5.6       Query

Interpretation of some provisions of the Payment

of Bonus Act, 1965—1.

In case the allocable surplus exceeds the maximum bonus payable under Section 11 of the Payment of Bonus Act, 1965, the Section 15 of the same Act provides for the carry forward of the excess for future use. To the extent the carry forward is not used during the subsequent four years, it lapses to the Company.

If the provision for the carry forward is made in the Profit and Loss Account, the carry forward, which lapses after four years, will have to be written back to the Profit and Loss Account. Another alternative is that the amounts carried forward can be mentioned as a footnote in the Balance Sheet in the form of a contingent liability only.

It is, of course, clear that the Memorandum Register, as prescribed by the Payment of Bonus Rules, will have to be kept under both of the above methods showing the set-on and set-off of the carry forward. Which particular method would you recommend as more appropriate and in accordance with the law?

Opinion                                                                                              September 17, 1966

The query is as to the most appropriate method of accounting that may be adopted in respect of the amount of set-on determined in accordance with the provisions of the payment of Bonus Act, 1965, and more particularly Section 15 thereof.

In our opinion, the provisions relating to carry forward for set-on in the four subsequent accounting years of the excess of the allocable surplus over the maximum bonus payable to the employees under the Act for a particular year, have the effect of affecting the manner in which the quantum of the bonus that may become payable. In respect of those succeeding years this is to be worked out. While, no doubt, the Memorandum Register prescribed by the Payment of Bonus Rules has to be maintained, the amount of set on determined for a particular year is certainly not a liability of the establishment in respect of that year nor is it a liability of the establishment outstanding as at the last day of that year. From a purely accounting view point, the amount of set on is also not a contingent liability as at the end of the particular year. Strictly speaking, it is a possible future liability that may devolve on the establishment, dependent upon a contingency which will occur after the close of that year. Namely. The quantification of the allocable surplus according to the provisions of the Act for each of the four succeeding years.

In this view of the matter, it is clear that there is no legal obligation on the establishment to either provide or reserve in its financial accounts an amount equivalent to the amount of set-on computed according to the Act, nor is it obligatory to disclose the amount of set-on to be carried forward by way of footnote on the Balance Sheet. Therefore, where a company chooses not to make provision for the amount of set-on or to disclose it in its Statements of Accounts, the Auditor can not insist that the Company should make such provision or disclosure.

While the correct position under the Law is, in our opinion. as stated above, there is of course no bar to a company voluntarily disclosing the amount available for set-on for carrying forward as at the end of a particular year in its accounts, or even making a provision, or setting aside a reserve, in respect of such future contingent liability. The desirability, and in rare cases, possibly even the necessity depend upon the facts and circumstances of each particular case. In our opinion, where the amount of set-on is material in relation to the disclosure of a true and fair view of the results and the financial position of the company, and it appears probable that such set-on will have to be utilised during the succeeding years, an omission to disclose this information may prejudice the financial position of the company or mislead persons such as members of the company, creditors or potential investors, as to the financial state of affairs of the company, it would certainly be desirable for the Management to make appropriate disclosure regarding the amount of set-on.

_________________________