UNIT-5

The Payment of Bonus Act, 1965

 Introduction
• Bonus is a cash payment made to employee in addition to wages. Bonus
differs from wages in that it does not rest on contract, but still payments
for bonus are made because legally due, but parties do not contemplate
indefinitely.
• The practice of paying bonus in India originated during First World War
when certain textile mills granted 10% of wages as war bonus to their
workers in 1917.
• In certain cases of industrial disputes, demand for payment of bonus was
also included. In 1950, the full bench of the labour appellate tribunal
evolved a formula for determining bonus, a plea was made to raise that
formula in 1959.
• At the second and third meetings of the 18th session of standing
labour committee (G.O.I.) held in new Delhi in March/ April 1960, it
was agreed that a commission be appointed to go into the details of
bonus and evolve suitable norms.
• A tripartite commission was set up by the Govt. of India in 1961 to
consider in a comprehensive manner, the details of payment of bonus
based on profits to employees employed in establishments and to
make recommendation to the Govt.
• The Govt. of India accepted the recommendation of the commission
subject to certain modifications. To implement these
recommendations the Payment of Bonus Ordinance, 1965, was
promulgated on 29th may, 1965. To replace the said ordinance the
payment of bonus bill was introduced in the Parliament and
approved.
• Under this Act the payment of bonus has become a statutory
obligation imposed upon the employers covered by the Act.

• The Act came into operation with effect from 25th September, 1965.

• The Act consists of forty sections and four schedules.

 The formula for the grant of bonus is as follows:-
• As both labour and capital contribute to the earnings of the industrial concern, it is fair
that labour should derive some benefit, if there is a surplus after meeting prior or
necessary charges.
In Mill Owners Association v. Rshtriya Mill Mazdoor Sangh (1952)LAC 423) a full bench
of 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”.
• The Formula provided the following prior charges should be deducted from the gross
profits of an enterprise:
1) Return on paid capital generally at the rate 6%;
2) Return on working capital varying from 2% to 4%;
3) Depreciation worked out on a notional basis;
4) Rehabilitation;
5) Income tax.
 The Supreme Court in Muir Mill Ltd. V. Suti Mill Madoor Union (1955) I
LLJ 1) laid down two conditions which had to be satisfied before a
demand for bonus could be justified:
1) the wage fell short of the living standard; and
2) the industry makes huge profits part of which are due to the
contribution made by employees in increasing production.
• The demand for bonus would become an industrial claim when either
or both of these conditions were satisfied.
 Aims of The Payment of Bonus Act, 1965

•The payment of Bonus Act, 1965 aims at providing for the

payment of bonus to the employees of certain
establishments, on the basis of profits or production or
productivity and for matters connected therewith.
 Objectives of the Act
1) To impose a statutory liability upon the employer to pay bonus to his
employees.
2) To regulate the amount of bonus to be paid to the workers.
3) To provide for payment of the maximum and minimum bonus and
linking the payment of bonus with the scheme of “set-off and set-on”.
4) To prescribe a formula for computing the bonus.
5) To reward the workers by sharing the profits earned by the organization.
6) To provide machinery for enforcement of the liability for payment of
bonus.
 APPLICABILITY (Sec. 1)
• The Act applies to every factory and every other establishment
employing not less than 20 persons on any day during an accounting
year. The Central/State Governments can, however, extend its
provisions to any establishment employing less than 20 but more
than 10persons. The establishments covered under the Act shall
continue to pay bonus even if the number of employees fall below
10, at a later date.
• The establishment shall be profitable.
 DEFINITIONS (Sec. 2)
Sec.2(1) “accounting year” means -
(i) in relation to a corporation, the year ending on the day on which the books and accounts of the
corporation are to be closed and balanced.
(ii) in relation to a company, the period in respect of which any profit and loss account of the
company laid before it in annual general meeting is made up, whether that period is a year or
not;
(iii) in any other case -
(a) the year commencing on the 1st day of April; or
(b) if the accounts of an establishment maintained by the employer thereof are closed and balanced
on any day other than the 31st day of March, then, at the option of the employer, the year ending
on the day on which its accounts are so closed and balanced:
• Provided that an option once exercised by the employer under paragraph (b) of this sub-clause shall
not again be exercised except with the previous permission in writing of the prescribed authority
and upon such conditions as that authority may think fit.
 Sec.2(4) - Allocable Surplus 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, sixty-seven per cent of the
available surplus in an accounting year;

(b) in any other case, sixty percent of such available surplus.

 Sec.2(5) “appropriate Government” means-
(i) in relation to an establishment in respect of which the appropriate
Government under the Industrial Disputes Act, 1947, is the Central
Government, the Central Government;
(ii) in relation to any other establishment, the Government of the
State in which that other establishment is situated.

Sec.2(6) “available surplus” means the available surplus computed

under section 5.
 Sec. 2 (13) - Employee –
• Means any person (other than apprentice) employed on a salary or
wage not exceeding twenty one thousand rupees per month 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 expressed or implied.
 Sec. 2(14) “employer” includes-
• (i) in relation to an establishment which is a factory, the owner or
occupier of the factory, including the agent of such owner or
occupier, the legal representative of a deceased owner or occupier
and where a person has been named as a manager of the factory
under clause (f) of subsection (1) of section 7 of the Factories Act,
1948, the person so named; and
• (ii) in relation to any other establishment, the person who, or the
authority which, has the ultimate control over the affairs of the
establishment and where the said affairs are entrusted to a Manager,
Managing Director or Managing Agent, such Manager, Managing
Director or Managing Agent;
 Sec. 2(21) “salary or wage” means - all remuneration (other than remuneration in respect of
over-time 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 or of work done in such employment and includes dearness allowance (that is to
say, all cash payments, by whatever name called, paid to an employee on account of a rise in
the cost of living);
but does not include -
(i) any other allowance which the employee is for the time being entitled to;
(ii) the value of any house accommodation or supply of light, water, medical attendance or other
amenity or of any service or of any concessional supply of food grains or other articles;
(iii) any traveling concession;
(iv) any bonus (including incentive, production and attendance bonus);
(v) any contribution paid or payable by the employer to any pension fund or provident fund or
for the benefit of the employee under any law for the time being in force;
(vi) any retrenchment compensation or any gratuity or other retirement benefit payable to the
employee or any ex gratia payment made to him;
(vii) any commission payable to the employee
• (Note: An ex gratia payment is made to an individual for damages or claims, but it does not require the
admittance of liability by the party making the payment).
 Chalthan Vobhag Sahkari Khand Udyog v. Govt. Labour
Officer and Ors (1981) I LLJ 450 (SC)
• The appellant which runs a sugar factory, treated the retaining allowance paid
to the workmen during the off- season as part of their wages for the
purpose of the Employees' Provident Fund Act, 1972, but not for the purpose
of the Payment of Bonus Act,1965. On a reference of an industrial dispute, the
Industrial Court, Gujarat made an award holding that the allowance cannot be
included in wages or remuneration for the purpose of calculation of bonus. The
Gujarat High Court set aside the award in writ petition and held that the
allowance fell within the definition of the expression `salary or wage' in s.
2(21) of the Act. The appellant sought special leave to appeal under Art.
136 of the Constitution.
• Dismissing the special leave petition, the SC held that the retaining allowance
paid to the employees during the off-season in the sugar industry partakes
the nature of deferred wages on a lower scale and falls within the definition of
the expression `salary or wage' within the meaning of s.2(21) of the Payment
of Bonus Act, 1965 and, therefore, must be taken into account for the purpose
of calculation of bonus payable under s.10 of the Act.
• The definition of the expression `salary or wage' as given in s.2(21) of the Act is
wide enough to cover the retaining allowance granted to the workmen during
the off-season. The retaining allowance is nothing but remuneration correlated
to service and it would be a misnomer to call it an allowance. It does not fall
within the purview of clause (i) of the exclusionary clause of s.2(21) but comes
within the substantive part of the definition of `salary or wage' in s. 2(21) of the
Act.
 Establishments to include departments, undertakings and
branches (Sec.3)

• Where an establishment consists of different department 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.
 K.C.P.Employee Association, Madras v. K.C.P Ltd.
(AIR 1978 SC 474)
• The respondent is a public limited company carrying on three business adventures
viz., manufacture of sugar, of cement and of heavy engineering machinery, at
three different places. In respect of the workers of, the engineering unit
known as Central Workshops and which was financially ill, the management
demurred the payment of bonus under the Act for the years 1964-65 and
1965-66 on the ground that the central workshop was a separate undertaking to
which the proviso to Section 3 applied and consequently the claim for bonus on the
basis of a single establishment within the meaning of the main s. 3 was
untenable.
• The Labour Tribunal, however, upheld the claim of the workmen for both the
years. When the said two awards were challenged by a writ petition, a single
Judge of Madras High Court upheld the award for 1964-65. In further appeal by
the management, the Division Bench set aside both the awards for 1964-65 and
1965-66 and directed the Tribunal to correct certain errors.
• Dismissing the appeals by special leave the SC held that in industrial
law, interpreted and applied in the perspective of Part IV of the
Constitution, the benefit of reasonable doubt on law and facts, if
there be such doubt, must go to the weaker section, labour.
• The SC further held that in the instant case : (a) Proviso to s. 3 is
attracted. Separate balance sheet and profit and loss accounts have
been prepared and maintained in the past and during the relevant
years of accounting also and (b) The High Court is right in directing
the Tribunal to re-enquire, rectify the balance sheets and profit and
loss accounts for the years in question taking due note of the
requirements of the Act.
 Constitutionality of the Act
• The constitutional validity of the Act was challenged in the case of
Jalan Trading Co.(Pvt.) Ltd v. Mill Mazdoor Sabha., (AIR 1977 SC 691)
on the grounds of violation of Articles 14 and 19(1)(g) of the
Constitution.
• The Supreme Court upheld the main provisions of the Act regarding
payment of minimum bonus as constitutional.
 Jalan Trading Co.(Pvt.) Ltd v. Mill Mazdoor Sabha
(AIR 1977 SC 691)
• During the pendency before the Industrial Tribunal, Bombay, a reference under
s. 73A of the Bombay Industrial Relations Act, 1946, which arose out of a
demand for the payment of bonus for the years 1961 and 1962, the Payment of
Bonus Ordinance 3 of 1965 was promulgated by the President on May 29, 1965
with immediate effect.
• The representatives of the workmen claimed that even if the plea of the
employers that the profit and loss account of establishment for the years in
question disclosed a loss, was correct, the ordinance governed the dispute and
that the employees were entitled to receive bonus, at the minimum rate of 4% of
the salary or wages or Rs. 40 whichever was higher.
• The Industrial Tribunal upheld the plea of the workmen and directed the employers
subject to the provisions of the Bonus Ordinance, 1965 to pay to each employee
bonus for the year 1962 equivalent to 15 days' of the salary or wages or Rs. 40
whichever was higher.
• With special leave the employers appealed to SC and challenged the validity of the
Payment of Bonus Act, 1965, which repealed Ordinance 3 of 1965 and especially of the
provisions under which bonus at minimum rate was made payable under the Act.
• The SC held that the impugned legislation was within the legislative competence of
Parliament and therefore not a colourable exercise of power or a fraud on the
Constitution. The power to exempt certain establishments from the operation of the
Act given to the appropriate Government u/S. 36 was not an unguided power because
the Government was enjoined to take public interest, the financial position of the
establishment, and other relevant circumstances into consideration before exercising
the said power.
• There was therefore no excessive delegation of legal authority by s. 36 and the section
was valid.
 ELIGIBILITY (Sec.8)
• Every employee (other than an apprentice) receiving salary or wages up to
Rs.3,500 per month and engaged in any kind of work whether skilled,
unskilled, manual, managerial, supervisory, technical, clerical , etc. is
entitled to bonus for every accounting year, if he has worked for at least 30
working days in that year.
• Every employee who is drawing a salary or wage upto Rs. 10000.00 per
month (w.e.f. 1- 4 - 2006) and who has worked for minimum period of 30
days in a year is entitled to be paid bonus. {Section 2(13) & 8}
• (Note: Eligibility: Employees drawing ₹21000 per month or less (basic + DA,
excluding other allowances) and have completed 30 working days in that
financial year are eligible for bonus payment (2015 amendment).
• Employees of the General Insurance Companies, LIC, Central/State
Government establishments, Indian Red Cross Society, Universities and
Educational Institutions, Hospitals, Chambers of Commerce, Reserve Bank
of India, Industrial Finance Corporation of India, Unit Trust of India, Social
Welfare Institutions, Local Bodies, etc. are not entitled to bonus under the
Act. What they are paid as bonus, is ex-gratia payment (Sec. 32).
(Note: What Is an Ex-gratia Payment?
• An ex gratia payment is made to an individual by an organization,
government, or insurer for damages or claims, but it does not require the
admittance of liability by the party making the payment.)
• (Ex gratia is Latin for "by favour", and is most often used in a legal context.
When something has been done, ex gratia, it has been done voluntarily, out
of kindness or grace. In law, an ex gratia payment is a payment made
without the giver recognizing any liability or legal obligation).
 EMPLOYEE IS DISQUALIFIED FROM RECEIVING
BONUS{Sec. 9}

If an employee is dismissed from services for:

a) fraud;
b) riotous or violent behavior while on the premises of the
establishment;
c) theft, misappropriation, or sabotage of any property of the
establishment;
• he is disqualified from receiving bonus.
 MINIMUM BONUS {Sec. 10}
• The minimum bonus which an employer is required to pay even if he
suffers losses during the accounting year or there is no allocable
surplus (except in case of new establishments), is 8.33% of the salary
or wages of the employee during the accounting year. Rs. 100 in case
of employees above 15 years and Rs. 60 in case of employees below
15 years, whichever is higher.
• (Bonus payable will be at a min rate of 8.33%, and max at 20%)
 MAXIMUM BONUS{Sec. 11}

•If in any accounting year, the allocable surplus exceeds the

amount of minimum bonus, the employer shall pay bonus in
proportion to the salary or wages earned by the employee
during that accounting year, subject to a maximum of 20% of
such salary or wages.
MODE AND TIME FOR PAYMENT OF BONUS (Sec. 22 )

•Bonus should be paid in cash and within 8 months from the

close of the accounting year.
•Bonus is payable only annually.
 EMPLOYER’S OBLIGATIONS

•To calculate and pay the annual bonus as required under the
Act.
•To maintain the prescribed registers; and
•File annual returns of bonus paid.
•To submit Form D to the inspector within 30 days.
 TIME LIMIT FOR PAYMENT (Sec. 19)

•The bonus should be paid in cash within 8 months from the

close of the accounting year or within one month from the
date of enforcement of the award or coming into operation
of a settlement following an industrial dispute regarding
payment of bonus.
•However if there is sufficient cause extension may be applied
for.
 CALCULATION OF BONUS

1) Calculate the Statutory bonus.

2) Calculate the Available Surplus.
 MEANING OF STATUTORY BONUS
• Statutory Bonus means bonus payable as per statute, i.e., the Payment of
Bonus Act. As per the Act, an amount equal to 8.33% of the Basic +
Dearness allowance paid to an employee who is eligible for bonus is to be
paid irrespective of availability of surplus or profit. Therefore, 8.33% is the
statutory minimum bonus payable.
• However, depending upon availability of profit, the employer shall pay
bonus subject to a maximum of 20%.
• The Payment of Bonus Act, 1965, gives to the employees a statutory right
to a share in the profits of his employer. Earlier some employees used to
get bonus but that was so if their employers were pleased to pay the same.
• Under the Payment of Bonus Act, 1965 all the confirmed employees whose
basis is less than or equal to Rs.10000/- per month is eligible for statutory
bonus @ rate of 8.33% of Basic pay.
 HOW STATUTORY BONUS IS CALCULATED?
• The Act enables the employees to get a minimum bonus equivalent
to one month's salary or wages (8.33% of annual earnings) whether
the employer makes any profit or not.

• But the Act also puts a ceiling on the bonus and the maximum bonus
payable under the Act is equivalent to about 2 1/2 months' salary or
wage (20% of annual earnings).
 Calculation of bonus
As per the amendment for the Payment of Bonus Act passed in 2015 -
• when wages or salary exceeds ₹7000 or the minimum wages fixed by the government,
• bonus will be payable on ₹7000 or the minimum wages as fixed by govt., whichever is
higher.
Note: This bonus payable will be at a min rate of 8.33%.
Example:
1) Salary = Basic + DA – 6000, Min. Wages – 6000, bonus payable on 6000x8.33/100 =500
per month, 500x12=6000 per year. (not exceeded 7K).
2) Salary = Basic + DA – 7200, Min. Wages – 8000, bonus payable on 8000x8.33/100=666
per month, 666x12=7992 per year.(exceeded 7K)(whichever is higher).
3) Salary (Basic + DA) = ₹7500, Min. Wages = ₹8000, Bonus will be payable on
8000x8.33/100=666 per month, 666x12=7992 per year. (exceeded 7K)(whichever is
higher).
 Types of Bonus
Annual Bonus Spot Bonus
• It is usually based on overall company • A spot bonus is for people who go above and
performance. So you may get a large or small beyond their normal duty and is usually tied to a
bonus depending on how successful your task that was outside the scope of your role.
organization was that year as well as how big a
part of that success you are. • It’s generally a one-time thing, if not an
occasional occurrence depending on budget,
• This can also be considered as ‘profit sharing’. priorities, and work efficiency.
Referral Bonus Holiday Bonus

• A referral bonus is given to current employees on

• A holiday bonus is another way to recognize
referring great candidates for jobs at their
employees for their hard work and to give them
company.
an extra boost during an especially expensive
time of the year.
• It’s generally given when the candidate is hired
• It’s often but not always a set percentage of your
and has stayed on for several months (usually
annual salary (say anywhere from 5% to 10%).
 Signing Bonus Retention Bonus

• It is a one-time bonus provided when

you sign on to a new role.
• A retention bonus is somewhat similar
to a signing bonus and is given for
• Companies usually offer signing
retaining valuable employees.
bonuses when an employee is
moving to a new city for a job and the
• It’s generally given during an
company wants to cover some of the
acquisition, merger or to make
cost.
someone stick around for an extra
period of time if they were looking to
• It is also a way for employers to
leave.
make up for salary demands they
can’t meet.
 CALCULATE THE AVAILABLE SURPLUS
Available Surplus = Gross Profit
1) Depreciation admissible u/s 32 of the Income Tax Act;
2) Development allowance;
3) Direct taxes payable for the accounting year;
4) Sums specified in the Third Schedule;
5) Direct Taxes in respect of such gross profits as reduced by the
amount of bonus, for the immediately preceding accounting year;
6) + Direct Taxes in respect of gross profits for the immediately
preceding accounting year.
 POINTS REGARDING AVAILABLE SURPLUS
1) Direct taxes payable for the accounting year (calculated as per
sec-7)- sums specified in the third schedule.
2) Direct taxes (calculated as per sec-7) in respect of gross profit for
the immediately preceding accounting year.
3) Allocable surplus = 60% of available surplus, 67% in case of foreign
companies.
4) Make adjustment for “set on” and “set off” for calculating the
amount of bonus in respect of an accounting year.
 ALLOCABLE SURPLUS
Allocable Surplus = 60% of Available Surplus, 67% in case of foreign
companies. The bonus is to be paid out of the allocable surplus.
▪ The allocable surplus so computed is distributed amongst the
employees in proportion to salary or wages received by them during
the relevant accounting year.
▪ In case of a foreign company, the allocable surplus is 67 percent of
the available surplus and in other cases it is 60 percent (Ss. 4,5 and 7)
 Sec. 4. Computation of gross profits —
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.
 Sec. 5. Computation of available surplus—
The available surplus in respect of any accounting year shall be the gross profits for that
year after deducting therefrom the sums referred to in section 6;
• Provided that the available surplus in respect of the accounting year commencing on any
day 1968 and in respect of every subsequent accounting year shall be the aggregate of –
(a) the gross profits for that accounting year after deducting therefrom the sums referred
to in section 6; and
(b) an amount equal to the difference between –
• (i) the direct tax, calculated in accordance with the provisions of 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, calculated in accordance with the provisions of section 7, in respect of
an amount equal to the gross profits of the employer for such preceding accounting year
after deducting therefrom 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.
 Sec. 7. Calculation of direct tax payable by the employer —
• Any direct tax payable by the employer for any accounting year shall, subject to
the following provisions, be calculated at the rates applicable to the income of the
employer for that year, namely:-
• (a) in calculating such tax no account shall be taken of –
• (i) any loss incurred by the employer in respect of any previous accounting year
and carried forward under any law for the time being in force relating to direct
taxes;
• (ii) any arrears of depreciation which the employer is entitled to add to the
amount of the allowance for depreciation for any following accounting year or
years under sub-section (2) of section 32 of the Income-tax Act;
• (iii) any exemption conferred on the employer under section 84 of the Income Tax
Act or of any deduction to which he is entitled under sub-section (1) of section
101 of that Act, as in force immediately before the commencement of the Finance
Act, 1965.
 SET ON & SET OFF (Sec. 15, Schedule IV)
The principle of “set on and set off” of allocable surplus is as follows:
• Where for any year the allocable surplus exceeds the amount of maximum bonus
payable to the employees, then, the excess shall, subject to a limit of twenty per
cent of the total salary or wages of the employees, be carried forward for being
set on in the succeeding year and so on to be utilized for the purpose of payment
of bonus.
• Where for any 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, and there is no amount or sufficient amount carried forward and set
on 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 year and so on.
• (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.

• The allocable surplus so computed is distributed amongst the

employees in proportion to salary or wages received by them during
the relevant accounting year.)
 The Employees of The National & Grindlays Bank Ltd. v. The National &
Grindlays Bank Ltd.
(AIR 1976 SC 611)
• As a result of negotiations between the respondent-Bank and its
employees (appellants) an industrial dispute with regard to bonus for
the years 1956 to 1964 was settled on an ad hocbasis. By the time
of the settlement however the Payment of Bonus Act, 1965 came
into force. In respect of the accounting year 1964, though the bonus
formula was applicable, no separate computation was made in
accordance with that formula since it was settled on an ad hoc basis
as a part of an omnibus settlement.
• An industrial dispute having arisen between the parties in regard to
the computation of bonus for the accounting year 1966, it was
referred to an Industrial Tribunal for adjudication.
 • The Tribunal's award was assailed by the workmen on the following
grounds:
(a) that there was an excess of allocable surplus over the amount of maximum
bonus for the accounting years 1964 and 1965, which, by reason of s. 15(1),
was liable to be carried forward for being set on in the succeeding accounting
year 1966;
(b) that while the object of "add back" was that the entire amount set apart as
provision for bonus should be added back in determining the available surplus.
In spite of making a provision of a much larger amount as bonus, the Bank had
added back only a small amount representing the bonus of those workmen
who were employees falling within the meaning of s. 2(13) and there by failed
to take into account bonus in respect of those workmen who are not such
employees; the word 'employee' in items 2(a) of the First Schedule was not
limited to employees as defined in s. 2(13) but was used, in a wider sense to
include all employees, that is, employees drawing more than 1600 rupees or
less.
• The SC held that the workmen are not entitled to contend that
though the claim for bonus for the year 1964 was settled on an ad
hoc basis without making computation under the provisions of the
Act, such computation must now be made, not for the purpose of
determining the bonus payable to them, but for the purpose of
determining whether there is any amount liable to be carried
forward and set on.
• Section 15(1) 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.
 Special provisions related to newly established
organizations [u/s 16]
When the organizations are newly set up, the employees shall be
entitled to bonus in the following manner:
• a)In the first 5years of the establishment of the company, the bonus
shall be paid out only if the profits are earned.
• b)In the 6th year, profits shall be paid out of the allocable surplus
available. It can set on or set off the bonus of the 5th or 6th accounting
years.
• c)In the 7th year, distribute the bonus out of the allocable surplus and
can also set off or set on the bonus payments of the 5th ,6th, and 7th
years.
Sec.17:Adjustment of customary or interim bonus – If any employee has
received any puja bonus or customary bonus or any part of bonus, then he is
entitled to receive only the balance amount of bonus after deduction of such
bonus already paid.
Sec.18: Deductions of certain amount from the bonus payable – the employer
may deduct any amount from the bonus payable for any misconduct of the
employee leading to a financial loss.
Sec.19:Time limit for payment of bonus – it should be paid in cash with in
8months from close of accounting year in normal cases. But if there is a
dispute, then within a month from the date of award.
Sec.21:Recovery of bonus due from employer – the employee or his
representative or his assignee (incase of death) shall give in writing to the
appropriate government for the recovery of bonus due. The appropriate
government will then issue a Certificate to the Collector to recover the same.
Sec. 22: Reference of disputes under the Act - Under the purview of
the Industrial Dispute Act, 1947.
Sec. 26: Maintenance of Registers - The employers shall maintain
registers and other documents as required.
Sec. 27: Appointment of Inspectors - The inspectors are appointed by
appropriate government to carry out the enquiries , investigations,
collect evidences, conduct interrogations, etc.
 OFFENCES AND PENALTIES (Sec. 28)
• For contravention of the provisions of the Act or rules the penalty is
imprisonment up to 6 months, or fine up to Rs.1000, or both.
• For failure to comply with the directions or requisitions made the
penalty is imprisonment up to 6 months, or fine up to Rs.1000, or
both.
• In case of offences by companies, firms, body corporate or
association of individuals, its director, partner or a principal officer
responsible for the conduct of its business, shall be deemed to be
guilty of that offence, unless the person concerned proves that the
offence was committed without his knowledge or that he exercised
all due diligence.
 FORMS & REGISTER UNDER THE ACT

• Form A - Computation of the Allocable surplus

• Form B - Set-on and Set-off of Allocable surplus
• Form C - Bonus paid to employees
• Form D - Annual Return - Bonus paid to employees
 AMENDMENTS IN THE ACT as on 2015
• The employees eligible for bonus should have a salary or wage of INR
21,000 per month, earlier which was INR 10,000.
• For computation of bonus, the wage ceiling has been raised to INR
7000 per month or the Minimum Wages (whichever is higher).
• Maximum bonus shall be 20% of INR 7000.
• Salary includes Basic + DA.
 Case laws
1) Workmen Employed in Associated Rubber Industry v. Associated
Rubber Industry Ltd. (AIR 1986 SC 1)
(Sec.4: Computation of gross profits)
Facts of the case:
• The Associated Rubber Industry Ltd. had purchased, some years back, shares of
INARCO Ltd. by investing a sum of Rs. 4,50,000/-. They were getting annual
dividends in respect of these shares and the amount so received was shown in the
Profit and Loss Account of the company year after year.
• It was taken into account for the purpose of calculating the bonus payable to the
workmen of the company. Some time in the course of the year 1968, the
company transferred the shares of INARCO Ltd. held by it to Aril Bhavnagar Ltd.
(subsequently changed to the Aril Holdings Ltd.), a subsidiary company wholly
owned by The Associated Rubber Industry Ltd. Aril Holdings Ltd. had no other
capital except the shares of INARCO Ltd. transferred to it by the Associated
Rubber Industry Ltd. It had no other business or source of income whatsoever
except receiving the dividend on the shares of INARCO Ltd.
• The dividend income from the shares of INARCO Ltd. was not transferred to The
Associated Rubber Industry Ltd. and therefore, it did not find place in profit and
Loss Account of the company with the result that the available surplus for the
purposes of payment of bonus to the workmen of the company became reduced.
• The net result of the exercise was that bonus at the rate of 4% only was paid to
the workers for the year 1969 instead of at the rate of 16% to which they would
have otherwise been entitled. Later on Aril Holdings Ltd. was itself wound up in
the year 1971 and amalgamated with The Associated Rubber Industry Ltd.
• The workmen of the Associated Rubber Industry Ltd., Bhavnagar raised an
industrial dispute claiming that they were entitled to be paid bonus at the rate of
16% for the year 1969. According to them, the transfer of the shares of INARCO
Ltd. to Aril Holdings Ltd. was no more than a device to avoid payment of higher
bonus to the workmen.
• Industrial Tribunal and thereafter the High Court of Gujarat
under Article 226 of the Constitution, held that The Associated
Rubber Industry Ltd. and Aril Holdings Ltd. were two independent
companies with separate legal existence and therefore, the profits
made by Aril Holdings Ltd. could not be treated as profits of The
Associated Rubber Industry Ltd. for the purpose of computing to
gross profits earned by the Associated Rubber Industry Ltd.
• The SC held that employees are entitled to be paid bonus at the rate
of 16% for the year 1969 and set aside the order the HC by declaring
both entities as one unit.
 2) Indian Oxygen Limited v. Their Workmen (AIR 1972 SC
471)
(Sec.5: Computation of available surplus)
Facts:
• For its accounting year 1964-65 the Indian Oxygen Ltd. was liable to
pay bonus under the Payment of Bonus Act 1965. The accounts of
the company for the said year were passed on February 12, 1966.
The company calculated bonus at the rate of 17.58% of the total
annual wages of salary plus Dearness Allowance and declared the
said amount payable by notice dated March 23, 1966.
• The workmen demanded a higher rate of bonus. The resulting
industrial dispute was referred to the National Industrial Tribunal.
The Tribunal fixed the rate of bonus at 20%. Against the decision
of the Tribunal appeals were filed in the SC.
 Issues:
(i) whether the tribunal was right in calculating the direct taxes after deducting
the amount of bonus payable for the accounting year 1964-65 from the gross
profits?
(ii) whether the Tribunal was justified in deducting the amount earmarked for
distribution of dividends from the reserves shown in the balance sheet at
the commencement of the accounting year even though the dividend had not
been declared at the commencement of the accounting year‘?
(iii) whether the Tribunal was justified in treating the amount shown against
doubtful debts as part of the reserves?
(iv) whether the Tribunal while calculating direct taxes was justified in not taking
into account the bonus paid for the year 1963-64?
(v) whether the directions given by the Tribunal regarding set on were justified?
• The SC held that in calculating the allocable surplus the tax
concession by way rebate that an employer will get under Income Tax
Act on the bonus for fund to be payable, need not be taken into
consideration. Account shown as doubtful debts is to be added back
to gross profits.
• Similarly, capital expenditure in the nature of expenses incurred in
Plant Transfer charges, Patent fees and Rent paid for godwon for
storing goods, for erecting a factory are to be added back to the gross
profits for the purpose of determining allocable surplus.
What do you mean by rebate?
• A rebate is an amount of money which is paid to you when you have
paid more tax, rent, or rates than you needed to. ... a tax rebate.
3) Vellore Central Co-Operative Bank v. Industrial Tribunal, Madras
and Ors. (1989) IILLJ 453 Mad)
(Sec.6: Sum deductible from gross profits)
The issue that arises for decision is, whether the petitioner-bank is to be treated
as a "banking company" and/or as a "co-operative society," for the purposes of
the Payment of Bonus Act, 1965?
• The Madras HC held that for the purpose of Bonus Act, "co-operative bank" is
distinct and different from "co-operative society" even though a co-operative
bank might have been registered under the Co-operative Societies Act,
1912(Amended in 2013)
• If so, for the purposes of deduction under Section 6(d)which refers to the Third
Schedule, the bank has to be treated as banking company falling under Item (2)
only and not a co-operative society under Item (4) or both under Items (2) and
(4).
• The court observed that the provisions for payment of bonus are clear
unambiguous and upheld the award of tribunal.
4) The Project Manager, Ahmedabad v. Sham Kumar Sehgal (Since
Dead) by his Legal Representatives (1995) ILLJ 863 Guj)
(Sec.8: Eligibility for Bonus)
• Deceased Sham Kumar Sehgal was employed as an Assistant Grade (I) (R) with the
Oil and Natural Gas Commission (ONGC for short). It was the case of the ONGC
that, while functioning as Junior Assistant, Technical and Purchase Section, ONGC,
Cambay, late Mr. Sham Kumar Sehgal committed misconduct. The ONGC,
therefore, initiated disciplinary action against him under Regulation 25 of the Oil
and Natural Gas Commission (Conduct, Discipline and Appeal) Regulation, 1964.
• During the pendency of departmental proceedings, he was placed under
suspension in October, 1963. Pursuant to the directions given by this court in
Special Civil Applications Nos. 166 of 1976 and 722 of 1978, the Inquiry Officer
completed the inquiry and recorded his findings on Sept. 2, 1978.
• The Disciplinary Authority held that, late Mr. Sehgal was guilty of
charge 2(i) mentioned in charge-sheet and awarded penalty of
stoppage of one increment with cumulative effect.
• The Disciplinary Authority also directed that the period of suspension
would not be counted as on duty for any purpose except for
continuity of service.
• The deceased respondent was served with the order of reinstatement
on April 6, 1978 and immediately, on the next day, i.e., on April 7,
1978, he resumed his duties.
• The deceased respondent submitted an application under Section
33-C(2) of the Industrial Disputes Act, 1947 for recovery of bonus
amount due from the petitioner to him.
• In the said application, it was contended by the respondent that,
though he was ready and willing to serve he was not allowed to do so
by the petitioner and therefore, he was entitled to receive for the
disputed period. By filing the said application, the deceased
respondent claimed a total amount of Rs. 6,448.78 ps. being the
amount of bonus which he was entitled to receive for the years
1966-67 to 1976-77.
• The HC held that when an employee is suspended, it cannot be said
that such an employee did not work for the establishment. The word
‘worked” in Sec.8 of the Act mean “ready and willing to work”.
Therefore when an employee is prevented from working by an overt
act on the part of the employer, which is ultimately set aside and
employer is liable to pay bonus.
6) J. K. Ginning & Pressing Factory v. Labour Court, Akola &
Others (March 9th 1987)
(Sec.8: Seasonal employee’s Eligibility for Bonus)
• This writ petition by the employer is directed against the order passed by
the Labour Court, Akola, granting bonus at the rate of Rs.100 per annum
for the period 1974-75 to 1978-79 to each of the respondents. In this case
a factory employed ten seasonal employees, and the issue of their bonus
eligibility arose.
• The Bombay High Court ruled that the Act does not exclude such seasonal
workers from employment; the only criterion for eligibility is that they
meet the Section 8 requirements. As a result, even seasonal employees
were deemed to be entitled to bonus payments under the Act.
 7) Mr. Shachindra Kumar v. State of Karnataka
(2013 LLR 595 (Karn Hc)
(Contract Labourer Eligibility for Bonus)
• In this case, the labour department penalized the factory on ground that the
contractual labour was not paid bonus equal to the regular employees of the
company.
• The contract laborers were paid Minimum Bonus as per Section 10 of the Payment of
Bonus Act, the department demanded that the contract labour should be paid bonus at
par with regular employees in accordance to Section 11 which provides for Maximum
Bonus to employees.
• The HC held that to claim the benefit of Bonus, first the applicability of the Act to
contractual employees is required to be looked into. While comparing the definition of
term ‘employee’ under section 2(13) of the Payment of Bonus Act, section 2(9) of the
Employee State Insurance Act & section 2(f) of the Employees’ Provident Fund and
Miscellaneous Provision Act, the court observed that unlike the Bonus Act which neither
expressly nor impliedly provide for contractual labour in the definition, the other two
enactments specifically include contractual labour.
• Therefore, having regard to the definition of employee, the court held
that the contract laborers cannot be treated at par with the regular
employees for the purpose of Payment of Bonus.
• The court quashed the proceedings against the factory and stated
“when the contract laborers are not 'employees' as defined under
Payment of Bonus Act, there is no obligation on the part of the
employer to pay bonus at par with regular employees, therefore, it
does not constitute violation as contemplated by Section 11
punishable under Section 28 of Payment of Bonus Act.”
8) Pandian Roadways Corporation Ltd. v. Presiding Officer (1996) IILLJ 606
Mad)
(Sec. 9: Disqualification for bonus)
• The petitioner is a Govt. of Tamil Nadu Undertaking engaged in passenger transport.
The respondent was working as a Conductor under the petitioner. While so, on
January 12, 1984, he re-issued two tickets already sold in the previous trip and thus
misappropriated a sum of Re. 1.60. Hence, a charge memo was issued to him and he
submitted his explanation. His explanation was found to be unsatisfactory and
therefore, a full-fledged enquiry was conducted.
• The Enquiry Officer submitted his finding wherein he found that the charge levelled
against the respondent, was proved. Hence, by an order dated October 21, 1984,
the respondent was dismissed from service for the proved charge of fraud and
misappropriation.
• Aggrieved by the order of dismissal, the respondent raised a dispute and on failure
of conciliation, the same was referred for adjudication and taken on file by the
petitioner as I.D No. 5 of 1986.
• During the pendency of the above case, by virtue of a settlement under Section 18(1) of
the Industrial Disputes Act, the respondent was appointed as a fresh entrant by a
settlement dated March 6, 1989 and accordingly, he reported for duty with effect from
March 16, 1989.
• As per clause 3 of the settlement it was agreed by the respondent that he will not claim
any benefit or approved privileges, for the period of his service before dismissal, i.e., for
the period from January 1, 1977 to October 21, 1984.
• Thereafter, the respondent preferred a Claim Petition under Section 33(c)(2) of the Act
claiming bonus for the period from 1983-84 and 1984-85 amounting to Rs. 1,842/-. The
claim of the respondent was based on Section 9 of the Payment of Bonus Act.
• According to the petitioner, in the case of a dismissal from service on grounds of fraud
or theft or misappropriation, the employee forfeit his bonus and he is disqualified in
receiving any bonus under the Payment of Bonus Act.
• The HC ruled in the case that if an employee is dismissed from service, he is disqualified
from receiving any bonus under the Act.
 9) M/s. Sriram Bearings Limited v. The Presiding Officer, Labour
Court, Ranchi& Ors (1986) IILLJ 459 Pat)
(Sec. 9: Disqualification for bonus)
• The petitioner is a limited company and carries on business of manufacturing ball
bearing in his factory located at Ratu, Ranchi. The respondents are the
employees of the company. They were dismissed from service for riotous and
violent behavior at the premises of the establishment.
• The respondent Nos. 2(i) to 2(vi) filed an application under Section 33-C(2) of the
Industrial Disputes Act before the Labour Court claiming bonus for the period
July, 1975 to June, 1976.
• The petitioner-company in their show cause submitted that such an application
under Section 33-C(2) of the I.D. Act was not maintainable as all these workmen
were dismissed employees of the company for various acts of misconduct,
riotous and violent behaviour within the premises of the factory and as such they
stood disqualified for receiving bonus under Section 9 of the Act.
• The respondents 2(ii) to 2(vi) in their letters sent on different dates to the Works
Manager of the petitioner-company requested that their dismissal may be
converted into resignation.
• The request was accepted by the management and final settlement between the
management and these respondents has been arrived at and in accordance with
it they were paid their dues in full. Thus, in so far as respondents 2(ii) to 2(vi) are
concerned, the dispute has now been finally settled.
• The only matter which now survives for consideration is in respect of respondent
No. 2(i), N.S. Verma who never made such an application before the management
for converting his dismissal into resignation.
• His termination from service was upheld by the Labour Court and the subsequent
writ application challenging the said order of termination was also dismissed in
limine.
• It was argued that his dismissal from service for the act of riotous and violent
behavior within the premises of the factory has been held to be justified, he is
entitled for bonus of the past years excepting the bonus for the accounting year
in which the order of dismissal was passed.
• According to him, the provisions of Section 9 of the Act must be given a restricted
meaning and the word an employee shall be disqualified from receiving bonus
under this Act should be read so as to mean that the employee shall be
disqualified from receiving the bonus of the accounting year only in which he is
dismissed because such disqualification is dependent only upon the order of
dismissal from service.
• The question which arises for consideration is whether an employee dismissed
from service on any one of the grounds enumerated in Section 9 of the payment
of Bonus Act, 1965 is disentitled to receive bonus payable only for the accounting
year in which the order of dismissal is passed or is disentitled to receive
whatsoever bonus was remaining unpaid on the date of the order of dismissal?
• The HC held that the provision of Section 9 of the Payment of Bonus
Act cannot be given a restricted meaning and the words.
• “an employee shall be disqualified from receiving bonus under the
Act” cannot be read so as to mean that the employee shall be
disqualified from receiving the bonus of the accounting year only in
which he is dismissed because such disqualification is dependent only
upon the order of dismissal from service. No such restriction in
Section 9 has been put by the Legislature.
• Therefore, if an employee is dismissed from services, he stands
disqualified from receiving any bonus under the Act and not the
bonus only of the accounting year.
 10) J.K. Chemicals Ltd. v. Govt. of Maharashtra (16th August, 1995,
Bom)
(Sec.10: Payment of Minimum Bonus with in the period)
• In this case, in the accounting year ending on 30th April, 1981, the petitioner Co.
had employed 743 workmen to whom the petitioner became liable to pay the
sum of Rs. 6,99,720/- as and by way of minimum bonus under section 10 of the
Act.
• As per section 19(b) of the Act, the petitioner was required to pay the said
amount to its employees within a period of eight months from the close of the
said accounting year i.e., by 31st December, 1981.
• On 15th December, 1981, the petitioner made an application under section 36 of
the Act to the Govt. for grant of exemption to the petitioner from payment of
compulsory bonus payable for the accounting year ended on 30th April, 1981.
• In the application, the petitioner stated that the petitioner had suffered heavy
losses during the two years preceding the accounting year ended on 30th April,
1981 which accumulated to Rs. 99,71,879/- after adjustment and that the loss for
the said accounting year was to the extent of Rs. 79,50,137/-.
• The petitioner further stated that the petitioner had no resources at all left with
which the petitioner could make the payment of even the minimum bonus as
provided under the Act.
• The petitioner also stated in the said application that the workmen had resorted
to strike from 27th June, 1981 which was subsequently declared as illegal by the
Labour Court resulting into even closure of petitioner's factory.
• By its letter bearing No. PBA/1081/ (948) /Lab-12 dated 4th October, 1983, the
Govt. informed the petitioner that its said application for exemption from
payment of compulsory bonus for the accounting period commencing from 1st
January, 1980 to 30th April, 1981 could not be granted.
• The petitioner has challenged the order in the HC, not granting exemption
under section 36 of the Act to the petitioner.
• The HC held that the company would not be relieved from its liability to pay
minimum bonus, if the bonus liability is negligible in comparison to the loss
incurred. If the employer's damages were not caused by employees wrongdoing,
the employer must pay the statutory minimum bonus.
Thank You