The question herein is whether new units started by an existing Company can claim benefit of exemption from payment of Bonus. And whether the workers working in the new units are entitled to bonus as per the Balance-sheet which is common to both the units.
The new unit started by an existing Company can avail of the benefit of exemption available to new units under Sec.16 of the Payment of Bonus Act. This makes an exemption from payment of Bonus to newly set up establishments. Sub-section 2 of Sec 16 provides that the provisions of the Sub-sections (1),(1-A),(1-B)&(1-C) of the Section 16 shall, so far as may be, apply to new departments or undertakings or branches set up by the existing establishments. Proviso to sub-section (2) of Sec.16 provides that if an employer in relation to an existing establishment consisting of different departments, undertakings or branches (whether or not in the same industry) set up at different periods has, before the 29th May,1965, been paying Bonus to the employees of all such departments or undertakings or branches irrespective of the date on which such departments or undertakings or branches were set up on the basis of the consolidated profits computed in respect of all such departments or undertakings or branches, then, such employer shall be liable to pay bonus in accordance with the provisions of the Bonus Act to the employees of all such departments or undertakings or branches (whether set up before or after that date) on the basis of the consolidated profits computed as aforesaid. The new Division started after 1965 can, therefore, take advantage of the Bonus exemption under sub-section (1) of Section 16 of the Act and the Company will have to pay Bonus to the employees of the new Division in the first five accounting years following the accounting year in which the employer sells goods produced or manufactured by him or render services, as the case may be, from such establishment only in respect of the accounting year in which he derives profit from such establishment.
Illustration:
A factory is set up in the year 2010. It starts selling its products in the accounting year (‘AY’) 2011 – 2012. Section 16(1-A) exempts payment of bonus for AY 2011 – 2012. Thereafter, suppose the profits of the factory are as under:
AY 2012 – 2013 No profit
AY 2013 – 2014 Profit
AY 2014 – 2015 No profit
AY 2015 – 2016 No profit
AY 2016 – 2017 Profit
The provision of Section 16(1-A) of the Bonus Act states that the employer will be liable to pay bonus only in AY 2013 – 2014 and AY 2016 – 2017, and is exempt from paying bonus in the other AYs above. Thereafter, the employer has to pay bonus on all accounting years following AY 2016 – 2017 as per the provisions of the Act.
As laid down in Explanation II to Section 16 that for the purpose of Sub-section (1A), an employer shall not be deemed to have derived profit in any accounting year unless he has made provision for the year’s depreciation to which he is entitled under the Income-tax Act and the arrears of such depreciation and losses incurred by him in respect of the establishment for the previous accounting years have been fully set off against his profits. The question whether, therefore, any employer has made profits in the first five accounting years following the accounting year in which he sells goods produced or manufactured by him or renders services, as the case may be, shall be determined only after taking into account depreciation for the relevant year, arrears of depreciation and previous year’s losses. If the new Division prepares and maintains Balance-sheet and Profit and loss account, employees of the new Division will not be entitled to Bonus on the basis of Balance-sheet and Profit and loss account which is common to both the Divisions.
Situation 1 –
This brings us to a situation where there are continuous losses for the first five years. What does an establishment do in such a situation? Such carried forward losses are to be considered for the purpose of computation of allocable surplus for the purpose of payment of Bonus in the sixth year.
The first five accounting years mentioned in Sub-section (1A) of Sec.16 are the first five accounting years following the accounting year in which the employer sells goods produced or manufactured by him or renders services, as the case may be, from such establishment. The accounting years mentioned in sub-section (1A) will, therefore, be six accounting years and not five accounting years. For instance, if an employer has accounting year from 1st April to 31st March and he has sold goods produced or manufactured by him or rendered services for the first time in the year 1985-86, the five years following the said accounting year will be 1986-87,1987-88,1988-89,1989-99 and 1990-91 and for these five years which actually means total six accounting years he would be entitled to Bonus exemption as contemplated in Sub-section (1A) of Sec.16 of the Act. In these accounting years he would be liable to pay Bonus in those years in which he derives profits from his establishment and he shall be deemed to have made profits in any accounting year only after making provision for depreciation under the Income tax Act, for that year and arrears of such depreciation and losses for the previous accounting years have been fully set off against his profits. The Bonus in these years shall be calculated in accordance with the provisions of the Act but without applying the provisions of Section 15 with regard to set on and set off of allocable surplus.
For the seventh accounting year i.e. sixth accounting year following accounting year in which the employer sells goods produced or manufactured by him or renders services as the case may be, set on or set off shall be made in the manner illustrated in the Fourth Schedule taking into account excess or deficiency if any, as the case may be, of the allocable surplus set on or set off in respect of the fifth and sixth accounting years. It would be seen that for the purpose of computing Bonus for the seventh accounting year onwards (i.e. sixth accounting year onwards following the accounting year in which the employer sells goods produced or manufactured by him or renders services, as the case may be), there is no provision for taking into account carry forward losses in the first six accounting years. What can be taken into account for the seventh accounting year is set on or set off in the fifth and sixth accounting years. When there are continuous losses in the first six accounting years, question of employer having paid any Bonus in the same years will therefore not arise.
Situation 2 –
Now, what if there is loss in the first three years and depreciation is claimed in every year and there is a profit in the fourth, whether bonus is payable on the basis of profit in fourth year and if there is loss in the fifth year whether minimum Bonus is payable in the fifth year.
In the fourth year there should be profit after setting off the losses incurred by the employer in the previous accounting years against the profit in the fourth year. If after setting off the said losses there is a profit, then the employer will be liable to pay Bonus in accordance with the provisions of the Bonus Act in relation to that year. If there is a loss in the fifth year the employer will not be liable to pay Bonus for the said fifth year as per provisions of sub-section (1A) of Sec.16 of the Bonus Act.
Situation 3 –
In case of loss during the first five years while computing allocable surplus in the sixth year whether losses during the aforesaid five years also should be considered and Bonus should be paid accordingly or whether balance or surplus/deficit of the sixth year only be considered.
For the sixth accounting year, following the accounting year in which the employer sells goods produced or manufactured by him or renders services, as the case may be, there is no question of considering losses in the preceding five accounting years. What can be considered is only set or set off in respect of fifth and sixth accounting years, as no bonus could have been paid to the employees for the said years.
The employees will have to be paid Bonus for the sixth accounting year following the accounting year in which employer sells goods produced or manufactured by him or renders services, as the case may be, based on computation of allocable surplus for the said year. If there is no allocable surplus the employees will have to be paid the minimum bonus for the said accounting year.