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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
7
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 1
st
feb,2012 n
resigned on 28
th
.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
17
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
21
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.Sec32point 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
33
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 employerhowever,
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 6
th
n 7
th
accounting years,Sec15 would be applicable with certain
modifications
3.The 8
th
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

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