Genuine business expenditure and the settled bonus formula must be applied before computing distributable surplus and workmen's bonus.

A genuine, contractually binding service fee paid under a technical aid agreement could not be disallowed in bonus computation merely because the tribunal questioned its commercial necessity; absent evidence that the payment was sham or intended to suppress profits, the expenditure had to be treated as a permissible business outlay. The settled bonus formula also required recognised prior charges to be deducted before ascertaining available surplus, so treating bonus itself as a prior charge was an impermissible departure from the formula. The award was modified accordingly, the service fee was restored, and bonus was recalculated on that basis.

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Issues: (i) Whether the Industrial Tribunal was justified in disallowing the major portion of the service fee paid by the company to its parent company while computing surplus for bonus; (ii) Whether the Tribunal was justified in varying the bonus calculation by treating bonus as a prior charge ahead of the recognised prior charges under the bonus formula.

Issue (i): Whether the Industrial Tribunal was justified in disallowing the major portion of the service fee paid by the company to its parent company while computing surplus for bonus.

Analysis: The service fee was payable under a binding technical aid agreement under which the company obtained designs, technical processes, expert assistance, training facilities, machinery support and the right to use the parent company's trade marks. The payment had been accepted year after year by the income-tax authorities as an allowable business expenditure and had also been approved by the Reserve Bank and the relevant Government departments. In the absence of evidence that the payment was sham or designed to suppress profits for depriving workmen of bonus, the Tribunal could not substitute its own view of commercial necessity for the management's judgment.

Conclusion: The disallowance of the major portion of the service fee was unjustified and could not be sustained.

Issue (ii): Whether the Tribunal was justified in varying the bonus calculation by treating bonus as a prior charge ahead of the recognised prior charges under the bonus formula.

Analysis: The established bonus formula requires the ascertainment of available surplus after deducting recognised prior charges and then the distribution of that surplus among the industry, shareholders and workmen. Treating bonus itself as a prior charge before those deductions departs from the formula and amounts to an ad hoc computation. Such a departure is inconsistent with settled industrial adjudication principles.

Conclusion: The Tribunal's variation of the bonus formula on that basis was not proper.

Final Conclusion: The award was modified by restoring the service fee as a permissible business outlay and by recalculating the bonus accordingly, resulting in a reduced bonus entitlement for the workmen.

Ratio Decidendi: An Industrial Tribunal cannot disallow a genuine and contractually binding business expenditure on its own notion of commercial necessity unless there is evidence that the expenditure is sham or was incurred to manipulate profits, and it must apply the settled bonus formula by first deducting recognised prior charges before determining distributable surplus.

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