Payment Of Bonus Act,1965

IPCC Paper 2: Law, Ethics & Communication Chapter 4

CA. Paridhi Sinha, FCA

Learning Objective

2

The main intention of the Act is to enforce the provisions related to bonus

The main object of bonus is to maintain peace and harmony in the establishment between the employer and employee

Another object of the Act is to allow the employees to share the property of the business from surplus/profits of the employer

Important Concepts

3

Payment of Bonus Act,1965

4

POBA is applicable to:

Every EMPLOYEE defined u/s2(13)

Of an ESTABLISHMENT defined u/s1(3)

Employee U/s 2(13)

5

Employee=every person other than apprentice

For a salary of less than rs.10000pm

For any skilled,unskilled,supervisory,technical,

Administrative,clerical,manual,managerial work

Whether the terms of employment are expressed or implied.

Establishment u/s1(3)

6

POBA is applicable to foll 3 categories:

1.Every Factory

2.Establishment with min 20 employees

(once the limit of 20 employees is crossed

POBA is applicable even if the no of employees

Goes below 20)

3.Establishment notified by the Appropriate Govt

Departments, Undertakings & Branches

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1• Sec 3 states the above 3 will be considered as

a part of the same establishment provided:

2• They have a common P/L account n B/S

3• However, their location is irrelevant.

Condition u/s 8

8

An employee defined u/s2(13)

Of an Establishment

covered u/s1(3)

Will be eligible for

bonus only if

He has worked in the establishment

for min 30 working days.

Computation of working days

9

Sec 14 states that the following days are

DEEMED WORKING DAYS•1.laid-off•2.Leave with salary•3.Temporary disablement(during employment)•4.Earned maternity leave

Sec 13=where the employee has not worked for all working days the minimum bonus shall be proportionately reduced

Disqualification for Claiming Bonus

10

3.Theft,misappropriation or sabotage of property

2.Riotous or violent behaviour

1.Fraud

Sec 9 states that the employee will be disqualified from claiming bonus if he is DISMISSED on the following grounds:

Minimum Bonus Vs Maximum Bonus

11

Sec10 states that Minimum bonus is

8.33% (Salary/ Wages)or Rs.100 (Higher)

If the employee is minimum 15 years of Age

Or Rs.60 if the employee is below 15 yrs of age

WHEREAS Sec11 states that Maximum bonus is20% (salary/wages)

Practical Questions

12

Practical Question 1

13

Mr. A joined an establishment as an apprentice for a payment of Rs.3000pm. He worked for 45 days. Is he eligible to claim bonus?

Ans.Sec2(13)….

Sec8…..

Above case…..

Since an apprentice is expressly excluded from the definition of employee,Mr.A is not eligible to claim bonus even if he has worked for more than 30 days

Practical Question 2

14

Mr. A joined an establishment as a supervisor for Rs.7000pm on 1st feb,2012 n resigned on 28th.Company declared a bonus of 20%.Is he eligible to claim bonus?

Ans.Sec2(13)….

Sec8….

Above case….

Since Mr. A is an employee as per sec2(13) but he does not fulfill the requirement of sec.8,he is not eligible to claim bonus

Practical Question 3

15

Mr.A=probationer=40 days.Is he eligible to claim bonus?

Ans.sec2(13)….

Sec8….

Above case….

A probationer is definitely an employee.Confirmation is not necessary.Since he has also worked for more than 30 days,he is

eligible to claim bonus.

Practical Question 4

16

Will the following types of employees be eligible to claim bonus if they have worked for 40 days/

1.Retrenched employee

2.Dismissed and reinstated employee

3.Piece rated employee

4.Seasonal employee

5.Casual worker

Ans.sec2(13)…sec8….Thus bonus is payable

Practical Question 5

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Since Mr.A is fulfilling the requirements of both the sections,he is eligible to claim bonus

Sec8…..

Ans.sec2(13)….

Mr.A =temporary workman=salary rs.9000pm.During the year,he was prevented from working for 2 months pending certain enquiry.As there were no adverse findings,he was reinstated and

he worked for the remaining 10 months.Is he eligible to claim bonus?

Practical Question 6

18

In an accounting year,an establishment to which POBA applies,suffered heavy losses.The management decided not to give bonus.The employees move to the court for relief.Is the action of the employees valid?

Ans.Sec10…..

Above case….

As stated in sec10,minimum bonus is payable even if there is no allocable surplus.thus,the company is liable to pay min bonus which is……..and the action of the employees is absolutely valid

Establishments in Public Sector

An Intro.

19

Establishment in Public Sector(EPS)

20

Basically,POBA is not applicable to an EPS

An EPS is defined u/s 2(16) as an establishment

Owned,controlled or managed by:

1.Government company(i.e a company in which min 51%of Paid up share capital is held singly or jointly by CG or SG,including its subsidiary) OR

2.Government Corporation(i.e a corporation in which min 40%of paid up share capital is held singly or jointly by:

Government,RBI,Corportion owned by govt or RBI

EPS Contd…

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Exceptionally,POBA would be applicable to an EPS if the requirements of Sec.20 are fulfilled.

Sec20 states 2 conditions

Condition1.EPS= sale of goods/providing services in competition with the private sector and

Condition2.Income from such business is minimum 20% of the Gross Income

Establishments to which POBA is not applicable

22

Sec32 states POBA is expressly not applicable to the following:

1.Employee employed by LIC,RBI,IDBI,IFCI,SFC,UTI,PFCI,NABARD

2.Employee employed by Indian Red Cross Society, Universities, Chambers of Commerce, Social welfare associations, hospitals, educational institutions

3.Employee employed under any authority of CG, SG, Local authority

4.Seaman,employee employed under Dock Workers Act,employee employed under Indian Water Transport

Practical question

23

Appointment of a Controller is only a temporary phenomenon and thus exemption cannot be claimed.

For claiming exemption u/s32,the establishment should be under the DIRECT AUTHORITY of the CG,SG,LA.

Above case….

Ans.Sec32…point no.4….

Modern Mills Kanpur,refused to pay bonus to its employees on the grounds that the management was controlled by an authorised controller appointed by the Govt and as such it was entitled to exemption from POBA.Is the claim valid?Decide.

Power of Appropriate Govt.to grant exemption

24

Sec36 gives the power to the AG to grant exemption from Minimum Bonus

The exemption is only for a specific period

It is given by way of a notification in the Official Gazzette

The AG considers the financial position of the establishment but if the amt of bonus payable is negligible,the exemption may be granted

Also,if the loss is due to the misconduct of the employees,the exemption may be granted and if the loss is due to the misconduct of the management,the exemption may be denied

The exemption may also be granted in the public interest

Bonus linked with productivity

25

Sec31A states,sometimes there may be an agreement between the employer and the employees for payment of bonus linked with productivity in lieu of bonus linked with profitability

In such a case,bonus will be paid accordingly

Restriction1.Any agreement for relinquishing Minimum Bonus u/s10 will be void

Restriction2.Any agreement promising more than the Maximum Bonus u/s11 will be void

Practical question

26

A textile company entered into an agreement with its employees to pay bonus linked with productivity in lieu of bonus linked with profitability.The company promised 30% and in return,the employees relinquished their right to minimum bonus.However,later on the company refused.Can the employees move to the court for relief?Will they still be eligible to claim Minimum Bonus u/s10?

Ans.Sec31….

Above case….

The above agreement is void.The employees cannot demand more than max Bon u/s11 but they can definitely move to the court for claiming Min Bon u/s10 i.e…..(contents of sec10)

Customary/ Interim/ Advance Bonus

27

Sec17 states that where an employer has paid any

Customary/Interim/Advance bonus during the year,he has a right to adjust the same against the final

bonus amount payable as per POBA

Therefore the employee will have a right to claim only

the balance

Practical question

28

An employer pays diwali bonus every year to his employees every year in addition to the bonus payable as per POBA since last 10 years.The bonus was payable even in the year of losses.In the current year,he wants to adjust the bonus payable as per POBA against the diwali bonus.Is he entitled to do so?

Ans.Sec17…..

Above case….

The employer is entitled to adjust the bonus payable as per POBA against the diwali bonus and the employee will be entitled to claim only the balance amount

Deduction of Financial Losses

29

Sec18 states that where the employer has suffered any financial loss due to the misconduct of the employee,the employer can deduct the same from the final amount of bonus payable as per POBA

The employee will have a right to claim only the balance amount

Time limit for payment of bonus

30

Sec19 states the time limit for payment of bonus

In case where there is NO DISPUTE,bonus is payable within 8 months from the closing of the accounting year,however a maximum 2 years extension can be obtained from the AG

In case where there is a DISPUTE u/s22 of POBA,then it is payable within 1 month from the date of award/settlement

Recovery of Bonus

31

Sec21 states the procedure for recovery of bonus

1.Employee/Ex-employee/authorised person/legal heir(in case of deceased employee)/official assignee(in case of insolvent employee)will make an application to the AG within 1year of the due date/extended due date allowed by AG

2.The AG will give the Certificate to the Collector

3.The Collector will collect it from the employer and give it to the applicant

Presumption about accuracy of P/L n B/S in case of a dispute

32

1.Sec23 states that in case of Companies,the P/L n B/S will be presumed to be accurate if audited by an auditor qualified u/s226(1) of The Companies Act,1956.

The accuracy need not be proved by an affidavit

The trade union/employees may demand clarifications from the employer

Presumption about Accuracy - 2

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2.Sec24 states that in case of Banking companies,the P/L n B/S will be presumed to be accurate if audited by an auditor qualified u/s226(1) of The Companies Act

No clarifications can be demanded

Only certain information can be demanded but not which is prohibited as per Banking Regulation Act,1949

Presumption about Accuracy - 3

34

Sec25 states that in case of other establishments(factory) the P/L n B/S will be presumed to be accurate if audited by an auditor qualified u/s226(1) of The Companies Act,1956

If not audited then the court may demand that the same be audited by a person authorised by the state

Powers of Inspector

35

Sec27 states:

1.Inspectors are appointed by the AG by way of a notification in the Official Gazzette

2.The purpose is to ascertain whether the provisions of POBA have been complied with or not

3.The Inspector can exercise the following powers:

- demand information

-examine BOA,registers,documents

-make copies of BOA(not Banking Companies)

Penalty

36

Sec 28 states that if the provisions of POBA are contravened or a person fails to comply with the directions then the penalty=fine of rs.1000 or imprisonment of 6months or both

Accounting Year

37

• 1.In case of corporations,it is the period with the year ending on the day on which the BOA are closed and balanced

• 2.In case of companies,it is the period for which the P/L n B/S is made and laid @ AGM,whether it is a year or not

• 3.In any other case, it is 1.4 to 31.3 or any period @ option of the employer…however, the option once exercised can be changed only with the permission of the authority

Sec2(1) states that accounting

year depends upon the

establishment

Appropriate Government

38

Sec2(5) states that the Appropriate Government depends upon the establishment

If it is specified in The Industrial Dispute Act,1947 that the AG=CG then the AG=CG

If it is not so specified, AG=SG of the state in which the establishment is situated

Employer

39

Sec2(14) states that the employer depends upon the establishment

In case of a factory, emloyer=owner/occupier, agent of owner/ occupier, legal heir of owner /occupier, manager

In any other case,employer=the person who has ultimate control over the affairs of the establishment i.e manager or managing director

Award

40

Sec2(7) states that award =final settlement of an industrial dispute by:

Labour court

Industrial tribunal

National tribunal set up under IDA,1947

Any other authority for investigating and settling industrial disputes

Salary/Wages

41

Sec2(21) states that salary/wages include all kind of remuneration(cash/kind)including DA and value of food but excludes :

Commission

Overtime allowance

HRA

Travelling allowance

Retirement benefits like gratuity,PF,

Any other allowance(bonus)

Employers contribution to pension fund

Practical question

42

Mr.A is a salesman in a company employed on a salary basis.He receives the following payments:

1.Overtime allowance

2.Dearness allowance

3.Commission on sales

4.Employers contribution to pension fund

5.Value of food

Of the above,which payments will form a part of salary under POBA?

Ans.Sec2(21)….

Above case…..

Points 2 n 5 are included n points 1,3,4 are excluded from salary for the purpose of POBA

Allocable Surplus

43

Sec2(4) states that allocable surplus is a certain % of the Available surplus

It depends upon the establishment

In case of Banking companies,it is 60%(available surplus)

In case of other establishments,it is 67%(available surplus)

Available Surplus

44

Sec2(6)states that Available surplus is computed as under:

Gross profit

Less:prior charges u/s6 which are:

(depriciation,trf to development rebate reserve/investment allowance reserve,provision for direct tax)

Less:Sums specified in Schedule Three of POBA

Add:Income tax saved in the last year

Sums Deductible under Sch. 3 of POBA

45

Sec2(6)Available surplus….

Above sums depend upon the establishment

In case of Banking companies:

Dividends payable on its preference share capital

7.5% of equity share capital

5% of reserves

Sum to be transferred to Reserve fund or any reserve specified by RBI(higher)

Sums Deductible under Sch. 3 of POBA-2

46

In case of Non-Banking companies:

Dividends payable on its preference share capital

8.5% of equity share capital

6% to reserves

Set-on and Set-off of Allocable Surplus

47

Sec15 provides the rules for set-on and set-off of allocable surplus

Where the allocable surplus is>maximum bonus u/s11,the excess can be set-on in 4 succeeding years

Where there is:

no allocable surplus or

there are no carried forward amounts or

the allocable surplus is<minimum bonus u/s10

The deficiency can be set-off in 4 succeeding years

Set-on and Set-off are done in the manner provided in schedule four of POBA

New Establishments

48

Sec16 states:

1.In the first 5 accounting years,bonus shall be payable only in the years in which there is a surplus.Sec15 will not be applicable i.e.set-on and set-on of allocable surplus cannot be done

2.In the 6th n 7th accounting years,Sec15 would be applicable with certain modifications

3.The 8th accounting year onwards,Sec 15 would be applicable as applicable to any other establishment

Lesson Summary

49

So friends, all the concepts related to POBA have been explained in the order of the sections of The POBA,1965

The theoretical concepts have been combined with practical case studies.

For best results,you could prepare a list of sections for

revision and future reference.

So,All the Best and Happy Studying!!!

CA. Paridhi Sinha, FCA

Thank You