an overview of payment of bonus act

7/27/2019 An Overview of Payment of Bonus Act

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Payment of Bonus Ordinance & Act:

The Government of India appointed a Commission, known as theBonus Commission, by its resolution dated 6 th December 1961. TheBonus Commission submitted its report to the Government on 18 th January 1964. The Government Accepted the report with slightmodifications by their resolution dated 2 nd September 1964. In order to give statutory effect to the recommendations made by the Bonus

Commission, an ordinance known as Payment of Bonus Ordinancewas promoted in May 1965. The Ordinance was later replaced bythe Payment of Bonus Act, 1965.


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Establishments to include departments, undertakings & branches ( Sec. 3):

Sec. 3 provides that where an establishment consists of differentdepartments or undertakings or has branches, whether situated in thesame place or in different places, all such departments or

undertakings or branches shall be treated as parts of the sameestablishments for the purpose of computation of bonus under thisAct. Where for any accounting year a separate balance-sheet &P&L a/c are prepared & maintained in respect of any suchdepartment or undertaking or branch shall be treated as a separateestablishment for the purpose of computation of bonus under thisAct for that year, unless such department or undertaking or branchwas, immediately before the commencement of that accounting year,treated as part of the establishment for the purpose of computation of

the bonus.


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Act not to apply to certain categories of employees ( Sec.32):

- Employees employed by any insurer carrying on general insurance business & the employees employed by the LIC of India;- Seamen as defined in the Merchant Shipping Act, 1958;- Employees registered or listed under any scheme made under theDock Workers ( Regulation of Employment ) Act, 1948, &employed by the registered or listed employers;

- Employees employed by an establishment engaged in any industrycarried on by or under the Authority of any department of theCentral Government or a State Government or a Local Authority;- Employees employed through contractors on building Operations;


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- Employees Employed by---

The Indian Red Cross Society or any other institution of a like nature( including its branches);Universities & other Educational Institutions;Institutions ( including hospitals, chambers of commerce & socialwelfare institutions) established not for purposes of profit;- Employees Employed by the RBI;- Employees employed by inland water transport establishmentsoperating on routes passing through any other country;- Employees employed by

The Industrial Finance Corporation of India;The Financial Corporation or State Financial CorporationThe Deposit Insurance CorporationThe NABARD, UTI, IDBI, SIDBI, NHB


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Power of Exemption (Sec. 36):The Appropriate Government may having regard to the financial

position & other relevant circumstances of any establishmentsexempt by notification in the Official Gazette such establishment or class of establishments from all or any of the provisions of thePayment of Bonus Act. It may do so if is of opinion that it will not

be in public interest to apply all or any of the provisions of the Actto such establishment or class of establishments. An order passed in

proceeding under Sec. 36 refusing exemption must be speaking one,if it is passed without giving reasons, it is invalid. Any decisiontaken under Sec. 36 must be an objective one & not based onirrelevant or extraneous considerations.


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Salary or wage [Sec. 2(21)]:

It means all remuneration (other than remuneration in respect of overtime work) capable of being expressed in terms of money whichwould, if the terms of employment, express or implied werefulfilled, be payable to an employee in respect of his employment or of work done in such employment. It includes dearness allowance,

but does not include - the value of house-accommodation or supply of light, water,medical attendance or other amenity or concessional supply of food

grains;- Any travelling concession, Any Commission payable to employee;- Any bonus (including incentive, production & attendance bonus);- Any retrenchment compensation or any gratuity or other retirement

benefit payable to the employee.


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Determination of Bonus:

I. Computation of gross profit ( Sec. 4):

Where a new company was created wholly owned by the principalcompany, with no assets of its own except those transferred to it by

the principal company, with no business or income of its own exceptreceiving dividends form shares transferred to it by the principalcompany, it was held that the new company was formed as a deviceto reduce the gross profits of the principal company & therebyreduce the amount to be paid by way of bonus to workmen. Theamount of dividend received by the new company should therefore

be taken into account in assessing the gross profits to the principalcompany.[ Workmen Employed in Associated Rubber Industry Ltd v.

Associated Rubber Industry Ltd, 1986]


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- Computation of gross profits in case of a banking company: Sec.4(a)Items to be added back to net profit:

1. Provisions for bonus to employees, & bonus paid to employees inrespect of previous accounting years, to the extent charged to P&La/c;2. Provision for depreciation;

3. Provision for development rebate reserve, to the extent charged toP&L a/c;4. Provision for any other reserves, to the extent charged to P&L a/c;5. The amount debited in respect of gratuity paid or payable toemployees in excess of the aggregate;6. Donations in excess of the amount admissible for income-tax;7. Losses of, or expenditure relating to any business suited outsideIndia;8. Capital receipts & Capital profits including profits on the sale of

capital assets on which depreciation has not been allowed for IT.


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Items to be deducted:

1. Capital receipts & capital profits other than profits on the sale of assets on which depreciation has been allowed for Income Tax to theextent credited to P&L a/c;2. Income of foreign banking companies from investments outside

India, to the extent credited to P&L a/c;3. Refund of any excess direct tax paid for previous accounting years& excess provision, if any of previous accounting years relating to

bonus, depreciation or development rebate, if written back, to theextent credited to P&L a/c;4. Cash subsidy if any, given by the Government or by any bodycorporate established by any law for the time being in force or byany other agency through budgetary grants to the extent credited toP&L a/c.


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Computation of gross profits in other cases: [ 2 nd Schedule]

The Manner of computing the gross profits derived by non-bankingestablishments is specified in the Second Schedule to the Act.Items to be added back to the net profit:1. Provision for bonus to employees & bonus paid in respect of

previous accounting years, to the extent charged to P&L a/c;2. Provision for depreciation;3. Provision for direct tax, including the provision if any for

previous accounting years;4. Provision for development rebate/investment allowance/development allowance reserve, to the extent charged to P&L a/c;5. Donations in excess of the amount admissible for IT;6. Losses or expenditure relating to any business situated outsideIndia.


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Items to be deducted:1. Capital receipts & capital profits other than profits on the sale of

assets on which depreciation has been allowed for Income Tax to theextent credited to P&L a/c;2. Capital receipts & capital profits other than profits on the sale of assets on which depreciation has been allowed for IT or AgriculturalIT to the extent credited to P&L a/c;3. Profits & receipts relating to any business situated outside India,to the extent credited to P&L a/c;

4. Refund of any direct tax paid for previous accounting years &excess provision, if any of previous accounting years relating to bonus, depreciation, taxation or development rebate or developmentallowance, if written back to the extent credited to P&L a/c.


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Sums deductible from gross profit ( Sec. 6):

- Any amount by way of depreciation admissible in accordance withthe provisions of Sec. 32(1) of the IT Act, 1961 or in accordancewith the provisions of the Agricultural IT law, as the case may be;

- Any amount by way of development rebate or investmentallowance or development allowance which the employer is entitledto deduct from his Income under IT Act, 1961;- Any direct tax which the employer is liable to pay for theaccounting year in respect of his income, profits & gains during thatyear;- Any other sum specified in respect of the employer in the 3 rd Schedule.


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3rd Schedule:

In respect of a Company other than a banking company:- The dividends payable on its preference share capital for theaccounting year calculated at the actual rate at which such dividendsare payable;- 8.5% of its paid-up equity share capital as a the commencement of the accounting year;- 6% of its reserves shown in its balance sheet as at the

commencement of the accounting year, including any profit carriedforward from the previous accounting year.


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In respect of a Banking Company:- The dividends payable on its preference share capital for the

accounting year calculated at the rate at which dividends are payable;- 7.5% of its paid-up equity share capital as a the commencement of the accounting year;

- 5% of its reserves shown in its B/S at the commencement of theaccounting year, including any profits carried forward from the previous accounting year.

In respect of a Corporation:- 8.5% of its paid up capital as at the commencement of theaccounting year;- 6% of its reserves, if any shown in its B/S as at the commencementof the accounting year, including any profit carried forward form the

previous accounting year.


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In respect of a Co-operative Society:- 8.5% of the capital invested by such society in the establishment as

evidenced from its books of a/c at the commencement of the accountingyear;- Such sum has been carried forward in respect of the accounting year to areserve fund under any law relating to co-operative societies for the time

being in force.

Any employer other than a banking company, being a licenseewithin the meaning of the Electricity Supply Act, 1948:- The sums mentioned in 3 rd Schedule to be deducted as prior charges fromgross profit to arrive at the available surplus are in the nature of dividend

payable on Preference capital & Equity share capital & Interest at a certainfixed rate on the reserves of the employer;- Items as are required to be appropriated by the licensee in respect of theaccounting year to a reserve under the 6 th Schedule to the Electricity Act,1948 shall also be deducted.


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Any other employer not falling under any of the aforesaid

categories:- 8.5% of the capital invested by him in his establishment as evidencedfrom his books of account at the commencement of the accounting year;- Where such employer is a firm an amount of 25% of the gross profitsderived by it from the establishment in respect of the accounting year after deducting depreciation in accordance with the provisions of Sec. 6(a) byway of remuneration to all the partners taking part in the conduct of

business of the establishment shall also be deducted;- Where such employer is an individual or a Hindu Undivided familyAn amount equal to 25% of the gross profits derived by such employer from the establishment in respect of the accounting year after deductingdepreciation in accordance with the provisions of Sec. 6(a) or Rs 48000 whichever is less, by way of remuneration to such employer shall also be deducted.


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Calculation of direct tax payable by the employer ( Sec. 7):

Any direct tax payable by the employer for any accounting year shall, subject to the following provisions, be calculated at the ratesapplicable to the income of the employer for that year.- In calculating such tax no account shall be taken of 1. Any loss incurred by the employer in respect of any previous

accounting year & carried forward under any law for the time beingin force relating to direct taxes;2. Any arrears of depreciation which the employer is entitled to addto the amount of allowance for depreciation for any following

accounting year or years under Sec. 32 of the IT Act, 1961.- Where the employer is an individual or a Hindu Undivided Family,the tax payable by such employer under the Income-Tax Act, 1961shall be calculated on the basis that the Income derived by him fromthe establishment is his only income;


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- Where the Income of any employer includes any profits & gainsderived form the export of any goods or merchandise out of Indiaany rebate on such income is allowed under any law for the time

being in force relating to direct taxes, then, no account shall be takenof such rebate;- No account shall be taken of any rebate other than developmentrebate, or investment allowance, or development allowance or creditor relief or deduction in the payment of any direct tax allowed under any law for the time being in force relating to direct taxes for thedevelopment of any industry.


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III. Allocable Surplus:

The allocable surplus is the workers share in the available surplus.

Rules to be followed for its distribution are as follows:

- Amount of Bonus:The bonus formula as envisaged in the Act provides for the payment of minimum & maximum bonus to the employees in an accounting year so that they are not deprived of any bonus in the accounting year. The

bonus is payable even if there are losses in that particular accountingyear.1. Minimum Bonus (Sec. 10):

Subject to the other provisions of the Act, every employer shall be bound to pay a minimum bonus which shall be 8.33% of the salary or wage earned by the employee during the accounting year or Rs. 100 (Rs. 60 in case of employees below 15 years of age ), whichever ishigher. The minimum bonus is payable whether or not the employer

has any allocable surplus in the accounting year.


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2. Maximum Bonus (Sec. 11):Bonus at a rate higher than the minimum rate is payable only whenthe allocable surplus in a particular accounting year exceeds theamount of minimum bonus referred in Sec. 10 payable to theemployees. It is paid to a maximum of 20% of such salary or wage.

- Set on & Set off of allocable surplus (Sec. 15):

Payment of Wages Act, 1965 envisages a scheme prescribingminimum & maximum rates of bonus together with the scheme of set on & set of of allocable surplus. Set on- Where the allocable surplus for any accounting year exceeds

the amount of maximum bonus payable to the employees in theestablishment under Sec. 11 then the excess of allocable surplus,subject to a limit of 20% of total salary or wage of the employeesemployed in that accounting year, shall be carried forward for beingset on to the succeeding accounting year.


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Set off- Where for any accounting year, there is no allocable surplusor the allocable surplus in respect of that year falls short of theamount of minimum bonus payable to the employees in theestablishment under Sec. 10, & there is no amount or sufficientamount carried forward & set on which could be utilized for the

purpose of payment of the minimum bonus, then such minimum

amount or the deficiency, shall be carried forward for being set off in the succeeding accounting year.

- Proportionate reduction in bonus in certain cases ( Sec. 13):Where an employee has not worked for all the working days in anyaccounting year, the minimum bonus of Rs. 100 as the case may beof Rs. 60, if such bonus is higher than 8.33% of his salary or wagefor the days he has worked in that accounting year shall be

proportionately reduced.


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Computation of number of working days (Sec. 14):Sec. 14 provides that an employee shall be deemed to have worked inan establishment in the accounting year also on the days on which

He has been on leave with salary or wage;He has been absent due to temporary disablement caused by accidentarising out of & in the course of his employment; &The Employee has been on maternity leave with salary or wage, duringthe accounting year.

- Adjustment of customary or interim bonus against bonus payableunder the Act ( Sec. 17):Sec. 17 authorizes the employer to deduct the amount of Pooja Bonus

or other customary bonus paid to an employee in an accounting year from the amount of bonus payable to him to the employee under theAct in respect of hat accounting year. The employee in such a case isentitled to receive only the balance. Customary bonus is a voluntary

payment made by the employer to its employees to meet specialexpenses of a festival.


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The Fourth Schedule:In this schedule the total amount of bonus equal to 8.33% of the annualsalary or wage payable to all employees is assumed to be Rs. 1,04,167.Accordingly the maximum bonus to which all the employees areentitled to be paid ( 20% of the annual salary or wage of all theemployees) would be Rs. 2,50,000.

- Recovery of bonus ( Sec. 21):Where any money is due to an employee by way of bonus from hisemployer under a settlement or an award or agreement, he may makean application to the appropriate Government for the recovery of money due to him. If the appropriate Government or authority may

specify in this behalf is satisfied that any money is so due, it shall issuea certificate for that amount to the collector who shall proceed torecover the same as an arrear of land revenue. The mode of recovery

prescribed in Sec. 21 shall be available only if the bonus sought to berecovered is under a settlement or an award or an agreement.


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The application under Sec. 21 for the recovery of any amount of bonus due from an employer to an employee may be made by The employee himself; OR Any other person authorized by the employee in writing to act on his

behalf; OR

In case of the death of the employee, his assignees or heirs.The existence of Sufficient cause is a condition precedent for theexercise of discretion under Sec. 21. Sufficient cause must mean acause beyond the control of the party invoking the aid of this Sec. A

cause for delay which a party could have avoided by the exercise of the care & attention cannot be a sufficient cause. In other words TheCourt must be able to say, having regard to the facts &circumstances of the case, that the delay was reasonable.


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Special Provisions with Respect to Certain Establishments

( Sec. 16):

In case of a new establishment whether before or after thecommencement of the Act, its employees shall be entitled to be paid

bonus under Act in accordance with the provisions of Sec. 16. Theliability for paying bonus in a newly set up establishment has to be judged with reference to different accounting years-- First 5 accounting years:Bonus by a new establishment in the first 5 accounting yearsfollowing the accounting year in which the employer sells the goods

produced or manufactured by him or renders services, from suchestablishment shall be payable only in respect of the accounting year in which the employer derives profits from such establishment.


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Special Provision with respect to payment of bonus linkedwith production or productivity ( Sec. 31-A):

Where the employees have entered into an agreement with their employer for payment of an annual bonus linked with production or

productivity in lieu of bonus based on profits under Payment of Bonus Act, 1965, then such employees shall be entitled to receive

bonus due to them under such agreement. But any such agreementor settlement whereby the employees relinquish their right to receive

the minimum bonus under Sec. 10 shall be null & void as it purportsto deprive them of such right. Further, such employees shall not beentitled to be paid any bonus in excess of 20% of the salary or wageearned by them during the relevant accounting year.


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an overview of payment of bonus act

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