TABLE OF CONTENTS

List of abbreviations
Introduction
Full Bench Formula
Kinds of bonus
Right to claim bonus
Computation of gross profit/allocable surplus
Calculation of direct tax payable by the employer
Eligibility of bonus
Disqualification for bonus
Payment of maximum bonus
Payment of minimum bonus
Calculation of bonus with certain employees
Proportionate reduction in bonus in certain cases
Calculation of number of working days
Set-on and set-off of allocable resources
Special provisions with respect to new establishments
Adjustment of customary or interim bonus against bonus payable under the Act
Time limit for payment of bonus
Recovery of bonus due from an employer
Conclusion

TABLE OF CASES

Rashtriya Mill Mazdoor Sangh v. Mill Owners Association, Bombay 1950 (I) CR 1164
New Maneck Chowk Spinning and Weaving Company v. Textile Labour Asoociation

1961 1 LLJ 521

Mill Owners Association , Bombay v. Rashtriya Mill Mazdoor Sangh, Bombay 1950 (2)
LLJ 1247

Muir Mill Ltd. V. Suti Mill Mazdoor Union 1955 1 SCR 991
Associated Cement Companies Ltd. v Its Workmen AIR 1959 SC 967
Textile Labour Association v. Ahemdabad Mill Owners Association(1951) 1 CR 811
Sree Meenakshi Mills v. Their Workmen AIR 1958 SC 153
Kohinoor Tobacco Products v. Labour Court 1986 Lab IC 1055
Ahmedabad Miscellaneous Workers Union v. The Ahemdabed Electricity Co. Ltd. AIR
1962 SC 1255

INTRODUCTION
There was no statutory basis for payment of bonus to the employees before the codification of
law of payment of bonus. The Act has been enacted for the payment of bonus to persons
employed in certain establishments on the basis of profits or on the basis of production or
productivity and for matters concerned therewith. It imposes statutory obligation upon an
employer of any factory or other establishment covered under the provisions of the Act.It
provides for payment of minimum and maximum bonus, conditions of eligibility and

disqualification of bonus, adjustment of customary or interim bonus, time limit for payment of
bonus, mode of recovery of bonus due from an employer. The Act contains special provisions
with respect topayment of bonus linked with production or productivity. There are many other
provisions for payment of bonus under the Act.
Bonus meaning:
Bonus has not been defined under the Act, nor exists any definition of Bonus under any
enactment. One of the terms of reference to Bonus Commission was to define the concept of
bonus. The Commission in its report said: It is difficult to define in rigid terms the concept of
bonus but it is possible to urge that once profits exceed a certain base, labour should legitimately
have a share in them. Bonus ia a cash payment made to employees in addition to wages. It is not
an ex-gratia payment. In our country bonus was for the first time granted to the employees in
textile industry in July,1917 which is known as war bonus because an increase in wages was
allowed owing to war conditions. The question of payment of bonus has been one of the main
causes of industrial disputes during post-independence days.

FULL-BENCH FORMULA
The Labour Appellate Tribunal in the famous case of Rashtriya Mill Mazdoor Sangh v. Mill
Owners Association, Bombay1,held that the employees do have a right to claim bonus and it is
not paid gratuitously by the employer. In this case the L.A.T. also worked out a formula for the
11950 (I) CR 1164

calculation of available surplus after deducting prior charges from the gross-profit. This formula
is commonly known as full-bench formula. According to this, following four deductions were
allowed to be deducted as prior charges from the gross-profit to arrive at the available surplus.
These prior charges are;
I.
II.
III.
IV.

Provision for depreciation as permissible under the income Tax Act;

Reserve for rehabilitation;
Return on paid-up capital at the rate of 6 per cent;
Return on working capital at any rate but less than 6 per cent.

After deducting the above prior charges from the gross profit the figure arrived was called as
available surplus and a reasonable share from the available surplus was actually payable to the
employees as bonus. This formula was allowed throughout the country for more than a decade,
for the payment of bonus, till it was challenged as arbitrary before the Supreme Court, at least in
two cases.

KINDS OF BONUS
In New Maneck Chowk Spinning and Weaving Company v. Textile Labour Asoociation 2, the
Supreme Court suggested the following four types of bonus , namely;a. Production bonus
b. Bonus as an implied term of contract between the parties:
c. Customary bonus connected with some festival; and
Profit bonus
Profit bonus has now been given statutory recognition in the Payment of Bonus Act. Under this
quantum of the bonus will depend upon the extent of profit obtained in the relevant year. This is
subject to statutory minimum bonus and maximum bonus.
d. Apart from these there are goodwill bonus etc.

RIGHT TO CLAIM BONUS

21961 1 LLJ 521

In present concept of profit bonus was evolved in the war time as a gratuitous payment out of
war time surplus profit. For the first time, the textile manufactures in 1917 declared war bonus.
It was continued for two years. Thereafter, all the employees in all the industries demanded to
pay bonus. The British Government appointed the Bonus Committee under the Chairmanship of
Sir Norman Macleod in 1924.That committee did not recognise the right of bonus and rejected
the claim of employee. There were conflict between the employers and employees for the
payment of bonus. The employers paid bonus on their wish as ex-gratia.
In Mill Owners Association , Bombay v. Rashtriya Mill Mazdoor Sangh, Bombay 3,the Labour
Apellate Tribunal has evolved a formula for the payment of bonus and held that the employees
do have a right to claim bonus and that it is not paid gratuitously by the employer.
In Muir Mill Ltd. V. Suti Mill Mazdoor Union4,the Supreme Court accepted the payment of
bonus under the full-bench formula with two conditions i.e. wages fall short of living wages: and
the industry make profits and held that bonus is not a deferred wage.
In Associated Cement Companies Ltd. v Its Workmen 5, the Supreme Court asked the
Government to appoint a Commission for considering all questions relating to bonus.
Accordingly the Government constituted a tripartite Bonus Commission to recommend on the
question of payment of bonus. On the basis of Commissions recommendations the Government
enacted the Payment of Bonus Act,1965.
Article 43 of the Constitution of India(Directive Principles of State Policy)says that the State
shall endeavour to secure by suitable legislation to all workers a living wage ensuring a decent
standard of life.
According to Article 43 of the Constitution, living wagesis a right of worker. However, it is not
a Fundamental Right under Constitution. As bonus is paid when wages are lower than the living
wages, bonus also becomes a right of worker.
31950 (2) LLJ 1247
4 1955 1 SCR 991
5 AIR 1959 SC 967

In Textile Labour Association v. Ahemdabad Mill Owners Association 6, for the first time the
Industrial Court conferred the right on the workers to claim bonus. It was held that bonus is not a
ex-gratia payment made gratuitously by the employer,but the workers do have a legitimate claim
for the bonus since the profit earned by the Mill Owners is the result of the combined efforts of
capital and labour and it is not fair to grant a reasonable share of the profit to the workers where
joint efforts have also contributed to the profit-earning. Thus the right to claim bonus was
conferred upon the workers.
In Sree Meenakshi Mills v. Their Workmen7, the Suprme Court held thatbonus is a right of the
workers to claim bonus and observed that bonus is not a gratuitous payment nor it is a deferred
wage; and that where wages fall short of the living standards and the industry makes profits
which is due to the contribution of the workers,the latter possesses a legitimate claim to bonus.
In Kohinoor Tobacco Products v. Labour Court 8, it has been held that the Payment of Bonus Act
is a complete code in respect of right to bonus. Hence under the Payment of Bonus Act,1965
bonus is a statutory right of workers.

6(1951) 1 CR 811
7AIR 1958 SC 153
8 1986 Lab IC 1055