Case Note & Summary
The Supreme Court of India heard an appeal by special leave against an award dated 29 April 1961 passed by the State Industrial Court, Nagpur, under Section 38(a) of the Central Provinces and Berar Industrial Disputes Settlement Act, 1947. The dispute concerned a licensee company that supplied electricity to the public within the municipal limits of Akola. The company's license was due to expire on 6 December 1959, and the State Electricity Board had earlier, by notice dated 27 November 1957, intimated its intention to purchase the undertaking upon expiry. In view of the impending closure, the employees raised a claim for gratuity. An earlier Industrial Court award dated 4 December 1959 directed payment of gratuity, but on the company's application under Article 227 of the Constitution, the Nagpur High Court set aside that award and remanded the matter for reconsideration of the company's financial condition. After taking evidence, the Industrial Court concluded that the company was in a sound financial position and could bear a gratuity burden of Rs. 50,000 or more. It consequently made a fresh award directing gratuity at the rate of one month's average wage for employees with at least five years of continuous service, with the average wage calculated for the period from 1 December 1958 to 30 November 1959. This award was made more than a year after the company had ceased business. Before the Supreme Court, the appellant company contended that the Tribunal was not justified in imposing a gratuity scheme when the business had already closed, arguing that gratuity schemes are planned on a long-term basis and are meant to provide retirement benefits to employees who retire from year to year, not to an entire workforce upon closure. The respondents relied on Indian Hume Pipe Co. v. Its Workmen and Bharatkhand Textile Mfg. Co. v. Textile Labour Association to argue that neither retrenchment compensation nor provident fund schemes barred a gratuity scheme, implying that closure should not bar it either. The Court accepted the appellant's submission, observing that gratuity schemes are not based on any statutory enactment but have been evolved by industrial adjudication as a step towards social justice. Industrial adjudication has always proceeded on the assumption that only a small percentage of workmen retire in any particular year, making the gratuity burden manageable. However, when the industry is about to close or has closed, the entire body of workmen would retire at once, and in substance though not in name, the provision of gratuity would be equivalent to granting retrenchment compensation in addition to what is statutorily provided. The Court found no justification for such an imposition in the principles of social justice. It distinguished the two cited cases, noting that neither dealt with the situation of an industry on the verge of closure or already closed. The Court also quoted from Bharatkhand Textile Mfg. Co. to emphasise that before framing a gratuity scheme, industrial adjudication must take into account relevant facts such as financial condition, profit-making capacity, reserves, and ability to bear the burden on a long-term basis. The Court held that gratuity schemes are always made in the expectation that the industry will continue to function for a long time. Accordingly, the Supreme Court held that the Industrial Court acted wrongly in directing gratuity, allowed the appeal, and set aside the award. It made no order as to costs.
Headnote
A) Labour Law - Gratuity Scheme - Long-Term Viability and Closure - Section 38(a) Central Provinces and Berar Industrial Disputes Settlement Act, 1947 - The Industrial Court at Nagpur framed a gratuity scheme for the employees of an electricity supply company after its license had expired and its business had ceased, directing payment of one month's average wage to employees with not less than five years' continuous service. The Supreme Court held that gratuity schemes are always made in the expectation that the industry will continue functioning for a long time, and framing such a scheme after closure is unjustified because the entire body of workmen retires at one and the same time, making the provision in substance equivalent to additional retrenchment compensation. Held that the Industrial Court acted wrongly in directing gratuity, and the award was set aside (Paras 1-25). B) Labour Law - Gratuity and Retrenchment Compensation - Distinction and Closure Overlap - Indian Hume Pipe Co. v. Its Workmen, [1960] 2 S.C.R. 32 and Bharatkhand Textile Mfg. Co. v. Textile Labour Association, [1960] 3 S.C.R. 329 distinguished - The Court noted that earlier cases established that statutory retrenchment compensation or provident fund schemes do not bar a gratuity scheme, but none of those cases dealt with an industry that was about to close or had already closed. The Court reasoned that social justice does not justify imposing a gratuity burden that would operate as a duplicate retrenchment benefit. Held that the closure of an industry is a bar to framing a gratuity scheme (Paras 6-22).
Issue of Consideration
Whether an Industrial Court or Tribunal is justified in framing a gratuity scheme for employees where the employer industry is on the verge of closure or has already ceased to carry on its business.
Final Decision
Appeal allowed; the award made by the Industrial Court was set aside; no order as to costs.
Law Points
- Gratuity schemes are not based on any statutory enactment but evolved by industrial adjudication as a step towards social justice
- gratuity schemes presuppose that the industry will continue to function for a long time
- framing a gratuity scheme when an industry is on the verge of closure or has closed is unjustified because the entire workforce retires at once
- making the provision equivalent to additional retrenchment compensation
- the ability of an industry to bear a gratuity burden must be assessed on a long-term basis considering average yearly retirements
