1.

INTRODCTION

Prior to the enactment of the payment of the bonus act, 1965 in India, Payment of Bonus by
the employer has not been regular feature in the industrial establishment. Later Payment of
Bonus has assumed important because it has become the subject matter of numerous
industrial disputes. Therefore, the payment of bonus enables to establish harmonious relations
between workers and management. After passing the payment of bonus, bonus which was
once regarded has Ex- Gratia payment, has now regarded has worker’s legitimate share an
account of their participation in the process of production. It has become a mandatory
obligation to pay their employers with the view to bridge the gap between the actual wage
and living wage so long as living standard as the goal lay down in the constitution is not
reached. 1 Similarly, in Standard Vacuum Oil Company v. Their Workmen, 2 the tribunal held
that bonus is intended to shorten the gap between actual and ideal wages of a living wage.

2.HISTORY OF BONUS

In India, the practice of paying bonus was adopted during war time. It seems emerged after
World War-I when certain mills granted 10 percent of wage increase in 1970 as war bonus
(Later it was called as special allowance) 3 because the world war- 1 cause inflation. IN 1991,
the war bonus was enhanced to 35 percent of basic wage. In 1924, bonus disputes committee
under the chairmanship of sir Norman Macleod (Then Chief Justice of Bombay High Court)
was appointed by the government of Bombay. The committee had examined the nature and
basis of bonus. The committee did not consider bonus as enforceable claim. Further the
committee has held the workers don’t have the right to claim as the workers had not
established any enforceable claim, customary, legal or equitable, to the payment annually of a
bonus which would be upheld in a Court of Law. The Committee observed that bonus is to be
paid as ex-gratia payment to the employees depending upon the circumstances and wish of
the employers.

Later during the World War II, Payment of Bonus was made voluntary by those
industries which had reaped huge profit. Industrial dispute was raised against those
employers who could not make the payment of bonus. The passing of time, the workers

1
Inland Steam Navigation Workers’ Union v. Inland General Navigation and Railway Company, (1957) LAC 231.
2
(1954) II LLJ 253.
3
Jalan Trading Company v. Mill Mazdoor Sabha, AIR 1967 SC 691.
raised industrial dispute for non-payment of bonus. The adjudicators recognized that the
demand for bonus being an industrial claim could be upheld when wages fall short of living
standard and the industries made huge profit, for the part of which were due to the
contribution which workers made, in increasing the production (Kothari p-63)

The concept of bonus has become a settled principle of industrial law with advent of
constitution of India. The payment of bonus has been treated legitimated claim based on the
consideration of social justice.

3.FULL BENCH FORMULA OF BONUS

The full bench formula of bonus was evolved by the land mark case Rajsri Mill Mazzdoe son
v. Mill Owner Association4. In this case, the court held that the bonus is not anex-gratia
payment made graciously by the employer for determining the amount of bonus, the amount
of availablesurplus of the employer has to be determined. The Labour Appellate Tribunal
devised the formula for determining the available surplus of the profits for the payment to
workers as bonus. Therefore, the formula is otherwise called as available surplus formula.
According to the Formulas bonus was to paid it there was a surplus available after deducting
certain prior charges. These prior charges wereas follows:

1. Provision for depreciation

2. Reserves for rehabilitation
3. Return at 6 percent on paid-up capital.
4. Return on the working capital at any rate but less than 6 percent.

It is important to note that according to this formula bonus was not payable if there was no
available surplus left with the employer.

In Associated Cement Companies Ltd. v. Their workmen, 5 the employees challenged the full
Bench formula on the ground that reserve for rehabilitation as prior charge was permitted
without subjecting it to any upper limits while other deductions as prior charges were
permitted subject to certain maximum limit. Therefore, deduction permitting reserve for
rehabilitation which did not subject to any upper limit was unconstitutional and arbitrary.
Further, demand for revision was sought on the question of abolition of rehabilitation at the

4
1950 Vol II LLJ 1247.
5
1959 Vol I LLJ 644 SC
prior charge. While rejecting the contention of the workmen the Supreme Court observed
that:

“If the legislature feels that the claim for social and economic justice made by labour should
be re-defined on a clearer basis, it can step in and legislate in that behalf. It may also be
possible to have the question comprehensively considered by a high-powered commission
which may be asked to examine the pros and cons of the problem in all its aspects by taking
evidence from all industries and bodies of workmen”.

Similarly in Ahmedabad Miscellaneous Industrial Workers’ Union v. Ahmedabad Electricity

Company Ltd.6, the reserve for rehabilitation was again challenged. The Supreme Court
accepted the objection and suggested the Government to appoint a high-powered commission
to examine the issues relating to payment of bonus.

4.APPOINTMENT OF BONUS COMMISSION

Even though, the industrial tribunals and Supreme Court made effort to evolve just and
equitable norm for determination of available surplus, industries were struggled by numerous
litigation due to the controversies in the determination of provision for rehabilitation. Hence,
bonus commission was set up in 1961 to enquire into the whole question of bonus and to
identify acceptable norms for the payment of bonus. This is the tripartite commission
consisted of the following members:

1. Two representatives of the employer,

2. Two representatives of the employees,
3. Two representatives of consumers,
4. One chairman with high judicial experience.

The seven member high power bonus commission was presided over by Mr. M.R. Meher,
Chairman of Industrial Tribunal Bombay, to evolve a detailed scheme by addressing all the
issues relating to the full bench formula. The commission has submitted its report on 18 th
January 1954 by giving a new dimension to the concept of bonus. The Government adopted
the recommendation of the bonus commission with slight modification in the payment of
bonus ordinance 1955. Later the ordinance was replaced by the Payment of Bonus Act, 1965
when it received the assent of President of India on 25 th September 1965.

6
1961 II LLJ 377
5.OBJECTIVES OF THE ACT

The Scheme of the Act has been under the following objectives:

 To impose statutory obligation upon the employer of every establishment covered by

the act to pay bonus to the employees in the establishment.
 To define the principle of payment of bonus according to the prescribed formula.
 To provide for payment of minimum and maximum bonus and link the payment of
bonus with the scheme of “set-off” and “Set-on”.
 To provide machinery for the enforcement of the liability for the payment of bonus 7.

6.EXTENT AND APPLICATION OF THE ACT

The Act extends to whole of India. In the first instance it applies to:

a. Every factory; and

b. Every other establishment in which 20 or more persons are employed on any day
during an accounting year.

After the application of the Act to an industrial establishment, it shall continue to apply not
withstanding that the number of persons employed therein falls below 20.

Factory:

There is no separate definition is provided under the Act. But Section 2(17) of the Act
provides definition which defines that factory shall have the meaning as in clause (m) of
Section 2 of the Factories Act, 1948. Similarly, establishment has also not been exclusively
defined under the Act. The establishment means the place in which one is personally fixed for
business for necessary equipment, any office or place of business. 8

Whereas the Payment of Bonus Act defines Establishment, Corporation, company and Co-
operative Society as follows:

7
Jalan Trading Company v. Mill Mazdoor Sabha, AIR 1967 SC 691
8
S.N. Mishra, Labour and Industrial Laws, Allahabad: Central Law Publications, 2019 Edn. P. 942
Section 2(15) – Establishment in Private Sector means any establishment other than as
establishment in public sector.

Section 2(16) – Establishment in public sector means an establishment owned, controlled and
managed by

(a) A Government company as defined in Section 617 of the Companies Act, 1956
(b) A corporation in which not less than forty per cent of its capital is held (whether
singly or taken together) by –
i. The Government; or
ii. The Reserve Bank of India; or
iii. A corporation owned by the Government or the Reserve Bank of India;

According to Section 2(11) “Corporation” means any body corporate established by or under
any Central, Principal or State Act. It does not include a company or a co-operative society.

Section 2(9) – “Company” means any company defined in Section 3 of the Companies Act,
1956 and includes a foreign company within the meaning of Section 591 of that Act.

Section 2(10) – “Co-operative Society” means a society registered or deemed to be registered

under the Co-operative Societies Act, 1912 or any other law for the time being in force in any
State relating to co-operative societies.

7. APPLICATION BY NOTIFICATION

The Central Government / State Government may extend the provisions of the Act to any
establishment employing less than 20% in an accounting year. However, the number of
persons employed in any establishment must not be less than 10 9. But such application can be
made by notification in the Official Gazette after giving not less than 2 months’ notice of its
intent to apply the Act.

8.SCOPE OF THE ACT:

The Act covers any person who has been employed for hire and reward and receiving
salary/wages up to Rs. 21,000/-. For the purpose of applicability of the Act, counting of
number of employees working in the branches/departments of the same establishments

9
Section 1(3) of the Act.
whether situated in the same place or different places should be taken into account. 10 The Act
covers probationer11 but does not cover apprentice as per section 2(13) 12 of the Act.

9.DEFINITION, NATURE AND SCOPE OF BONUS

DEFINITION

The term bonus was neither defined in the Payment of Bonus Act, nor in any legislative
enactment. The encyclopedia Britannica has defined bonus as “an award in cash or its
equivalent by an employer to an employee, for accomplishment other than that paid by
regular wages, such accomplishment being considered desirable and perhaps implied, though
not intended as a stimulus but may also express a desire on the part of the employer to share
with the employees the fruits of their joint enterprise”. 13

A bonus is a reward, could be a monetary or a non-monetary one, that is given to an

employee on top of their base salary.

Bonuses can be a part of an organization’s employee benefits, that are promised to the

employees for their achievements, contributions, or their tenure. Some bonuses could go out

to one employee or one department, while others might go out to the whole workforce in case

of a big win or a celebration.

The nature of bonuses that an organization has in store for its employees depends on the

industry's best practices, and the size and type of business you are running. Let’s expand on

that and read about all the different bonuses that can be added to businesses in virtually all

industries. 14

10
Section 3 of the Act.
11
Secretary Bank of Mathura Ltd. v. General Secretary, Bank of Mathura Employees Union, (1970) 2 LLJ 91
12
Definition of employee
13
I. Satya Sundaram, National Wage Policy, Delhi, B.R. Publishing Corporation, 1987 Edn. P. 201

14.Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023) .

10.DEFINITION OF BONUS BY TEXTILE LABOUR INQUIRY COMMITTEE:

The term “Bonus” is applied to a cash payment made in addition to wages. It generally
represents the cash incentive given conditionally on certain standards of attendance and
efficiency being attained.

11.DEFINITION OF BONUS BY BONUS COMMISSION:

The concept of bonus is difficult to define in rigid terms, but it is possible to urge that once
profits exceed a certain base, labour should legitimately have a share in them. In other words,
we think it proper to construe the concept of bonus as sharing by the workers in the
prosperity of the concern in which they are employed. This has also the advantage that in the
case of low paid workers such sharing in prosperity augments their earnings and so helps to
bridge the gap between the actual wage and the need-based wage.

12.NATURE AND SCOPE OF BONUS:

Moral and Sociological Dimension

The purpose of bonus is to mitigate or abolish the present gap between the low level of wages
and fair and living wages. These are the moral and sociological dimensions of the issue. The
award of Durga Pooja, Onam and other festival bonus comes under this category. 15

Economic Dimension

The second dimension of bonus is economic which is embedded in task, performance and
production bonus as these are differently called.

Dimension in the direction of industrial democracy

This dimension of bonus is related to industrial socialism and is in the direction of

recognition of industrial democracy and co-partnership in industry has been accepted as the
economic ideal. The aim is to ensure fair distribution of benefits and risks of modern industry
and technology between the labour and the entrepreneurial classes.

15
I. Satya Sundaram, National Wage Policy, Delhi, B.R. Publishing Corporation, 1987 Edn. P. 201
Bonus and Wages

Wages is different from bonus as it is determined on long-term basis and are not necessary
dependent on the profit made in a particular year.16 In Sri Meenakshi mills limited v. their
workmen,17 it was held that bonus is neither, as it etymological meaning suggests, a mere
matter of bounty gratuitously made by the employer to his employees, nor is it a matter of
deferred wages.

The term bonus conveys the idea of sharing the profits in the industry and applies to cash
payment in addition to wages. In Muir Mills Company Ltd. v. Suti Mill Mazdoor Union,
Kanpur,18the Court observed that bonus represent the cash incentive given on some
conditions, e.g, attainment of certain standard and efficiency. Wages is different from bonus
as it is determined on long-term wages and are not necessarily dependent on the profit made
in the particular year. 19 In Herclues Insurance Company v. their workmen20, the Supreme
Court observed:

“Bonus under the Industrial Disputes Act is not a part of wages . . . Bonus can be claimed as
a matter of right provided of course, by the application of the Full Bench Formula it is shown
that for the relevant year the employer has sufficient available surplus in hand”.

Bonus and profit sharing and productivity linked to bonus

Bonus is not covered under the technical meaning of the term profit sharing. But it takes the
form of sharing profits. In Burn and Company Ltd. v. Suti Mills Mazdoor Union21, in law, a
claim for bonus will be admissible only if the bonus has resulted during the year in sufficient
profits. And as a reason for the grant of bonus is that workers should share in the prosperity
to which they have contributed, all of them would have the right to participate in it. It has

16
M/s. Lipton Ltd. v. Their employees, (1959) I LLJ 431 SC
17
(1958) I LLJ 239
18
(1955) I SCR 991
19
M/s. Lipton Ltd. v. Their employees, (1959) I LLJ 431 SC
20
(1961) I LLJ 249
21
AIR 1957 SC 38
been reiterated by the Supreme Court in State of Mysore v. Workers in Gold Mines 22, as
follows:

“The recognition of workmen’s claim for bonus rests on the view, which is now established,
that both labour and capital contribute to the earnings of the industrial concern and that social
justice requires that workmen should be allowed a reasonable share in the profits made by the
industry”.

There are two different proposals to devise a system to construe the concept of bonus. The
first one is the system of profit-based bonus and the second is payment of bonus linked to
production or productivity. When an attempt is made to compare the system of profit-based
bonus, linking of bonus to productivity is an idea that would give scope to management for
keeping down labour’s share of the cake. 23 Even in case of profit linked bonus there is
practical difficulties with regard to the profit as depends on a number of practice. However,
the object of the Payment of Bonus Act is to provide for the payment of bonus to persons
employed in certain establishments on the basis of profit or on the basis of production or
productivity and for matters connected therewith. 24

Bonus – If deferred wage

Generally employees feel that bonus payment should be compulsory, irrespective of the firms
profits or losses. But the concept of deferred wage has been consistently opposed by the
employers. The Supreme Court has examined the issue whether bonus is a deferred wage in
Muir Mills Ltd. v. Suti Mills Mazdoor Union, 25 and held that bonus is not a deferred wage
because, had it been a deferred wage it would have ranked for priority before the dividend is
paid to the share holder. Since bonus is not paid before the dividend is paid to the share
holder, it is not a deferred wage.

Bonus and Dividend

Labourers contribute to the surplus is significant and should be enjoyed by them as the due
share in their surplus. Like shareholders who receive dividend from the firm was generating
surplus, workers are also to be treated as shareholders. Therefore, bonus is considered as ex-

22
AIR 1958 SC 923
23
I. Satya Sundaram, National Wage Policy, Delhi, B.R. Publishing Corporation, 1987 Edn. P. 223
24
Preamble, Payment of Bonus Act, 1965
25
AIR 1955 SC 170
post payment having relation to the prosperity of an organisation. In Greaves Cotton and
Crompton Parkinson Ltd. v. their workmen26, the distinction has been drawn between bonus
and dividend. The circumstances and consideration which determine whether any and if so,
what dividend will be paid, bear no relation to the circumstances and consideration governing
the grant of bonus.

13. KINDS OF BONUS

In India there are four kinds of Bonus widely prevalent in Industries which are as follows:

1. Customary or festival bonus,

2. Attendance bonus,
3. Incentive bonus, and
4. Prosperity bonus.
5. Discretionary Bonus
6. Non-Discretionary Bonus
7. Profit-Sharing
8. Gain Sharing
9. Spot Bonus Award
10. Non-Cash Bonus
11. Project Bonus
12. Task Bonus / Milestone Bonus / Mission Bonus
13. Sign-On Bonus
14. Referral Bonus
15. Retention Bonus
16. Holiday Bonus
17. Sales Commission
18. Gift Cards
19. Annual Bonus

26
(1956) I LLJ 486 LAT
1. Customary or Festival Bonus:

This type of payment of bonus in connection with some festivals has become customary. For
example: In pooja festivals many firms use to pay their employees bonus to meet special
pooja expenses. When payment was not made disputes arose and were adjudicated by various
tribunals. In Mahalaxmi cotton mills v. Mahalaxmi cotton mills workers union 27, the workers
claimed pooja bonus as a matter of right which is payable at the time of Durga pooja in
Bengal. The Labour Appellate Tribunal observed that receiving of pooja bonus is not based
on the general principle that labour and capital should share the surplus profit available after
meeting the necessary and prior charges, whereas it is based on agreement between the
employers and workers. Therefore, the claim for pooja bonus is based on either of the two
grounds:

 It may either be a matter of express agreement between employers and employees

creating a term of employment for the payment of pooja bonus, or
 It may be implied agreement between employers and employees creating a term of
employment for the payment of pooja bonus.

In order to determine an inference of an implied agreement the test has been laid down as
follows:

 The payment must be unbroken,

 It must be for a sufficiently long period, and
 The circumstances in which payment was made should be such as to exclude that it
was made out of bounty.

Similarly, in Sanghi Jeevaraj Ghewar Chand and others v. Secretary, Madras Chillies, Grains
Kirana Merchants Workers’ Union & Another 28, the Court held that customary bonus does
not require calculation of prior available surplus, because it is founded on long usage and
justified often by spending on festivals.

27
(1952) II LLJ 635
28
(1969) 1 SCR 366
2. Attendance Bonus:

Attendance bonus is primarily intended for the permanent operatives working on daily wage
basis.29 The benefit of attendance bonus cannot be claimed by badly or temporary workmen
on account of uncertainty in the tenure of their service. 30

In Baidyanath Ayurveda Bhawan Mazdoor Union v. Management,31 the Court examined

whether attendance bonus was included in the bonus payable to the workmen under the
Payment of Bonus
Act. In the instance case, the workmen in the establishment had been receiving attendance
bonus which is being paid in the establishment before passing of the Payment of Bonus Act,
1965. The employer did not pay bonus for the year 1966-67 and hence an industrial dispute
was raised and referred to adjudication under Section 10. The Tribunal found that workmen
were entitled to attendance bonus over and above the bonus payable under the Payment of
Bonus Act. The employer challenged the award before the High Court on the ground that no
separate attendance bonus was payable when bonus was being paid under the Act. The High
Court held that the workmen were not entitled to payment of attendance bonus for the year
1966-67 and accordingly vacated the award of the tribunal. An appeal was filed by Special
Leave before the Supreme Court. The Supreme Court held that the High Court was not right
in vacating the award. The Court also held that if the employer had not challenged the award,
the workmen would have the benefit of the bonus more than a decade back and directed that
the amount found by the tribunal for being given as attendance bonus shall carry interest at
the rate of 9% per annum from the due date till disbursement.

Attendance bonuses, as the name suggests, are rewarded to those with an immaculate record

of attendance. This is given to employees who have near-perfect attendance, those who reach

on time and exit the office on time. Companies could distribute this bonus either on an annual

basis or a quarterly one.

29
S.C. Srivastava, Labour Law in Factories, Mines, Plantations, Transport, Shops and other industrial
establishments, New Delhi, Prentice Hall of India Pvt. Ltd., 1982, P. 427
30
Titagarh Papers Mills Company Ltd. v. ---- AIR 1959 SC 1095
31
(1984) I SCC 279
This bonus is particularly common in service-based industries that pertain to the workforces

at restaurants, hotels, pharmacies, etc., which are open and on-duty throughout the year.

Workforces like these must work all year round even during special days and festivals and

hence perfect attendance does not go unnoticed, and is, therefore, rewarded.

3. Incentive Bonus:

Incentive bonus is given as a cash incentive to appreciate the effort on the part of the labour.
The essential condition for the payment of incentive bonus is that industry concerned must
earn profit of which is due to the contribution which the workmen made in increasing
production.32

4. Prosperity Bonus:

This kind of bonus is paid to workers for higher production. According to the amount of work
done, the amount of bonus is paid to workers and it varies from worker to worker. The very
aliment of variation in its quantum excludes it from the concept of basic wages which are
always fixed and uniform for all the workmen falling under the same category. 33

5. Discretionary Bonus

A discretionary bonus comes as a kind of bonus that is given to the particular employee with

the sole discretion of the employer. It mostly comes in the form of variable pay as a total

surprise. These bonuses are never expected by the employee receiving them and do not

follow any employee benefits guidelines. There are also no eligibility criteria for receiving

this kind of bonus. The details of this bonus, like the amount, requirements, and timing of

handing this particular reward are kept hush until the benefactor is announced to the

workforce.

32
Mathura Kanchi v. Labour Appellate Tribunal (1958) 2 LLJ 265
33
Muir Mills Company Ltd. v. Suti Mill Mazdoor Union, Kanpur, AIR 1960 SC 985
A discretionary bonus is usually rewarded to an employee when they make a huge leap in

their career or deliver exceptional performance in a certain amount of time.34

6.Non-Discretionary Bonus

Unlike discretionary bonuses, non-discretionary bonuses are based on airtight eligibility

criteria and well-defined guidelines. These are bonuses that the employees look forward to

and know how to perform to get to them. If all the criteria are met, the organization is liable

to provide the promised bonus to the employees.

Non-discretionary bonuses are aimed at setting tangible goals and targets for the workforce to

achieve. These work like incentives for employees and the workforce is always looking to

achieve these for the rewards at the end of the tunnel. 35

7.Profit-Sharing

Profit-sharing is a way of presenting bonuses to the whole workforce. The employer

pays their employees using a share of the net profits gained by the business on top of

their base salary. This bonus could be provided to the employees on an annual basis or

could be included as a surplus in their pension plans.

Profit-sharing is actually a very interesting type of bonus because it gives the

employees the feeling that they contribute positively and quite significantly to the

growth of the company. It helps foster a work environment where everyone feels

valued and motivated enough to work hard towards the collective goals of the

organization.

The concept of profit-sharing is now being accepted in the industrial world and on the

government level as well. 36

34
. Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023).
35
. Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023).
8.Gain Sharing

For gain-sharing bonuses or gainsharing, organizations map out several formulations

so that the gains and profits won by an organization can be judiciously distributed

among the workforce of the organization.

Firstly, the organization works on creating a baseline by marking the actual

performance of the company. According to this baseline, all the gains and profits are

calculated and the amounts that can be distributed within the team are determined.

The employees are provided with these shared gains on a monthly or quarterly basis.

Gainsharing challenges employees to work with higher efficiency and produce better

results. It serves the workforce as an incentive where their efforts would translate into

literal gains, a part of which will further go into their own pockets. 37
9.Spot Bonus Award

Spot awards, as the name suggests, are awards that are given to employees on the spot

for achievements that they have achieved recently. Spot awards may or may not stick

to eligibility criteria or a set of defined guidelines.

Spot bonuses actively help boost workplace morale. These are given to the employees

who go above and beyond and aid in a particularly big achievement. While most

employees are eligible to receive this type of bonus, top officials might not be eligible

to receive the same.

Spot bonuses act as rewards that create an environment of motivation,

encouragement, and zeal. These awards are typically awarded to individuals and not

teams. While most of the time, these awards are rewarded without a vote, according to

36
Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023).
37
Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023).
 the very apparent performances of the employees, some could also be given because a

manager nominates an employee to receive the same. 38

10. Non-Cash Bonus

Non-cash rewards are exactly what their name says, they are non-monetary. Even

though this particular bonus will come in the form of a reward that has financial

value, it is still not a prize amount that is contained in a cheque or a gift card.

This bonus comes in the form of a more meaningful, more thoughtful award. This

could be something unique, and definitely something tangible, but nothing that the

recipient may have expected to receive.

Non-cash awards could also become a part of a tradition at the office, where these

bonuses could be given to anyone who was winning and keeping up with a similar

kind of stature. This would help make the work environment and company culture

more enriching. In fact, this sort of award system could become a highly motivating

venture for your employees to rally around and, consequently, work hard for. 39
11. Project Bonus

Project bonuses, as the name suggests, are rewarded on a project-per-project basis.

When a team or a department gets done with a particular project, and all the rollout

and feedback processes are done for, companies (who follow the guidelines to giving

out this particular bonus) provide these teams with a project bonus.

Planning this business takes the meticulous efforts made by the HR department as

well as the management of the particular department/team as per project timeline,

38
Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023).
39
Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023).
 milestones, and final targets. Generally, a project bonus is a cash price that is given to

the whole team as a one-time payout.

Also known as goal bonuses, these bonuses help in securing an environment for

employee motivation where the team gathers together to play against all odds and beat

the deadlines while also systematically achieving a trail of goals that finally reach

project completion. 40
12. Task Bonus / Milestone Bonus / Mission Bonus

Much like a project bonus, a task/milestone/mission bonus is built and put into effect

to reward the team or individual when they surpass a certain mission, reach a

particular milestone or wrap up an important task. Usually allocated to projects that

come with a highly critical deadline, this reward is handed to the employee/employees

right in the middle of the project while the milestone is achieved, or the crucial task is

done.

In companies where the Scrum practice is followed and sprints are run, teams deliver

feature after feature in the duration of different sprints, and hence when a sprint is

over, a team is done with a huge feature that is added to the program that is under

construction, which is one example of where a milestone/task business could be

rewarded as a bonus.

The company, or the heads of teams, have a whole chart prepared for the direction of

the project, the tasks that take the team to fruition of the project, and the critical

milestones that are to be achieved on the way. Therefore, to help drive the project

forward at a consistent pace while meeting all deadlines, the team is given

40
Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023) .
 opportunities to achieve these types of bonuses that can help them steam up their

engines and get ready for the next task/sprint/milestone. 41

13.Sign-On Bonus

A sign-on bonus is one that is handed to an employee when they are accepting the job

offer and joining the organization. This is a time when skills have branched out, and

there are specialists and experts for just about every job. Other than that, there is also

a lot of competition in the market for who will get the best talent.

A sign-on bonus comes in handy where you need to make sure that the employee that

you are hiring does not make a lateral move and goes someplace else for another

hiring company, or when the skills that you are looking for are extremely hard to

find.

Different organizations have different types of bonus allotment policies. Where some

organizations would find the concept alien, others might have a set of sign-on bonus

policies that differ from each other’s a lot. Most organizations make the joining

employee sign a contract that states that the employee would have to forfeit the bonus

amount if they are to leave the employment from the organization before a defined

amount of time. 42
14.Referral Bonus

A referral bonus, as you might know, or have guessed by the name is provided to an

employee when they refer a certain asset to the team while they are in search of the

same. When an employee refers an outsider for an open position at the workplace,

41
.
Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023)

42
Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023).
 they are entitled to a referral bonus (that is, if your workplace offers one in the first

place).

Some organizations help promote the onboarding and the welcoming of new and

diverse talent through employee connections, this not only helps the org dip into a

larger talent pool but also helps them hire people who are somewhat verified.

The amount that a referral bonus comes with could vary from role to role. It could be

a flat amount for every role, or it could vary according to the specificity of the skills

required – in the end, it all depends on the policies of the particular company. 43

15. Retention Bonus

A retention bonus is a unique kind of bonus or reward compensation that an employee

receives in the event of a merger or an acquisition. It could also be given to an

employee who is involved in a high capacity within the organization and is leaving

the company for a better offer. The retention bonus, as the name suggests, is the kind

of incentive that encourages employees to stay with the company for a longer period

of time.

The amount that a retention bonus holds depends on the employee’s salary, their role

in the organization, the budget, and financial situation, and the tenure for which the

employee has stayed in the company. 44

16.Holiday Bonus

With the rise in stress levels, remote working leading to loneliness, blurring lines

between home and work, and the pressure to stay abreast of all new trends and talents,

people are more likely to fall prey to burnout. This is dealt with by companies all

43
Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023).
44
Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023).
 around the world by offering their employees a holiday bonus on a timely basis when

they win a particularly big achievement.

A holiday bonus is generally a gift to the employees that comes as a reward that

promotes wellbeing, refreshment, and rejuvenation instead of a more mainstream

monetary compensation45.
17. Sales Commission

Sales commission is a very easy tactic to give employees a bonus. According to the

performance of the employee and the kind of sale they make, teams, especially

employees from the sales team are entitled to earn a surplus amount that directly goes

into their own pockets. This commission comes as a bonus above the base salary that

the employees already receive.

The commission acts as an incentive to push the salespeople to make more sales and

hence bring in more clients, customers, and prospects for the organization as a whole.

Sales commission is actually a beautiful tool helping everyone to make a win out of a

simple situation like making a sale. 46

18.Gift Cards

While cash prizes and holiday bonuses are an amazing incentive and a motivation

tactic to work towards, another amazing choice for a bonus that will work for the

same kind of a morale boost is a gift card.

Gift cards as a bonus were mainly introduced among workforces because monetary

rewards can be particularly alienating for the other employees. While monetary boosts

45
Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023).
46
Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023).
 are only meant to motivate people, they can also cause a feeling of inferiority and

envy among the other employees.

There are numerous benefits to giving gift cards to the employees, for instance, it

provides the employees with the ability to choose what they would like to buy for

themselves. It is also a cost-effective solution for the company while also creating a

rather memorable and momentous occasion for the employee, hence creating an

employee experience that they can appreciate. 47

19. Annual Bonus

Annual bonuses are kind of a no-brainer, these are a type of bonus wherein the bonus

is provided to the employee on an annual basis. This yearly compensation is paid

from the employer to the employee. Generally, this bonus sum is what an employee

earns on top of what they are paid on a monthly basis, and when accumulated, this

sum is handed back to the employee in the form of an annual bonus.

This helps the employees maintain a certain level of consistency at work and drives

the workforce to constantly come up with innovative solutions and major inputs that

turn into significant gains. Annual bonuses, also called synonymous bonuses, make up

the cash incentives, however, these may also be given to the recipient in the form of

stock options. 48

CONCLUSION

Bonuses are an excellent way to engage employees and reward the workforce for the tireless

efforts they put in to bring accolades to the organization as a whole. I hope that this article

47
Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023).
48
Types of Bonus, India, available at https://blog.darwinbox.com/types-of-bonus (Visited on April 03,2023).
has been a great help to you in learning about all the different ways in which you could be

rewarding your employees and maintaining a steady stream of job satisfaction and employee

happiness in the process.

Now let’s go tweak some policies and add in some incentivized bonuses to help the team with

morale and motivation.

 PAYMENT OF BONUS ACT

Prior to the enactment of the payment of the bonus act, 1965 in India, Payment of Bonus by
the employer has not been regular feature in the industrial establishment. Later Payment of
Bonus has assumed important because it has become the subject matter of numerous industrial
disputes. Therefore, the payment of bonus enables to establish harmonious relations between
workers and management. After passing the payment of bonus, bonus which was once regarded
has Ex- Gratia payment, has now regarded has worker’s legitimate share an account of their
participation in the process of production. It has become a mandatory obligation to pay their
employers with the view to bridge the gap between the actual wage and living wage so long as
living standard as the goal lay down in the constitution is not reached. 1 Similarly, in Standard
Vacuum Oil Company v. Their Workmen, 2 the tribunal held that bonus is intended to shorten
the gap between actual and ideal wages of a living wage.

History of Bonus

In India, the practice of paying bonus was adopted during war time. It seems emerged after
World War-I when certain mills granted 10 percent of wage increase in 1970 as war bonus
(Later it was called as special allowance) 3 because the world war- 1 cause inflation. IN 1991,
the war bonus was enhanced to 35 percent of basic wage. In 1924, bonus disputes committee
under the chairmanship of sir Norman Macleod (Then Chief Justice of Bombay High Court)
was appointed by the government of Bombay. The committee had examined the nature and
basis of bonus. The committee did not consider bonus as enforceable claim. Further the
committee has held the workers don’t have the right to claim as the workers had not established
any enforceable claim, customary, legal or equitable, to the payment annually of a bonus which
would be upheld in a Court of Law. The Committee observed that bonus is to be paid as ex-
gratia payment to the employees depending upon the circumstances and wish of the employers.

Later during the World War II, Payment of Bonus was made voluntary by those
industries which had reaped huge profit. Industrial dispute was raised against those employers
who could not make the payment of bonus. The passing of time, the workers raised industrial
dispute for non-payment of bonus. The adjudicators recognized that the demand for bonus

1
Inland Steam Navigation Workers’ Union v. Inland General Navigation and Railway Company, (1957) LAC
231.
2
(1954) II LLJ 253.
3
Jalan Trading Company v. Mill Mazdoor Sabha, AIR 1967 SC 691.
being an industrial claim could be upheld when wages fall short of living standard and the
industries made huge profit, for the part of which were due to the contribution which workers
made, in increasing the production (Kothari p-63)

The concept of bonus has become a settled principle of industrial law with advent of
constitution of India. The payment of bonus has been treated legitimated claim based on the
consideration of social justice.

In one sense, bonus may be a mere gift or gratuity as a gesture of good- will, or it may be
something to which an employee is entitled on the happening of a condition precedent and is
enforceable when the condition is fulfilled. Or it may be some extra consideration to what is
ordinarily received, or strictly due to the recipient as bonus.

In industrial adjudication in India. however, the concept of bonus has acquired a special
meaning and significance4. In the early stages of industrial adjudication, the employers
advanced the plea that the payment of bonus was an ex-gratia payment and that the workmen
had no legal right. The court. however, while rejecting the plea, held that "[b]onus is not, as its
etymological meaning would suggest, a mere matter of bounty, gratuitously made by the
employer to his employees5." Nor does it partake of the character of deferred wage because, if
it were so, it would necessarily rank for precedence before the dividend 6.

Eventually, bonus came to be regarded as filling the gap existing between the living wage and
the actual paid wage. This gap theory" emerged as the wages continued to fall short of living
wage and bonus was claimed in partial satisfaction of the deficiency. However, this gap theory
did not hold good for long as the workers were enabled to share in the prosperity of the concern
without disturbing the underlying basic wage structure.

4
Mumbai Kamgar Sabha v. Abdulbhai, A.LR. 1976 S.C. 1455.
5
Sree Meenakshi Mills Ltd, v. Their Workmen, 1958 S.C.R. 878 at 883.
6
Lipton Ltd. v. Their Employees, A.I.R. 1999 S.C. 676,
FULL BENCH FORMULA OF BONUS

The full bench formula of bonus was evolved by the land mark case Rajsri Mill Mazzdoe son
v. Mill Owner Association7. In this case, the court8 held that the bonus is not an ex-gratia
payment made graciously by the employer for determining the amount of bonus, the amount
of available surplus of the employer has to be determined. The Labour Appellate Tribunal
devised the formula for determining the available surplus of the profits for the payment to
workers as bonus. Therefore, the formula is otherwise called as available surplus formula.
According to the Formulas bonus was to paid it there was a surplus available after deducting
certain prior charges. These prior charges were as follows:

1. Provision for depreciation

2. Reserves for rehabilitation
3. Return at 6 percent on paid-up capital.
4. Return on the working capital at any rate but less than 6 percent.

It is important to note that according to this formula bonus was not payable if there was no
available surplus left with the employer.

This notion was reiterated in Textile Mills v. Their Workmen and Famous Cine Laboratory v.
Their Workmen9.

Of late, the Supreme Court in Muir Mills, endorsing the basic principle underlying the full
bench formula. refused to allow the grant of bonus to workers in the year when the company
had no profits and refuted the employees' plea that it should be allowed on considerations of
social justice. The decision of the labour appellate tribunal granting bonus out of reserves and
undistributed profits on the ground of social justice was reversed by the court. The court
deprecated the tendency to import such fanciful notions of social justice. It was also of the
opinion that to ask a failing concern to give bonus to employees would be a negation of the
very idea of social justice.

7
1950 Vol II LLJ 1247.
8
The reason for such a delay was that the judges were slow to adjust themselves to the new requirements and
challenges thrown by poverty, hunger, unemployment and inequitable distribution of wealth. See, for a detailed
analysis, Bakhshish Singh. The Supreme Court of India as an Instrument of Social Justice 73-78 (1976) 22.
Millowners Association, Bombay v. Rashtriya Mills Mazdoor Sabha, 1950 (11)
9
1953 (I) Lab. L.J. 466
Subsequently, the same view was endorsed by the highest court in State of Mysore v. Workers
of Gold Mines10, where it was observed: The concept of social and economic justice is a living
concept of revolutionary import; it gives sustenance to the rule of law and meaning and
significance to the ideal of a welfare state. It is on this concept of social justice that the formula
in question has been founded and the experience in the matter of industrial adjudication shows
that, on the whole, the formula has attained a fair amount of success11.

In Associated Cement Companies Ltd. v. Their workmen, 12 the employees challenged the full
Bench formula on the ground that reserve for rehabilitation as prior charge was permitted
without subjecting it to any upper limits while other deductions as prior charges were permitted
subject to certain maximum limit. Therefore, deduction permitting reserve for rehabilitation
which did not subject to any upper limit was unconstitutional and arbitrary. Further, demand
for revision was sought on the question of abolition of rehabilitation at the prior charge. While
rejecting the contention of the workmen the Supreme Court observed that:

“If the legislature feels that the claim for social and economic justice made by labour should
be re-defined on a clearer basis, it can step in and legislate in that behalf. It may also be possible
to have the question comprehensively considered by a high-powered commission which may
be asked to examine the pros and cons of the problem in all its aspects by taking evidence from
all industries and bodies of workmen”.

Various judicial pronouncements in the pre-1965 Act era thus reveal that no doctrinaire view
about bonus is possible or desirable. It is judicially settled that bonus is neither an ex gratia
payment nor deferred wage. In the industrial jurisprudence of a modern economic society, it is
a legal claim. The recognition of workers' claim is, therefore, based upon the desirability of a
balance of adjustments of the different interests concerned in the industrial structure of a
country in order to promote harmony amongst them on an ethical and economic foundation.
No bonus can, therefore, be claimed or justified unless there is profit out of which bonus is to
come and that profit is the result of joint contribution of capital and labour.

10
1958 S.C.J. 1243
11
Id at 1248
12
1959 Vol I LLJ 644 SC
Thus, the essential features of the concept of bonus as evolved by the industrial adjudication
reflect the view that the judicial wisdom in India has not only striven to adjust the substantive
law of trade and commerce but has also attempted to transform the adjective and procedural
laws so as to accelerate the attainment of socio-economic justice.

Similarly in Ahmedabad Miscellaneous Industrial Workers’ Union v. Ahmedabad Electricity

Company Ltd.13, the reserve for rehabilitation was again challenged. The Supreme Court
accepted the objection and suggested the Government to appoint a high-powered commission
to examine the issues relating to payment of bonus.

13
1961 II LLJ 377
APPOINTMENT OF BONUS COMMISSION14

Even though, the industrial tribunals and Supreme Court made effort to evolve just and
equitable norm for determination of available surplus, industries were struggled by numerous
litigation due to the controversies in the determination of provision for rehabilitation. Hence,
bonus commission was set up in 1961 to enquire into the whole question of bonus and to
identify acceptable norms for the payment of bonus. This is the tripartite commission consisted
of the following members:

1. Two representatives of the employer,

2. Two representatives of the employees,
3. Two representatives of consumers,
4. One chairman with high judicial experience.

The seven member high power bonus commission was presided over by Mr. M.R. Meher,
Chairman of Industrial Tribunal Bombay, to evolve a detailed scheme by addressing all the
issues relating to the full bench formula. The commission has submitted its report on 18th
January 1954 by giving a new dimension to the concept of bonus. The Government adopted
the recommendation of the bonus commission with slight modification in the payment of bonus
ordinance 1955. Later the ordinance was replaced by the Payment of Bonus Act, 1965 when it
received the assent of President of India on 25 th September 1965.

Bonus Act 1965, substantially modelled on the commission's proposals, adopts a blue print
essentially worked on profits.

The most important achievement of the Act is the provision relating to the payment of
minimum bonus15." It has been made imperative for the employer to pay minimum bonus in
case of those employments which are covered by the Act. Its justification would rest
essentially on the ground that the mass of the workers do not, as yet, enjoy even the minimum
need based wages and so long as that minimum level is not reached, they are entitled to
additional yearly payment to meet a part of their pent up essential needs. The question,
however, remains: Could the minimum statutory bonus be considered as being in conformity

14
The Bonus Commission was appointed by the Government of India on 6 December 1961 under the
chairmanship of M.R. Mehar
15
Section 10
with the concept of social justice? Will it not be against the spirit of social justice aimed at
penalizing the employer alone, particularly in the case of failing concern? These questions
can be answered if we know the circumstances under which bonus can be given under the Act
and its nature as provided in the Act.

Though the Act introduces the concept of statutory bonus, it covers only those establishments
which might have suffered trading loss in a particular accounting year, but are financially
sound enough to pay the statutory minimum bonus after applying the set-on and set-off
principles16. Section 10(3) of the Act, which is a part and parcel of the main provision dealing
with statutory minimum bonus, provides: For the purposes of this section, the allocable
surplus shall be computed taking into account the amount set-on or set-off in the three
immediately preceding accounting years in respect of which the bonus is payable.

In fact, the payment of bonus scheme, as contemplated by the Act, does not take a year as a
unit. The Act applies set-on and set-off principles for a cycle of four years as an industrial
establishment may have trading loss in a particular year for reasons not controllable by the
two partners of industrial production, viz., the employer and the employee. eg.. scarcity of
raw materials, non-availability of power or the lack of demand for the products. And the
same establishment can earn huge profits in the succeeding year. Under these circumstances,
the employees deserve some- thing in recognition of their honest cooperation with the
employer in running the industry.

With regard to establishments which continue to suffer trading losses and render the set-on
and set-off principle ineffective, the Act confers upon the government the power to exempt
them from the operation of the Act, having regard to the financial position and other relevant
circumstances of the establishment 17.

As rightly observed by the Bonus Review Committee18:

16
Section 15
17
Section 36
18
Interim Report of the Bonus Review Committee 44 (1972)
“If there is an establishment which goes on making losses continuously for years, evidentally
there is something basically wrong with such an establishment and the remedy lies in other
directions. Any tinkering with the minimum bonus is not going to provide solution.”

Thus, the Act adopts a blueprint essentially worked on profits. Schematically speaking,
statutory bonus as provided by the Act is a profit bonus. The relevant statutory provisions
clearly demonstrate that the legislature never intended to penalize the employer. Any claim by
the employees for bonus would, therefore, be justifiable on the basis of social justice as
corroborated by the earlier judicial pronouncements.

This provision for statutory minimum bonus was eclipsed for a short period by the Payment of
Bonus (Amendment) Act 197619: which linked bonus to production or productivity and made
the employer liable to pay minimum bonus only when the establishment had any allocable
surplus during the year in question. The amendment Act thus dispensed with the relevance of
the set-on and set-off principles. Theoretically, it was in consonance with the efforts made by
the Supreme Court in extolling the justification of a claim relating to bonus on the plea of social
justice. However, in the absence of a properly devised scheme of determining bonus based on
production and productivity, the basic premise of the amending Act appeared to be hollow and
lacking in rationality.

The government received complaints that in many cases, despite profits there was no allocable
surplus and hence no bonus was payable to workers. Doubts were also expressed about the
accuracy of balance sheets and profits and loss accounts. To remedy this problem the
government announced in January 1977 that a minimum bonus of Rs. 100 will be payable to
every adult employee even if there is no allocable surplus but there is profit as per profit and
loss account. Thereafter, bonus has been sanctioned from year to year by ordinances.

19
The preamble to the amending Act reads as follows : “An Act to provide for the bonus to persons employed in
certain establishments on the basis of profits or on the basis of production or productivity…”
 SYNOPSIS

 INTRODUCTION

 AVAILABLE SURPLUS AND ALLOCABLE SURPLUS

 SET OFF AND SET ON

 HISTORICAL BACKGROUND OF PROVISION

 ANALYSIS OF THE PROVISION

 ILLUSTRATION

 LANDMARK CASES

 SET-OFF AND SET-ON UNDER WAGE CODE ,2019

 CONCLUSION

 REFERENCES
 SET OFF AND SET ON UNDER PAYMENT OF BONUS ACT

Introduction

The payment of Bonus Act, 1965 aims to regulate the amount of bonus to be paid to the
persons employed in establishments based on its profit and productivity. The Act imposes a
statutory liability on the part of the employers of the establishment to pay to the labour, in
accordance with the capital available for the peaceful functioning of the establishment. The
purpose of the Act was to enable the employees to have a say in the profits of the company and to
earn a little more than the minimum wage according to their performance in the organization.

The act has various various provisions such as computation of gross profit, computation of
available surplus, disqualifaction of bonus, recovery of bonus etc. One such important provision
is ‘Set on and Set off of Allocable Surplus’ which is given under S.15 of the act. The purpose of
this section is to carry forward any extra allocable surplus to next accounting year to use it there.
In order to understand , set off and set on properly we need to first discuss what is available surplus
and allocable surplus.

Available Surplus

Sec. 2(6) defines available surplus as surplus computed under Sec. 5. Section 5 says that
available surplus is arrived at by deducting the sums referred to in Sec.6 from gross profit of any
accounting year.1

A proviso was added to Sec.5 by the way of amendment act in 1969. It says that available
surplus in respect of any year subsequent to 1968 should be aggregate of

i. Gross profit for that accounting year after deducting therefrom the sums given
under S.6
ii. And the differnce between
a)Direct Tax calculated under Sec.7 for immediately preceding accounting
year

1
The Payment of Bonus Act,1965(Act 21 of 1965), S.5
 b)Direct Tax calculated under Sec.7 for such immediately preceding
accounting year after deducting therefrom the amount of bonus which the employer
has paid or liable to pay.2

Sums liable to be deducted from Gross Profit under Sec.6

a. Amount of depreciation admissible under Sec. 32(1) of Income Tax Act.

b. Amount of development rebate or investment allowance or development allowance
which is employer is entitled to deduct from his income under Income Tax Act.
c. Any direct tax employer is liable to pay for an accounting year in respect of his
income, profits and gains during that year.
d. Such other sums given under third schedule. 3

So, by using this method available surplus of particular year can be determined.

Allocable Surplus

For a company other than banking company the allocable surplus shall be 67% of Available
Surplus in that accounting year. In case of Banking Company, 60% of available Surplus. 4

Banking Company - 60% of Available Surplus

Company other than Banking Company – 67% of Available Surplus

Illustration

So now for illustration let’s just assume A company has Gross profit of Rs.4,50,000 after
deductions given under Sec.6 and Difference between direct tax be Rs.50,000 calculated as per
Sec.7

Available Surplus = 4,50,000 + 50,000

= Rs.5,00,000

2
The Payment of Bonus Act,1965(Act 21 of 1965), S.5(b)
3
Dr. V.G.Goswami, Labour and Industrial Laws, 632(Central Law Agency,10 th Edition)
4
The Payment of Bonus Act,1965(Act 21 of 1965), 2(4)(b)
Lets just assume that the company is a company other than a Banking Company.
Allocable Surplus = 67% of Available of Surplus
In this case, 67% of Rs.5,00,000, which gives Rs.3,35,000
Thus, Allocable Surplus of Company X is Rs.3,35,000

Set on and Set off of Allocable Surplus

The scheme of providing minimum and maximum bonus is based on the device of set on
and set off of the allocable surplus of a particular year. This device was first applied in the bonus
pact of ahmedabad textile industry. It is pertinent to note that the amount of set on and set off has
to be taken into account for the payment of bonus with allocable surplus. The available allocable
surplus for relevant accounting year has to be arrived at after taking into account the figures of set
on and set off in the previous year.
This section has to be read with Sections 5 and 10 of the Act. It lays down a method of set-
off and set-on of allocable surplus. The excess of allocable surplus, if any, after distributing the
maximum bonus as provided under Section 10, shall be set-on and taken into account up to the
fourth accounting year.
In case of any shortage or want of allocable surplus the amount distributed as bonus shall
be carried forward for set-off and adjusted out of the allocable surplus. The amount set-on or set-
off shall be taken into account for the payment of bonus with the allocable surplus. The available
allocable surplus shall be arrived at after taking into account the figures of set-off or set-on in the
previous year. The Fourth Schedule illustrates the method of distribution and set-off or set on of
the amount available for bonus out of the allocable surplus. It is illustrative and the principles
derived out of it shall apply to all cases covered under the section.5

Historical Background of the Provision

The set off and set on provisions of the act has been amended twice. The section was
amended by the Act No. 23 of 1976 . Then the section was further amended by Act No. 66 of 1980
which brought the act back to the original position i.e position before 1976 amendment. Thus the
amendment introduced by Act. No. 23 of 1976 have been negative by Act No. 66 of 1980. 6

5
K.D. Srivastava, Payment of Bonus Act, 1965,387( Eastern Book Company, 8th Edition)
6
Ibid at 385
Set On:
In any accounting year, where the allocable surplus exceeds amount of maximum bonus
payable to employees under Sec.11 (Maximum Bonus payable is 20% of salary or wage under
Sec.11), then the excess amount can be carried forward for being set on in the succeeding
accounting year. But the amount being carried forward to being set on should not exceed 20% of
total salary of employees employed in the establishment. This can be done for upto four accounting
years for the purpose of payment of bonus. 7

Set Off:
In any accounting year where there is no available surplus or allocable surplus of that year
falls short of minimum bonus payable to employee under Sec.10 (Minimum Bonus payable is
8.33% of salary or wage under Sec.10) and there is no amount or sufficient amount to carry forward
and set on as per 15(1) then the deficiency can be carried forward to be set off in the succeeding
accounting year. This can be done for upto four accounting years.
For cases not covered by 15(1) and 15(2), the principle of set off and set on given under fourth
schedule will be applied.

Illustration 1:

Let’s assume a establishment with 20 employees all with the salary of Rs.15,000.

So here Minimum Bonus (8.33%) payable to each employee = Rs.1249.5

Total amount of minimum bonus payable by the establishment = 1249.5 x 20= 24,990

Similarly Maximum Bonus Payable to the each Employee = Rs. 3000

Total amount of Maximum bonus payable by the establishment= 60,000

7
The Payment of Bonus Act,1965(Act 21 of 1965), S.15(1)
Now lets assume that in accounting year 2021,the allocable surplus available is Rs.3,00,000. Now
this amount exceeds the maximum bonus payable to employees. The excess amount equal to 20%
of total salary of employees can be carried forward to next year to set on.

Salary of 20 employees i.e 15,000 x 20 =3,00,000

20% of 3,00,000 = Rs.60,000

So, in this case Rs.60,000 can be carried forward to next year to set on

Illustration 2:

Now lets assume a scenario where there is no available surplus or allocable surplus
Rs.20,000 which will not be enough to provide minimum bonus payable to all employees. The
defiency in this case is Rs.4,990.

So this deficiency of Rs. 4,990 can be carried forward to next year to be set off.

Case Laws on Set on and Set Off

In the case of Workmen N.G. Bank v. N.G. Bank8, it was held that it is clear from the
scheme of the Act and the context in which Section 15(1) occurs, following closely upon Sections
4 to 10 that basic condition for the applicability of Section 15(1) is that bonus is computed in
accordance with the statutory formula provided in the preceding sections of the Act and as a result
of such computation it is found that the allocable surplus is more than sufficient to cover the
maximum bonus payable under the Act and where such is the case the sub-section provides that
the excess over the amount of the maximum bonus, shall, to the extent of 20 per cent of the total
wage or salary be carried forward and set on the succeeding year. This sub-section can have no
application where no computation is made under the Act and bonus is paid not in accordance with
the statutory formula, but, on an ad hoc basis. Then it is not possible to say what was really the
bonus payable under the Act. It may be less or more than the bonus in fact paid.

It was held in Co-operative Banks and Societies Employees' Federation Maharashtra v.

A.K. Thorat Member I.T9., that since the Payment of Bonus Act is applicable to the society and

8
AIR 1976 SC 611
9
1988 II LLJ 484 (Bom)
bonus was in fact paid to the employees, then whatever amount was paid towards bonus must be
referable to the Act and therefore the employer was entitled to claim set off on the amount of bonus
paid to the employees during the relevant years.

In Express Cables Private Limited v. Commissioner of Income-tax10, the question

involved related to the extent of the liability of the Assessee under the Payment of Bonus Act
which related to the years 1968-69 and 1969-70. It was held that the liability has to be determined
with reference to Sections 10 and 11 of the Act. The Act requires a minimum and a maximum of
bonus for an accounting year. Section 15 does not require the payment of any bonus in this or even
in any subsequent assessment year until and unless there is a shortfall. The liability under the Act
is only 20% in one accounting year. The provision requiring the assessee to carry forward the
excess to the extent of another 20%, of the allocable surplus is only in the nature of a guarantee
for the payment of minimum bonus in the subsequent accounting year in case there is any shortfall.
Section 15 merely makes provision for meeting a contingency where there is inadequate allocable
surplus in subsequent accounting year. Such a provision cannot be regarded as a liability of the
accounting year in which the provision is required to be made.

It was further held in the above case that the assessee is entitled to deduct only the bonus
required to be paid in the accounting year which is to the extent the accounting year. Any provision
made to meet the liability of the assessee in of a maximum of 20% of the allocable surplus in
computing the total income of the subsequent accounting year cannot be considered to be an
expenditure laid out for the purpose of business in computing the profits of this accounting year
and cannot therefore be allowed to be deducted.11

In the case of Sakhar Mills Mazdoor Sangh v. Gwalior Sugar Co. Ltd.12 it was observed
that the provision of set on comes into operation only when, in a given accounting year, the
allocable surplus exceeds the maximum bonus under the Act so that after payment of maximum

10
1992 I LLJ 441 (Cal)
11
S.N.Misra, Labour and Industrial Law,958 (Central Law Publication, 28th Edition)
12
1995 3 LLJ 460
bonus there is surplus left which can be carried forward and set on, subject to the limit of 20% of
total salary or wages.13

Set off and Set on Under Wage Code

36. (1) Where for any accounting year, the allocable surplus exceeds the amount of
maximum bonus payable to the employees in the establishment under section 26, then, the excess
shall, subject to a limit of twenty per cent. of the total salary or wage of the employees employed
in the establishment in that accounting year, be carried forward for being set on in the succeeding
accounting year and so on up to and inclusive of the fourth accounting year to be utilised for the
purpose of payment of bonus in such manner as may be prescribed by the Central Government.

(2) Where for any accounting year, there is no available 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 section 26, and there is no amount or sufficient amount carried forward and
set on under sub-section (1) which could be utilised for the purpose of payment of the minimum
bonus, then, such minimum amount or the deficiency, as the case may be, shall be carried forward
for being set off in the succeeding accounting year and so on up to and inclusive of the fourth
accounting year in such manner as may be prescribed by the Central Government.

(3) The principle of set on and set off as may be provided in rules by the Central Government
under this Code shall apply to all other cases not covered by sub-section (1) or sub-section (2) for
the purpose of payment of bonus under this Code.

(4) Where in any accounting year any amount has been carried forward and set on or set off under
this section, then, in calculating bonus for the succeeding accounting year, the amount of set on
or set off carried forward from the earliest accounting year shall first be taken into account.14

As we can see , the new wage code didn’t bring any noteworthy change to the provision of set off
and set on.

13
Avtar Singh & Harpreet Kaur, Introduction to Labour and Industrial Law,443 ( Lexis Nexis, 3rd Edition)
14
The Code on Wages, 2019 (Act 29 of 2019), S.36
Conclusion
To conclude, it is fair to say the set off and set on protect the interest of the workers with
respect to receiving bonus. The provision allows the employer to carry forward the excess surplus
to next year . this ensures that the payment of bonus will be guaranteed for next year to employees.
On the similar note, the set off provision also helps the employees to claim the bonus due to them
from previous year. It is good to see that the provision for set off and set on remain unchanged
even in wage code,2019.
 REFERENCES

1) Avtar Singh & Harpreet Kaur, Introduction to Labour and Industrial Law, Lexis Nexis, 3rd
Edition
2) S.N.Misra, Labour and Industrial Law,Central Law Publication, 28 th Edition

3) K.D. Srivastava, Payment of Bonus Act, 1965, Eastern Book Company, 8 th Edition

4) Dr. V.G.Goswami, Labour and Industrial Laws,Central Law Agency,10th Edition

5) The Payment of Bonus Act, 1965

6) The Code on Wages, 2019

7) indiakanoon.org