India: Bombay High Court Stays The Retrospective Operation Of The Payment Of Bonus (Amendment) Act, 2015

On 13 June 2016, the Division Bench of the Hon'ble Bombay High Court (comprising of Hon'ble Justice V M Kanade and Hon'ble Justice M S Sonak) has passed an ad interim order staying the retrospective operation of the Payment of Bonus (Amendment) Act, 2015 (the Amendment Act) in a writ petition filed by Tech Mahindra Limited, who was represented by the Firm.

Background

The Payment of Bonus Act, 1965 (the Principal Act) was enacted by the Parliament in 1965. The preamble to the Principal Act states that it is an "Act to provide for the payment of bonus to persons employed in certain establishments on the basis of profit or on the basis of production or productivity and for matters connected therewith".

The Principal Act provides for the mandatory annual payment of bonus, calculated on the basis of the gross-profits which are determined at the close of the accounting year, to eligible employees of establishments which employ 20 or more persons. Under the Principal Act, every employee who draws a salary of INR 10,000 or below per month and who has worked for not less than 30 days in an accounting year, is eligible for bonus (calculated as per the methodology provided under the Principal Act) with the floor of 8.33% of the salary payable to him/her and a cap on the maximum bonus statutorily payable (20% of the salary). The manner of calculation of the gross-profits and the available and allocable surplus for calculation of bonus to be arrived at, are also set out in the Principal Act.

The Amendment Act

The Bill to amend the Principal Act was tabled in the Lok Sabha (Upper House) on 30 November 2015. Clause 1(2) of the said Bill provided that "It shall be deemed to have come into force on the 1st day of April, 2015." This Bill was passed by the Lok Sabha (Upper House) on 22 December 2015 with one amendment by which the date of operation of the Amendment Act was advanced from 1 April 2015 as provided in Clause 1(2) of the Bill to 1 April 2014.

Some of the key amendments carried out to the Principal Act by the Amendment Act are as follows:

Eligibility Limit of Employees

Section 2(13) of the Principal Act was amended to increase the ceiling on salary or wage limit for eligible employees from INR 10,000 per month to INR 21,000 per month.

Ceiling on Salary or Wages for Calculation of Bonus

The amended Section 12 now provides that where the salary or wage of an employee exceeds INR 7,000 per month or the minimum wage for the scheduled employment, the bonus payable to such employee shall be calculated as if his salary or wage were INR 7,000 per month or the minimum wage for the scheduled employment, whichever is higher.

Retrospective Applicability of Amendments

Section 1(2) of the Amendment Act makes the amendments relating to eligibility of employees entitled to receive bonus and the ceiling on salary or wages for calculation of such bonus payments, effective retrospectively from 1 April 2014.

Challenges to the Amendment Act

Tech Mahindra Limited and others (Petitioners) filed a writ petition in the Hon'ble Bombay High Court challenging the Amendment Act by stating that: (i) the retrospective operation of the Amendment Act with effect from 1 April 2014; and (ii) the amendment introduced vide Section 3 of the Amendment Act in so far as the words "or the Minimum Wage for the scheduled employment, as fixed by the appropriate Government, whichever is higher", should be struck down for being unreasonable, illegal and unconstitutional and in violation of Articles 14 and 19(1)(g) of the Constitution of India.

The following grounds, inter alia, were raised in the writ petition to challenge the constitutional validity of the Amendment Act:

Linking of Ceiling for Calculation of Bonus to Minimum Wages Act

The object of the Principal Act is, inter alia, to require equitable distribution of the surplus profits of an establishment  with a view to maintain peace and harmony between labour and capital and allow the employees to participate in the prosperity of an establishment (as reflected in the profits earned) due to the contributions by capital, management and labour.

The Amendment Act unreasonably and impermissibly discriminates between employees that are within the same class in the same establishment having offices in different parts of India by providing that employees drawing minimum wages higher than INR 7,000 shall be entitled to receive higher bonus than the employees drawing minimum wages of or lesser than INR 7,000. In this manner, the Amendment Act has introduced a classification among employees previously unknown to the scheme of the Principal Act, right from inception. This classification is not only discriminatory amongst the employees but also adversely affects the Petitioners. Further, it is contrary to the object and purpose of the Principal Act, inasmuch as such a distinction in the manner of computing bonus may give rise to unrest and discontent and affect the business of the Petitioners.

Retrospective Applicability imposes hardship and leads to absurd Consequences

The Amendment Act was introduced and passed much after the financial statements for the financial year 2014-15 have already been finalized, audited and approved by the members of the respective companies at their respective annual general body meeting. Further, income tax / bonus computation and payments and statutory filings under various laws and regulations have already been made on the basis of these audited financial statements.

Therefore, the Petitioners, for no fault of theirs, may be constrained to get their financial statements re-audited. This will result in absurd consequences as tax audit and filing of income tax returns as well as the publication of audited financial statements and filing the same with the regulatory authorities will have to be carried out again. Such harsh and undue consequences was not desirable nor intended by the Parliament while enacting the Amendment Act.

Comment

Along with the Hon'ble Bombay High Court, the Hon'ble High Courts of Karnataka, Allahabad, Madras, Kerala, Punjab and Haryana, Rajasthan, Gujarat, Madhya Pradesh, Calcutta and Andhra Pradesh have also passed ad interim orders staying the retrospective operation of the Amendment Act.

The case raises few important questions of constitutional law and interpretation of statutes, which will have to be determined by the courts. The retrospective applicability of the Amendment Act imposes harsh burden on the employers since there is no specified timeframe to factor in the increased costs of compliance in their financial statements. The Amendment Act, by linking payment of bonus to minimum wages, creates discrimination among employees situated in different States. The Amendment Act had the potential to work against the object of the Principal Act, thereby warranting interference from courts.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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