judgement:
Appeal No. 1675 of 1970.
Appeal by special leave from the Award dated February 18, 1970 of the Industrial Tribunal, Rajasthan, Jaipur in Case No. 1.T. 12 of 1967.
G. B. Pai, P. N. Tiwari and O. C. Mathur, for the appellant.
M. K. Ramamurthi and Vineet Kumar, for the respondent, 653 The Judgment of the Court was delivered by P. Jagamohan Reddy, J.
This Appeal is by Special '.
Leave against the Award of the Industrial Tribunal, Rajasthan directing the payment of a bonus of Rs. 1,21,000/ apart from an amount of Rs. 90,000/ already disbursed to the workmen of the Appellant for the year 1962 63.
The dispute for the bonus year beginning 1st July '62 and ending 30th June '63 was raised by the workmen because the Company which had admittedly made profits, did not pay them a bonus though a gratuity of one month was given to them.
The following dispute was therefore referred to the Tribunal: "Whether workmen of M/s. J.K. Synthetic Ltd., Kota are entitled to any bonus for the year 1962 63 and whether payment of one month 's wages as gratuity by the management can be regarded as payment towards bonus for the, year in question?".
The Mazdoor Union (hereinafter called 'the Union ') on behalf of the Workmen contended that on the basis of the calculation,; of available surplus they were entitled to a bonus of 60% in accordance with the bonus formula which will entitle them to a five months wages apart from the one month 's wages already paid to them.
The first statement of computation filed on behalf of the workers was obviously incorrect because it did not take into account the various prior charges such as Income Tax, return on reserves, rehabilitation reserve etc.
which are deductible under Full Bench formula as approved and accepted by this Court from% time to time.
It therefore filed another revised return showing an available surplus of Rs. 5.34 lakhs.
The management on the other hand challenged the validity of the claim as according to it there was no available surplus for distribution even though they had already paid one month 's bonus wrongly styled as gratuity.
The calculations given by it were also found to be equally wanting.
As such it filed a revised calculation showing a net deficit of Rs. 72.35 lakhs.
It may however, be mentioned that as pointed ' out by the Tribunal, there was no dispute with regard to any of the eight items which comprised the computation of gross profits amounting to Rs. 62.16 lakhs.
The Union also did not dispute the deduction of interest on debentures of Rs. 0.06 lakhs; share transfer fee of Rs. 0.05 lakhs; the notional normal depreciation of Rs. 30.57 lakhs; and the return on share capital of Rs. 7.50 lakhs.
It had however challenged the deduction of Rs. 4.1 lakhs received as dividend on shares as extraneous income which was being claimed as a deduction by the management.
It also disputed an amount of Rs. 1, 11,000/ shown as return on reserves employed in the business and Rs. 75.89 lakhs shown as the annual share required for rehabilitation.
The method of calculation of income tax amounting to Rs. 15.23 lakhs was also objected to.
The four" 654 items upon which the Tribunal was called on to adjudicate therefore were: ( 1 ) Deduction of Rs. 4.
10 lakhs received as dividend on shares from the gross profits as extraneous income; (2) Rs. 1, 11,000/ as return on reserves employed in business; (3) Rs. 75.89 lakhs as annual share required for rehabilitation, and (4) Rs. 15.23 lakhs towards Income tax.
With respect to the first issue the Tribunal felt that even though there was share capital available to the Appellant, instead of utilising it as working capital it had borrowed amounts to work the Nylon factory for which they had to pay an interest of over Rs. 5 lakhs.
In these circumstances it disallowed the claim for deduction on the ground that it would be unfair to allow the management to treat the income from Investments as extraneous income and still reduce the profits by raising loans and pay interests resulting in demunition of the surplus.
On the second issue the objection of the Union for a deduction of Rs. 1,11 lakhs as return on reserves employed as working capital was disallowed on the ground that the statement M.W. 2/1 produced by Talwar, established that the excess of liability over the assets was utilised as working capital during the course of the bonus.
The claim of the management for deduction of Rs. 75.89 lakhs as share required for rehabilitation was however disallowed, as the oral and documentary evidence produced on behalf of the Management did not according to the Tribunal either establish that the life of the Plant and machinery was only 10 years for 1961 62 Block (hereinafter called 'the first Block ') and 11 years for 1962 63 Block (hereinafter called 'the second Block ') nor was the deviser of six years for both the first and the second Block reasonable.
It found that the more reasonable multiplier was 13 years for machinery purchased in respect of the first Block and 14 years for machinery purchased in respect of, the second Block and likewise a reasonable deviser for these two Blocks would be four years and two years respectively.
In so far as rehabilitation requirements for buildings was concerned the Union did not raise any dispute to the claim of the management amounting to Rs. 0.90 lakhs.
As there was also no dispute about the original cost of plant & machinery, the Tribunal by applying the multiplier and deviser as aforesaid computed the annual rehabilitation replacement for plant, machinery and buildings as follows : Rupees in lakhs Block Origi Mul Repla Break Balan Funds Net Life Annu of nal tip cement down ce avail Repla al re plant lier cost value able cement quire & Mach cost cost ment 61 62 133 004 522 .006 65 525 35113 28412 07 1331 70 62 63 15 00 2 0 30 00 0 . '75 29 25 29 25 14 2 10 33.80 655 Rehabilitation replacement for machinery. .33.80
Rehabilitation replacement for building (as per Company calculation). . . . . . 0.90 Total 34.70 Accordingly the additional rehabilitation to be providedfor was calculated as under Funds available : Depreciation upto 31 3 62. .
Rs. 15 .68 lakhs General reserves . . 12.00 Investments . . . . 85.60 113 28 Annual rehabilitation replacement. . 34.70 Less : Depreciation provided during the year30 57 _________________ Additional rehabilitation to be provided . 4.23 In so far as Income tax calculation of Rs. 15.18 lakhs was accepted being in accordance with the calculations under the Income Tax Act with respect to which it was said the Union did not find itself in a position to contest.
The Tribunal after giving its finding on the matters in issue computed the available surplus as follows: 1.
Gross profit. .
62 11 lakhs 2, Deduct prior charges: Rs. 1.
Notional normal depreciation. . 30.57 lakhs 2.
Direct tax. . . . . 15.18 3.
Return on share capital. . . 7.50 4.
Return on reserves. . . .1.11 5.
Additional requirement for rehabilitation4 23 58.59 Available suprlus . .
Rs. 3 .25 lakhs of the 60% payable as bonus would come to Rs. 2,1 1,000/ .
As the Company had already disbursed Rs. 90,000/ , the Tribunal directed payment of the balance of Rs. 1,21,000/ .
Before us only two items of controversy have been urged namely:(1) relating to extraneous income of Rs. 4.10 lakhs and(2) relating to rehabilitation requirement amounting to Rs. 75.89 lakhs, the first of which the Tribunal disallowed while in respect of the second it only admitted Rs. 4.23 lakhs.
With respect to the first item, the disallowance of Rs. 4.10 lakhs, the management not only claimed this amount but also Rs. 7.5 lakhs as return on paid up capital of Rs. 125 lakhs @ 6% per annum.
Obviously even on a cursory glance it would appear that the management was seeking to obtain double benefit in respect of investments 656 made out of the paid up capital.
The reasons which impelled the Tribunal to reject the claim of the management have, already been noticed and it would therefore be unnecessary to reiterate them.
It however, appeared to the Tribunal that if the Company wanted to exclude income from investments it cannot also be allowed 6% return on that part of the share capital which is invested elsewhere and at the same time be allowed to treat the income of Rs. 4.10 lakhs earned therefrom as extraneous income, because apart from deducting income tax on this amount the Company also meets the expenses of administration and management in respect of the said investments.
In this view it sustained the objection of the Union.
The return on paid up capital is one of the prior charges admissible under the Full Bench formula as approved by this Court.
It is based on the principle that while the claim of labour to a share in the profits by way of bonus is in furtherence of social justice, the claim of the capital for a fair return to the investor and also to keep the industry running efficiently which will in the long run enure for the benefit of labour is equally based upon that principle.
If therefore any amount is earned from the employment of capital unconnected with the business of the Company, the labour cannot claim the right to participate in its returns.
Apart from this if any reserves are utilised for working capital whether these reserves are depreciation reserves or any other, a return in respect of these also is allowed as a prior charge at a reduced rate because utilisation of such reserves would obviate the borrowing from outside sources for which a higher interest has to be paid and which in the long run will not be for the benefit of the workers.
These principles have been laid down by this Court as well accepted in Industrial adjudication.
While it is true that the Company has the discretion to invest its capital in various activities it cannot on that account deprive the workmen of the benefits of the returns derived therefrom unless of course the investments in such activity is extraneous to the activities of the Company, in the earning of which they had not made any contribution.
Whether in any particular case the return on investments amounts to an extraneous income will depend on the facts and circumstances of each case.
So far as the case before us is concerned there can be no doubt that the return from the investments is a return on a part of the paid up capital of the Company which is invested for the purpose of earning an income.
It cannot therefore be construed as extraneous income.
In Workmen of M/s. Hindustan Motors Ltd. vs M/s. Hindustan Motorv Ltd. & Anr.,(1) to which one of us was a party (Vaidialingam, J.) no doubt where the income of the Company was from interest on (1) 1. 657 fixed deposits, it was treated as extraneous income because it was held that it accrued to the Company without any contribution by the workmen.
At the same time the Company was not permitted on equitable ground to claim the interest paid by it on its borrowings as business expenditure.
Further in that case even the income received by the Company from its foreign collaborators as commission on sales effected by the said collaborators of their own cars in India was treated as extraneous income to which the Company 's workmen made no contribution and was therefore not to be taken into account in calculating the available surplus.
In the recent case of MI? Gannon Dunkarley & Co. Ltd. vs Their Workmen(1), by a reference to the decision in the Hindustan Motor 's this principle was again reiterated.
In that case one of the question which this Court considered was whether dividends received from trade investments should be deducted from the gross profits for calculating the surplus available for bonus.
It was held that "these trade investments have to be treated as capital assets of the Company forming part of their trading activities.
The income accruing from these dividends must therefore be re lated to the business of the Company as a whole and hence the income from these dividends has to be included in the income for purposes of calculation of surplus available for bonus".
In this view we think the Tribunal was justified in disallowing the deduction of Rs. 4.10 lakhs and in fact on behalf of the Appellant it was frankly conceded before us that the claim in respect of the said item cannot be pressed on any tenable or valid grounds.
This brings us to the only remaining controversy, the provi sion for rehabilitation requirement.
The claim for a prior charge on this account like any other prior charge has to be established by evidence but As this item results in a substantial deduction from the gross profits and reduces available surplus, materially, effecting the claim of the employees for bonus, each constituent element which is necessary for computing the amount to be provided for must be proved by satisfactory evidence and cannot be left to surmises and conjectures.
It is idle to suggest that as the employees have not in any particular case given any evidence or have not produced any material to controvert the claim of the management that claim must be admitted, because it is the management that is in possession of all the relevant material and is accordingly required to satisfactorily substantiate that claim.
The elements which are important for the computation of annual rehabilitation requirement, is, the price of the assets at the original cost, the period for which these assets can be used before requiring rehabilitation and the probable increase in the cost of rehabilitation, due to rise in prices, devaluation etc.
The probable increase in the price of assets at the time of the rehabilitation over the original (1) L3SupCI/72 658 cost is the multiplier, as it is measured in terms of multiples of the original cost.
The number of years after which the asset requires replacement, rehabilitation or modernisation is termed the deviser because the probable cost on a future date has to be provided annually and therefore has to be divided by the number of years at the end of which the amount would be required.
There is in this case no dispute between the parties as to the original cost of the plant and machinery which is for the first block Rs. 133.00 lakhs and for the second block Rs. 15.00 lakhs.
The only controversy is about the multiplier and the deviser which has been adopted by the Tribunal.
The Appellant had in its written statement claimed the multiplier for each of the two blocks as six and the deviser for the first block as 10 and for the second block as 11 but as we have already noticed earlier the Tribunal has accepted the multiplier as 4 for the first block and 2 for the second block and the deviser as 13 and 14 respectively.
Even in respect of these the learned Advocate for the Appellant admitted that he is not in a position to contest the reasonableness of what has been adopted by the Tribunal but the Respondent has challenged the very basis adopted by the Tribunal as being more dependent on guess work than on any evidence or material before it.
On behalf of the management the right of the Union to chal lenge the multiplier and deviser, in the absence of an Appeal by it is strenuously contested but in our view there is little force in this objection.
The appeal by the employer is against the grant of bonus to the employees which implies that the method of computation of the gross profits, as well as of the available surplus and the rate at which the bonus is granted can be subjected to scrutiny.
It is needless to recount the several priorities that have to be deducted and the items in respect of which amounts have to be added, before arriving at the available surplus.
In an Appeal, the several steps which have to be taken for computation of the available surplus either in respect of the actual amounts or the method adopted, can be challenged.
If so the Union, even where it has not appealed against the Award, can support it on a method of computation, which may not have been adopted by the Tribunal but nonetheless is recognised by the Full Bench formula of this Court so long as in the final result the amount awarded is not exceeded.
We are supported in this view by a decision of this Court in Management of Northern Railway Cooperative Society Ltd. vs Industrial Tribunal, Rajasthan, Jaipur & Anr.(1) where it was held that the Respondents were entitled to support the decision of the Tribunal even on grounds which were not accepted by the Tribunal or on other grounds which (1)[1967] 2 S.C.R. 476.
659 may not have been taken notice of by the Tribunal while they were patent on the face of the record.
A passage from the case of Ramanbhai Ashabhai Patel vs Dabhi Ajithkumr Fulsinji & Ors.
(1), will give the reasons adopted by this Court for the aforesaid view.
That no doubt was an election appeal but it was said that though the rules framed by this Court in exercise of its rule making powers do not contain any provisions analogous to Order XLI Rule 22 of the Civil Procedure Code, which permits a party to support the Judgment appealed against upon a ground which has been found against him in the Judgment, it was held that this Court has the jurisdiction to sustain the Judgment on grounds which have been found against the Respondent.
Mudholkar, J. speaking for himself, Gajendragadkar, C.J., Wanchoo, Hidayatullah, and Raghubar Dayal, JJ. after considering whether the provisions of Order XVIII, Rule 3 of the Rules of this Court which requires parties to file statement of the case could limit it only to those contentions which deal with the points found in favour of that party in the Judgment appealed from, observed at page 724: "Apart from that we think that while dealing with the appeal before it this Court has the power to decide all the points arising from the Judgment appealed against and even in the absence of an express provision like O.XLI, R. 22 of the Code of Civil Procedure it can devise the appropriate procedure to be adopted at the hearing.
There could be no better way of supplying the deficiency than by drawing upon the provisions of a general law like the Code of Civil Procedure and adopting such of those provisions as are suitable.
We cannot lose sight of the fact that normally a party in whose favour the Judgment appealed from has been given will not be granted special leave to appeal from it.
Considerations of justice, therefore, require that this Court should in appropriate cases permit a party placed in such a position to support the judgment in his favour even upon grounds which were negatived in that Judgment".
In the view we have taken, we will have to consider the plea on behalf of the Respondents that the rehabilitation requirement has not been properly established, but this need only be entertained if we come to the conclusion that the main contention that the rehabilitation requirement has not been properly computed and if so computed there will be no available surplus for awarding bonus to the employees.
(1) ; 660 The learned Advocate for the Appellant as we said earlier has not seriously insisted on the adoption of the multiplier and the deviser claimed by the Appellant but on the other hand contends that even if the multiplier and the deviser as adopted by the Tribunal is followed the trade investments amounting to Rs. 85.6 lakhs cannot be said to be available for computation of rehabilitation requirement.
On this assumption while not disputing the computation of the Tribunal in respect of the original cost which as we have earlier mentioned has not been disputed, even by accepting the multiplier, the break down value and the deviser as adopted by the Tribunal the annual amount required would be Rs. 10.71 lakhs and not Rs. 4.23 lakhs as computed by the Tribunal.
The only variation between the computation of the appellant and that of the Tribunal is in respect of the funds available which according to the Tribunal is Rs. 113.28 lakhs including the trade investment of Rs. 85.6 lakhs and according to the Appellant it is Rs. 27.8 lakhs comprising of only two items namely depreciation of Rs. 15.68 lakhs and general reserve of Rs. 12 lakhs.
If this computation isaccepted then there will be a negative balance of Rs. 2.9 lakhs.
This result is arrived at as follows : Gross profits . . . . . .Rs. 62.11 lakhs 1.
Notional normal depreciation.
30.57 lakhs 2.
Direct tax . . . .
Rs. 15 .18 3.
Return on share capital. .
7 .50 4.
Return on reserves. . .
1 .11 5.
Additional requirement for rehabilitationRs.
10 .71 Rs.65.
07" Negative balance.
( ) Rs. 2 .96 lakhs It will be observed that the prior charges comprised in items 1 to 4 are not really in dispute.
It is only the additional requirement for rehabilitation that is the bone of contention between the parties and this is challenged on two grounds; firstly that the trade investment of Rs. 85.6 lakhs are available funds for rehabilitation requirement as admitted by the Appellant to be so available in the statement which it furnished to the Tribunal; secondly that no claim for rehabilitation requirement has been substantiated.
On the first ground it is contended that the question, what was the: available amount for the annual requirement was specifically before the Tribunal, and that it was the case of the management and not of the workmen that an amount of Rs. 1,23,90,000/ was available consisting of Rs. 26.30 lakhs towards depreciation, Rs. 12 lakhs towards general reserves and Rs. 85 6 lakhs towards investments.
In these circumstances the Tribunal was not called upon to investigate the question as to what exactly was the nature of the investments or whether any of 661 them were realisable or were not available for meeting the rehabilitation requirements.
Further there was no grievance made in this behalf in the Special Leave Petition and therefore the management is, it is submitted stopped from challenging before his Court the validity of inclusion of this amount in the amount available for rehabilitation.
It is further submitted that assuming that this question can be agitated, in the absence of any specific investigation as to the nature of the investments and more particularly when the management itself had shown this amount as being available, the Appellant cannot be permitted to say that it is not available.
The contention of the respondents proceeds on a basic error namely that the Appellant had held out that the trade investments were available for rehabilitation requirement.
This is not so.
In the amended written statement filed on 4 7 69 after obtaining the permission of the Tribunal on 3 7 69, the Appellant claimed the annual share required for rehabilitation as Rs. 93,56,207/ .
Even in the statement filed earlier on 10 4 69 it showed two amounts as being available namely depreciation of Rs. 26.31 lakhs and general reserves of Rs. 12 lakhs.
It is submitted by the Appellant that only when the arguments were completed on behalf of the Company on 9 12 69, having regard to the claim made by it for deduction of Rs. 4.1 lakhs as extraneous income derived from the trade investments, the corpus of Rs. 85.6 lakhs which earned that income was also shown as available and a statement to 'hat effect was filed on the same day to facilitate the Tribunal in arriving at an Award.
In as much as we are not allowing the deduction of Rs. 4.1 lakhs as extraneous income, the question whether the corpus should be treated as being available also has to be considered in the light of the decisions of this Court.
The Appellant in our view is fully justified in urging this contention before us, as it cannot be said that this was not raised before the Tribunal.
The Tribunal had ample opportunity of considering this aspect since it did specifically consider the nature of the income therefrom.
Assuming for the present that the adoption by the Tribunal of the multiplier and deviser can be justified, though the validity of the Tribunal 's award in this behalf has been seriously challenged 'before us, the question to be determined is whether the investments of the Appellant amount to Rs. 85.6 lakhs is available for rehabilitation which in turn will depend upon whether these investments are made in the course of the business of the Company or are unconnected with its business and only invested with a view to earning extraneous income.
The principles upon which rehabilitation grant is to be calculated as laid down by this Court is that the depreciation reserves, or in the case of other reserves only if they are available as liquid assets and cash and not earmarked for any specific purposes, are deemed to be available and can be taken into account in computing the annual requirement.
The 662 depreciation reserve, the object of which is to meet the requirement of replacement, rehabilitation and modernisation at a future date is considered to be always available whether it is in the form of a liquid asset or not.
It is obvious that even this amount will not achieve the purpose of recouping the cost of replacement of the wasted assets and it is for that reason the claim of the industry for rehabilitation in addition to the admissible depreciation has been recognised.
Then there are the general reserves, capital reserves and development reserves all of which will be considered to be available if they are in the form of liquid assets or cash.
The question in some of these cases will be whether they are considered to be the capital assets of the Company kept in that form in the course of its business or kept as investments outside the business of the Company for the purposes of earning an extraneous income.
If it is the former then they are available but if it is the latter they cannot be brought into account for calculating the rehabilitation requirement.
As it happens in most cases the claim by the employer is that the reserves are either wholly or partly not available because they have been used as working capital and consequently the, amount to be utilised should not be excluded from the amount claimed towards rehabilitation.
The principles governing what deductions should be made from out of reserves before calculating the amount in respect of rehabilitation for the bonus year were set out in the Full Bench formula and have been restated in the Associated Cement Co. Ltd. vs Its Workmen(1).
The two items according to that decision that are to be taken into consideration are the general reserves available to the employer and the reserves which have been reasonably earmarked for specific purposes of the industry.
In explaining what was meant by availability of the reserves or the earmarking for specific purposes Subba Rao, J. as he then was in Khandesh Spinning & Wvg.
Mills Co. Ltd. vs Th.? Rashtriya Girni Kamgar Sang Jalgaon(2), observed at page 845 846 : "We do not think that by using the said words this Court meant to depart from the well recognized principle that if the general reserves have not been used as working capital, they cannot be deducted from the rehabilitation amount.
The reserves may be of two kinds.
Moneys may be set apart by a company to meet future.
payments which the Company is under a contractual or statutory obligation to meet, such as gratuity etc.
These amounts are set apart and tied down for a specific purpose and, therefore, they are not available to the employer for rehabilitation purposes.
But the same thing cannot be said of the general reserves : they would be available to (1) @ 970.
(2) ; 663 The use of the words "reasonably earmarked" is also deliberate and significant.
The mere nominal allocation for binding purposes, such as gratuity etc.
in the Company 's books is not enough.
It must be ascertained by the Industrial Court on the material placed before it whether the said amount is far in excess of the requirements of the particular purpose for which it is so earmarked and whether it is only a device to reduce the claim of the labour for bonus".
What is meant by the above observations in the Khandesh Spinning & Wvg.
Mills case was later explained by Wanchoo J, as he then was in Bengal Kagazkal Mazdoor Union & Anr.
vs The Titaghur Paper Mills Co. Lid.(1).
This was what was said at page 54 "All that that decision lays down is that that part of the reserves which go to make up the working capital which is in the shape of raw materials etc.
or earmarked reserve will not be deducted from the I gross rehabilitation amount; it does not lay down that all cash reserves in the shape of depreciation reserve, general reserve, renewal reserve and so on and also in the shape of investments and advances cannot be deducted from the gross rehabilitation amount as they may be used as working capital next year".
Now the question of trade investments unconnected with the purposes of the industry fell for consideration in the National Engineering Industries Ltd. vs Its Workmen (2).
In this case the Company had an investment of Rs. 18.22 in shares, which were treated by this Tribunal as liquid assets available for rehabilitation.
But the Company contended that this investment can either be treated as a trading transaction carried out in the ordinary course of business or as a capital asset.
If it was the former then it should have been allowed the loss of Rs. 1.72 lakhs as trading expenditure but instead the tribunal had added the profits therefrom to the gross profits, thereby treating the investment as capital asset.
It could not therefore deduct Rs. 18.22 lakhs as a fund available for rehabilitation cost.
Negativing this contention of the Company, Shelat J, observed at page 796 797 : "We fail to see any contradiction on the part of the Tribunal.
The balance sheet for the year 1957 58 contains two schedules; Schedule A shows fixed assets and schedule B shows trade investments of the value of (1) (2) ; 664 Rs. 18,21,571/ .
The Company not being an investment Company the investment of Rs. 18.22 acs in shares of other joint stock Companies prima facie represents extra capital not required as working capital for otherwise the Company could not have spared this amount for investment in the stocks of other Companies.
The Tribunal was right in treating this investment as a capital asset and in refusing to treat the loss therefrom as trading expenditure. 'the Tribunal at the same time could deduct this amount from the rehabilitation cost because that amount was available to meet the rehabilitation cost.
The investment in shares could easily, if the Company was so minded, be converted into cash and utilised for replacement of its worn out machinery".
In Gannon Dunkerley 's case also these principles were reiterated.
It was held in that case that in calculating rehabilitation grant one of the principles which this Court has laid down is that the depreciation reserve must always be deducted irrespective of the fact whether it is available or not as a liquid asset.
In addition other reserves like general reserve are also to be deducted if they are available as liquid reserves and are not ear marked for any specific purpose.
The capital reserve and the development reserve can also be deducted if there is material to show that they existed in the form of liquid assets or cash.
The question would be whether they are capital assets of the Company kept in that form in the course of its business or whether they have been treated as investments outside the business for the purposes of earning extraneous income.
If they are investments made in the course of its business they are to be treated as part of the capital but otherwise if they are extraneous to the business they do not form part of the reserves available for rehabilitaion.
It may be observed that in the National Engineering Industries Ltd. vs lts Workmen(1), an exception had been made in the case of an investment Company the investment of which is to be treated as working capital employed in the business of the Company.
The Companies Act placed restrictions on the purchase of shares by one Company, of shares of any other body corporate except to the extent and except in accordance with the restrictions and conditions specified in Sec.
372 of that Act as amended by Act 65 of 1960.
373 it is enjoined on Companies investing after 1st April 1952 in shares of any other body corporate in exercise of the limit specified in sub section (2) and the second proviso to the said sub section of Sec. 372 to obtain the authority of 'he Central Government within six months from the commencement of the Act and if such authority and approval is not so obtained 665 the Board of Directors must dispose of the investments in excess of the limits specified in the aforesaid provision within two years from the commencement of the Act.
It is also provided by Sec.
372(10) that after the commencement of the Companies Amendment Act a statement should be annexed to the balance sheet giving the details of, the investments acquired; the bodies corporate in the same group, of which the shares have been acquired, whether the investments are existing or not, and the nature of the said investments.
An exception however has been made by the proviso to the said sub section in the case of investment Companies (which are those whose principal business is the acquisition of shares etc.) that it shall be sufficient if the investments, existing on the date as at which the balance sheet to which the statement is annexed has been made out From these provisions it is contended that the balance sheet in this case shows only those details which are required to be given by an investment Company which is also consistent with the plea,, ,that the investments of the Appellant were made prior to 1952 when it was an investment Trust Company and these investments, which are the same exceeded the limits prescribed by the Companies Amendment Act without having to conform to the conditions of having either to obtain approval of the Central Government or to dispose of the excess within two years i.e. by 31st March 1962.
On behalf of the Respondents however it is submitted that there has been no finding by the Tribunal that the Company is an Investment Company or that the investments were made prior to, 1952 as an Investment Company which would entitle it to treat those investments as not available for the purposes of rehabilitation within the exception indicated in the National Engineering Industries case.
In our view this submission has no force.
There is ample justification in the contention of the Appellant 's Advocate that the Tribunal did advert to the fact that the Company invested initially a capital of Rs. 75 lakhs as an investment Trust Company and from its inception these investments have been made and that it is only after the amendment in 1960 when it was not possible for it to invest further amounts that it changed its name, increased its capital and started the present industry.
On this, aspect of the matter the Tribunal stated thus : "Originally the Company was floated as J. K. Investments Trust Ltd. It had a share capital of Rs. 75 lakhs.
They invested this amount and some loans in debentures and loans.
Due to amendments in Company law they had to stop further investment from 1960 onwards and changed the name of the Company to J. K. Synthetics Limited, raised additional Rs. 50.00 lacs 666 share capital and started this Nylon factory.
Thus to date the share capital of the Company is Rs. 125.00 lacs including the old share capital of Rs. 75.00 lacs of J. K. investments Trust Ltd. Now instead of utilising the old share capital and loans invested in debentures the Company took separate loans to work the Nylon factory for which according to the balance sheet they had to pay over Rs. 5 lacs as interest on loans".
It is also apparent from Schedule 'E ' statement forming part of the balance sheet as at 30th June, 1963 that a list of trade investments held by the Appellant have been given.
There are two notes attached thereto.
Note (1) states Investments in the Companies marked with asterisks exceed ten per cent of their respective subscribed capital.
These investments were acquired before the commencement of the Companies (Amendment) Act, 1960, while Note (2) states The Total investments of the Company exceed thirty per cent of its subscribed capital.
These investments were acquired before the commencement of the Companies (Amendment) Act, 1960.
Having regard to these undisputed facts it appears to us clear that the trading investments were made prior to 1960 when the Company Was an Investment Company, as such these investments are not connected with the activities of the Company, are extraneous to its business and do not form part of the reserves available ,for rehabilitation.
In the circumstances the Tribunal is not justified in including this amount in the amounts available for rehabilitation purposes.
While this is so and the result of the non exclusion of Rs. 85.60 lakhs would result in a negative balance, the respondents as we have already held are entitled to challenge the claim for rehabilitation on the ground that the essential requisites have not been established by any cogent or sufficient evidence.
In computing the requirements for rehabilitation as has been stated often, regard must be had, to two imponderables out of the three main elements because one of them namely the original cost of the asset is specifically ascertainable while the other two have to be established as near as possible which might to some extent involve an estimate based on evidence deducible therefrom.
These two imponderables are the multiplier and the deviser.
Unless all these elements are determined the amount required for rehabilitation cannot be ascertained.
of course the scrap value of the old assets has also to be ascertained but this does not involve any difficulty because normally it is taken as 5% of the value of the assets at cost.
Even so the determination of the amount for rehabilitation no doubt poses problems but it is suggested that a reasonable method would be to divide them into blocks, accord 667 ing to the nature of the asset and the year in which the assets have been acquired.
The cost of the separate blocks has then to be ascertained and their probable future life has to be estimated.
Once this estimate is made it becomes possible to anticipate approximately the year when the plant and machinery would need replacement and the probable price of such requirement at a future date when the asset requires replacement.
In determining this difficult question the Tribunal as already observed must have before it all available evidence from which a reasonable and probable adjudication can be made in respect of these essential requisites.
The Respondent 's Advocate submits that the Tribunal while quite properly rejecting the evidence produced on behalf of the Appellants indulged in guess work when it adopted arbitrarily the multiplier and the deviser.
It is his case that the determination of the life of machinery depends on various factors such as for instance nature of the machinery, its quality, the nature of the industry, the efficiency of workmen etc.
In the Hindustan Motor 's case, Bhargava, J, after examining the several cases relating to this aspect of the matter observed at page 319 : "The life of machinery of one particular factory need not necessarily be the same as that of another factory.
Various factors come in that affect the useful life of a machinery.
There is, first the consideration of the quality of machinery installed.
If the machinery is purchased from a country producing higher quality of machines, it will naturally have longer life than the machinery purchased from another country where the quality of production is lower.
Again, the articles on which the machinery operates may very markedly vary the life of a machine.
If, for example, a machine is utilised for grinding of cement the strain on machine will necessarily not be the same as on a machine which operates on steel or iron".
In the Honorary Secretary South India Millowners ' Association & Ors.
vs The Secretary, Coimbatore District Textile Workers ' Union(1), to which a reference had been made in the above case, after accepting, on the facts of that case, that the life of the textile machinery was adopted as 25 years, this Court laid down the following principle at p. 933.
"We are not prepared to accept either argument because, in our opinion, the life of the machinery in every case has to be determined in the light of evidence adduced by the parties".
(1) [1962] 2 Supp.
S.C.R. 926.
668 The Advocate on behalf of the Appellant on the other hand says that the Full Bench Formula for determining rehabilitation as accepted in Associated Cement Companies(1) case laid down an elastic measure for determining the probable cost which was to be estimated "as near actualities or realities as possible".
At pages 967 968 Gajendragadkar J, as he then was observed : "The estimate about the probable life of the plant and machinery 'is itself to some extent a matter of guess work and any anticipation, however, intelligently made, about the probable trend of prices during the interven ing period would be nothing but a guess.
That is how, in determination of this problem, several imponderables face the tribunals.
One of the points which raises a controversy in this connection is : What level of prices should the tribunal consider in making its calculations about the probable cost of replacement. .
It seems to us that in order to enable the Tribunal to make an estimate in this matter as near actual ties of realises as possible it is necessary that the Tritunal should be given full discretion to admit all relevant evidence about the trend in price levels .
The problem of determining the probable cost of replacement itself is very difficult; but the difficulty is immediately increaser when it is remembered that the claim for rehabilitation covers not only cases of replacement pure and simple but of rehabilitation and modernisation.
In the context rehabilitation is distinguished from ordinary repairs which go into the working expenses of the industry.
It is also dis tinguished from replacement .
That is why we think it is necessary that the tribunals should exercise their discretion in admitting all relevant evidence which would enable them to determine this vexed question satisfactorily".
Keeping these observations in view what we must see is whether the Tribunal was justified on the evidence in adopting the particular multiplier and the deviser.
The stand taken by the management is that it had produced sufficient evidence in support of its own multiplier and deviser and in any case the learned Advocate says the Tribunal is right in arriving at its own conclusion.
In fact it is submitted, the management had made an application for appointment of an assessor to assist the Tribunal as an expert for determining the several questions appertaining to the computation of rehabilitation requirements, but that was rejected as the Tribunal did not feel any necessity for it and there is nothing more which the management could do in the circumstances.
(1)[1959] S.C.R. 925 @970.
669 It is pointed out that the Nylon industry was a new industry at the time when it was started and the evidence of the General Manager, who had been with the Company from the initial stages and throughout the negotiation for purchase of the machinery, says that according to the manufacturers the life of the machinery could only be six years.
That apart the management also produced sample invoices for each year and adduced the evidence of the Manager to prove what would be the cost of rehabilitation.
In fact it is said that the Appellant was fortunate in having actual invoices of machinery purchased because the Company had only then expanded its undertaking.
The Tribunal rejected the oral evidence on the ground that the witnesses produced by the management were no experts and they did not throw any material light on the matters to be adjudicated by it.
It also rejected the documentary evidence on the ground that the machinery which was said to have been purchased was not the same as was sought to be replaced and in any case there was not sufficient evidence for it to accept the multiplier and deviser as claimed by the management.
Whether this criticism is valid or not will depend largely on what in fact weighed with the Tribunal in arriving at the multiplier and the deviser.
No doubt the employer did make an appli cation to the Tribunal as noticed earlier and the same was rejected on 5 8 69 as it did not find it necessary to appoint an assessor.
The application itself was for requesting the Tribunal to appoint an assessor if it thinks necessary.
The management cannot without discharging its duty of placing all the necessary material before the Tribunal ask it to appoint an assessor who would be useless without that material.
We do not think in the circumstances the Tribunal was wrong in rejecting the application.
The Tribunal considered the evidence of S/Shri Jain, Aggarwal and that there had been hundred per cent increase in prices also machinery worth about Rs. 10 lakhs had already been replaced and that there had been hundred percent increase in prices also due to devaluation.
The witness was however, not able to give any details as to when the replacement of the parts and machinery took place even though the management kept the record of the replacement of the machinery.
He could not also explain what exactly was the impact of the devaluation of Rupee on prices.
He did not see the quotations of the machinery.
It was therefore concluded that his statement both with regard to the life of the machinery and the replacement cost was quite us less and was based on hearsay.
Shri Aggarwal 's evidence was also considered unsatisfactory, both with respect to the estimate of the replacement cost and the life of the machinery.
His calculations were based on a comparison of the original cost of machinery in invoices exhibit M. 1, M. 2 and M. 3 and their cost in 1967, as given in the corresponding invoices exhibit M. 4, M. 5 and M. 6 and the devalua 670 tion of the Rupee.
The Tribunal then considered the discrepancy between the machines mentioned in various exhibits.
No doubt there is some justification in the comment of the learned Advocate by the Tribunal merely because the machines mentioned therein for the Appellant that some of these invoices were not relied upon were different in size and weight to those which were installed in the factory.
Undoubtedly there would be a variation because the ingenuity of the inventor and technician is not static and as time goes on there are improvements, renovations and changes that make the machine more sophisticated and efficient.
While this is so the question is whether satisfactory evidence has been produced to prove the total cost of rehabilitation and also the life of the machinery.
The evidence of Talwar was equally found to be defective.
He was greatly relying on the Handbook of Chemical Engineers by John Parry, for establishing the life of the machinery.
He said that in that Book the life of a Chemical plant working in three shifts is shown to be 11 years.
He also admitted that the Author gives only the guideline for Income tax purposes only.
An extract of the Parry 's Handbook was also given by the Tribunal, which stated its conclusions as under : "In view of the above said infirmities it is evident that the management 's claim for rehabilitation is very much inflated.
The selection of the average multiplier is rather arbitrary or at least quite generous to the management and their estimate about the life of the machinery is slightly conservative.
From the available evidence on record he then proceeds to make his own estimates which as far as the life of the machinery is concerned was placed between that adopted for textile machinery of 25 years and the life given in he Chemical Engineers Handbook of 11 years.
It said after referring to the statement in the Chemical Engineer 's Handbook that the life of a Chemical machinery must be more than II years in America where they work efficiently to the maximum capacity of the machinery.
It was observed here the working conditions being different the machinery is likely to last longer and certainly due to poor economic conditions in the country the management also cannot afford to discard such valuable machines in eleven years only.
The life of the plant therefore must be more than 11 years.
On the other hand the ordinary life of textile machinery is taken to be 25 years or more.
In this view of the matter if we take the life of the machinery as 14 years it would still be on the side of the conservative estimate".
671 Regarding the multiplier the Tribunal said that : "The 1961 62 Block of the machinery would require replacement according to our estimate in 1975 76.
The Company 's claim of six times the original cost based on a comparative study of invoices exhibit M. 1 to M. 3 on the one hand and exhibit M. 4 to M. 6 on the other is very much inflated .
The Company has not produced the current price list also of the machinery or any price indices indicating the trend of prices of machines.
The prices of machines are more stabilised than prices of consumer goods.
The production of the machines has also gone up in the country and it is not impossible that by 1975 we might manufacture our own machines for Nylon factory also.
Even otherwise the prices of imported machines are not likely to be more than four times.
Therefore, in our opinion the multiplier should only be four for the block of 1961 62.
In awards also relied upon by Shri Talwar even though they considered only prewar block of machines, in no case they allowed a multiplier of six.
For the block of machines installed in the accounting year, ordinarily the unit is taken as the multiplier but as there has been in the meantime deva luation of the rupee we think it would on the whole be fair to adopt two as a suitable multiplier for the block installed in the accounting year".
It appears to us that this is an unsatisfactory way of determining the two most important factors required for computing the rehabilitation requirement.
The evidence produced before the Tribunal consisted only of a few invoices which were to serve as samples of the price of machines to show that they have gone up.
We are not impressed with the submission of the learned Advocate for the Appellant that a complete set of invoices in respect of all the Departments of the industry which required rehabilitation had been placed before the Tribunal.
Indeed the very application for appointment of Assessor demonstrably contradicts this assumption.
In this application the management stated that it did , 'examine S/Shri section section Aggarwal, A. C. Talwar as its expert witnesses and have filed some invoices by way of example to show the trend in rising cost in plant and machinery.
With regard to useful life of the plant the Respondent places reliance on Chemical Engineer 's Handbook IVth Edition by John Parry" (emphasis ours).
It is apparent from this application that the management was relying only on a few sample invoices which they said they had produced while depending heavily only on Parrv 's Handbook for ascertaining the life of the machinery and the probable cost.
672 We have also gone through the evidence of the three witnesses and the invoices referred to and we think that the Tribunal rightly rejected this evidence as not being of much assistance.
It is quite probable that the price of the indigenous industry as appearing from the bulletin of the Reserve Bank of India has gone up but that does not furnish a basis for arriving at any specific multiplier or deviser for the Appellant 's plant.
All that the invoices produced before the Tribunal establish is only the probable cost of machinery of 2 1/2 lakhs, in an attempt to prove the cost of replacement of plant and machinery worth Rs. 825 lakhs.
The Tribunal was therefore, amply justified in saying that the only evidence given is of the few invoices the value of which is only 2 1/2 % of the requirement of the replacement cost which in our view is not sufficient to establish, how many machines in each Department of the industry are required, what is the nature of those machines and what is the probable cost of each of those machines.
We are far from satisfied that the management has placed before the Tribunal any satisfactory evidence much less sufficient evidence to arrive at a multiplier and deviser nor has the Tribunal any bases for arriving at its own multiplier and deviser except it be on a pure conjecture and guess work.
The result is that though the appellant is able to succeed in one of the main points of his Appeal, the Appeal will have to be dismissed as the Respondents are able to sustain the Award on other grounds.
The circumstances of the case justify a direction for each party to bear its own costs.
S.C. Appeal dismissed.

summary/full:
A dispute for Bonus was raised by the workers of the Appellant company before the Tribunal for the Bonus year 1962 63, as the appellant company which made profit during the year, did not pay any bonus to the workers; but only a gratuity of one month was paid to them.
According to revised returns filed by the workers, there was an available surplus of Rs. 5.34 lakhs; but according to the management, there was a deficit.
There were two main points of dispute : (1) the workers challenged the deduction of Rs. 4.1 lakh received as dividend by the company as extraneous income.
According to the management however, as the company invested part of the paid up capital in hares which earned an income of Rs. 4.1 lakh, the company was entitled to claim this amount as an extraneous income because the workers had made no contribution in its earning and so this amount should be deducted from the gross profit.
(2) The workers also disputed Rs. 75.89 lakhs shown by the management as the annual share required for rehabilitation.
The management divided the plant and machinery of the company into two blocks.
The original cost of the plant and machinery for firdt block was 133.00 lakhs and Rs. 15.0 lakhs for the second block.
The appellant company claimed the `multiplier ' (which is the probable increase in the price of assets at the time of rehabilation over the original cost) for each of the two blocks as 6 and the `deviser ' (number of years after which the asset require s replacement) for the first block as 10 and for the second block as 11.
The Tribunal decided the first point against the management because even though there was share capital available to the appellant, instead of utilising it as working capital, it had borrowed amounts to work the Nylon factory for which it bad to pay an interest of over Rs. 5 lakhs.
In these circumstances, it disallowed the claim for deduction on the ground that it would be unfair to allow the management to treat the income from investments as extraneous income and still reduce the profits by raising loans and pay interests resulting in diminution of the surplus.
On the second point the Tribunal admitted only a fraction of the total amount as annual share required for 'rehabilitation.
It held the 'Multipliee as 4 for the first block and 2 for the second block and the 'deviser ' as 13 and 14 respectively.
After deducting the prior charges from the gross profits, the tribunal computed the available surplus to be Rs. 3.25 lakhs and of this, 60 per cent payable as bonus would come to Rs. 2,11,000/ .
As the company bad already distributed Rs. 90,000 the tribunal directed payment of the balance of Rs. 1,21,000/ a# bonus.
In appeal by special leave, a further point was agitated before the Court as to whether the Respondent can challenge a finding by the Tribunal in the absence of an appeal by it.
Dismissing the appeal, HELD, : (i) Since the dividend in the present case is the return from investment , of part of the paid up capital of the company which is invested for the purpose of earning an income, it cannot be construed as 652 ,extraneous income and the Tribunal is justified in disallowing tile dividend on shares as a valid deduction.
The return on paid up capital is one of the prior charges admissible as a valid deduction and if any amount is .earned from the employment of capital unconnected with the business of the company, the labour cannot claim the right to participate in its returns.
Further if any reserve is utilised for working capital, whether this .reserve is depreciation reserve or any reserve, a return in respect of they are also allowed as prior charges, at a reduced rate.
The company has the discretion to invest its capital in various activities; but it cannot deprive the workmen of the benefits of the returns derived therefrom unless the investments in such activity is extraneous to the activities of the company, in the earning of which the workers had not made any contribution.
In the present case, the return from the investments is a return on a part ,of the paid up capital which is invested for the purpose of earning an income and therefore, it is not extraneous income as claimed by the management.
[656 G B] (ii) The elements which are important for the computation of annual rehabilitation is the price of the asset at original cost, the period for which these assets can be used before requiring rehabilitation due to rise in prices, devaluation etc.
In other words, for computation of annual rehabilitation, the 'multiplier ' and the 'deviser ' is to he found out.
In the present case, the management failed to place satisfactory evidence before the Tribunal to arrive at a proper 'multiplier ' and 'deviser ' and in absence of any proof as to how and on what basis the Tribunal had arrived at its own 'multiplier ' and 'deviser ' on a pure conjecture and guess work, the appeal cannot be sustained.
Further, the Tribunal is not justified in including the trading investments to be available for the purpose of re habilitation as these investments were made prior to 1960 when the company was an investment company and as such these investments were not connected with the activities of the present company, which was floated only in 1960.
[666 G] (iii)In appeal, the respondents are entitled to challenge or support the judgmentin his favour given before the High Court even upon grounds which are negatived in the judgment.
Workmen of M/s. Hindustan Motors Ltd. vs M/s. Hindustan Motors Ltd. & Anr. ; , M/s. Gannon Dunkerley & Co. vs Their Workmen, , Management of Northern Railway Cooperative Society Ltd. vs Industrial Tribunal, Rajasthan; , , Ramabhal Ashabhai Patel vs Dabhai Ajit Kumar Fulshingji ; , Associated Cement Co. Ltd. vs Its Workmen, , Khandesh spinning & Wvg.
Mills Co. Ltd. vs Rashtriya Gir Kamgar Samiti Jalgoan, ; , Bengal Kagazkar Mazdoor Union vs Titaghar Paper Mills Co. Ltd., , National Engineering Indnstries Ltd. vs Its Workmen, ; and Honorary Secretary, Coimbatore District Textile Workers Union [1962] Supp. 2 S.C.R. 926, referred to.


judgement:
Appeal No. 1207 of 1968.
Appeal by special leave from the judgment and order dated May 10, 1967 of the Punjab and Haryana High Court in Letters Patent Appeal No. 159 of 1966.
V. C. Mahajan and R. N. Sachthey, for the appellants.
M. C. Setalvad, M. C. Bhandare, Rameshwar Nath, T. R. Bhasin and Lalit Bhasin, for the respondent.
The Judgment of the Court was delivered by Shelat, J.
The respondent company carries on business as hoteliers and conducts several hotels including the 'Cecil Hotel ' at Simla.
Besides conducting hotels, it also carries on restaurant business.
As part of its business as hoteliers, the company receives guests in its several hotels to whom, besides furnishing lodging, it also serves several other amenities, such as public and private room, bath with hot and cold running water, linen, meals during stated hours etc.
The bill tendered to the guest is an all inclusive one, that is to say, a fixed amount for the stay in the hotel for each day and does not contain different items of each of the aforesaid amenities.
That is, however, not the case in its restaurant business where a customer takes his meal consisting either of items of food of his choice or a fixed menu.
The primary function of such a restaurant is to serve meals desired by a customer, although along with the food, the customer gets certain other amenities also, such as service, linen etc.
The bill which 939 the customer pays is for the various food items which he consumes or at a definite rate for the fixed menu, as the case may be, which presumably takes into account service and other related amenities.
The respondent company, as such hoteliers, has been registered as a dealer under the Punjab General Sales Tax Act, XLVI of 1948 and has been filing quarterly returns and paying sales tax under that Act.
On September 2, 1958 the company applied for a declaration that it was not liable to pay sales tax in respect of meals served in the said Cecil Hotel to the guests coming there for stay.
In support of its plea, the company raised the following contentions : (1) that the, hotel receives guests primarily for the purpose of lodging, (2) that when so received, the management provides him with a number of amenities incidental to such lodging and with a view to render his stay in the hotel comfortable including meals at fixed hours, (3) that the transaction between the company and such a guest is one for the latter to stay and not one of sale of food stuffs supplied as one of the incidental amenities, (4) that the bill given by the company and paid by the guest is one and indivisible, that is, a fixed amount per day during his stay in the hotel and does not consist of separate items in respect of the several amenities furnished to him including meals served to him, and (5) that the transaction so entered into does not envisage any sale of food since the guest cannot demand a rebate or deduction if he were to miss a meal or meals, nor is he entitled to carry away or deal with in any manner the food served at his table, if a part of it remains unconsumed.
It is, on the other hand, the management which has the right to deal with such unconsumed remainder as it likes.
Such a position, therefore, is inconsistent with a sale under which the property in the whole must pass to the purchaser, and who can deal with the remainder in any manner he likes.
The Sales Tax Officer rejected the company 's application on the ground that the transaction Which takes place between the management and a resident guest takes in both lodging and boarding and the hotel charges include consideration for both.
A revision under section 21 of the Act by the company to the Commissioner met the same fate.
The company then filed a writ petition for an order quashing the said decision as also the notices issued by the Sales Tax authorities under the Act.
The grounds put forward in the writ petition were almost the same which the company had previously urged in its application for declaration.
There was no dispute regarding the facts stated in the writ petition and particularly with regard to the fact that the transac 940 tion which a visiting resident enters into with the management is one and indivisible, that the bill charged on him is likewise one and indivisible, that the charges are for each day of stay, and that that being so, the bill was incapable of being split up into separate charges for each of the amenities furnished and availed of by such a visiting resident.
The dispute was as to the nature of the transaction and whether such transaction included sale of food stuff supplied at various meals supplied to such a customer.
The High Court, on a consideration of the arguments urged before it and relying mainly upon the decision of this Court in Madras vs Gannon Dunkerley and Co. Ltd.(, '), to the effect that where a transaction is one and indivisible it cannot be split up so as to attract the Sales Tax Act to a part of it , allowed the writ petition.
It held that a transaction between a hotelier and his resident visitor did not involve a sale of food when the former supplied meals to the latter as one of the amenities during his residence, and that if there was one inclusive bill, it was incapable of being split up in the absence of any rates for the meals agreed to between the parties as part of the transaction between the two.
The High Court also held that the transaction was primarily one for lodging, that the board supplied by the management amounted to an amenity considered essential in these days in all properly conducted hotels, and that when so supplied, it could not be said to constitute a sale every time a meal was served to such a resident visitor.
This appeal, by special leave, is filed against this view of the High Court.
The question in this appeal, it would appear, arises in the present form for the first time.
There are, therefore, no previous decisions to guide its determination.
It would, however, be helpful to consider certain decisions both of this Court as also of the High Courts, in which different types of transactions which came up before them for consideration in sales tax cases have been dealt with and which might throw some light upon the problem before us.
In a case arising under the Assam Sales Tax Act, 1947 though there was no express sale in respect of gunny bags in which rice, an exempted commodity, was supplied to Government, they were held to form assessable turnover.
There was, however, in that case evidence that the assessees had charged the Government for those bags (Mohanlal Jogani Rice & Atta Mills V. Assam) (2).
In D. Masanda and Co. vs Commissioner of Sales Tax(3), the question was whether photographic materials imported and (1) ; (3) [1957] 8 S.T.C. 370.
(2) [1953] 4 S.T.C. 129.
941 used in the process of manufacturing photographic work, copies of which were supplied by the assessee to a customer, was a transaction involving sale of those materials.
The High Court held that such a transaction did not cease to be a sale merely because the materials were not sold directly in their original form but in another form, forming the, components of the finished product, namely, the copies of the photograph, and that the transaction was not merely the performance of skilled services but the supply of finished goods.
This was, however, a border line case.
The transaction might well be considered as one of service, during performance of which, a transfer of certain materials, in respect of which there was no contract for sale, either express or implied, may be said to have taken place.
An illustration of such a kind is furnished by the case of United Bleachers Ltd. vs Madras(1).
In that case the assessee bleached and dyed, calendered, pressed and folded unbleached yarn and cloth manufactured by his custo mer textile mills.
The bills issued by the assessee contained, (a) bleaching charges, and (b) charges for stitching, folding, stamping, baling etc., but did not contain separately charges for the materials used for those ' purposes.
The Revenue contended that there was transfer of those materials and separately assessed the charges of those materials holding that though the assessee did not specifically deal in those materials, a portion of the profit earned in the business of bleaching and calendering could legitimately be attributed to the packing materials and the transaction involved a sale of them for consideration.
On a reference, the High Court held that the case was one of contract of service as distinguished from a sale of a principal commodity, such as rice in Assam case (supra) and salt in Varasuki and Co. vs Madras(1) On the other hand, where a contract is to supply such commodity in a packed condition, it could be inferred, though the contract might not be express that the intention of the parties was to give and accept delivery of the goods in a packed condition and not to take the principal commodity alone so that in the contract of sale of such a commodity there was implicit the sale of packing material as well.
Even in a contract of service such as bleaching and calendering where the goods after such processing are delivered packed a sale of packing, materials is possible, quite apart from the contract of service.
The question in such cases would be one of evidence, whether there is such a contract beside the one of service.
Where however there are no such distinct contracts and the contract is one and indivisible, the essential part of which is one of service, packing would be part of or incidental to the service, and unless an intention to charge for the materials used in the packing can be spelt out, the Revenue would not be (1) [1960] 9 S.T.C. 278.
(2) [1950] 2 S.T.C. 1. 942 entitled to split up the contract, estimate approximately the charges for such materials and treat them as chargeable on the mere ground that the transaction involved transfer of packing materials, whose value must have been taken into consideration while fixing charges for the service.
Such an implied contract of supply of packing materials was inferred in a contract of service, namely, drying raw tobacco in Krishna and Co. Ltd. vs Andhra Pradesh But the decision in that case did not rest on there being a transfer of packing materials in favour of the customer.
There was evidence that such a transfer was for consideration, inasmuch as the amounts charged as remuneration for service also contained charges for the packing materials though such charges were not separately shown in the assessee 's accounts.
In such a state of evidence it would be possible for the Court to infer a separate implied contract of sale of packing materials and not as part of the service of drying raw tobacco and delivering it in packed condition.
The difficulty which the Courts have often to meet with in construing a contract of work and labour, on the one hand, and a contract for sale, on the other, arises because the distinction between the two is very often a fine one.
This is particularly so when the contract is a composite one involving both a contract of work and labour and a contract of sale.
Nevertheless, the distinction between the two rests on a clear principle.
A contract of sale is one whose main object is the transfer of property in, and the delivery of the possession of, a chattel as a chattel to the buyer.
Where the principal object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel, the contract is one of work and labour.
The test is whether or not the work and labour bestowed end in anything that can properly become the subject of sale; neither the ownership of materials, nor the value of the skill and labour as compared with the value of the materials, is conclusive, although such matters may be taken into consideration in determining, in the circumstances of a particular case, whether the contract is in substance one for work and labour or one for the sale of a chattel(1).
In Patnaik and Co. vs Orissa (3), a difference of opinion arose because of the fine distinction between the two types of contract.
The contract there was for constructing and fixing bus bodies on the chassis supplied by the Orissa Government.
The contract, infer alia, provide that the appellants were to construct the bus bodies in the most substantial and workmanlike manner (1) [1956] 7 S.T.C. 26.
(2) Halsbury 's Laws of England, 3rd Ed.
34, 6 7.
(3) [1965] 16 S.T.C. 364. 943 both as regards materials and otherwise in every respect in strict compliance with the specifications and should deliver them to the Governor on or before the dates specified therein.
The majority rejected the contention that that was a contract of work and labour and held that the transaction was one of sale.
The question primarily was one of construction of the contract, and the majority held that both the agreement and the sale related to one kind of property, namely, the bus bodies.
The reason for so.
holding was stated to be that it was clear from the contract that the property in the bus bodies did not pass on their being constructed on the chassis, but only when the vehicles including the bus bodies were delivered.
Such a contract was unlike a building contract or a contract under which a movable is to be fixed on to another chattel or on the land, where the intention plainly is not to sell that article but to improve the land or the other, chattel and the consideration is not for the transfer of the chattel but for the work and labour done and the materials furnished.
The contract in question was to manufacture a bus body and fix it on the chassis supplied and transfer the bus body so constructed for consideration.
In Madras vs Gannon Dunkerley and Co. Ltd.(1) the main question was as regards the vires of the Madras General Sales.
Tax Act, 1939, as amended by Madras Act XXV of 1947 which widened the definition of 'sale ' by including, inter alia, in it a transfer of property in the goods involved in the execution of a works contract.
Under this definition, the Sales Tax authority brought into chargeable turnover the materials used in the constructiOn works carried out by the company.
This Court held that a power to enact a law with respect to tax on sale of goods under entry 48 of List 11 in the 1935 Constitution Act must, to be intra vires, be one relating in fact to a sale of goods and that a Provincial Legislature could not, in the purported exercise of its power, tax transactions which were not sales, by enacting that they should be deemed to sales, that to construe a transaction as sale there should be an agreement relating to goods to be supplied by passing title in those goods, and that it was of the essence of such a concept that both the, agreement and the sale should relate to one and the same subject matter.
The conclusion arrived at was that in a building contract, even if it were to be disintegrated, there was no passing of title in the materials as movables in favour of the other party of the contract.
The contract was one and indivisible, there was no sale of materials, and consequently, there was no question of title to the materials used by the builders passing to the other party to the contract.
Even where the thing produced under a contract is movable property, the materials in (1) ; 944 corporated into it might pass as a movable.
But there would be no taxable sale if there was no agreement to sell the materials as such.
In arriving at this conclusion, the Court relied upon Appleby vs Myres(1) and the observations of Blackburn, J., at 659 660 of the report to show that thread stitched into a coat which is under repair becomes part of the coat, but in a contract for repairing the coat the parties surely did not enter into an agreement of sale of that thread.
In Andhra Pradesh vs Guntur Tobaccos Ltd.(2), the transaction was for redrying tobacco entrusted to the respondent company by its customers.
The process involved the keeping of the moisture content of tobacco leaf at a particular level and for that purpose the leaf had to be packed in bales, in water proof packing material, as it emerged from the reconditioning plant.
The tobacco was then returned to the customer packed in costly packing material.
In the, company 's charges for redrying there was no separate charge for the value of such packing material.
It was held that the redrying process could not be completed without the use of the packing material, that packing formed an integral part of that process, and that although the redried tobacco was returned together with the packing materials there was no sale of those materials as there was no intention on the part of the parties to enter into any transaction of sale as regards those materials.
The mere fact that in such a contract of work or service property in goods which belonged to the party performing service or executing the work stands transferred to the other party is not enough.
To constitute a taxable sale, the Revenue has to establish that there was a sale, distinct from the contract of work or service, of the property so passing to the other party.
Thus, in consider whether a transaction falls within the purview of sales tax it becomes necessary at the threshold to determine the nature of the contract involved in such a transaction for the purpose of ascertaining whether it constitutes a contract of sale or a contract of work or service.
If it is of the latter kind it obviously would not attract the tax.
From the decisions earlier cited it clearly emerges that such determination depends in each case upon its facts and circumstances.
Mere passing of property in an article or commodity during the course of the performance of the transaction in question does not render it a transaction of sale.
For, even in a contract purely of work or service, it is possible that articles may have to be used by the person executing the work and property in such articles or materials may pass to the other party.
That would not necessarily ,convert the contract into one of sale of these materials.
in ,every case the Court would have to find out what was the primary (1) [1867] L.R.2C.P.651.
(2) ; 945 object of the transaction and the intention of the parties while entering into it.
It may in some cases be that even while entering into a contract of work or even service, parties might enter into separate agreements, one of work and service and the other of sale and purchase of materials to be used in the course of executing the work or performing the service.
But, then in such cases the transaction would not be one and indivisible, but would fall into two separate agreements, one of work or service and the other of sale.
What precisely then is the nature of the transaction and the intention of the parties when a hotelier receives a guest in his hotel ? Is there in that transaction an intention to sell him food contained in the meals served to him during his stay in the hotel ? It stands to reason that during such stay a well equipped hotel Would have to furnish a number of amenities to render the customer 's stay comfortable.
In the supply of such amenities do the hotelier and his customer enter into several contracts every time an amenity is furnished ? When a traveler, by plane or by steam ship, purchases his passage ticket, the transaction is one for his passage from one place to another.
If, in the course of carrying out that transaction, the traveler is supplied with drinks or meals or cigarettes, no one would think that the transaction involves separate sales each time any of those things is supplied.
The transaction is essentially one of carrying the passenger to his destination and if in performance of the contract of carriage something is supplied to him, such supply is only incidental to that services, not changing either the pattern or the nature of the contract.
Similarly, when clothes are given for washing to a laundry, there is a transaction which essentially involves work or service, and if the laundery man stitches a button to a garment which has fallen off, there is no sale of the button or the thread.
A number of such cases involving incidental uses of materials can be cited.
none of which can be said to involve a sale as part of the main transaction.
The transaction in question is essentially one and indivisible.
namely, one of receiving a customer in the hotel to stay.
Even if the transaction is to be disintegrated, there is no question of the supply of meals during such stay constituting a separate contract of sale.
since no intention on the part of the parties to sell and purchase food stuff supplied during meal times can be realistically spelt out.
No doubt, the customer, during his stay, consumes a number of food stuffs.
It may be possible to say that the property in those food stuffs passes from the hotelier to the customer at least to the extent of the food stuffs consumed by him.
Even if that be so, mere transfer of property, as aforesaid, is not conclusive and does not render the event of such supply and con 946 sumption a sale, since there is no intention to sell and purchase.
The transaction essentially is one of service by the hotelier in the performance of which meals are served as part of and incidental to that service, such amenities being regarded as essential in all well conducted modem hotels.
The bill prepared by the hotelier is one and indivisible, not being capable by approximation of being split up into one for residence and the other for meals.
No doubt, such a bill would be prepared after consideration of the costs of meals, but that would be so for all the other amenities given to the customer.
For example, when the customer uses a fan in the room allotted to him, there is surely no sale of electricity, nor a hire of the fan.
Such amenities, including that of meals, are part and parcel of service which is in reality the transaction between the parties.
Even in the case of restaurants and other such places where customers go to be served with food and drink for immediate consumption at the premises, two conflicting views appear to prevail in the American courts.
According to one view, an implied warranty of wholesomeness and fitness for human consumption arises in the case of food served by a public eating place.
The transaction, in this view, constitutes a sale within the rules giving rise to such a warranty.
The nature of the contract in the sale of food by a restaurant to customers implies a reliance, it is said, on the skill and judgment of the restaurant keeper to furnish food fit for human consumption.
The other view is that such an implied warranty does not arise in such transactions.
This view is based on the theory that the transaction does not constitute a sale inasmuch as the proprietor of an eating place does not sell but "utters" provisions, and that it is the service that is predominant, the passing of title being merely incidental( ', ').
The two conflicting views present a choice between liability arising from a contract of implied warranty and for negligence in tort, a choice indicative of a conflict, in the words of Dean Pound, between social interest in the safety of an individual and the individual interest of the supplier of food.
The principle accepted in cases where warranty has been spelt out was that even though the transaction is not a sale, the basis for an implied warranty is the justifiable reliance on the judgment or skill of the warrant or and that a sale is not the only transaction in which such a warranty can be implied.
The relationship between the dispenser of food and one who consumes it on the premises is one of contractual relationship, a relationship of such a nature that an implied warranty of wholesomeness reflects the reality of the transaction involved and an express obligation understood by the parties in the sense that the customer does, in fact, rely upon such dispenser (1) Corputs Juris Section, Vol 77,1215 1216.
947 of food for more than the use of due care.
(see Cushing v Rodman(1).
A representative case propounding the opposite view is the case of F. W. Woolworth Co. vs Wilson(2), citing Nisky vs Childs Co.(3), wherein the principle accepted was that such cases involved no sales but only service and that the dispenser of food, such as a restaurant or a drug store keeper serving food for consumption at the premises did not sell and warrant food but uttered and served it and was liable in negligence, the rule in such cases being caveat emptor.
In England, a hotel under the Hotel Proprietors Act, 1956 is an establishment held out by the proprietor as offering food, drink, and if so required, sleeping accommodation, without special contract, to any traveller presenting himself and who appears able and willing to pay a reasonable sum for the services and facilities provided.
This definition, which is also the definition, of an inn, still excludes, as formerly, boarding houses, lodging houses and public houses which are merely alehouses and in none of which there is the obligation to receive and entertain guests.
An innkeeper, that is to say, in the present days a hotel proprietor, in his capacity as an in keeper is, on the other hand, bound by the common law or the custom of the realm to receive and lodge in his inn all comers who are travellers and to entertain them at reasonable prices without any special or previous contract unless he has some reasonable ground of refusal (4) .
The rights and obligations of hotel proprietors are governed by statute which has more or less incorporated the common law.
The contract between such a hotel proprietor and a traveller presenting himself to him for lodging is one which is essentially a contract of service and facilities provided at reasonable price.
The transaction between a hotelier and a visitor to his hotel is thus one essentially of service in the performance of which and as part of the amenities incidental to that service, the hotelier serves meals at stated hours.
The Revenue, therefore, was not entitled to split up the transaction into two parts, one of service and the other of sale of food stuffs and to split up also the bill charged by the hotelier as consisting of charges for lodging and charges for food stuffs served to him with a view to bring the latter under the Act.
The conclusion arrived at by the High Court is one with which we agree.
Consequently, the appeal fails and is dismissed with costs.
V.P.S. Appeal dismissed.
(1) 104 American L.R. 1023; Srs. 864, 868.
(2) Srs.
(3) 103 N.J. Law 464.
(4) Halsbury 's Laws of England, 3rd Ed., Vol. 21, 445 446.

dataset_name: IN-Abs

summary/full:
The respondent company was running the business of a hotelier and was registered as a dealer under the Punjab General Sales Tax Act, 1948.
It applied for a declaration that it was not liable to sales tax in respect of meals served to the guests staying in the hotel on the grounds that : (1) the hotel receives guests primarily for the purpose of lodging; (2) when so received the management provides him with a number of amenities including meals at fixed hours, incidental to such lodging and with a view to render hi , stay comfortable; (3) the transaction between the respondent and the guests is one for the latter to stay and not one of sale of food stuffs supplied; (4) the bill given by the respondent and paid by the guest is one and indivisible, being a fixed amount per day during his stay in the hotel and does not consist of separate items in respect of the several amenities furnished to him, and (5) the transaction does not envisage any sale of food since the guest cannot demand a rebate or deduction if he were to miss a meal or meals nor is he entitled to carry away or deal with, in any manner, the food served on his table if a part of it is not consumed.
The department rejected the company 's application but the High Court allowed its writ petition.
Dismissing the appeal to this Court, HELD : The transaction is one essentially of service in the performance of which and as part of the amenities incidental to that service, the hotelier serves meals at stated hours.
The Revenue, therefore, was not entitled to split up the transaction into two parts one of service and the other of sale of food stuffs and to split up the bill charged as consisting of charges for lodging and charges for food stuffs served with a view to bring the latter under the Act.
[947 F G] The distinction between a contract of sale and a contract of work and service is fine especially when the contract is a composite one involving both.
In considering whether a transaction is a sale falling within the purview of sales tax it is necessary to determine the nature of the contract involved on the facts of each case.
A contract of sale is one whose main object is the transfer of property and delivery of possession of a chattel to the buyer; but the mere passing of property in an article or commodity during the course of the performance of a transaction does not render it a transaction of sale when there is no intention to sell and purchase.
When the principal object of work undertaken by the payee of the price is not the transfer of a chattel qua chattel the contract is one of work and labour.
The test is whether or not the work or labour bestowed ends in anything that can properly become the subject of sale; neither the ownership of the materials nor the value of the skill 938 and labour as compared with the value of materials is conclusive, although such matters may be taken into consideration.
In every case the court would have to find out what is the primary object of the transaction and the intention of the parties while entering into it.
[942 D G: 944 F G. H] The transaction in the present case is one and indivisible, namely, one of receiving a customer in the hotel to stay.
The bill is not capable of being split up into one for residence and another for sale of meals.
Amenities including meals, are part and parcel of the service which, in reality, is the transaction between the parties.
Even if it was to be disintegrated the supply of meals during such stay does not constitute a separate contract of sale, since no intention on the part of the parties to sell and purchase the food stuffs supplied during meal time can be spelt out.
[945 G H; 946 A C] Madras vs Gannon Dunkerley & Co. Ltd., ; , Mohanlal Jogani Rice & Atta Mills.
vs Assam [1953] 4 S.T.C. 129, Masanda & Co. vs Commissioner of Sales tax, [1957] 8 S.T.C. 370, United Bleachers Ltd. vs Madras, (1960) 9 S.T.C. 278, Krishna & Co. Ltd. vs Andhra Pradesh, [1956] 7 S.T.C. 26, Patnaik & Co. vs Orissa, [1965] 16 S.T.C. 364, Andhra Pradesh vs Guntur Tobaccos Ltd. ; and English Law and United States Law, referred to.