Introduction

The Payment of Bonus Act, 1965 in India is a key part of labor welfare
measures, focusing on allocable surplus. It aims to bridge the gap between
employers and employees by mandating profit-sharing mechanisms,
recognizing labor's contribution to organizational growth. Allocable surplus is a
portion of an employer's surplus earnings, calculated after accounting for taxes,
depreciation, and dividends. It forms the basis for determining bonuses payable
to employees, ensuring workers benefit from the enterprise's prosperity while
safeguarding the financial stability of the organization.

All employees are entitled to a minimum bonus, with a minimum bonus of

8.33% for those working for at least 30 days in a financial year. The Act also
caps the maximum bonus at 20%, maintaining a balance between rewarding
employees and protecting the company's financial health. If the allocable
surplus exceeds the required amount, excess surplus can be carried forward for
future years, preventing unsustainable financial obligations.

These provisions promote industrial harmony, reduce income disparities, and

establish a predictable and transparent profit-sharing framework.

Allocable surplus

Bonus payable under the Act is linked with profits. The employer has to
calculate "gross profits" of his establishment in the manner specified in section
4. Then, from "gross profits" so calculated he has to deduct the sums referred to
in section 6 as prior charges.

The balance is called "available surplus". A percentage of the available surplus

calculated in accordance with the provisions of sub-section (4) of section 2 is
called "allocable surplus."

Where, in respect of any year the allocable surplus exceeds the amount of
minimum bonus payable to the employees' the employer must pay to every
employee in respect of that year bonus in proportion to the salary or wage
earned by the employee during the year subject to a maximum of twenty per
cent of such salary or wage.

ONGC v. Sham Kumar Sahegal & Ors. (1995) - The Supreme Court held
that the allocable surplus is calculated after deducting the prior charges
specified under the Act, such as direct taxes, and other charges for
calculating gross profits. The interpretation of terms related to surplus and
their calculation was clarified in this judgment.

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.

Ganesh Sugar Mills v. Labour Court, Hapur The Court clarified how profits
should be calculated in line with the provisions of the Payment of Bonus Act,
particularly Schedule I and Schedule II of the Act, which detail the methods for
calculating gross profits for allocable surplus.

Set on and set off of allocable surplus:

1) Where for any accounting year, the allocable surplus exceeds the amount of
maximum bonus payable to the employees in the establishment under section
11, then, the excess shall, subject to a limit of 20% of the total salary or wage of
the employees employed in the establishment in that accounting year, be carried
forward for being set on in the succeeding accounting year and so on up to and
inclusive of the fourth accounting year to be utilized for the purpose of payment
of bonus in the manner illustrated in the Fourth Schedule.
2) Where for any accounting 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 in the establishment under section 10, and there is no
amount of sufficient amount carried forward and set on under sub-section.

a) 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 accounting year and so on up
to and inclusive of the fourth accounting year in the manner illustrated in the
Fourth Schedule.

3) The principle of set on and set off as illustrated in the Fourth Schedule shall
apply to all other cases not covered by sub-section

a) or sub-section for the purpose of payment of bonus under this Act.

4) 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.

In the first five accounting years, after the establishment has started selling and
manufacturing goods or rendering services, it has to pay bonuses only in case of
profits.

However, in the sixth, seventh and eighth accounting year, after the
establishment has started selling and manufacturing goods or rendering services,
the bonus shall be paid, taking into account the set on or set off.

In the case of the sixth year, the allocable surplus of the fifth and the sixth
year would be taking into account and in the case of the seventh year, the
allocable surplus of the sixth and the seventh year is taken into
consideration.

Computation of Allocable Surplus

Computation of the Allocable surplus under section 2(4) of Bonus Act

Step 1 – Calculate Gross Profit as per Second Schedule

COMPUTATION OF GROSS PROFITS

Item No. Particulars Amount (Rs.)

1- Net Profit as per Profit and Loss Account.

2- Add back provision for:

(a) Bonus to employees.

(b) Depreciation.

(c) Direct Taxes, including the provision (if any) for previous accounting
years-

3- Add back also:

(a) Bonus paid to employees in respect of previous accounting years. The

amount debited in respect of gratuity paid or payable to employees in excess of
the aggregate of

(i) the amount, if any, paid to, or provided for payment to, an approved gratuity
fund; and

(ii) the amount actually paid to employees on their retirement or

termination of their on employment for any reason.

(b) Donations in excess of the amount admissible for income tax.

(c) Any annuity due, or commuted value of any annuity paid, under the
provisions of section 280D of the Income-tax Act during the accounting year.

(d) Capital expenditure (other than capital expenditure on scientific research

which is allowed as a deduction under any law for the time being in force
relating to direct taxes) and capital losses (other than losses on sale of capital
assets on which depreciation has been allowed for income-tax or agricultural
income tax).

(e) Losses of, or expenditure relating

(1) to, any business situated outside India. Total of Item No. 3.

4- Add also income, profits or gains (if any) credited directly to reserves,
other than -

(i) capital receipts and capital profits (including profits on the sale of capital
assets on which depreciation has not been allowed for income-tax or
agricultural income-lax).

(ii) profits of, and receipts relating to, any India.

(iii) income of foreign concerns from investments outside India. Net total of
Item No. 4

5- Total of Item Nos. 1, 2, 3 and 4

6- Deduct

(a) Capital receipts and capital profits

(b) Profits of, and receipts relating to, any business situated outside India.

(c) Income of foreign concerns from investments outside India.

(d) Expenditure or losses (if any) debited directly to reserves, other than-

(i) capital expenditure and capital losses (other than losses on sale of capital
assets on which depreciation has not been allowed for income-tax or
agricultural income-tax;

(ii) losses of any business situated outside India.

(e) In the case of foreign concerns proportionate (over-head) expenses of

Head Office business.

(f) Refund of any direct tax paid for previous accounting years and excess
provision, if any, of previous accounting years relating to bonus, depreciation,
taxation or development rebate or development allowance, if written back.

Refund of any direct tax paid for previous accounting years and excess
provision, if any, of previous accounting years relating to bonus, depreciation,
taxation or development rebate or development allowance, if written back.

(g) Cash subsidy, if any, given by the Government or by any body corporate
established by any law for the time being in force or by any other agency
through budgetary grants, whether given directly or through any agency for
specified purposes and the proceeds of which are reserved for such purposes.

Total of Item No. 6. Gross Profit for purposes of bonus (Item No. 5 minus
Item No. 6)

Things to Remember

(1) If, and to the extent, charged to Profit and Loss Account.

(2)If, and to the extent, credited to Profit and Loss Account.

(3)In the proportion of Indian Gross Profit (Item No. 7) to Total World Gross
Profit (as per Consolidated Profit and Loss Account, adjusted as in Item No.2
above only)

Step 2 – Calculate Depreciation Under Section 6

(a) It is depreciation admissible in accordance with the provisions of sub-section

(1) of section 32 of the Income-tax Act.

Step 3 – Calculate Development Rebate or Development Allowance Section

6

It is development rebate or investment allowance or development allowance

which the employer is entitled to deduct from his income under the income-
tax Act.

Step 4 – Calculate Direct Taxes payable by Employer

It is 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 as per Income Tax Act.

Step 5 – Calculate sum as specified under the third schedule to the Act
Particulars Amt (Rs.)

1- Company, other than a Banking Company:

(i) The dividends payable on its preference share capital for the accounting year
calculated at the actual rate at which such dividends are payable.

(ii) 8.5 per cent of its paid up equity share capital as the commencement of the
accounting year.

(iii) 6 per cent of its reserves shown in its balance-sheet as at the

commencement of the accounting year, including any profits carried forward
from the previous accounting year:

Provided that where the employer is a foreign company within the meaning
of section 591 of the Companies Act, 1956 (1 of 1956), the total amount
to be deducted under this Item shall be 8.5 per cent, on the aggregate of the
value of the net fixed assets and the current assets of the company in
India.

After deducting the amount of its current liabilities (other than any amount
shown as payable by the company to its Head Office whether towards any
advance made by the Head Office or otherwise or any interest paid by the
company to its Head Office) in India.

2- Any other employer not being Banking Co., Corporation or Co-operative

society 8.5 per cent, of the capital invested by him in his establishment as
evidenced from his books of accounts at the commencement of the accounting
year:

Provided that where such employer is a person to whom Chapter XXII-A of the
Income-tax Act applies, the annuity deposit payable by him under the
provisions of that Chapter during the accounting year shall also be deducted.

3- Where such employer is a firm an amount equal to 25 per cent, of the gross
profits derived by it from the establishment in respect of the accounting year
after deducting depreciation in accordance with the provisions of clause

(a) of section 6 by way of remuneration to all the partners taking part in the
conduct of business of the establishment shall also be deducted, but where the
partnership agreement, whether oral or written, provides for the payment of
remuneration to any such partner.

(i) the total remuneration payable to all such partners is less than the said 25 per
cent, the amount payable, subject to a maximum of forty-eight thousand rupees
to each such partner; or

(ii) the total remuneration payable to all such partners is higher than the said 25
per cent, such percentage, or a sum calculated at the rate of forty-eight thousand
rupees to each such partner, whichever is less, shall be deducted under this
provision.

(iii) forty-eight thousand rupees, whichever is less, by way of remuneration to

such employer, shall also be deducted.

4- Where such employer is an individual or a Hindu undivided family

(i) an amount equal to 25 per cent, of the gross profits derived by such employer
from the establishment in respect of the accounting year after deducting
depreciation in accordance with the provisions of clause

(a) of section 6; or (ii) forty-eight thousand rupees, whichever is less, by way

of remuneration to such employer, shall also be deducted.

Explanation- The expression “reserves” shall not include any amount set apart
for the purpose of
(i) payment of any direct tax which, according to the balance-sheet, would be
payable;

(ii) meeting any depreciation admissible in accordance with the provisions of

clause (a) of section 6.

(iii) payment of dividends which have been declared, but shall include:

(a) any amount, over and above the amount referred to in clause (i) of this
Explanation, set apart as specific reserve for purpose of payment of any direct
lax.

(b) any amount set apart for meeting any depreciation in excess of the amount
admissible in accordance with the provisions of clause (a) of section 6.

Payment Of Minimum Bonus

Section 10 of the Act states that, regardless of whether the employer has some
allocable surplus in the accounting year, each employer must pay each
employee a minimum bonus equivalent to 8.33 percent of the employee's salary
or wage earned during the accounting year, or one hundred rupees, whichever is
greater. However, if an employee is under the age of fifteen at the start of the
accounting year, the terms of this Section refer to that employee as if the words
"one hundred rupees" were replaced with "sixty rupees." Section 10 of the Act
does not contradict Articles 19 and 301 of the Constitution. Even if the
employer loses money during the fiscal year, he must pay the minimum bonus
as according to section 10 of the act.

In J.K. Chemicals Ltd. vs. Govt. of Maharashtra7 the court 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 employee wrongdoing, the employer must pay the
statutory minimum bonus.

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Payment Of Maximum Bonus

If the allocable surplus for any accounting year referred to in Section 10

exceeds the amount of the minimum bonus available to workers under that
Section, the employer is allowed to pay a bonus equal to each employee's salary
or wage received during that accounting year. In determining the allocable
surplus under this Section, the amount set on or set off under the provisions of
Section 15 must be taken into account in accordance with those provisions.

Conclusion

The Payment of Bonus Act, 1965 is a law that balances workers' rights to share
in an enterprise's profits while ensuring employers are not overburdened. It
includes provisions for allocable surplus, minimum and maximum bonuses, and
judicial interpretations. The Act guarantees a minimum bonus of 8.33% of
wages, even in loss-making years, and caps the bonus at 20% based on the
allocable surplus. Indian courts have reinforced the equitable distribution of
bonuses, and set-on and set-off provisions allow businesses to smooth payouts
over profitable and unprofitable years. The Act aims to promote industrial
harmony and a more equitable work environment.