Concept of Bonus and Right to Share in the Profits | Labour and Industrial Law - CLAT PG PDF Download

Introduction

• The practice of paying bonuses in India is believed to have started during World War I when textile mills offered a 10% war bonus to workers.
• In 1950, the Labour Appellate Tribunal proposed a bonus determination formula, which was later revised.
• The Payment of Bonus Ordinance, 1965 was enacted based on recommendations from a Tripartite Commission.
• The Supreme Court established criteria for bonus demands, emphasizing wage adequacy and industry profits.
• The Payment of Bonus Act, 1965 aims to ensure bonus payments in certain establishments, outlining employer obligations and bonus calculation principles.

The Payment of Bonus Act, 1965: An Overview

Definitions and Key Terms

• Allocable Surplus: The portion of available surplus that can be allocated as per the Act. For companies not following specific Income-tax Act arrangements, it is 67% of available surplus. In other cases, it's 60%.
• Appropriate Government: The government with jurisdiction over an establishment, either Central or State, depending on the Industrial Disputes Act.
• Direct Tax: Taxes like Income-tax, Super Profits Tax, Companies (Profits) Surtax, agricultural income-tax, or any tax declared by the Central Government as a direct tax for this Act.
• Employee: Any person (excluding apprentices) earning a salary or wage not exceeding ₹3,500 per month, engaged in various types of work for hire or reward.
• Employer: In a factory, the owner or occupier, including their agents or legal representatives. In other establishments, the person or authority with ultimate control over the affairs of the establishment.
• Gross Profits: Gross profits calculated under Section 4, with specific adjustments for companies. This includes adding back certain depreciation and disallowing specific inter-office interest payments.

Computation of Available Surplus

• The available surplus for any accounting year is calculated by deducting certain sums from the gross profits for that year.
• For accounting years starting from 1968 onwards, the available surplus includes:
  • Gross profits for the accounting year after deducting specified sums.
  • An amount reflecting the difference in direct tax calculations for the preceding accounting year.
• The direct tax difference is calculated based on gross profits, with adjustments for bonus amounts payable to employees.

Sums Deductible from Gross Profits

• Certain sums are deducted from gross profits as prior charges, including:
  • Depreciation admissible under the Income-tax Act or agricultural income-tax law.
  • Development rebate, investment allowance, or development allowance.
  • Direct tax liability for the accounting year.
  • Additional sums specified in the Third Schedule for certain employers.
• In the case of banking companies, the admissible depreciation is determined according to Section 32(1) of the Income-tax Act, not based on any accounting method.
• The burden of proving the correct amount of depreciation claimed by a bank rests with the bank itself, and the Tribunal must determine depreciation under Section 32(1) in a quasi-judicial manner.

Eligibility for Bonus

• Every employee is entitled to receive a bonus from their employer in an accounting year, as per the Act's provisions, provided they have worked in the establishment for at least thirty working days during that year.
• In the case of Project Manager, Ahmedabad Project, O.N.G.C. Sabarmati v. Sham Kumar Sahegal(Died) by his Legal Representatives, it was ruled that an employee on suspension is still considered to have worked for the establishment. The term "worked" in Section 8 of the Act implies being "ready and willing to work."
• Therefore, if an employee is prevented from working due to the employer's actions and is later reinstated, their eligibility for bonus under Section 8 remains intact. The employer cannot deny the bonus entitlement if it is otherwise payable according to the Act's provisions.

Disqualification for Bonus

• According to the Act, an employee is disqualified from receiving a bonus if they are dismissed from service for specific reasons, including:
  • Fraud
  • Violent or riotous behavior on the premises of the establishment
  • Theft, misappropriation, or sabotage of the establishment's property
• In the case of M/s.Sriram Bearings Ltd. V. The Presiding Officer, Labour Court, Ranchi & others, it was determined that the disqualification provisions in Section 9 of the Payment of Bonus Act should not be narrowly interpreted. If an employee is dismissed from service, they are disqualified from receiving any bonus under the Act, not just the bonus for the accounting year in which they were dismissed.
• The disqualification is solely dependent on the order of dismissal from service, as per the legislation's intent.

Section 11. Payment of Maximum Bonus

1. If the allocable surplus for an accounting year (as mentioned in section 10) exceeds the minimum bonus amount due to employees, the employer is obligated to pay a bonus to every employee based on their salary or wage for that year, with a cap of 20% of their salary or wage.
2. When calculating the allocable surplus, any amounts set on or set off under section 15 should be included as per the rules of that section.

Section 12. Bonus Calculation for Certain Employees

• If an employee's salary or wage exceeds Rs. 7,000 per month, or if the minimum wage for their scheduled employment (as determined by the government) exceeds Rs. 7,000, the bonus under Section 10 or 11 will be calculated as if their salary or wage were Rs. 7,000 or the applicable minimum wage, whichever is higher.
• Explanation: The term "scheduled employment" is defined in section 2(g) of the Minimum Wages Act, 1948.

In the case of Indian Cable Co. v. Workmen, it was determined that officers earning between Rs. 750 and Rs. 1,600 per month are considered employees under Section 2(13) and are eligible for bonus. However, for the calculation of bonus under Sections 10 and 11, their salary will be capped at Rs. 750 per month. Any additional payment made to them as an ex-gratia amount to compensate for this difference will be added back to the gross profits of the employer when determining the available surplus.

Section 18. Deduction from Bonus for Misconduct

• If an employee is found guilty of misconduct that results in financial loss to the employer during an accounting year, the employer has the right to deduct the amount of loss from the bonus payable to that employee under this Act for that specific accounting year.

Section 19. Time-limit for Bonus Payment
All bonus amounts due to an employee under this Act must be paid in cash by the employer within specific timeframes:

• (a) If there is a dispute regarding bonus payment before any authority under section 22, the bonus must be paid within one month from the date the award becomes enforceable or the settlement takes effect.
• (b) In all other cases, the bonus must be paid within eight months from the end of the accounting year.

Proviso: The appropriate Government or an authority designated by it may extend the eight-month period for valid reasons, but the total extension cannot exceed two years.

Claims for bonus can only be made after the accounting year concludes and must follow the Act's provisions. Gross profits, available surplus, and allocable surplus can only be calculated at the end of the accounting year. There is no provision for employers to calculate these figures mid-year or before the accounting year ends.

Section 21. Recovery of Due Bonus from Employer
If an employee is entitled to bonus from their employer under a settlement, award, or agreement, they or an authorized representative can apply to the appropriate Government or designated authority for recovery. If the authority confirms that money is due, they will issue a certificate to the Collector for recovery as land revenue arrears.

• Application Timeframe: Applications must be made within one year from when the money became due. Late applications may be accepted if the Government finds sufficient cause.
• Definition of "Employee": In this section and sections 22, 23, 24, and 25, "employee" includes those entitled to bonus under this Act but no longer employed.
• Settlement or Award Basis: The recovery method applies only to bonus under a settlement, award, or agreement, not to bonus payable under the Act.

Section 27. Appointment and Powers of Inspectors

Appointment of Inspectors: The appropriate Government can appoint Inspectors through an official notification to ensure compliance with this Act.
Powers of Inspectors: Inspectors have the authority to:

• Request information from employers.
• Enter establishments to examine relevant documents.
• Interview employers or employees regarding compliance.
• Make copies of or extract information from documents.
• Exercise other prescribed powers.

Inspectors are considered public servants under the Indian Penal Code. Individuals required to provide information or documents by Inspectors must comply. However, Inspectors cannot compel banking companies to disclose certain information under the Banking Regulation Act.

Section 28. Penalty for Non-Compliance

• Individuals who violate any provisions of this Act or its rules, or fail to comply with directions or requisitions under this Act, may face imprisonment for up to six months, a fine of up to one thousand rupees, or both.
• Section 36. Power of Exemption
• The appropriate Government can exempt certain establishments or classes of establishments from all or part of this Act's provisions if deemed in the public interest, considering their financial position and other relevant factors.
• In the case of Associated Publishers (Madras) Ltd. v. Government of Tamil Nadu, the Government's decision to grant or refuse exemption was upheld. The petitioner must provide relevant information beyond financial position for exemption consideration.
• If exemption is based on public interest, the Government should clarify the public interest aspect; otherwise, the order may be against public interest.