Payment of Bonus Act, 1965

Brief Overview

- Kumar Paramjeet Singh

 Object of the Act: The Payment of Bonus Act, 1965 is an Act for the payment of bonus to persons
employed in certain establishments on the basis of profits or on the basis of production or
productivity; and for other connected matters.

 Bonus is a cash payment made to employees in addition to wages. It is not an ex-gratia

payment.

 The payment of bonus to the employees was originally voluntary, but under the Payment of Bonus
Act, 1965, it became statutory obligation of an employer.

 In fact, the payment of bonus is one of the way of sharing the profits in the industry or an
establishment. It is an incentive to increase the production. The purpose of the payment of bonus
is to bridge the gulf between the wages paid and the ideal of a living wage.
 The adjudicators found varying bases to uphold the payment of bonus to workers. However, it
was recognized that the demand for a bonus being an industrial claim could be upheld when
wages fell short of living standard and the industries made huge profits, part of which were due
to the contribution which workers made, in increasing the production. This observation became
settled principle till year 1946.

 With the advent of the Constitution of India, the notions of progressive social philosophy and the
need for giving social justice to the workers, the concept of bonus established firm roots in
industrial adjudication.

 The Supreme Court declared in emphatic terms that as both capital and labour contribute to the
earnings of an industrial concern, it is only fair and just that the labour should derive some benefit
if there is surplus available after meeting prior and necessary charges. Thus bonus formula was
evolved based on considerations of social justice intending to satisfy legitimate claims of both
labour and capital.
 Available Surplus Formula or Full Bench Formula
 In Mill Owners Association v Rashtriya Mill Mazdoor Sangh, (1952), a Full Bench of the Labour
Appellate Tribunal observed that bonus could no longer be considered as an ex-gratia payment
and laid down a formula known as ‘Full Bench Formula’.

 Broadly speaking the formula provided that the following prior charges should be deducted from
the gross profits of an enterprise:
1. Return on paid up capital generally @ of 6%;
2. Return on working capital varying from 2 to 4 %;
3. Depreciation worked out on a notional basis;
4. Reserves for rehabilitation; and
5. Income tax.

 If after deduction of these prior charges, surplus was left over, the workmen would be entitled to
a share in the said surplus, on an equitable basis. In the absence of any surplus, however, there
would be no question of payment of bonus on general notions of social justice.
 Despite of having Full Bench Formula, Labour Unions did not feel satisfied. Their main grievance
was against the rehabilitation charge which, in their view, generally wiped out what was left of
the available surplus. Some employers were also not quite happy with this formula because it did
not provide an easy method for computation of bonus and often led to disputes year after year.

 The SC while approving this principle in Muir Mill Ltd v Suti Mill Mazdoor Union (1955), laid down
two conditions which had to be satisfied before a demand for bonus could be justified:
1. The wages fell short of the living standard; and
2. The industry makes huge profits part of which are due to the contribution made by workmen
in increasing production.

 The demand for bonus would become an industrial claim when either or both of these conditions
were satisfied. The Government of India had been under a constant pressure to revise the bonus
formula.
 The present Act is the outcome of the recommendations made by a Tripartite Commission, which
was set up by the Government of India in 1961. the Commission was asked to consider the
question of payment of bonus based on profits to employees employed in establishments.

 The recommendation of the Commission was received by the Government on January 24, 1964
and implemented on September 2, 1964.

 With a view to accept these recommendations, the Payment of Bonus Ordinance, 1965 was
promulgated on 26th May, 1965. the Ordinance later on was adopted by the Parliament and
enacted as Payment of Bonus Act, 1965.

 Under the Act, the payment of bonus has become a statutory obligation imposed upon the
employers covered by the Act.
 Scheme of the Act
 Broadly speaking the scheme of the Act is four dimensional:

1. To impose statutory liability upon an employer of every establishment covered by the Act to
pay bonus to employees in establishment;
2. To define the principle of payment of bonus according to the prescribed formula;
3. To provide for payment of minimum and maximum bonus and linking the payment of bonus
with the scheme of ‘set-off’ and ‘set-on’; and
4. To provide machinery for enforcement of the liability for payment of bonus.

 Bonus Act is applicable to:

1. Every employee defined under section 2(13) of the Act;
2. Of an establishment defined under section 1(3) of the Act.
 Section 2(13) - "Employee" means
 any person (other than an apprentice) employed on a salary or wage not exceeding [Rs.
21,000] per mensem
 in any industry to do any skilled or unskilled manual, supervisory, managerial, administrative,
technical or clerical work
 for hire or reward,
 whether the terms of employment be express or implied;

 Section 1(3) – “Establishment” includes

a) every factory; and
b) every other establishment in which 20 or more persons are employed on any day during an
accounting year.

An establishment to which this Act applies shall continue to be governed by this Act
notwithstanding that the number of persons employed therein falls below twenty.
 Definition of Establishment
Establishments to include departments, undertakings and branches:

 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 establishment for the purpose of computation of
bonus under this Act.

 Where for any accounting year a separate balance-sheet and profit and loss account are
prepared and maintained in respect of any such department or undertaking or branch, then,
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 bonus.
 Computation of gross profits – S. 4
The gross profits derived by an employer from an establishment in respect of the accounting year
shall,-

a) in the case of a banking company, be calculated in the manner specified in the First Schedule;
b) in any other case, be calculated in the manner specified in the Second Schedule.

 Working of Bonus Formula under the Act involves four steps –

1. Net Profits – Step I
2. Gross Profits – Step II
3. Available Surplus – Step III
4. Allocable Surplus – Step IV
 Net Profits – Step I
 The bonus formula provided under the Act presumes about the accuracy of balance-sheet and
profit and loss account of companies and corporations. It, therefore, starts with the presumption
that the net profit shown in the profit and loss account and balance-sheet should be taken as
the first step for determination of the bonus.

 Where the authority is satisfied that the statements and particulars contained in the balance-
sheet or profit and loss account of the corporation or the company are not accurate, it may
take such steps as it thinks necessary to find out the accuracy of such statements and particulars.
[S. 23(1)]

 The authority may also, if it thinks necessary, require the corporation or the company to furnish to
the union or employees any clarification required by the balance-sheet or the profit and loss
account under S. 23 (2) of the Act
 Gross Profits – Step II
 The gross profit is calculated as per S. 4 of the Act. This gross profit would be a notional gross profit
because it would be arrived at by the process provided in the Act. Hence, it would be different
from the gross profit which might be shown as gross profit in the profit and loss account (P&L A/c).

 Accordingly, to the net profit shown in the P&L A/c, the following amounts must be added:
1. Bonus to employees
2. Depreciation
3. Direct taxes, including provisions for previous years
4. Development rebate/ development allowance/ invest allowance
5. Any other reserves provided in the year
6. Bonus paid to employees in respect of previous accounting years.

To this aggregate should be added back items at 3 and 4 of Second Schedule and from the
total of all these deductions stated in item 6 should be made. The result would be the gross profit.
 Available Surplus – Step III
Computation of available surplus (S. 5)
 The available surplus in respect of any accounting year shall be the gross profits for that year after
deducting there from the sums referred to in section 6:

 The available surplus in respect of the accounting year shall be the aggregate of,-
a) the gross profits after deducting there from the sums referred to in section 6; and
b) an amount equal to the difference between,-
i. the direct tax (section 7), in respect of an amount equal to the gross profits of the employer
for the immediately preceding accounting year; and
ii. the direct tax (section 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.
 Sum Deductible from Gross Profits U/s. 6
 Depreciation: Any amount by way of depreciation admissible in accordance with the provisions
of the section 32 (1) of the Income Tax Act or in accordance with the provisions of the agricultural
income tax law, as the case may be:

 Development Rebate or Allowance: Any amount by way of development rebate or investment

allowance or development allowance which the employer is entitled to deduct from his income
under the Income Tax Act.

Prohibition for utilizing the development rebate allowable under the Income Tax Act for
distribution by way of dividends or profits does not operate as a bar in taking the rebate amount
into consideration in ascertaining the available surplus in the hands of the employer during the
year in question.
 Direct Taxes: Subject to the provisions of section 7, any direct tax which the employer is liable to
pay for the accounting year in respect of his income, profits and gains during that year.

 Liability under section 6(c) must be notional lability of a venture of which gross profits are known
and the prior charges by way of depreciation, development rebate and development
allowance are computed. Income-tax is to be worked out for the purpose of formula without
taking into account the question of bonus payable under the Act.

 The tax liability is to be computed without deducting first the amount of bonus liable to be paid
for that year. The manner of computation of direct taxes payable by the employer has been
specified in section 7 of the Payment of Bonus Act.

 Return on Capital: Return on capital is a prior charge as provided in S. 6(d) which says that such
further sums shall be deducted from the gross profits as are specified in respect of the employer in
the Third Schedule.
 Allocable Surplus – Step IV
"Allocable surplus" as per section 2(4) means,-

a) in relation to an employer, being a company (other than a banking company) which has not
made the arrangements prescribed under the Income Tax Act for the declaration and payment
within India of the dividends payable out of its profits in accordance with the provisions of section
194 of that Act, 67 % of the available surplus in an accounting year;

b) in any other case, 60 % of such available surplus.

While calculating allocable surplus, order of the Income Tax authorities regarding depreciation
should be regarded as a relevant factor, where such order was not challenged.
 Payment of Minimum Bonus – S. 10

 Subject to the other provisions of this Act, every employer shall be bound to pay to
every employee in respect of the accounting year, a minimum bonus which shall be
8.33 % of the salary or wages earned by the employee during the accounting year or
100 rupees, whichever is higher, whether or not the employer has any allocable surplus
in the accounting year.

 Where an employee has not completed 15 years of age at the beginning of the
accounting year, the provisions of this section shall have effect in relation to such
employee as if for the words “100 rupees" the words “60 rupees" were substituted.
 Payment of Maximum Bonus – S. 11
 Where in respect of any accounting year referred to in section 10, the allocable
surplus exceeds the amount of minimum bonus payable to the employees under that
section, the employer shall, in lieu of such minimum bonus, be bound to pay to every
employee in respect of that accounting year bonus which shall be an amount in
proportion to the salary or wages earned by the employee during the accounting
year subject to a maximum of 20 % of such salary or wage.

 In computing the allocable surplus under this section, the amount set-on or the
amount set-off under the provisions of section 15 shall be taken into account in
accordance with the provisions of that section.
 Calculation of bonus with respect to certain
employees - S. 12
 According to section 12, where the salary or wage of an employee exceeds Rs. 7,000 or the
minimum wage for the scheduled employment, as fixed by the appropriate Government,
whichever is higher per mensem, the bonus payable to such employee under S. 10 or, as the
case may be, under S. 11, shall be calculated as if his salary or wage were 7,000 rupees or the
minimum wage for the scheduled employment, as fixed by the appropriate Government,
whichever is higher per mensem.

 Explanation: For the purpose of this section, the expression ‘scheduled employment’ shall have
the same meaning as assigned to it in section 2 (g) of the Minimum Wages Act, 1948. In case an
employee is drawing wages/ salary @ Rs. 11,000 per month but his wage are not in the
Scheduled Employment of the Minimum Wages Act, 1948.

 So far as calculation of the managerial and supervisory staff is concerned, even though their
wage/ salary happens to be above Rs. 7,000 p.m., they may not be getting bonus on actual
salary in case the scheduled employment are silent about their category of employees in view
of the definition of ‘employee’ as given in the Minimum Wages Act, 1948.
 Proportionate Reduction Where Employee
Did Not Work For Whole Year – S. 13

Proportionate deduction in bonus in certain cases

 Where an employee has not worked for all the working days in an
accounting year, the minimum bonus of one hundred rupees or, as the
case may be, of sixty rupees, if such bonus is higher than 8.33 per cent of his
salary or wage of the days he has worked in that accounting year, shall be
proportionately reduced.
 Rule of Set-On and Set-Off of Allocable
Surplus – S. 15
The scheme for providing minimum and maximum bonus is based on the device of set-on and set-off
of the allocable surplus of a particular year. It is pertinent to note that the amount of set-on or set-off
has to be taken into account for the payment of bonus with the allocable surplus.

The available allocable surplus for the 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 provision 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 bonus, there is surplus left which can be carried forward and set
on, subject to the limit of 20 % of total salary or wages.

Set on of allocable surplus

 Where for any accounting year, the allocable surplus exceeds the amount of maximum bonus
payable to the employees in the establishment under section 11, then, the excess shall, subject to
a limit of 20 % of the total salary or wages 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 4th (fourth) accounting year to be utilized for the purpose of
payment of bonus in the manner illustrated in the Fourth Schedule.
 Set off of allocable surplus
 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 10, and there is no amount or sufficient amount carried forward and
set on under sub-section (1) which could be utilized 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
4th accounting year in the manner illustrated in the Fourth Schedule.

 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.

 Note: The principle of set-on and set-off as illustrated in the Fourth Schedule applies to all other
cases not covered by section 15 for the purpose of payment of bonus.
 Eligibility For Bonus – S. 8
 Every employee shall be entitled to be paid by his employer in an accounting year, bonus, in
accordance with the provisions of this Act, provided he has worked in the establishment for not
less than 30 working days in that year.

 In a situation where some employees services were terminated on the allegation of misconduct
and subsequently such termination of service of an employee is set aside and the employee is
reinstated treating him to have been in continuous service, the employee would be deemed
eligible to receive bonus even for the period during which he might not have worked due to
illegal termination.

 Season workers working for not less than thirty days are entitled to bonus. Employees working on
part-time basis as well as workers who have option to attend to work at the factory premises are
entitled to bonus.
 Disqualification for Bonus – S. 9
Section 9 contains a non obstante clause which says that notwithstanding anything contained in this
Act, an employee shall be disqualified from receiving bonus under this Act, if he is dismissed from
service for,-
a. fraud; or
b. riotous or violent behavior while on the premises of the establishment; or
c. theft, misappropriation or sabotage of any property of the establishment.

Adjustment of customary or interim bonus against bonus payable – S. 17

Where in any accounting year,-
a) an employer has paid any puja bonus or other customary bonus to an employee; or
b) an employer has paid a part of the bonus payable under this Act to an employee before the
date on which such bonus becomes payable, then, the employer shall be entitled to deduct the
amount of bonus so paid from the amount of bonus payable by him to the employee under this
Act in respect of that accounting year and the employee shall be entitled to receive only the
balance.
 The provision for deduction of the amount of customary bonus paid from the amount of bonus
payable under the Act indicates the independent existence of customary bonus, although to
some extent, its quantum is adjustable towards statutory bonus.

 The statutory bonus and customary bonus operate in two fields and do not clash with each other,
generally. The Bonus Act is confined to profit bonus and not other kinds of bonus.

 If the customary bonus or other kind of bonus is part of employment contract, then the same shall
be payable as part of the terms of contract, irrespective of the statutory position under the Act.

Deduction of certain amounts from bonus payable under the Act – S. 18

 Where in any accounting year, an employee is found guilty of misconduct causing financial loss
to the employer, then, it shall be lawful for the employer to deduct the amount of loss from the
amount of bonus payable by him to the employee under this Act in respect of that accounting
year only and the employee shall be entitled to receive the balance, if any.
 Special provision with respect to payment of bonus
linked with production or productivity – S. 31A.
Notwithstanding anything contained in this Act,-
1. where an agreement or a settlement has been entered into by the employees with their
employer before the commencement of the Payment of bonus (Amendment) Act, 1976, or
2. where the employees enter into any agreement or settlement with their employer after such
commencement, for payment of an annual bonus linked with production or productivity in lieu of
bonus based on profits payable under this Act, then, such employees shall be entitled to receive
bonus due to them under such agreement or settlement, as the case may be:

 PROVIDED that any such agreement or settlement whereby the employees relinquish their right to
receive the minimum bonus under section 10 shall be null and void in so far as it purports to
deprive them of such right:

 PROVIDED FURTHER that such employees shall not be entitled to be paid such bonus in excess of
twenty per cent of the salary or wages earned by them during the relevant accounting year.
 Time-limit for payment of bonus – S. 19
All amounts payable to an employee by way of bonus under this Act shall be paid in cash by his
employer,-
 where there is a dispute regarding payment of bonus pending before any authority under section
22, within a month from the date on which the award becomes enforceable or the settlement
comes into operation, in respect of such dispute;
 in any other case, within a period of eight months from the close of the accounting year.

 PROVIDED that the appropriate government or such authority as the appropriate government
may specify in this behalf may, upon an application made to it by the employer and for sufficient
reasons, by order, extend the said period of eight months to such further period or periods as it
thinks fit; so, however, that the total period so extended shall not in any case exceed two years.
 Recovery of bonus due from an employer – S. 21
 Where any money is due to an employee by way of bonus from his employer under a settlement
or an award or agreement, the employee may make an application to the appropriate
government for the recovery of the money due to him, and if the appropriate government or
such authority as the appropriate government 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 in the same manner as an arrear of land revenue:

 PROVIDED that every such application shall be made within one year from the date on which the
money became due to the employee from the employer:

 PROVIDED FURTHER that any such application may be entertained after the expiry of the said
period of one year, if the appropriate government is satisfied that the applicant had sufficient
cause for not making the application within the said period.