Chapter 5(C) Payment of Bonus Act, 1965 – CS Professional Labour Laws and Practice Notes is designed strictly as per the latest syllabus and exam pattern.
Payment of Bonus Act, 1965 – CS Professional Labour Laws and Practice Study Material
Question 1.
Write short notes of the following:
Object and scope of the Payment of Bonus Act, 1965. (June 2009, 5 marks)
Answer:
- The object of the Payment of Bonus Act, 1965 is timely payment of bonus to the employees.
- Bonus is a right of the employees and can enforce the timely and proper discharge of bonus.
- The Payment of Bonus Act, 1965, contains large number of provisions relating to Applicability, valuation, set off set on, payment, calculation of allocable surplus etc which ensures that the employees are not exploited by the employers while making the payment.
Question 2.
Write short notes on the following:
Classes of employees not covered under the Payment of Bonus Act, 1965. (June 2011, 5 marks)
Answer:
Classes of employees not covered by Payment of Bonus Act, 1965 are as follows:
- Section 32 of the Act provides that the following class of persons shall not be governed by Payment of Bonus Act, 1965.
- Employees employed by any insurer carrying on general insurance business and the employees employed by the Life Insurance Corporation of India.
- Seamen as defined in clause (42) of Section 3 of the Merchant Shipping Act, 1958.
- Employees registered or listed under any scheme made under the Dock Workers (Regulation of Employment) Act, 1948 and employed by registered or listed employers.
- Employees employed by an establishment engaged in any industry called or by or under the authority of any department of Central Government or a State Government or a local authority.
- Employees employed by
(a) the Indian red cross society or any other institution of a like nature including its branches,
(b) universities and other educational institutions
(c) institutions established not for the purpose of profit. - Employees employed by Reserve Bank of India.
- Employees employed by
(a) Industrial Financial Corporation of India.
(b) Any financial corporation established under section 3 or any Joint Financial Corporation established under section 3 A of the State Financial Corporation Act, 1951.
(c) The Deposit Insurance Corporation
(d) The National Bank for Agriculture & Rural Development.
(e) The Unit Trust of India.
(f) The Industrial Development Bank of India.
(g) The Small Industries Development Bank of India established under section 3 of Small Industries Development Bank of India Act, 1989.
(h) The National Housing Bank
(i) any other financial institution (other then Banking Company) being an establishment in public sector, which the central government may by notification specify.
(j) Employees employed by inland water transport establishments operating on routes passing through any other country.
Question 3.
Write notes on the following:
Object and scope of the Payment of Bonus Act, 1965. (Dec 2012, 5 marks)
Question 4.
Write a brief essay on the Concept of bonus and profit sharing. (Dec 2020, 6 marks)
Answer:
The term “bonus” is not defined in the Payment of Bonus Act, 1965. Webster International Dictionary defines bonus as “something given in addition to what is ordinarily received by or strictly due to the recipient”. The Oxford Concise Dictionary defines it as “something to the good into the bargain (and as an example) gratuity to workmen beyond their wages”.
The purpose of payment of bonus is to bridge the gap between wages paid and ideal of a living wage. An employee is entitled to be paid by his employer a bonus in an accounting year subjected to the condition that he/she has worked for not less than 30 working days of that year.
Section 10 of the Payment of Bonus Act, 1965 states that subject to the other provisions of this Act, every employer shall be bound to pay to every employee in respect of any accounting year a minimum bonus which shall be 8.33 per cent of the salary or wage earned by the employee during the accounting year or one hundred rupees whichever is higher, whether or not the employer has any allocable surplus in the accounting year.
According to section 11, if the allocable surplus exceeds the amount of minimum bonus payable to the employees under Section 10, 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 wage earned by the employee during the accounting year subject to a maximum of twenty per cent of such salary or wage.
On the question whether the Act deals only with profit bonus, it was observed by the Supreme Court in Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai, (1976) II LLJ 186, that “bonus” is a word of many generous connotations and, in the Lord’s mansion, there are many houses.
There is profit based bonus which is one specific kind of claim and perhaps the most common. There is customary or traditional bonus which has its emergence from long, continued usage leading to a promissory and expectancy situation materialising in a right. There is attendance bonus and what not. The Bonus Act speak and speaks as a whole Code on the sole subject of profit based bonus but is silent and cannot, therefore, annihilate by implication, other distinct and different kinds of bonuses, such as the one oriented on custom.
The Bonus Act, 1965 as it then stood does not bar claims to customary bonus or those based on conditions of service. Held, a discerning and concrete analysis of the scheme of the Bonus Act and reasoning of the Court leaves no doubt that the Act leaves untouched customary bonus.
Bonus Linked with profit sharing:
Section 31A of the Payment of Bonus Act, 1965 enables the employees and employers to evolve and operate a scheme of bonus payment linked to production or productivity in lieu of bonus based on profits under the general formula enshrined in the Act. There is a logical presumption that whatever is statutorily payable under the Act would be on the basis of profits. However, bonus payments under Section 31A are also subject to the minimum (8.33 percent) and maximum (20 percent).
Question 5.
Attempt the following stating the relevant legal provisions and case law, if any:
During the accounting year 2003-04, Stingy Ltd. to which the Payment of Bonus Act, 1965 applies, suffered heavy losses. The Board of directors decided not to pay any bonus to its employees. The employees moved the court for relief. Will they succeed? (Dec 2005, 3 marks)
Answer:
- The employees will succeed in getting the bonus as under the provisions of Payment of Bonus Act, 1965, even if the employer suffers losses during the accounting year, he is bound to pay minimum bonus as prescribed [Section 10]
- The same was as held in State V/s Sardar Singh Majithia
Question 6.
Attempt the following stating the relevant legal provisions and case law, if any:
Manmauji, an employee, was suspended for an alleged misconduct. An inquiry was conducted and the charges against him could not be proved. As a result, he was reinstated with full back wages. The employee was, however, not paid bonus for the period of suspension. Can he challenge the employer’s action? (June 2006, 3 marks)
Answer:
Manmauji can challenge the employer’s action of not paying bonus for the period of suspension as the Act provides that an employee suspended but subsequently reinstated with full back wages can not be treated to be ineligible for bonus for the period of suspension.
The facts are similar to that of Project Manager, Ahmedabad project, ONGC v/s Sham kumar Sahegal
Question 7.
Attempt of the following stating relevant legal provisions and case law, if any: (June 2007)
(i) Rajat was suspended from service by the company. He was subsequently reinstated with full back wages. The company refused to pay bonus for the period of his suspension. Is Rajat entitled to get bonus for the period of his suspension ? (3 marks)
(ii) Arpit was dismissed from service for an act of misconduct. The company did not pay him any bonus. Arpit contended that he was eligible for payment of bonus for the accounting year in which dismissal took place. Will he succeed ? (3 marks)
Answer:
(ii) According to Payment of Bonus Act, if an employee is dismissed from service for any act of misconduct he will be disqualified from receiving any bonus under the Act, & not the bonus only for the accounting year in which the dismissal takes place. In this case, Arpit will not succeed on getting bonus under the Act. He is not eligible for bonus under the Act.
Question 8.
Attempt the following stating the relevant legal provisions and case law, if any:
An employee was dismissed from service for an act of misconduct. The company did not pay any bonus to the dismissed employee for the accounting year in which the dismissal took place. Is the action of the company justified? (Dec 2007)
Question 9.
Attempt of the following stating relevant legal provisions and decided case law, if any:
An employee was suspended, but after an inquiry, he was reinstated with full back wages. He claimed bonus for the period of suspension. Will he succeed ? (June 2008, 3 marks)
Question 10.
Attempt of the following stating relevant legal provisions and case law, if any:
An employee contended that subsistence allowance given during the period of his suspension should be included in his total wages for the purpose of calculation of bonus entitlement. Will he succeed? (Dec 2008, 4 marks)
Answer:
No, the contention of the employee is not tenable since subsistence allowance given during the period of suspension should not be included in the calculation of bonus since the same is not part of wage.
Question 11.
Attempt the following stating relevant legal provisions and decided case law, if any:
An employee was dismissed from service for an act of misconduct. The company did not pay any bonus to the dismissed employee for the accounting year in which the dismissal took place. Is the action of the company justified? (Dec 2009, 4 marks)
Question 12.
Attempt the following stating relevant legal provisions and decided case law, if any:
Growell Ltd. declared minimum bonus in an accounting year as there was no allocable surplus. However, the workmen claimed that the management was liable to pay higher amount of bonus in view of the terms of settlement entered into between the workmen and the management. Is the plea of the workmen tenable in law ? (Dec 2010, 4 marks)
Answer:
- Yes, the plea of the workmen is tenable in law.
- Though, the company Growell Ltd. has rightly declared minimum bonus in the accounting year as there was no allocable surplus, yet have entered into settlement with the workmen for higher bonus which needs to be abide by.
Question 13.
Attempt the following stating relevant legal provisions and decided case law, if any:
Roler Coaster Ltd. is engaged in the manufacture of electronic goods. The company has been paying puja bonus to its workers during Diwali festival since the beginning of its operations. Subsequently, the Payment of Bonus Act, 1965 became applicable to the company. The management wants to discontinue puja bonus on the ground that the company is paying bonus as per the Payment of Bonus Act, 1965. Is the management justified ? (June 2011, 4 marks)
Answer:
- The claim for customary bonus will not be affected by the introduction of statutory bonus as held in the case of Hukamchand Jute Mills limited v/s Second Industrial, Tribunal West Bengal.
- Statutory bonus and customary bonus operate in two filed and do not clash with each other.
- Hence the action of management is wrong. The management has to pay puja bonus to the employees.
Question 14.
Attempt the following stating relevant legal provisions and decided case law.
A workman was dismissed from service on 15th February, 2009 after a departmental enquiry for an act of misconduct. No bonus was paid to him for the accounting year during which he was dismissed. Subsequently, he was reinstated by the court with full back wages. Will the workman be entitled to claim bonus alongwith full back wages? (Dec 2011, 4 marks)
Answer:
Workmen is entitled to claim bonus along with full back wages
Question 15.
The employees of company Old Limited had been getting the maximum bonus of 20%. The company was amalgamated with certain other companies, on the stipulation that employees of amalgamating companies would become employees of the new company on terms not favourable to them and that a separate profit and loss account would be prepared for each of the amalgamating companies.
The new company allowed the said employees only the minimum bonus 8.33% on the basis of consolidated profit and loss accounts and contended that section 3 was not applicable as there was no stipulation for preparing separate balance sheets for each amalgamating companies. State as to who will succeed, the employees of Old Limited or the management of the new company? (Dec 2019, 6 marks)
Answer:
Section 3 of the Payment of Bonus Act, 1965 provides that the word establishment shall include all its departments, undertakings and branches wherever it has so whether situated in the same place or in different places and the same shall be treated as parts of the same establishment for the purpose of computation of bonus under this Act.
Provided that 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, undertaking or branches 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 establishment for the purpose of computation of bonus.
In the case of the Workman Of M/S. Binny Ltd vs. The Management of Binny Ltd. 1986 AIR 509, 1985 SCR the Supreme Court observed that in matters of welfare legislation, especially involving labour, the terms of contracts and the provisions of law should be liberally construed in favour of the weaker one. Section 3 is an enabling provision in favour of the employers.
When an establishment consists of different departments, undertakings or branches, all such departments, under takings or branches shall be treated as part of the same establishment for the purpose of computation of bonus under the Act. This means that the employees will be entitled to bonus on the basis of the surplus available from all the units put together.
The proviso speaks of separate balance sheet and profit and account being prepared and maintained for any accounting year in respect of one of the units of the whole undertaking. In such cases, the computation of allocable surplus for the payment of bonus should be on the basis of such separate profit and loss account and balance-sheet thus prepared and the employees will be entitled to claim bonus on this basis.
The claim of the employees on this basis can be defeated only if this separate unit was treated as part of the establishment for the computation of bonus immediately before commencement of the accounting year in question.
The mere omission to prepare a separate balance sheet for one of the amalgamating units will not by itself help the company to deny bonus to the employees of such a unit. When profit and loss account and trial balance sheet are prepared there should be difficulty in preparing the regular balance sheet.
In view of the above, it can be concluded that the employees of Old Limited will succeed.
Question 16.
Mr. X was an employee of Naya International Co. with more than one-year continuous service. He was dismissed from services on account of insubordination. The Company refused to pay him bonus. Decide whether such person is entitled to any bonus?
Also critically examine the disqualifications for payment of bonus. (Dec 2021, 6 marks)
Answer :
Payment of Bonus Act, 1965 provides for the payment of bonus to persons employed in certain establishments and for matters connected therewith. Payment of Bonus Act extends to the whole of India, and as per Section 1(3) the Act shall apply to
(a) every factory; and
(b) every other establishment in which twenty or more persons are employed on any day during an accounting year.
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 thirty working days in that year. According to Section 9 of the Payment of Bonus 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 behaviour while on the premises or the establishment; or
(c) theft, misappropriation or sabotage of any property of the establishment.
If an employee is dismissed from service for any act of misconduct enumerated in Section 9, he stands disqualified from receiving any bonus under the Act, and not the bonus only for the accounting year in which the dismissal takes place [Pandian Roadways Corpn. Ltd. v. Presiding Officer, Principal Labour Court, (1996) 2 LLJ 606].
Thus Mr. X is not entitled for bonus in the given case.
RECENT CASE LAWS
| Case Law | Decision | |
| 1. | Mumbai Kaamgar Sabha V Abduibhai Faizullabhi | It was held that the Bonus Act speaks on the sole subject of profit based bonus but is silent and cannot, therefore, annihilate by implication, other distinct and different kinds of bonuses , such as the one oriented on custom. Reasoning of Court leaves no doubt that the Act leaves untouched customary bonus |
| 2 | Chalthan Vibhag Sahakari Khand Udyog V Government Labour Officer | It was held in this case by the Supreme Court that the definition of salary or wage shall cover the payment of retaining allowance and also dearness allowance. Subsistence allowance given during suspension is not wages, however lay- off compensation is wages |
| 3 | Project Manager, Ahmedabad Project, ONGC V Sham Kumaar Sahegai | It was held that in case an employee is dismissed from services for any act of misconduct enumerated in Section 9 of the Act, then he stands disqualified from receiving any bonus under the Act, and not only the bonus only for the accounting year in which the dismissal takes place |
| 4 | Indian Roadways Corpn. Ltd. V Presiding Officer, Principal Labour Court | It was held that in case an employee is dismissed from services for any act of misconduct enumerated in Section 9 of the Act, then he stands disqualified from receiving any bonus under the Act, and not only the bonus only for the accounting year in which the dismissal takes place |
| 5 | State V Sardar Singh Majithia | It was held that in case the employer suffers the losses during the accounting year, then also he is bound to pay the minimum bonus as prescribed by Section 10 of the Payment of Bonus Act, 1965 |
Payment of Bonus Act, 1965 Notes
Applicability & Objective of the Payment of Bonus Act, 1965
- The Act extends to the whole of India & applies to:
- Factory
- Other establishment in which twenty or more persons are employed on any day during an accounting year.
- The objective of the Payment of Bonus Act, 1965 is timely payment of bonus to the employees.
- The Payment of Bonus Act, contains provisions relating to applicability, valuation, set off, set on, payment, calculation of allocable surplus etc. which ensures that the employees are not exploited by the employers while making the payment.
Who is an Employee
- Any person employed on a salary or wage not exceeding INR 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.
- Does not includes an apprentice.
- Classes of employees not covered by Payment of Bonus Act Following are the classes of persons not governed by Payment of Bonus Act, 1965:
- Employees employed by the Life Corporation of India,
- Seamen as per Section 3(42) of the Merchant Shipping Act, 1958.
- Employees registered or listed under any scheme made under the Dock Workers (Regulation of Employment) Act, 1948.
- Employees employed by an establishment engaged in any industry called or by or under the authority of any department of Central Government or a State Government or a local authority.
- Employees employed by:
(a) the Indian red cross society or any other institution of a like nature.
(b) universities and other educational institutions.
(c) institutions established not for the purpose of profit. - Employees employed by RBI
- Employees employed by
(a) IFCI
(b) SFC (State Financial Corporation)
(c) Deposit Insurance Corporation
(d) NABARD (National Bank for Agriculture & Rural Development)
(e) UTI (Unit Trust of India)
(f) IDBI (Industrial Development Bank of India)
(g) SIDBI (Small Industries Development Bank of India)
(h) NFIB (National Flousing Bank)
(i) any other financial institution (other than Banking Company) being an establishment in public sector, which the central government may by notification specify.
What is Allocable Surplus
In relation to employer being a company (not being a banking company) which has not made the arrangements prescribed under the Income tax for the declaration & payments of the dividends within India: 67% of the available surplus in an accounting year.
Other Employers: 60% of the available surplus
Meaning of Salary/Wage as per Bonus Act
All remuneration (other than remuneration in respect of overtime work) capable of being expressed in terms of money, which would, if the terms of employment, express or implied, were fulfilled, be payable to an employee in respect of his employment.
- Includes
- Dearness Allowance (DA)
- Excludes-
- (a) Any other allowance which the employee is for the time being entitled to.
- (b) Value of any house accommodation or of supply of light, water, medical attendance or other amenity
- (c) Travelling concession
- (d) Bonus (including incentive, production and attendance bonus)
- (e) Contribution paid or payable by the employer to any pension/provident fund
- (f) Retrenchment compensation or any gratuity or other retirement benefit payable to the employee
- (g) Commission payable to the employee.
- Note:
- Free food allowance or free food by his employer shall be deemed to form part of the salary or wage of such employee.
- Retaining allowance and dearness allowance paid to the workman is also included in the definition of salary or wage.
- Lay off compensation also included within the ambit of wages.
- Subsistence allowance given during suspension is not included in wages.
Calculation of Amount payable as Bonus
- Gross profit is calculated as per First or Second Schedule. Computation of Gross Profits
- The gross profits derived by an employer from an establishment in respect of any 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. - From this Gross profit the sum deductible under section 6 are deducted.
Sums Deductible from Gross Profits
- any amount by way of depreciation admissible in accordance with the provisions of sub-section (1) of Section 32 of the Income-tax Act
- any amount by way of development rebate or investment allowance or development allowance which the employer is entitled to deduct from his income under IT Act.
- 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.
- Any other sums as are specified in respect of the employer in the Third Schedule.
- Add the sum equal to the difference between the direct tax calculated on gross profit for the previous year and direct tax calculated on gross profit arrived at after deducting the bonus paid or payable to the employees.
- The figure so arrived is available surplus.
- of this surplus, 67% in case of company (other than a banking company) and 60% in all other cases shall be the “allocable surplus” which is the amount available for Payment of bonus to employee.
Who is Eligible for Bonus
- 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 thirty working days in that year.
When is an employee disqualified for Bonus
An employee shall be disqualified from receiving bonus if he is dismissed
from service for:
(a) Fraud
(b) Riotous or Violent behaviour while on the premises or the establishment.
(c) Theft, misappropriation or sabotage of any property of the establishment.
Concept of Minimum bonus
Every employer shall be bound to pay to every employee a minimum bonus which shall be 8.33 % of the salary or wage earned by the employee during the accounting year or one hundred rupees, whichever is higher, whether or not the employer has any allocable surplus in the accounting year.
Provided that where an employee has not completed fifteen 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 “one hundred rupees”, the words “sixty rupees” were substituted.
Concept of Maximum bonus.
Were in respect of any accounting year, 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 wage earned by the employee during the accounting year subject to a maximum of 20% of such salary or wage.
Where the salary or wage of an employee exceeds three thousand and five hundred rupees per mensem, the bonus payable to such employee, shall be calculated as if his salary or wage were three thousand and five hundred rupees per mensem.
Time limit for payment of bonus
- Where there ¡s a dispute regarding payment of bonus pending before any authority: Within a month from the date on which the award become enforceable
- In any other case: Within a period of eight months from the close of the accounting year.