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Case Analysis: Jalan Trading Company v/s Mill Mazdoor Union

Facts of the Case
The Payment of Bonus Ordinance 3 of 1965 was promulgated by the President on May 29, 1965, with immediate effect due to the demand for payment of bonus for the years 1961 and 1962. The ordinance was passed while the case was pending before the Industrial Court, Bombay under s. 73A of the Bombay Industrial Relations Act, 1946.

The representatives of the workmen had claimed that even when the profit and loss account of the establishment for the years in question disclosed a loss, was correct. The Ordinance passed governed the dispute and the employees were entitled to receive the bonus at the minimum rate of 4% of the salary or Rs. 40/- whichever was higher.

The Industrial Court had upheld the plea of the workmen and directed the employers subjected to the provisions of the Bonus Ordinance, 1965, to pay to each employee bonus for the year 1962 equivalent to 15 days of the salary or wages or Rs. 40/- whichever is higher as both labour and capital employed in the industry have the right to claim a legitimate return on an establishment's profits and developed a form for the charging, on accounting year gross profit, of certain previous liabilities and for the provision of a percentage of the balance as a bonus for workers.

The employers had then filed a special leave petition in the Supreme Court and challenged the validity of the Payment of Bonus Act, 1965, which had replaced Ordinance 3 of 1965. They had especially challenged the provisions under which a bonus at a minimum rate is made payable under the Act.

Case Details:
Name of the Appellant: Jalan Trading Co. (Private Ltd.) v/s Name of the Respondent: Mill Mazdoor Union
Bench: J.C. Shah, K.N. Wanchoo, M. Hidayatullah, S.M. Sikri and Vaidynathier Ramaswami, JJ.
Citation: AIR 1967 SC 691 - Civil Appeal Number: 187 of 1966
Court: The Supreme Court of India - Decided on: 5th August 1966

Full bench formula
The Labour Appellate Tribunal in the year 1949 had broadly approved a formula. Surplus available for distribution had to be determined by debiting the following prior charges against gross profits:
  1. Provision for depreciation;
  2. Reserve for rehabilitation;
  3. Return of 6% on the paid-up capital;
  4. Return on the working capital at a lower rate than the return on paid-up capital;
And from the balance left called "available surplus," it was to be distributed reasonably among the workmen by way of bonus each year. It was to be computed on the profits of the establishment in that year.

Held: The formula it is clear was not based on any strict theory of legal rights or obligations. It was intended to make an equitable division of distributable profits after making reasonable allocations for prior charges.

The Government of India then set up a Commission on December 6, 1961, inter alia to define the concept of bonus. The employee is paid a bonus as a share in the establishment's profits and had advised that the Bonus Formula be adhered to. The bonus should be determined as the percentage gross profit reduced with some previous charges, namely, the normal admissible depreciation under the Indian Income Tax Act.

Recommended that sixty per cent of the available surplus should be distributed as a bonus, the excess being carried forward and taken into account in the next year. The balance of forty per cent should remain with the establishment.

The Government of India accepted a majority of the recommendations and the President had then issued on May 29, 1965 the Payment of Bonus Ordinance, 1965, providing for payment of bonus to all employees drawing salary not exceeding Rs. 1600 under the formula devised by the Commission.

The Payment of Bonus Act, 1965
  • Section 10 - Every employer has to pay every employee in an accounting year minimum bonus which has to be four per cent of the salary or wage earned by the employee during the accounting year or Rs. 40 whichever is higher, whether there are profits in the accounting year or not. If the employee is below the age of 15 then they have to be paid a minimum of Rs. 25.

  • Section 33 - The Act is made applicable to pending industrial disputes (regarding payment of bonus relating to any accounting year not being an accounting year earlier than the accounting year ending on any day in the year 1962) immediately before May 29, 1965, before the appropriate Government or any Tribunal or other authority under the Industrial Disputes Act, 1947, or under any corresponding law, or where it is pending before the Conciliation officer or for adjudication.

  • Sub-s. (2) of Section 34 - Special overriding provisions regarding payment of bonus to employees computed as a percentage of gross profits reduced by direct taxes payable for the year, (subject to the maximum prescribed by s. 11), when the bonus has been paid by the employer to workmen in the "base year" as defined in Explanation II.

  • Section 36 - Appropriate Government is invested with power to exempt an establishment or a class of establishments from the operation of the Act, provided the Government believes that having regard to the financial position and other relevant circumstances of the establishment, it would not be in the public interest to apply all or any of the provisions of the Act.

  • Section 37 - Power is conferred upon the Central Government by order to make provision, not inconsistent with the purposes of the Act, for removal of difficulties or doubts in giving effect to the provisions of the Act.

The contention of the Petitioner
The Act is invalid as it amounts to fraud on the Constitution or otherwise is a colourable exercise of legislative power.

The contention of the Respondents
Section 34(2) is not invalid because the ratio was intended to stabilize the previous grant of bonus and to maintain in favour of labour whatever was achieved by collective bargaining in the base year.

Fact in Issue:
  • Whether Section 10, 32, 33, 34(2), 36 and 37 of the Payment of Bonus Act, 1965 are ultra vires.
  • Was there excessive delegation of power when the Parliament to enacted a law relating to bonus.

Court's View (Majority)
The Parliament has the power to legislate in respect of bonuses to be paid to industrial employees. By enacting the Payment of Bonus Act, the Parliament has not attempted to trespass upon the province of the State Legislature. Parliament has normal power within the framework of the Constitution to enact legislation which modifies principles enunciated by this Court as applicable to the determination of any dispute, and by exercising that power the Parliament does not amount to fraud on the Constitution.

Section 10 of the Bonus Act is not open to attack the ground that it infringes Art. 31(1). Clause (1) of Art. 31 guarantees the right against deprivation of property otherwise than by the authority of law. Authority of the Parliament to legislate in respect of bonus is not denied and the provision for payment of bonus is not open to attack on the ground of infringement of fundamental rights other than those declared by Art. 14 and Art.19 (1)(g) of the Constitution.

The Government and the employees did not place any material before the court regarding Section 32. Many classes of employees were excluded in the section and none of those employees, nor their employers the court. The court, therefore, declined to express its opinion on the unconstitutionality of Section 32.

Concerning Section 33 the court held that it was patently discriminatory and the classification made on that basis is not reasonable. When there are two industrial units- one has a dispute with its workmen or some of them pending before the Government/ authority under the Industrial Disputes Act and relating to an accounting year ending in the year 1962.

For the years 1962, 1963 and 1964 this industrial unit will be liable to pay a bonus according to the statutory formula prescribed by the Act, whereas another industrial unit in the same industry which may be regarded as reasonably similar would be under no such obligation, if it has on May 29, 1965, no dispute relating to bonus pending because the dispute has not been raised or has been settled by agreement or by the award. There is neither logic nor reason in the different treatment meted out to the two establishments.

Section 34 imposes a special liability to pay bonus determined on the gross profits of the base year on an assumption that the ratio which determines the allocable surplus is the normal ratio not affected by any special circumstance. The concept of bonus as allocation of an equitable share of the surplus profits of an establishment to the workmen who have contributed to the earning has reality, any condition that the ratio on which the share of one party computed based on the working of an earlier year, without taking into consideration the special circumstances is arbitrary and unreasonable.

Condition for the exercise of power under Section 36 is that the Government holds the opinion that it is not in the public interest to apply all or any of the provisions of the Act to an establishment or class of establishments, and that opinion is founded on a consideration of the financial position and other relevant circumstances. Parliament has laid down principles and has given adequate guidance to the appropriate Government in implementing the provisions of s. 36.

The Power so conferred does not amount to delegation of legislative authority. Section 36 amounts to conditional legislation, and thus, is not void. However s. 37 which authorises the Central Government to provide by order for removal of doubts or difficulties in giving effect to the provisions of the Act, delegates legislative power which is not permissible.

The invalidity of Sections 33, 34(2) and 37 do not affect the validity of the, remaining provisions of the Act. The proceeding that was pending in court before the Act came into force and also those that are covered under Section 33 would be decided based on the full bench formula.

Therefore, Writ Petitions Nos. 3 of 1966 and 32 of 1966, declared Section 33 and 34(2) to be invalid as they infringe Art. 14 of the Constitution, and section 37 was also declared invalid as it delegates to the executive authority legislative powers.

They held that the Act does not make any difference in treatment within the class it deals with. All establishments in which disputes were pending are treated alike. Therefore, Section 33 is not invalid because of any inequality.

The existence of a rigid ratio under s. 34(2), which applies to all establishments which come under does not create any inequality and therefore, was also valid. As for delegated legislation, it was within the limit and there was no excessive delegation.

I agree with the decision of the Majority on delegated legislation. Delegated legislation is the power given to the executive to legislate through bye-laws, notification, ordinance, etc. This power is given to the executive as the legislature has limited time in the session to discuss all the laws. In the present case, there is excessive delegated legislation as s. 37 of the Act authorised the Central Government to provide by order for removal of doubts or difficulties in giving effect to the provisions of the Act. This not being permissible under delegated legislation.

The classification given in Section 33 of the act is confusing and discriminatory. When there are 2 industrial units, both were given different treatment which is not logical as said by the Judges. Section 34 was also discriminatory as special liability was placed. I agree with the decision of the court on these sections also.

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