An Overview of Payment of Bonus Act

Overview of Payment of Bonus Act 1965

Payment of Bonus Ordinance & Act: The Government of India appointed a Commission, known as the Bonus Commission, by its resolution dated 6 th December 1961. The Bonus Commission submitted its report to the Government on 18 th January 1964. The Government Government Accepted the report repo rt with with slight modifications by their resolution dated 2 nd September September 1964. In order  to give give statutory statutor y effect to t o the recom recommendations endatio ns made by the Bonus Commission, an ordinance known as Payment of Bonus Ordinance was promoted promoted in May 1965. The Ordinan Ordi nance ce was w as later later replaced replaced by the Payment of Bonus Act, 1965.

Object of the Act: The Object of the Payment of Bonus Act, 1965 is to maintain peace & harmony between labour & Capital & to persons employed in certain establishments. - To impose statutory liability upon an employer of every establishment establishment covered by the Act Act to pay bonus bonus to employees employees in the establishment; - To define the principle of payment of bonus according to the  prescribed  prescribed formu formula; - To provide provide for for payment payment of minimum minimum & maximum bonus; - To provide provide machinery machinery for enforc enforcem ement ent of the liabilit liabi lity y for payment payment of bonus. bonus. ( A minimum bonus of of 8.33% 8.33% of the wage or salary salary ( up to Rs. Rs. 1600) 1 600) of an employee employee ( Rs. Rs. 60 60 incase incase of the the employees employees below the age of 15 yrs) is payable irrespective of the fact whether the establishment establishment has made made a profit profit or loss )

Application of the Act: The Act extends to the whole of India [Sec. 1(2)]. - Every factory [as defined in Sec. 2(m) of the Factories Act, 1948; - Every other establishment in which 20 or more persons are employed on any day during any accounting year [Sec. 1(3)]. ( The Appropriate Government can make the provisions of the Payment of Bonus Act, 1965 applicable to any establishment employing less than 20 but not less than 10 persons. The Appropriate Government can do so after giving a notice of not less than 2 months by issuing a notification in the Official Gazette & specifying therein the accounting year from which the enforcement of the provisions will be made).

Establishments to include departments, undertakings &  branches ( Sec. 3): Sec. 3 provides that where an establishment consists of different departments or undertakings or has branches, whether situated in the same place or in different places, all such departments or  undertakings or branches shall be treated as parts of the same establishments for the purpose of computation of bonus under this Act. Where for any accounting year a separate balance-sheet & P&L a/c are prepared & maintained in respect of any such department or undertaking or branch shall be treated as a separate establishment for the purpose of computation of bonus under this Act for that year, unless such department or undertaking or branch was, immediately before the commencement of that accounting year, treated as part of the establishment for the purpose of computation of  the bonus.

Act not to apply to certain categories of employees ( Sec. 32): - Employees employed by any insurer carrying on general insurance  business & the employees employed by the LIC of India; - Seamen as defined in the Merchant Shipping Act, 1958; - Employees registered or listed under any scheme made under the Dock Workers ( Regulation of Employment ) Act, 1948, & employed by the registered or listed employers; - Employees employed by an establishment engaged in any industry carried on by or under the Authority of any department of the Central Government or a State Government or a Local Authority; - Employees employed through contractors on building Operations;

- Employees Employed by--The Indian Red Cross Society or any other institution of a like nature ( including its branches); Universities & other Educational Institutions; Institutions ( including hospitals, chambers of commerce & social welfare institutions) established not for purposes of profit; - Employees Employed by the RBI; - Employees employed by inland water transport establishments operating on routes passing through any other country; - Employees employed by —  The Industrial Finance Corporation of India; The Financial Corporation or State Financial Corporation The Deposit Insurance Corporation The NABARD, UTI, IDBI, SIDBI, NHB

Power of Exemption (Sec. 36): The Appropriate Government may having regard to the financial  position & other relevant circumstances of any establishments exempt by notification in the Official Gazette such establishment or  class of establishments from all or any of the provisions of the Payment of Bonus Act. It may do so if is of opinion that it will not  be in public interest to apply all or any of the provisions of the Act to such establishment or class of establishments. An order passed in  proceeding under Sec. 36 refusing exemption must be speaking one, if it is passed without giving reasons, it is invalid. Any decision taken under Sec. 36 must be an objective one & not based on irrelevant or extraneous considerations.

Salary or wage [Sec. 2(21)]: It means all remuneration (other than remuneration in respect of  overtime work) capable of being expressed in terms of money which would, if the terms of employment, express or implied were fulfilled, be payable to an employee in respect of his employment or  of work done in such employment. It includes dearness allowance,  but does not include —  - the value of house-accommodation or supply of light, water, medical attendance or other amenity or concessional supply of food grains; - Any travelling concession, Any Commission payable to employee; - Any bonus (including incentive, production & attendance bonus); - Any retrenchment compensation or any gratuity or other retirement  benefit payable to the employee.

Eligibility & Disqualification for Bonus: Eligibility for Bonus ( Sec. 8): Every Employee shall be entitled to be paid by his employer in an accounting year, bonus in accordance with the provisions of the Act,  provided he has worked in the establishment for not less than 30 working days in that year. Where an employee has not worked for  all the working days in any accounting year, the bonus payable to him shall be proportionately reduced.

Disqualification for Bonus ( Sec. 9): - Fraud; OR  - Violent behavior while on the premises of the establishment; OR  - Theft, misappropriation or sabotage of any property of the establishment.

Determination of Bonus: I. Computation of gross profit ( Sec. 4): Where a new company was created wholly owned by the principal company, with no assets of its own except those transferred to it by the principal company, with no business or income of its own except receiving dividends form shares transferred to it by the principal company, it was held that the new company was formed as a device to reduce the gross profits of the principal company & thereby reduce the amount to be paid by way of bonus to workmen. The amount of dividend received by the new company should therefore  be taken into account in assessing the gross profits to the principal company. [ Workmen Employed in Associated Rubber Industry Ltd v. Associated Rubber Industry Ltd, 1986]

- Computation of gross profits in case of a banking company: Sec.4(a) Items to be added back to net profit: 1. Provisions for bonus to employees, & bonus paid to employees in respect of previous accounting years, to the extent charged to P&L a/c; 2. Provision for depreciation; 3. Provision for development rebate reserve, to the extent charged to P&L a/c; 4. Provision for any other reserves, to the extent charged to P&L a/c; 5. The amount debited in respect of gratuity paid or payable to employees in excess of the aggregate; 6. Donations in excess of the amount admissible for income-tax; 7. Losses of, or expenditure relating to any business suited outside India; 8. Capital receipts & Capital profits including profits on the sale of  capital assets on which depreciation has not been allowed for IT.

Items to be deducted: 1. Capital receipts & capital profits other than profits on the sale of  assets on which depreciation has been allowed for Income Tax to the extent credited to P&L a/c; 2. Income of foreign banking companies from investments outside India, to the extent credited to P&L a/c; 3. Refund of any excess direct tax paid for previous accounting years & excess provision, if any of previous accounting years relating to  bonus, depreciation or development rebate, if written back, to the extent credited to P&L a/c; 4. Cash subsidy if any, given by the Government or by any body corporate established by any law for the time being in force or by any other agency through budgetary grants to the extent credited to P&L a/c.

Computation of gross profits in other cases: [ 2 nd Schedule] The Manner of computing the gross profits derived by non-banking establishments is specified in the Second Schedule to the Act. Items to be added back to the net profit: 1. Provision for bonus to employees & bonus paid in respect of   previous accounting years, to the extent charged to P&L a/c; 2. Provision for depreciation; 3. Provision for direct tax, including the provision if any for   previous accounting years; 4. Provision for development rebate/investment allowance/ development allowance reserve, to the extent charged to P&L a/c; 5. Donations in excess of the amount admissible for IT; 6. Losses or expenditure relating to any business situated outside India.

Items to be deducted: 1. Capital receipts & capital profits other than profits on the sale of  assets on which depreciation has been allowed for Income Tax to the extent credited to P&L a/c; 2. Capital receipts & capital profits other than profits on the sale of  assets on which depreciation has been allowed for IT or Agricultural IT to the extent credited to P&L a/c; 3. Profits & receipts relating to any business situated outside India, to the extent credited to P&L a/c; 4. Refund of any direct tax paid for previous accounting years & excess provision, if any of previous accounting years relating to  bonus, depreciation, taxation or development rebate or development allowance, if written back to the extent credited to P&L a/c.

II. Determination of Available Surplus ( Sec. 5): The available surplus in respect of an accounting year shall be the  —  aggregate of  1. The gross profit for that accounting year after deducting there from sums referred in Sec. 6; 2. An amount equal to the difference between —  - The direct tax, calculated in accordance with the provisions of Sec. 7 in respect of an amount equal to the gross profits of the employer  for the immediately preceding accounting year; & - The direct tax, calculated in accordance with the provisions of Sec. 7 in respect of an amount equal to the gross profits of the employer  for such preceding accounting year after deducting there from the amount of bonus which the employer has paid or is liable to pay to his employees in accordance with the provisions of this Act for that year.

Sums deductible from gross profit ( Sec. 6): - Any amount by way of depreciation admissible in accordance with the provisions of Sec. 32(1) of the IT Act, 1961 or in accordance with the provisions of the Agricultural IT law, as the case may be; - Any amount by way of development rebate or investment allowance or development allowance which the employer is entitled to deduct from his Income under IT Act, 1961; - Any direct tax which the employer is liable to pay for the accounting year in respect of his income, profits & gains during that year; - Any other sum specified in respect of the employer in the 3rd Schedule.

3rd Schedule: In respect of a Company other than a banking company: - The dividends payable on its preference share capital for the accounting year calculated at the actual rate at which such dividends are payable; - 8.5% of its paid-up equity share capital as a the commencement of  the accounting year; - 6% of its reserves shown in its balance sheet as at the commencement of the accounting year, including any profit carried forward from the previous accounting year.

In respect of a Banking Company: - The dividends payable on its preference share capital for the accounting year calculated at the rate at which dividends are  payable; - 7.5% of its paid-up equity share capital as a the commencement of  the accounting year; - 5% of its reserves shown in its B/S at the commencement of the accounting year, including any profits carried forward from the  previous accounting year. In respect of a Corporation: - 8.5% of its paid up capital as at the commencement of the accounting year; - 6% of its reserves, if any shown in its B/S as at the commencement of the accounting year, including any profit carried forward form the  previous accounting year.

In respect of a Co-operative Society: - 8.5% of the capital invested by such society in the establishment as evidenced from its books of a/c at the commencement of the accounting year; - Such sum has been carried forward in respect of the accounting year to a reserve fund under any law relating to co-operative societies for the time  being in force.

Any employer other than a banking company, being a licensee within the meaning of the Electricity Supply Act, 1948: - The sums mentioned in 3 rd Schedule to be deducted as prior charges from gross profit to arrive at the available surplus are in the nature of dividend  payable on Preference capital & Equity share capital & Interest at a certain fixed rate on the reserves of the employer; - Items as are required to be appropriated by the licensee in respect of the accounting year to a reserve under the 6 th Schedule to the Electricity Act, 1948 shall also be deducted.

Any other employer not falling under any of the aforesaid categories: - 8.5% of the capital invested by him in his establishment as evidenced from his books of account at the commencement of the accounting year; - Where such employer is a firm an amount of 25% of the gross profits derived by it from the establishment in respect of the accounting year after  deducting depreciation in accordance with the provisions of Sec. 6(a) by way of remuneration to all the partners taking part in the conduct of   business of the establishment shall also be deducted; - Where such employer is an individual or a Hindu Undivided family An amount equal to 25% of the gross profits derived by such employer  from the establishment in respect of the accounting year after deducting depreciation in accordance with the provisions of Sec. 6(a) or  Rs 48000 whichever is less, by way of remuneration to such employer  shall also be deducted.

Calculation of direct tax payable by the employer ( Sec. 7): Any direct tax payable by the employer for any accounting year  shall, subject to the following provisions, be calculated at the rates applicable to the income of the employer for that year. - In calculating such tax no account shall be taken of  —  1. Any loss incurred by the employer in respect of any previous accounting year & carried forward under any law for the time being in force relating to direct taxes; 2. Any arrears of depreciation which the employer is entitled to add to the amount of allowance for depreciation for any following accounting year or years under Sec. 32 of the IT Act, 1961. - Where the employer is an individual or a Hindu Undivided Family, the tax payable by such employer under the Income-Tax Act, 1961 shall be calculated on the basis that the Income derived by him from the establishment is his only income;

- Where the Income of any employer includes any profits & gains derived form the export of any goods or merchandise out of India any rebate on such income is allowed under any law for the time  being in force relating to direct taxes, then, no account shall be taken of such rebate; - No account shall be taken of any rebate other than development rebate, or investment allowance, or development allowance or credit or relief or deduction in the payment of any direct tax allowed under  any law for the time being in force relating to direct taxes for the development of any industry.

III. Allocable Surplus: The allocable surplus is the workers share in the available surplus. Rules to be followed for its distribution are as follows: - Amount of Bonus: The bonus formula as envisaged in the Act provides for the payment of  minimum & maximum bonus to the employees in an accounting year  so that they are not deprived of any bonus in the accounting year. The  bonus is payable even if there are losses in that particular accounting year. 1. Minimum Bonus (Sec. 10): Subject to the other provisions of the Act, every employer shall be  bound to pay a minimum bonus which shall be 8.33% of the salary or  wage earned by the employee during the accounting year or Rs. 100 ( Rs. 60 in case of employees below 15 years of age ), whichever is higher. The minimum bonus is payable whether or not the employer  has any allocable surplus in the accounting year.

2. Maximum Bonus (Sec. 11): Bonus at a rate higher than the minimum rate is payable only when the allocable surplus in a particular accounting year exceeds the amount of minimum bonus referred in Sec. 10 payable to the employees. It is paid to a maximum of 20% of such salary or wage. - ‘Set on’ & ‘Set off’ of allocable surplus (Sec. 15): Payment of Wages Act, 1965 envisages a scheme prescribing minimum & maximum rates of bonus together with the scheme of  ‘set on’ & ‘set of’ of allocable surplus. Set on- Where the allocable surplus for any accounting year exceeds the amount of maximum bonus payable to the employees in the establishment under Sec. 11 then the excess of allocable surplus, subject to a limit of 20% of total salary or wage of the employees employed in that accounting year, shall be carried forward for being set on to the succeeding accounting year.

Set off- Where for any accounting year, there is no allocable surplus or the allocable surplus in respect of that year falls short of the amount of minimum bonus payable to the employees in the establishment under Sec. 10, & there is no amount or sufficient amount carried forward & set on which could be utilized for the  purpose of payment of the minimum bonus, then such minimum amount or the deficiency, shall be carried forward for being set off  in the succeeding accounting year. - Proportionate reduction in bonus in certain cases ( Sec. 13): Where an employee has not worked for all the working days in any accounting year, the minimum bonus of Rs. 100 as the case may be of Rs. 60, if such bonus is higher than 8.33% of his salary or wage for the days he has worked in that accounting year shall be  proportionately reduced.

Computation of number of working days (Sec. 14): Sec. 14 provides that an employee shall be deemed to have worked in an establishment in the accounting year also on the days on which —  He has been on leave with salary or wage; He has been absent due to temporary disablement caused by accident arising out of & in the course of his employment; & The Employee has been on maternity leave with salary or wage, during the accounting year. - Adjustment of customary or interim bonus against bonus payable under the Act ( Sec. 17): Sec. 17 authorizes the employer to deduct the amount of Pooja Bonus or other customary bonus paid to an employee in an accounting year  from the amount of bonus payable to him to the employee under the Act in respect of hat accounting year. The employee in such a case is entitled to receive only the balance. Customary bonus is a voluntary  payment made by the employer to its employees to meet special of a festival

- Deduction of certain amounts from bonus ( Sec. 18): Where In any accounting year an employee is found guilty of  misconduct causing financial loss to the employer it shall be lawful for  the employer to deduct the amount of loss form the amount of bonus  payable by him to the employee under this Act in respect of that accounting year only & the employee shall be entitled to receive the  balance, if any; - Time limit for payment of bonus ( Sec. 19): All the amounts payable to an employee by way of bonus under the Act shall be paid in cash by his employer  —  1. Where there is a dispute regarding payment of bonus pending before any authority under Sec. 22 within a month from the date on which the award becomes enforceable or the settlement comes into operation, in respect of such dispute; 2. In any other case, within a period of 8 months form the close of the accounting year.

The Fourth Schedule: In this schedule the total amount of bonus equal to 8.33% of the annual salary or wage payable to all employees is assumed to be Rs. 1,04,167. Accordingly the maximum bonus to which all the employees are entitled to be paid ( 20% of the annual salary or wage of all the employees) would be Rs. 2,50,000. - Recovery of bonus ( Sec. 21): Where any money is due to an employee by way of bonus from his employer under a settlement or an award or agreement, he may make an application to the appropriate Government for the recovery of  money due to him. If the appropriate Government or authority may specify in this behalf is satisfied that any money is so due, it shall issue a certificate for that amount to the collector who shall proceed to recover the same as an arrear of land revenue. The mode of recovery  prescribed in Sec. 21 shall be available only if the bonus sought to be recovered is under a settlement or an award or an agreement.

The application under Sec. 21 for the recovery of any amount of   bonus due from an employer to an employee may be made by —  The employee himself; OR  Any other person authorized by the employee in writing to act on his  behalf; OR  In case of the death of the employee, his assignees or heirs. The existence of ‘Sufficient cause’ is a condition precedent for the exercise of discretion under Sec. 21. Sufficient cause must mean a cause beyond the control of the party invoking the aid of this Sec. A cause for delay which a party could have avoided by the exercise of  the care & attention cannot be a sufficient cause. In other words The Court must be able to say, having regard to the facts & circumstances of the case, that the delay was reasonable.

Special Provisions with Respect to Certain Establishments ( Sec. 16): In case of a new establishment whether before or after the commencement of the Act, its employees shall be entitled to be paid  bonus under Act in accordance with the provisions of Sec. 16. The liability for paying bonus in a newly set up establishment has to be  judged with reference to different accounting years- First 5 accounting years: Bonus by a new establishment in the first 5 accounting years following the accounting year in which the employer sells the goods  produced or manufactured by him or renders services, from such establishment shall be payable only in respect of the accounting year  in which the employer derives profits from such establishment.

- 6th & 7th Accounting year: For 6th & 7th accounting years in which the employer sells the goods  produced or manufactured by him or renders services, from such establishment the provisions of Sec. 15 shall apply subject to following modifications--For the 6th accounting year, set on or set off, shall be made in the manner illustrated in 4th schedule taking into account the excess or  deficiency, of the allocable surplus set on or set off of 5 th, 6th years; For the 7th accounting year, set on or set off, shall be made in the manner illustrated in 4th schedule taking into account the excess or  deficiency, of the allocable surplus set on or set off of 5 th,6th,7th years - From 8th accounting year: For 8th accounting years in which the employer sells the goods  produced or manufactured by him or renders services, from such establishment the provisions of Sec. 15 shall apply in relation to such establishment as they apply in relation to any other establishment.

Special Provision with respect to payment of bonus linked with production or productivity ( Sec. 31-A): Where the employees have entered into an agreement with their  employer for payment of an annual bonus linked with production or   productivity in lieu of bonus based on profits under Payment of  Bonus Act, 1965, then such employees shall be entitled to receive  bonus due to them under such agreement. But any such agreement or settlement whereby the employees relinquish their right to receive the minimum bonus under Sec. 10 shall be null & void as it purports to deprive them of such right. Further, such employees shall not be entitled to be paid any bonus in excess of 20% of the salary or wage earned by them during the relevant accounting year.