APPLICABILITY OF THE INDLSTRIAL DISPLTES ACT IN

REGARD TO CLAIM OF BONLS TO EMPLOYEES

EMPLOYED IN SMALLER ESTABLISHMENTS
I
The problem
SECTION 1 (3) of the Payment of Bonus Act, 1965 provides :
Save as otherwise provided in this Act, it shall apply to—
(a) every factory; and
(b) every other establishment in which twenty or more persons
are employed on any day during an accounting year.
The aforesaid provision raises a significant question whether under
the Industrial Disputes Act, 1947, it is open to the industrial tribunal
to adjudicate the question of bonus of the employees employed in the
industrial establishments to which the provisions of the Payment of Bonus
Act, 1965 are not applicable ? This question has been subject of much
litigation.
Prior to the Supreme Court decision in Sanghvi Jeevraj Ghewar Chand
and others v. Madras Chillies, Grains and Kirana Merchants Workers
Union1 conflicting opinions were expressed on the issue. In some cases2 the
industrial tribunal held that the Payment of Bonus Act covered the entire
field of payment of bonus whereas in some others 3 the tribunal took
the view that the Bonus Act did not cover the entire field of bonus and
hence the employees in the establishment not covered by the Act could
claim bonus in a dispute under the Industrial Disputes Act.
The Supreme Court in the Sanghvi Jeevraj Ghewar Chand case has, how-
ever, held that it is not open to the industrial tribunals to adjudicate under
the Industrial Disputes Act, 1947, the question of bonus to the employees
employed in industrial establishments to which the Payment of Bonus Act
is not applicable. This decision, as we shall presently see, is, however,
open to criticism.
II
Th? Historical background
For appreciating the issue, it is desirable to examine the legislative
j A I R t969 S.C. 530 "
2: See Bhuleshwar Swadeshi Mart, Bombay v. Its Workmen, (1966) II L.L J. 764
(I T Maharashtra).
3. See Madras Chillies, Grains and Kirana Merchants' Woikers' Union v Sha
Shankarlal Ramchand, (1965) II L.L J. 577 (IT. Madras); Various Kit ana and Chillies
Merchants in the City of Madras v. Their Workmen, (1961) I L L J. 826 (I.T Madras) ;
Workmen of Indian Telephone Industries Ltd, v. Indian Telephone Industries, (1967)11
L.L.J. 888 (I.T. Bangalore).

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1978] CLAIM OF BONUS BY EMPLOYEES OF SMALLER ESTABLISHMENTS 585

history of bonus prior to the commencement of the Payment of Bonus

Act, 1965.
The concept of bonus has undergone marked changes since the end of
the World War I. Originally, it meant gratuitous payment made by the
employer to his workmen at his pleasure to keep the workers contented.
With the efflux of time judicial wisdom has transformed it into a legitimate
claim, which the workers can demand as a matter of right. For instance,
in 1950 the full Bench of the Labour Appellate Tribunal in Millowners'
Association v. Rashtriya Mill Mazdoor Sangh* held that the bonus could
no longer be regarded as an ex gratia payment, for it had been recognised
that a claim for bonus, if resisted gave rise to an industrial dispute which
had to be settled by duly constituted labour court or industrial tribunal.
In this case the Labour Appellate Tribunal also laid down the formula5 for
determination of the available surplus of profits for distribution to workers
as bonus. According to the formula available surplus for distribution
had to be determined by deducting the prior charges viz, depreciation,
taxes, rehabilitation and return on capital from gross profit of an enter-
prise, and from the balance the workmen were to be awarded a reasonable
share by way of bonus for the year. The formula in principle was approv-
ed by the Supreme Court in Associated Cement Companies Ltd. v. Their
Workmen6; Muir Mills Ltd. v. Suti Mill Mazdoor Union1; Shri Meenakshi
Mills Ltd. v. Their Workmen70; and Indian Hume Pipe Co. Ltd. v. Their
Workmen.™ In Associated Cement Co's case the Supreme Court held that
the available surplus would be determined after deducting the prior charges
such as depreciation worked out on a notional basis, rehabilitation, income-
tax, return on paid-up capital (generally at the rate of six per cent) and
return on working capital (varying from two to four per cent) from the
gross profits of the enterprises. According to the Supreme Court, work-
men were entitled to a share in the said surplus on an equitable basis.
During the course of hearing of this case the workmen contended that
the formula should be revised inasmuch as rehabilitation should not be
cosidered as prior charge. The Supreme Court rejected the contention
and observed:

If the legislature feels that the claims for social and economic
justice made by labour should be redefined on a clearer basis, it
can step in and legislate in that behalf. It may also be possible to
have the question comprehensively considered by a high powered
commission which may be asked to examine the pros and cons of

4. (1950) L.LJ. 1247.

5. Known as the Full Bench Formula.
6. (1959) I L.LJ. 644 (S.C).
7. (1955) I L.L.J. 1 (S.C).
la. (1958) I LLJ. 239 (S.C).
lb. (1959) I L,W. 357 (S.C).

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586 JOURNAL OF THE INDIAN LAW INSTITUTE [Vol. 20:4

the problem in all its aspects by taking evidence from all industries
and bodies of workmen.8
The aforesaid suggestion was reiterated in Ahmedabad Miscellaneous
Industrial Workers'" Union v. Ahmedabad Electricity Company Ltd.9 where
it was urged that the formula should be modified in respect of deprecia-
tion to electricity company and the depreciation should be allowed accord-
ing to schedule VII of the Electricity Supply Act, 1954.
In response to the suggestion made by the Supreme Court, on
6 December 1961 the Government of India appointed a commission, inter
alia, to define the concept of bonus and to recommend the principles for
computation of bonus, the mode of payment, method for the settlement
of bonus disputes, and other related matters.
The commission made a detailed investigation and submitted its report
to the Government of India on 24 January 1964. The commission suggest-
ed considerable change in the Full Bench Formula. The commission did
not allow any specific deduction on account of replacement, modernization
of machinery and plant and rehabilitation which was an important prior
charge of the Full Bench Formula. Further, the commission provided for
the payment of minimum and maximum bonus linked with the scheme of
"set off" and "set on". The report was accepted by the Government of
India with certain modifications.
On 23 May 1965 the President of India promulgated the Payment of
Bonus Ordinance (No. 3 of 1965) for giving effect to the modified
recommendations of the Bonus Commission. The ordinance was subse-
quently replaced by the Payment of Bonus Act, 1965. The Act applies
only to certain establishments and its preamble and section 1 (3) show to
which of them it is expressly made applicable. Further, there is no
categorical provision in the Act depriving the employees of factories and
establishments not covered or otherwise saved in the Bonus Act which
they would be entitled to under any other law-
From the above trend it is evident that the Payment of Bonus Act does
not debar employees (not covered under the Act) to raise an industrial dis-
pute under the Industrial Disputes Act or under other similar enactments.
Ill
The response of the Supreme Court
In Sanghvi Jeevraj Ghewar Chand's case9a the Supreme Court was
called upon to discuss the applicability of the Industrial Disputes Act,
1947, in regard to bonus disputes raised by the workers engaged in certain
establishments. The main issue involved in this case was whether the
employees of establishments employing less than twenty persons and the
8. Supra note 6 at 661-62.
9. (1961) II L.L.J. 377.
9a- Supra note 1 f

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1978] CLAIM OF BONUS BY EMPLOYEES OF SMALLER ESTABLISHMENTS 587

public sector undertakings employing more than twenty persons (but

exempted under the payment of Bonus Act) could claim bonus under the
Industrial Disputes Act by raising an industrial dispute. The Supreme
Court, however, answered the question in negative.
The facts of the case may be briefly stated. The workers of certain
chillies and kirana shops in Madras employing less than twenty persons
claimed bonus from their management on 13 December 1965, equivalent
to four months wages on the ground that the management made huge
profits during the year in question. The conciliation officer intervened
but failed to resolve the dispute. Thereupon, the Government of Madras
referred the dispute to the industrial tribunal for adjudication.
A similar dispute relating to the demand for bonus for the years
1964-65 and 1965-66 was made by the workers engaged under telephone
industry (an establishment in public sector under section 32 of the Payment
of Bonus Act). The dispute was referred to the industrial tribunal for
adjudication.
In both these cases the tribunal held that though the Payment of Bonus
Act did not apply, the employees were entitled to claim bonus under the
Industrial Disputes Act and such claim could be adjudicated under the
Full Bench Formula as laid down in Millowners" Associations case.10
The aggrieved management, thereupon, preferred an appeal to the
Supreme Court. Shelat. J., in the course of judgment observed :
Considering the history of the legislation, the background and the
circumstances in which the Act was enacted, the object of the Act
and its schemes, it is not possible to accept the construction suggest-
ed on behalf of the respondents that the Act is not an exhaustive
Act dealing comprehensively with the subject-matter of bonus »n
all its aspects or that Parliament still left it open to those to whom
the Act does not apply by reason of its provisions either as to
exclusion or exemption to raise a dispute with regard to bonus
through industrial adjudication under the Industrial Disputes Act
or other corresponding law.11
The court accordingly held that the construction given to the Act by the
tribunal was incorrect.
The view adumberated by the Supreme Court ignores the policy
considerations, legislative history, and the object and scheme of the Act.
Further, the court failed to interpret the provisions of section 39 in
conformity with the context in which they appear. Moreover, the fear of
harrasment to employers of certain establishments as expressed by the
Supreme Court is unfounded. It would, therefore, cause severe depriva-
tion of the legitimate claim of employees of certain establishments to

10. Supra note 4.

Jl. Supra note 1 at 543,

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588 JOURNAL OF THE INDIAN LAW INSTITUTE [Vol. 20 : 4

demand bonus and diminishes the usefulness of the Industrial Disputes

Act in bonus disputes (not covered under the Payment of Bonus Act).
Policy considerations
The Supreme Court observed that there was a definite legislative
policy in excluding certain establishments from the purview of the Bonus
Act. The view also requires a careful scrutiny. In the present set up of
Indian economic and labour policy wherein the doctrine of laissez faire
has been replaced by a system of "social welfare economy" and wherein
every effort is being directed to maintain uninterrupted, and steeping-up,
industrial production, the state has assumed large powers to settle in-
dustrial disputes between the capital and labour peacefully. Further, the
state has adopted adjudication system to generally uplift the conditions of
the labour. Under the circumstances there does not appear to be any
good reason why employees employed in establishments employing less
than twenty persons and the public sector undertakings employing more
than twenty persons but excluded under the Payment of Bonus Act should
not be allowed to raise an industrial dispute in regard to bonus and get it
adjudicated by the Industrial Disputes Act. If such claim would not be
allowed it would not only cause great hardship to the aforesaid categories
of workers but would also deprive them from their legitimate claim.
The problem can also be approached from two opposite points of
view, namely, what consequences will follow if bonus disputes of emplo-
yees employed in establishments employing less than twenty persons and
the public sector undertakings employing more than twenty persons, but
excluded under the Payment of Bonus Act are not categorised as indus-
trial dispute under the Industrial Disputes Act, 1947 and conversely,
what will be the effect of such inclusion?
In India a good number of industries are employing less than twenty
persons. Further, a large number of employees are employed : (/) in the
Life Insurance Corporation of India ; (//) under the Merchant Shipping
Act, 1958 ; (//7) under the Dock Workers (Regulations of Employment)
Act, 1948 ; (iv) by the government departments; (v) by the Indian Red
Cross Society ; (vi) by the universities and other educational institutions ;
(vii) by social welfare institutions or hospital establishments not for the
purpose of profit; (viii) through contractors on building opeartions; (ix) by
the Reserve Bank of India, Industrial Finance Corporation of India and
similar other financial corporations or the Deposit Insurance Corporation;
(x) by the Unit Trust of India ; (xi) by the Agricultural Finance Corpora-
tion ; (xii) in inland water transport establishments operating on routes
passing through any other country ; (xiii) in the Industrial Development
Bank of India or other financial institution, and (xiv) in any other
public sector which have been excluded from the purview of the Payment
of Bonus Act.
If the employees employed in those industries are denied payment of

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1978] CLAIM OF BONUS BY EMPLOYEES OF SMALLER ESTABLISHMENTS 589

bonus, it would cause industrial unrest which would ultimately affect

industrial production. On the other hand, no harm would be done if they
are allowed to claim bonus under the Full Bench Formula, as the claim
would be maintainable under the formula only in case of profit earned by
the industry. Here it may be reiterated that the Supreme Court12 held
that one of the two conditions which had to be satisfied before a demand
for bonus could be justified was that industry had made huge profit, part
of which were due to contribution which workmen made in increasing
the production. In other case13 the court observed :

In Law, a claim for bonus will be admissible only if the business

had resulted during the year in sufficient profits. And as the
reason for the grant of bonus is that workers should share in the
prosperity to which they have contributed, all of them would have
a right to participate in it.14

The position was further elaborated in New Maneckchowk Spinning and

Weaving Co., Ltd. v. Textile Labour Association^* where the Supreme Court
remarked that :
Bonus, as observed by the Labour Court is based upon the principle
of labour and management jointly contributing to the earning of
profits but when the worker has not been actually in service and
has made no contribution for the earning of profits it is but right
that in computing the money value of the benefit bonus should be
excluded ,16

It would thus be evident that mere right to raise an industrial dispute

would not entitle the workers to claim bonus. It is not correct to say that
there is a difference between a right to raise an industrial dispute and
getting the same adjudicated and the right to get bonus. It is submitted
that policy consideration does not deny workers to claim bonus if an
industry even smaller one makes huge profit. In fact, the purpose of
excluding small and other public service establishments is that in the event
of loss in the industry the employers may not be put to hardship as it
would be detrimental in the interest of the industry. In our opinion
Parliament had no intention to deprive the employees of the establish-
ments not covered in the Payment of Bonus Act from claiming bonus
under law or industrial adjudication particularly in cases of huge profit
earned by such industries mainly due to the contribution of employees.
12. See Associated Cement Co. Ltd. v. Their Workmen, supra note 6 ; Muir Mills
Co. Ltd. v. Suti Mill Mazdoor Union, supra note 7.
13. See Burn & Co. v. Their Employees, (1957) I L.L.J, 226.
14. Id. at 232.
15. (1961) I L.L.J. 521.
16. Id. at 527.

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590 JOURNAL OF THE INDIAN LAW INSTITUTE [Vol. 20 : 4

It is submitted that Parliament meant that they would be covered by the

Full Bench Formula.
Statutory right under the Industrial Disputes Act and other corresponding
Acts
The Supreme Court gave several reasons in support of its decision.
As to the statutory right of workers to claim bonus under the Industrial
Disputes Act or other corresponding Acts the court observed :
Since there was no such statutory obligation under any previous
Act, there would not be any question of Parliament having to
delete either such obligation or right. In such circumstances, since
Parliament is providing for such a right and obligation for the first
time there would be no question also of its having to insert in the
Act an express provision of exclusion. In other words, it has not
to provide by express words that henceforth no bonus shall be pay-
able under the Industrial Disputes Act or other corresponding Act
as those Acts did not confer any statutory right to bonus.17
The court further pointed out :
It will be noted that though the Industrial Disputes Act confers
substantive rights on workmen with regard to lay off, retrenchment
compensation, etc., it does not create or confer any such statutory
right as to payment of bonus. Bonus was so far the creature of
industrial adjudication and was made payable by the employers
under the machinery provided under that Act and other correspond-
ing Acts enacted for investigation and settlement of disputes raised
thereunder. There was, therefore, no question of Parliament
having to delete or modify Item 5 in the Third Schedule to Indus-
trial Disputes Act or any such provision in corresponding Act or its
having to exclude any right to bonus thereunder by any categorical
exclusion in the present Act18
The aforesaid reasons given by the Supreme Court is difficult to support.
It is true that like lay-off and retrenchment compensation there is no
specific statutory provisions for bonus under the Industrial Disputes Act,
1947 but the judicial pronouncements and later the legislative prescrip-
tions under item 5 of schedule III of the Industrial Disputes Act have
transformed it into a legitimate claim which the workmen could demand
as a matter of right. It is significant to note that in the Millowners*
Association's19 case the Full Bench of the Labour Appellate Tribunal
laid down the formula for the determination of available surplus of
profits for distribution to the workers as bonus. This formula of the
17. Supra note \ at 540.
18. Ibid.
19. Supra note 4.

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1978] CLAIM OF BONUS BY EMPLOYEES OF SMALLER ESTABLISHMENTS 591

Labour Appellate Tribunal was followed in deciding the bonus disputes

by all the industrial tribunals throughout the country. Whenever the
working of the formula disclosed an amount of available surplus, the
labour was awarded a reasonable share in this amount by way of bonus
for the year. This formula was generally approved by the Supreme
Court in the Associated Cement Companies2® and the Muir Mills cases21.
Further, it is submitted that the aforesaid view of the Supreme Court
in the case under review, is not well founded even in the light of other
legislative enactments such as the Hindu Succession Act, 195622 ; the
Hindu Adoption and Maintenance Act, 1956,23 the Hindu Marriage Act,
195524; and the Hindu Minority and Guardianship Act, 1956.25 In all

20. Supra note 6.

21. Supra note 7.
22. S. 4 of the Hindu Succession Act, 1956 expressly provides :
Save as otherwise expressly provided in this Act,—
(a) any text, rule or interpretation of Hindu law or any custom or usage
as part of that law in force immediately before the commencement of
this Act shall cease to have effect with respect to any matter for which
provision is made in this Act;
(b) any other law in force immediately before the commencement of this
Act shall cease to apply to Hindus in so far as it is inconsistent with
any of the provisions contained in this Act.
23. S, 4 of the Hindu Adoption and Maintenance Act, 1956 also to the same effect
provides.
Save as otherwise expressly provided in this Act,—
(a) any text, rule or interpretation of Hindu law or any custom or usage
as part of that law in force immediately before the commencement of
this Act shall cease to have effect with respect to any matter for which
provision is made in this Act ;
{b) any other law in force immediately before the commencement of this
Act, shall cease to apply to Hindus in so far as it is inconsistent with
any of the provisions in this Act.
24. S. 4 of the Hindu Marriage Act, 1955 reads as follows :
Save as otherwise expressly provided in this Act,—
(a) any text, rule or interpretation of Hindu law or any custom or usage
as part of that law in force immediately before the commencement of
this Act shall cease to have effect with respect to any matter for which
provision is made in this Act ;
(b) any other law in force immediately before the commencement of this
Act shall cease to have effect in so far as it is inconsistent with any of
the provisions contained in this Act.
25. S. 5 of the Hindu Minority and Guardianship Act, 1956 reads :
Save as otherwise expressly provided in this Act,—
(a) any text, rule or interpretation of Hindu law or any custom or usage
as part of that law in force immediately before the commencement of
this Act shall cease to have effect with respect to any matter for which
provision is made in this Act;
(b) any other law in force immediately before the commencement of this
Act shall cease to have effect in so far as it is inconsistent with any of
the provisions contained in this Act.

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592 JOURNAL OF THE INDIAN LAW INSTITUTE [Vol. 20 :4

these cases there was no legislative enactment prior to the commencement

of these Acts but the statutes specifically excluded the text, rule, inter-
pretation of Hindu law and custom and usage as part of law immediately
before the commencement of these Acts.
The view of the Supreme Court is again not in conformity with the
Payment of Gratuity Act, 1972, which expressly provides that anything
contained in any enactment other than those in the Payment of Gratuity
Act, 1972 or in any instrument or contract shall cease to have any
effect.26
The legal right of the workmen to claim bonus prior to the com-
mencement of the Payment of Bonus Act was not only recognised by
the judiciary but was also expressly provided in item 5 of schedule III
of the Industrial Disputes Act, 1947. Accordingly it is difficult to support
the view of the Supreme Court that it was not necessary for Parliament to
exclude any right to bonus under item 5 of schedule III of the Industrial
Disputes Act or any such provision in the corresponding Act under the
payment of Bonus Act. Indeed, section 39 expressly saves the right to
claim bonus under the Industrial Disputes Act.
Scope of the Industrial Disputes Act and the Full Bench Formula after the
enactment of the Payment of Bonus Act
The Supreme Court in regard to the application of the Industrial
Disputes Act in establishment employing less than twenty persons
observed :
As...Parliament was evolving for the first time a statutory formula
in regard to bonus and laying down a legislative policy in regard
thereto as to the classes of persons who would be entitled to bonus
thereunder. It laid down the definition of an 'employee1 far more
wider than the definition of a 'workman' in the Industrial Disputes
Act and the other corresponding Acts. If, while doing so, it ex-
pressly excluded as a matter of policy certain petty establishments
in view of the recommendation of the Commission in that regard,
viz., that the application of the Act would lead to harrassment of
petty proprietors and disharmony between them and their em-
ployees, it cannot be said that Parliament did not intend or was
not aware of the results of exclusion of employees of such petty
establishments.
The aforesaid reason given by the Supreme Court does not fully reflect
26. S. 1(4) of the Payment of Gratuity Act, 1972, reads :
The provisions of this Act or any rule made thereunder shall have
effect notwithstanding anything contained in any enactment other
than this Act or in any instrument or contract have effect by virtue of
any enactment other than this Act.
27. Supra note 1 at 541.

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1978] CLAIM OF BONUS BY EMPLOYEES OF SMALLER ESTABLISHMENTS 593

the true legal position. It is submitted that the court failed to appreciate
the argument that |"the Parliament in excluding such petty establishments
could not have intended that employees therein who were getting bonus
under the Full Bench Formula should lose that benefit."28
Legislative history of bonus
The court while dealing with the applicability of the Industrial Dis-
putes Act and the corresponding Acts examined the history of the bonus
legislation and the circumstances in which it was enacted and the mischief
it intended to remedy. In the opinion of the court, the Payment of
Bonus Act was a comprehensive enactment with regard to the subject
matter of bonus and what was not covered by the Act could not be deemed
to be a subject-matter for adjudication under the Industrial Disputes Act
or other similar enactments. It is respectfully submitted that the view is
not in accordance with the legislative history.29

V
Conclusion

As is evident, section 1(3) of the Payment of Bonus Act, as interpreted

by the Supreme Court, provides no remedy to the employees employed
in industrial establishments (not a factory) employing less than twenty
persons to claim bonus. Thus, the person employed in such establish-
ments would be a legal orphan in respect of the claim of bonus.
It is accordingly, suggested that the court should review its own
decision failing which Parliament should amend the Payment of Bonus Act
to rectify the anomalous situation created by the judicial interpretation.

Suresh C. Srivastava*

28. "Save as otherwise expressly provided the provisions of this Act shall be in addi­
tion to and not in derogation of the Industrial Disputes Act, 1947 (14 of 1947) or any
corresponding law relating to investigation and settlement of industrial disputes in force
in a State".
29. For the legislative history see supra pp. 584-85.
♦Reader in Law, Kurukshetra University, Kurukshetra.

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