This article is written by Nishtha Pandey (batch 2023), student of Dr Ram Manohar Lohiya National Law University, Lucknow. In this article various sections of The Payment of Bonus Act, 1965 are explained.
Payment of Bonus Act, 1965 is 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 organisation.
This Act is applicable throughout India on the factory workers and the persons employed in railways or is in contract with railways. It also includes skilled or unskilled workers, whether under the express or implied terms of the contract.
Establishment to include department, undertakings, and branches
The term “establishment” in this Act is of great importance. It could be divided into Public and Private establishments. However, if these establishments function as different departments or branches then those departments and branches would be treated as a single establishment, but in case, different accounts are prepared for these branches and departments, then they would be treated as different departments or branches for the sake of computation of profit for that particular accounting year.
Computation of Gross profit
Gross profit is calculated for an accounting year
(i) Banking Company– in accordance with the first schedule.
(ii) In other cases– according to the manner prescribed in the second schedule.
Computation of available surplus
The available surplus is calculated taking into account the gross profit after making adjustments of depreciation, development allowance, direct taxes of the current accounting year and all the sums specified under Schedule 3 of the Act. This gross profit has to be added to the direct taxes in respect of the gross profit for the preceding year, deducting from it the direct taxes which has been adjusted to the gross profits that are reduced to the amount of bonus, for the immediately preceding year.
Sum deductible from gross profits
The following sums need to be deducted from the gross profit:
- Any amount by way of development rebate, investment allowance or the development allowance, which is deductible from the income according to the income tax.
- Any direct tax which the employer has to pay with respect to his income, profits, and gains during that year.
- Any other sums which are specified by the employer.
- Any amount of depreciation according to the Income Tax Act, 1961 or Agricultural Income Tax law.
Calculation of direct tax payable by the employer
The direct taxes are calculated as per the present year’s income of the employer. In case the employer is an individual or part of the Hindu Undivided Family, then the income which will be considered for the taxes will be treated as the only income of the employer.
Moreover, if the employer is a religious institute or charitable trust, not barred by Section 32 of the Act and if its income is partially or fully non-taxable then the income which is non-taxable would be treated as the income from an institution in which the public is substantially interested.
However the income would not include any loss of the previous year which is carried forward to this year under any existing law or the depreciation that need to be accounted to the depreciation allowance or any exemption under Section 84 of the Income Tax Act or any deduction under Section 101(1) of the Income Tax Act, 1961.
Eligibility for bonus
Under the present enactment, every employee is entitled to get a bonus only if he has worked for a minimum period of 30 days.
The minimum bonus which the employee would get in an accounting year would be 8.33% of the salary or wages of the employee or ₹ 100 whichever is more. In cases where the age of the employee is less than 15 years at the beginning of the accounting year, this provision would have the same effect except in the place of ₹ 100 it would be ₹ 60.
The maximum bonus which an employee could get in an accounting year is equal to 20% of the salary or wages of the employee in the given accounting year. The employer is bound to pay the maximum bonus when the allocable bonus has exceeded the minimum bonus of that accounting year.
The employee would be disqualified for a bonus if he has been terminated from employment on account of fraud or theft, misappropriation or sabotage of the establishment’s property or has displayed violent or unruly behaviour in the premises of the establishment.
Calculation of bonus with respect to certain employees
Where the salary of the employee exceed ₹ 7000 per mensem or minimum wages applicable for such employment as fixed by the government, whichever is higher, such employee would be entitled for bonus under Section 10 or Section 11 of the Act as if the salary or wages is ₹ 7000 per mensem or minimum wages applicable for such employment as fixed by the government whichever is higher.
Proportionate reduction in bonus
If an employee has not worked for any day in the accounting year, his minimum bonus which is ₹ 100 (or ₹60) or his salary or wages subject to 8.33%, whichever is higher would be reduced proportionately.
Computation of the number of working days
The computation of the working day is an important criterion for the calculation of the bonus. The employee would be considered working even on the days when he is on leave but is paid salary or wages or he is on a maternity leave with salary or wages, or he met with an accident while in undertaking the employment or he has been laid off under an agreement or as permitted under the Industrial Employment Act, 1946 or Industrial Disputes Act, 1947 or any legal provision which is applicable on the establishment at the given time.
Set on and set off of allocable surplus
The allocable income which is left even after paying the maximum bonus at the rate of 20% on the salary or wages, would be carried forward to the next year to compensate in case there is any shortage in that year. This is called set on.
However, the set off is the complete opposite of set on in which the profit falls short to pay even the minimum bonus at the rate of 8.33%. Then, in this case, the set on of the previous year would be used to pay the bonuses of the given accounting year.
In calculating the bonus, the amount of set on and set off from the previous accounting year shall be first taken into consideration. This allocable income would be distributed to the employees in proportion to their salary or wages in a given accounting year.
Special provisions with respect to certain establishments
In the first five accounting years, after the establishment has started selling and manufacturing goods or rendering services, it has to pay bonuses only in case of profits.
However, in the sixth, seventh and eighth accounting year, after the establishment has started selling and manufacturing goods or rendering services, the bonus shall be paid, taking into account the set on or set off.
In the case of the sixth year, the allocable surplus of the fifth and the sixth year would be taking into account and in the case of the seventh year, the allocable surplus of the sixth and the seventh year is taken into consideration.
Adjustments of customary or interim bonus against bonus payable under the Act
If the employer has paid any puja bonus or any other customary bonus or has paid the bonus before the date on which the bonus becomes payable, then, in that case, the employer has the right to deduct the amount of bonus from the actual bonus payable, and the employee shall get the remaining amount.
Deduction of certain amounts from bonus payable under the Act
If the employee is found to be guilty of misconduct due to which the establishment has to bear losses then such an establishment has the right to deduct the amount of loss from the bonus that has to be paid to the employee in that accounting year and shall be paid the balance if any.
The time limit for payment of bonus
Under the provisions of this Act, the employees must be awarded the bonus within 8 months from the closure of the accounting year. However, in cases of disputes (under the purview of the Industrial Dispute Act), the bonus has to be paid within 1 month from the time when the settlement becomes effective.
Application of Act to establishments in the public sector
If any public establishment manufactures or sells any product or renders any services and the income from them is less than 20% of the gross income of such public establishment then the provisions of this Act shall apply to it in the same manner as if it is a private establishment. However, except for the above case, the provisions of this Act would not be applicable to the employees working in the public establishment.
Recovery of bonus due to an employer
In case of any amount of the bonus which is due from an employer, the employee can or any of his assignees or in case of his death his heirs, have the right to make an application to the government and if it is satisfied with the veracity of the application then it shall issue a certificate to the collector who shall proceed to recover the amount in the like manner as if it were an arrear of land revenue.
However, such an application must be within one year after the payment has become due, if the application is made after the expiry one year and the government is satisfied with the reasons for doing so, then that application could be entertained.
Reference of disputes under the Act
In case of any dispute between the employee and the employer, that shall be treated as an industrial dispute within the meaning of Industrial Dispute Act or any other Act which is dedicated to the investigation and settlement of the disputes of like nature. Such law shall be applied as expressed.
Presumption about the accuracy of balance sheet and profit and loss account of corporations and companies
The disputes falling under the purview of the Industrial Dispute Act or any other law dedicated to the investigation and settlement of the disputes of like nature would be referred to an arbitrator or a tribunal in accordance with the above-mentioned laws. If the balance sheet or the profit and loss account of the corporations or the companies are audited by the Auditor General of India or any other auditor who is empowered to do so under the Companies Act, then there is no need to file an affidavit to prove its accuracy.
However, if the tribunal or the arbitrator is certain about the inaccuracy of the balance sheet or the profit and loss account then it can take any steps that it deems necessary to find out the accuracy of the balance sheet and the profit and loss accounts.
The trade unions or the employees, being a party to the dispute, can file an application to the authority for any clarification in the balance sheet or the profit and loss statement. The authority, after satisfying itself about the need for such clarifications, would further direct the company and corporation to tender the required clarification to the other party.
Audited accounts of banking companies not to be questioned
In case of the dispute (as per Section 22 of the Act), where one of the party is a banking company and it has rendered its account, to the authority which is duly audited, the trade union or the employee which is the other party has no authority to question the accuracy of the accounts. However, it can ask for information to verify the amount of bonus.
The trade union or the employee cannot ask for any information which the banking company is not obliged to give as per the banking regulations Act.
Audit of accounts of employers, not being corporations or companies
In case of a dispute between an employee and the other party not being a corporation or company and if it has tendered an account which is duly audited by an auditor empowered to do so under the Companies Act, 2013 then Section 23 of the Act would be applicable.
If however the accounts are not audited and the said authority thinks that it is necessary to have an audited account for making a decision, then it can direct the employer to get the accounts audited by the specified time.
If the employer fails to get the accounts audited then, in that case, the authority itself can get the accounts audited by the auditor and the authority is also entitled to levy punishments in accordance with Section 28 of this Act. The expenses incurred by the authority, in this case, shall be recoverable from the employer and if the employer does not pay the expenses then it would be recovered as per Section 21 of the Act.
Maintenance of registers, records, etc
Every employer is responsible to maintain records and register in the manner as it is prescribed in the provisions of this Act.
The government by way of notification in the official gazette may appoint a person to be an inspector under the provision of this Act.
The inspector can enter any premises at a reasonable time and ask for an examination of the accounts. The employer is legally bound to furnish the information asked by the inspector.
If any person contravenes a provision of this Act or fails to comply with any of the directions made under this Act, it would be punishable for imprisonment which shall extend up to 6 months or fine up to ₹ 1000 or both.
Offences by companies
If any offence is committed under the provisions of this Act and the offence is committed by the company, then everyone who is in charge of the company or responsible for the affairs of this company would be liable and could be proceeded against. However, if the offence has been committed while taking all due diligence or the offence so committed was beyond the knowledge of the person, then such person shall not be punishable under this Act.
However, if the offence so committed was in the knowledge of the director, manager, secretary or officer of the company then such person shall be liable and can be punished accordingly.
Cognizance of offences
No court shall take cognisance of the offence committed under this Act except there is a complaint by or under the authority of the government or by an officer of the government not below the rank of the regional labour commissioner or labour commissioner in the central and the state government respectively. Moreover, the court under which such complaints would be filed shall not below the court of presidency magistrate or magistrate of the first class.
Protection of action taken under the Act
The government and the government officers are protected from any suit or any other legal proceedings against them for their actions done in good faith in pursuance of the provision of the given Act.
Under the given Act, the procedure for the computation of the bonus has been delineated, however, in certain circumstances, the payment of the bonus is linked with the productivity and production of the given employee. Such an arrangement will take place when there is any settlement or agreement between the employer and the employee in this regard.
Act not to apply to certain classes of employees
- Life Insurance Corporation,
- The Indian Red Cross Society or any other institution of a like nature,
- Universities and other educational institutions,
- Institutions (including hospitals, chambers of commerce and social welfare institutions) established not for purposes of profit,
- Employees employed through contractors on building operations,
- Employees employed by the Reserve Bank of India,
- The Industrial Finance Corporation of India,
- Financial Corporations,
- the National Bank for Agriculture and Rural Development,
- the Unit Trust of India,
- the Industrial Development Bank of India,
- Employees of inland water transport establishment passing through another country.
Employees and employers not to be precluded from entering into agreements for grant of bonus under a different formula
It is provided that the employee and the employers can indulge in any agreement or settlement, for the purpose of bonus, with a different formula. If any law or rule which renders such agreement or settlement to be null and void, that law or rule would be inconsistent to that effect.
Effect of laws and agreement inconsistent with the Act
With regards to the Section 31A of the Act, the provisions of this Act shall apply even if there is an inconsistency with any other law in force at that time or with respect to any agreement or settlement.
The provisions of this Act would not be applicable to the Coal Mines, Provident Fund and Bonus Schemes Act, 1948.
Power of exemption
If the central government finds it necessary in the public interest to prevent the application of a certain provision of this Act in certain establishment or class of establishment then it may, through the notification in the official gazette, specify the time for which the application of those provisions would be ceased for that particular establishment or class of establishment
Power to make rules
The central government has the power to make rules with regard to the provisions of this Act. The government can make rules with respect to the accounting year, maintenance of records and registers, working of the inspectors under this actor any other matter which may be prescribed. The new rule shall be presented before each house of the parliament while it is in the session and if both the house have agreed that the rule shall be applicable or shall be applied will have the same effect accordingly. However, any modification or annulment made shall not be contrary to the rule previously made.
Application of certain laws not barred
Certain enactments like the Industrial Dispute Act, 1947 or any other statutory provision dedicated to the investigation and settlement of the dispute in the distribution of the be applicable in such cases. The applicability of the given legislation does not in any way bar the relevancy of other statutes.
The Payment of Bonus Act, 1965 seeks to legally regularise the practice of paying bonus by different establishment. It offers an objective way to calculate the bonus based on profit and productivity. It enables the employees to earn over and above their minimum wages or salary. This Act provides different procedures for different establishments like banking companies, public organisations and also for the establishments which are not a company or a corporation. Apart from the procedure, this Act also defines a robust redressal mechanism.
- Practical Guide To Payment of Bonus Act and Rules by H L Kumar
- Scindia Employees Union v/s Scindia Steam Navigation Co. Ltd.
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