue strain on the financial position of the employer. The
court observed that the introduction of a gratuity scheme will not re-
quire an initial fund of Rs. 33 or 34lakhs but otily involve an additional
burden of Rs. 1.5 lakhs at the most. Though the introduction of the ·
gratuity scheme may involve an expenditure of Rs. 1.50 lakhs a year
,..._ D the actual burd,en will be Rs. 60,000 as ther~ will be a reduction of the
income-tax payable by about 63%. Regarding the plea of the com-
pany that if the amounts due to income-tax and development rebate
are taken out, it would show that the company bas suffered a loss, the
Court observed that the provisions for income-tax and reserv~ must
take a second place as compared to provisions for a wage structure. In
E declining to accept the contention ·that provision for taxation and re-
serves should have precedence, the Court proceeded to base its deci-
sion on the findip.g that the financial capacity of the industry was such . r.

that it could bear the . burden. This Court held that if the industry
is in a stable condition and the burden of provident fund and gratuity
does not result in loss to the employer that burden will hav:e to be borne
by the employer like the burden of wage-structure in the interest of
social justice. ·
....
The statement that provision for income-tax and development rebate
taking only a second place may not be understood as holding that they
G should on no account be taken into consideration or that a wage increase
would be permissible if it would result in reduction of income-tax.. l'be
,.
decision is based on the finding that the company is in a position to
bear the burden and the observations were incidental and made on the ... '

factsof the case. . It may be no~~d that there is no reference about tak-
ing into account of depreciation allowance. The judgment should be
understood as negativing the plea th,at the income-tax and development
rebate should be taken into account to the extent of showing that the
industry is runnihg at a loss.
;·• ,
.CHALTHAN VIBHAG v. INDUSTRIAL COURT (Kbilasam, J.) 521
A'
The second decision is Indian Link Chain Manufacturers Ltd. v.
Their Workmen. e)
The question arose whether in the matter of deter-
mining surplus the Tribunal was justified in taking the figures of depre-
datioh allowance and development rebate from the balance sheet and
not from the income--tax assessment orders in which the figures were
higher and whether for determining the ret~m on reserves the figures · B
at the end of the year or the beginning of the year had to be taken. It
was held by this Court thatthere was no justification for the rejection
«>f the company's claim for depreciation and development rebate and
the same be allowed as p:;r income-tax assessment The Court allow-
ed depreciation allowance and development rebate. In determining
the financial position of the company the court obsefVt:;d that it would c
not be appropriate to approach its capacity to bear the burden from
. -;3D investors point of view. The over-all picture of the soundness of
the undertaking and its future prospects must be taken into account.*
The Court adopted the principles laid down in the Bharatkha.nd Textile
Mfg. Co. Ltd. & Ors. v. The Textile Labour Association, Ahmeda-
fJad(") which are as follows:- D
"It is not disputed that the benefit of gratuity is in the
nature of retiral benefit ahd there can be no doubt that before
framing a scheme for gratuity industrial adjudication has to
take into a~ount several relevant facts; the fina.'1Cial condition
oj the employer, his profit making capacity, the p;o{it3 earned E
by him in the past, the extent of his reserves and the chances
of his replenishing them as well as the claim for capital in-
vested by him, these aYul other malfrial considerations may
have to be borne in mind in determining the terms of the
gratuity scheme." (Emphasis supplied).
Thus the facts that have to be taken into account in determining an FJ
overall picture of. the financial capacity are the financial condition of
tbe employer his profit making capaCity the profits earned by him in
·the past, the extent of his reserves and the chances of his replenishing
'them as well as the claim for capital invested by him. After referring
to the dec1sion in the Hindustan Antibiotics Ltd. v. The Workmen &:
G
Ors., ( 8) at p. 809 the Court made the following observations : -
"It is pertinent to notice that gratuity and wages in indus-
trial adjudication are plac'ed on the same footing and have
priority over Income-tax and other reserves, as such in consi-
(1) [1972] I S.C.R. 790.
"'(Emphasis supplied) H
(2) [1960] 3 S.C.R. 329.
(3) [1967] 1 S.C.R. 652.
/

:~ :
522 SUPREME COURT REPORTS {1980] 1 S.C.R.

A dering the financial soudness of a'n undertaking for the pur-
poses of. introduction of a gratuity scheme the profits that
must be taken into account are those .comp1:1ted prior to the
·-
deduction_of depreciation and other reserves."
As already pointed out in Gramophone Company's case there is no
B reference to deduction of depreciation. In the case under considera-
tion i.e. Indz'an Lin~ Chain Ltd., the Court at p. 807 allowed the
claim of the company for a deduction on accoun,t of depreciation and
development rebate at Rs. 1,61,054 and Rs. 5,822 instead of
Rs. 80,190 and Rs. 3,970. On the facts of the case it is found that
the industry was in a position to bear the burden.
c
In Unichem Laboratories Ltd. v. The Workmen(') it was found
that the average gross profits of the company exceeded Rs. 40 lakhs
and the additional financ;;ial burden by the revision of the wage struc-
ture was 1b. 5.55 lakhs. On the facts the court held that the Tribu-
nal was justified i.il computing gross profits without deducting tax, de-
D preciation and development rebate. The court accepted the plea oa
behalf of lb-e company that the decision in Gramophone Company Ltd.
had no occasion to consider who~ther: depreciation reserve ean be deduc-
ted or not.
Scr_utinising the figures given at p. 581 of the Reports the Court
E .found that the average net profit worked out toRs. 13,84,691.00. The
depreciation that was claimed was Rs. 5,44,918 for 1965-66, Rs.
5,55,035 lor 1966-67, Rs. 7,84,824 for 1967-68, Rs. 11,11,775 for
1968-69 and Rs. 9,16,719 for 1969-70. On the facts the Court found
that the company had the financial capacity. The inclusion or exclu-
sion o~ the depreciation allowance would not have made any difference
~F to the capacity of the industry to bear the additional burden. The
decisio'n may not be understood as laying d9wn a principle of law that
iti no case the depreciation could be taken into account.
It may be remembered that in Bharatkhand Textile Mfg. Co. Ltd.-
(s-upra) the guidelines that were indicated were that in determining the
G capacity to pay by the industry the financial condition of the employer,
his profit making capacity, the profits earned by him in the past, the
extent of his reserves and the. chances of his replenishing them as well as
the claim for capital invested by him*. these and other material consi-
deration'S may have to be borne in mind. Thus the extent of the re-
serves the chances of replenishing them as well as the claim for capital .
H
(1) [19721 3 s.c.R. 567. '
•(Emphasis supplied)
cl!ALTHAN VIBHAG V. TNDUSTRfAL COURT (Kai/asam, f.) SZJ

invested by him and as observed in Ahmedab~d i\.1illowners' Associa-
tion v. Textile Workers,(') will have to be taken into account. The
position of the industry shoul~ be ex~ned in detnit and the decision
should be based on a ~road VIew which emerges from a consideration
of all relevant factors such as whether the employcr can reasonably be
called upon to bear the burden and wlwther the additional burden im-
posed on the consumer is justified wo~ld also have to be carefully exa-
mined. As pointed out in the Ahmedabad Millowners Association
cac;e (supra) "It is a long-range plan and in dealing with the problem,
which is difficult and ddicatc the financial position of the employer and
~· the future prospects of the indu~try and the additional burden which
may be imposed on the consumer must be carcfuay examined." c
It may be that for prudent management of an industry it will be
d-esirable to take into account to some extent the depreciation of the.
machinery for otherwise aft~r lapse o[ years the machinery may get
worn out and without provision for replacement the industry itself will
come to a stop. Whether provision for such depreciation should be made D
and if so to what extent wi!l depend upon the facts of the case. Depre-
ciation allowance to the extent of mak.i'ng out a loss need not be accept-
ed btlt reasonable provision should be made. The three decisions of
this Court referred to were giv~n on the particular facts of the case
·and may not be unJcrstootl as laying down that under no circull15tanccs
E
deduction for depreciation, reserves etc. cou!J be made. It is of utmost
importance that t~ industry must be kept going as long as it could pay
the minimum wages.· It may sometimes be necessary for the worker!
to make some sacrifice to keep the induo;try going. It is not wise to .i
kil! the ~oo5e that lays the golden eggs. The c:~paci ty of the industry l
to beur the burden will have to be taken into account in determining F
" . whether provision couiJ be nwd1.1 for .fixing a wage struct\Ire including .
provision for contribution to provident fund, gmtuity etc. In d.:t>~rmi?
tng the Cap~Icity of the industry to bear the burden all relcv:mt facts Wlll
have to be taken into account and actual state of atTain> d.:tcnnincd.
~c proced\11";! adopted by the industry to ddcrmine the financial capa-
City for o1h~r purposes may not be rekvant. It cnnnot be taken as a G
hard ti'nd fast rule th:~t provision for depreciation, provision f?r develop-
ment rebate, tax liabilities should nc\-::r be allowed. While the pre-
servation of the industry is paramount the attempts of the management
1? show that the company is running at a loss by boosting the dcprecia-
t~IJn allowanc~ etc. should not be permitted. In short the real capa-

---·
City of the industry to bear the extra burdcn will have to be dcte~ined.

(I) (l%5} t•S.C.R. 382.
ll
.,J
SUPREME COURT REPORTS
524 l1980]I s.c.R.

A An employer claiming depreciation allow~nce is only cntitt·~d to
the actual or probable depreciation of the m~c~mery, tools etc. for the
period due to wear and tear. The d•::precJatJon cannot be compirted
on any. notional basis or o'n the profit and loss account furnished by
the company. In the cases before use the mana~ement has claimed
. B
by way of depreciation the cost of purchase of m~chinery for e~pansion
of the manufacturing plant. In the matter relatmg to Chalthan Sugar ..j
Mill:; in the profit and loss account for the year ending June 30, 197S
Rs. 1,07,56,523 is claimed by way of depreciation at the end of the
year. The balan~ brought forward on this account from the pn.·vious
year is Rs. 79,11,066. During the year, an amount of Rs. 28,45,457
is added. In the profit and loss account for the year ending June 30,
c 1976 the depreciation fund increased from Rs. 1,07,56,523
toRs. 1,30,24,742. In the profit and loss account for the year ending"
June 30, 1977 an amount of Rs. 22,97,553 is added to the dcprcci;~
tion fund. The figures furnished by the other sugar factories follow
;..
the same pattern. During the course of argum~nts the appellants ad-
0 mitted that the amount shown as depreciation actually represented th~
cost of purchase of new machinery and balance for expansion of the
manufacturing units. These amounts relate to expansion of the indus-
try and should be fihown in the capital account and cannot be claimed
as deduction due to depreciation. Tho.! accounting of the sugar fac-
tories concerned is for the purpose of minimising the profits and show-
E ing loss for the purpose of depriving the workers their due. Such de-
preciation cannot be allowed. But as pointed out by us the actual
depreciation which should be deducted in the interest of the industry
can 9e taken into account. In the 'case~ before us if the inflated figures \.
should be left out of account we feel that the · industry has the capacity ., ..J.-
to bear the additional burden. ·
The High Court after referring to the decisions of this Court in
Gramophone Co. and Indian Link Chain Manufacturers and the Shiv·
raj Lit!w Work.r (supra)· came to the conclusion that gross profits
before allowance is made for depreciation has to be taken into account
fo.r the purpose of considering the paying capacity o( the industry. The
G HJgh CotJrt added the amount of depreciation to the net profits ns sho"'11 .,
In the balance 6h.eet and found that Iars.! profits were available ns gross I
~rolit~. . The HJgh C~urt was of the view that the position of the. fureC
factoncs In South GuJarat, namely Gandcvi Bardoli nod Madhi IS not
....,.
n tF
at all gloomy so far as the1r
1 . Court found that
· fimancJal
• prospects
' are coocerned· 'fhe
though the price of sugarcane was fi.:ted fot (.'
cldJvery nt the factory, it has pa.id the price to the growers ex-sugarcan.e
fi·.: , thus bearing the h f . ~.....nng 1t
t 0 th f . c arges or cutt1'ng sugarcane and. for Caur. ·d
e actory prenuses from the field. This payment was unjustJn~
CHALTHAN VIBI-IAG V. INDUSTRIAL COURT (Kailasam, J.) 525

and was intended fo~ the b:ncfi.t ~f ~he members of the cooperative
society and resulted m showtng of a Paper Loss'. We arc unable to
agree with the conclusion of the High Court that thjs payment is un-
justified and is for the purpose ~f benefiting its own members. It is
subnitted on behalf of the factones that the sugar factories pay an
extra amount to the growers to induce them to cultivate sugarcane for a
profit and thereby preventing them from cultivating other crops and B
reducing the area under sugarcane cultivation,. The finding of the
High ~ourt that this extra payment is to benefit the members of the
I
society itself is also not borne out as there are members who arc not
r . growers of sugarcane. The benefits by way of giving fertilisers at a
-~
' discount etc. will not profit members who arc not growers. The c
High Court has not estimated the likely increase tn profits.due to incrcas.;:
'
l
in the price of sugar levy along with the increase in expenditure due to·
the revision of the wage structure which it has estimated at about Rs. 5
lakhs. . Further as pointed out by us earlier the High Court erred in
adding back the depreciation and other reserves without determining
as to what extent such allowances are permissible on the facts of the D
case. For Lhe rcaso·ns stated we feel that the financial capacity of the '
industry has not been dctcrmincu in the manner in which it ought to ~
I.
ha\'e been done.

The wages arc normally fixcu on the basis of industry-cum-region.
The U.P. Pattern was fi.."t.:d by the Uttar Pradesh Government on an E
'ag:r~'Cmcnt bctwc<.:n the parties under section 3 (b) of the U.P. Industrial
Disputes Act, l947(U.P. Act No. 18 of 1947) . The order under
sec. 3(b) is proYisional in character. Section 3(d) providcs for
fixing the wages nfter proper adjudication. No such adjudication took
place in U.P. afler th·! passing of the order under sec. 3 (b). Even F
though normally the wages arc fixed on the industry-cum-region basis
it is open to the industry to plead that it has not the financial capacity
to bear the increased burden. When such a pica is 5pccificaJly raised
it is the duty of the Industrial Court to determine whether the increased
burden could be bor'ho by the particular industry. The reason given
by the JnJustrial Court and the I figh Court !or following th6 U.P. Pattern G
i~ tiM it h:ts been accepted by various sugar factories in the southern
region and a ntighbouting factory Kodinar Sugar Factory and hence
there is no reason for not applying th•.} same rates to the appellant fac-
tories. On behalf of the appellant it was pleaded that it is not admitted
that all the sugar factories in 1he southern region have accepted the B
U.P. Pattern. It was submitted that the case of the Kodinar is diffe-
rent because it was established tong time ago and is a flourishing concern.
15 -~31SCi,'79
SUPREME COURT REPORTS [1980]1 S.C.R,
526

A Jn view of the order we pro~ose to m~ke we do 'not. feel called upon
to examine in detail the financial capacity of the vanous factories or
to remit it to the Industrial Court for that purpose. We have found
that the order of the Industrial Court and the High Court relating to
the provision for variable dearness allowance of more than 100% neu-
tralisation is no~ sustainable ih law and will have to be set aside. Regard.
B ing the award relating to the retention allowance of the um;kllled workers
at 10% of the basic wage and the dearness allowance payable during
the crushing season, it was not chailcng~d before the High Courl Ute
only question therefore which is in dispute is the increase of graded
dearness allowance from Rs. 21 to Rs. 40 with effect from the date of
c the awan;l. We do not think that the increase in burden under this
head would be beyond the financial capacity of the factories especially ....
I

I
as we are satisfied that the claim for depreciation is highly exaggerated.
Taking all the circumstances relating to the financial capacity of the
factories we arc satisfied that the i:ncreaseo in the burden due to the in-
crease in the graduated dearness allowance will be within the capacity
D of the industry. We therefore find no reason for remitting the matter
back to the Industrial Court. We set aside the award relating to
the grant of graduated dearness allowance at more th:tn 100% but
direct that it will be confined to 83 paise for increase of one point ie.
limited to cent per cent neutralisation. So far as the increment of the
graduated dearness allowance from Rs. 21 to Rs. 40 from the date of
E the award and the retention a11owance at 10% of the basic wage and ...
_...._·

dearness allowance payable duri:ng the cru~hing sr.:ason to the unskilled
.
workers is concerned, it is confirmed.
The appeals are disposed of accordingly. Tile Appellant will pay
costs of the rc~pontlents one set of Rs. 2000/- which will be divided
F amongst the respondents.

N.K.A ippea/s allowed partly.