Payment of customary bonus: The cornerstone of Industrial Harmony

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The first Public Interest Litigation (PIL) in India was filed in the year 1976. The seed of PIL was sown by Justice Krishna Iyer’s judgment in the aforementioned case. The case deals with the payment of customary bonuses to the workmen employed in hardware stores in the locality of Nagdevi, Mumbai. the PIL was regarding the issue of bonus.

The payment of bonus is regulated by the Payment of Bonus Act of 1965, based on profit and productivity.[1] The act is applicable to the whole of India for all establishments which hasa minimum of twenty workers employed on any day during the year. The payment of bonus ensures a boost in morale and productivity as well as improved performance. Section 17 of the Act deals with the payment of customary bonus.[2]

The exgratia payments made by the employers of the hardware stores had solidified as a legal right for the workers and manifested as a custom, usage and condition of service. However, the association of employers halted the payments which led to the drafting of an eye-opening judgement by Justice Krisha Iyer with respect to judicious disdain for injustice and fortifying the role of the judiciary in upholding the rights of the weaker sections of society.

Factual background

The facts of the case are based in a locality in Bombay called Nag Devi. In the neighbourhood with a population of about 5000, a considerable number of the locality members were working in hardware stores. Most businesses had less than the statutorily mandated number of workmen. An association of hardware store employers and a union of workmen was formed as a result of this density of businesses and for the protection of worker’s rights and collective bargaining power. The well-maintained relationship between the workmen and the employers manifested itself in ex gratia payments for many years up until 1965.[3]

The annual payment of this bonus had been rooted as a right in the minds of these workers. However, in the year 1965, the employers decided to stop the payments and as a response, the workmen claimed a right to bonus.[4] To settle the dispute, a Board of Arbitrators was set up under Section 10A of the Industrial Disputes Act[5] to arbitrate upon twelve demands, including 4 months’ wages as bonus, put forward by the union of workmen, Mumbai Kamgar Sabha. This demand was rejected and the union’s continuous efforts led to conciliation. The intervention by the Deputy Commissioner of Labour did not change the mindset of the employers and the demand for bonus finally led to adjudication before an Industrial Tribunal.[6]

Procedural History

For adjudication, the Industrial Tribunal had formulated the following issues[7]:

  1. Whether the establishments have been giving bonuses until 1965? If yes, then for how long? What was the rate at which the bonus was given?
  2. Whether the payment of bonus has become customs or usage or condition of service and on what should be the basis should the payment of bonus be made?

After the statements of the parties were taken, two issues were formulated. Firstly, whether the Award of the Arbitration Board operates as res judicata to the demands of the workmen. Secondly, whether the reference in respect of the demands is tenable and legal. The Tribunal adjudged the first in the affirmative and the latter in the negative. The union had condemned the findings of the Tribunal and the error committed stating that they did not enter into the merits of the claim but dismissed it as the demand for customary bonus was barred by res judicata. The Tribunal stated that the Bonus Act was a complete code and no species of bonus could survive outside the contours of the statute. Therefore, the case of non-payment of bonus would not fall under the Act rendering the reference not tenable.


1. Whether the Union has locus standi?[8]

2. Whether the claim for bonus for the years 1966-69 is barred by res judicata?[9]

3. Whether there was apart from profit-based bonus, customary bonus as a condition of service?[10]

4. Whether the Bonus Act can interdict such a demand since it does not provide for the payment of customary bonus, or does the Act deal with bonus of all species unless it finds statutory expression to the contrary in the provisions of that Act?[11]

Summary of the decision and judgment

  1. The Union has locus standi

Article 226[12] has been viewed from a narrow perspective, for the assertion of individual rights alone. This traditional view was changed with this judgment to address collective grievances. Being an industrial dispute, the role of the union was merely for the purpose of representing the common issues faced by the workmen. The counsel for the Appellants argued that Section 36(1) and (4) of the Act[13], Rules 29 and 36 of the Central Rules under the Act[14]and Section 15(2) of the Payment of Wages Act[15] recognizes the capacity of unions. Indeed, organized labour inevitably calls for unionization. The appeal was hence regarded as one by the workmen impleaded through the union.[16]

  • Payment of Customary Bonus within the Bonus Act

In cases of customary or traditional payments, it is necessary to examine whether the payment has been consistently paid for a long period, independent of earning profits, at a uniform rate. The Bonus Act is comprehensive and no kind of bonus can gain legal recognition if it falls outside the scope of the Act. The payments in question are customary and were part of the terms of the employment. Indeed, the Act being a complete code would include this kind of payment as well.

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The plea by the respondents that the payments were profit-based was rejected as the real foundation of the right to bonus claimed by the workmen was directly attributable to custom, usage and condition of service.[17] The fact that the hardware stores were largely profitable does not imply that the payment of bonus was based on earning profits. Moreover, with respect to uniformity, the quantum of profits and bonus vary from establishment to establishment. Hence, uniformity cannot be expected from the point of view of the conglomerate of stores. The appellants’ contention that uniform conditions of service must be applied was rejected. It is pertinent to note that ex gratia payments for the period before the Bonus Act were admitted by the respondents.

The Counsel for the respondents contended that customary bonus has been linked to festivals according to precedents of the Court. Contrary to this, the Court was satisfied that the omission to mention a festival does not detract the claim of customary bonus.[18]The Court relied on Management of Churakulam Tea Estate v. Workmen[19], M/s. Ispahani Ltd. v. Employees’ Union[20]and Management of Bombay Co. Ltd. v. Workmen[21]to establish the root of customary bonus.

To understand the scope of the Act, the Court examined the Full Bench formula in Jalan Trading Co. Pvt. Ltd. v. Mill Mazdoor Union[22], the Commission Report and the pattern of bonus prevalent in the industry, which ultimately converged to the conclusion that the purpose of the payment of Bonus Act was to regulate profit-based bonus, with incidental incursions into other claims like customary bonus. The Court decided that the Bonus Act primarily deals with profit-based bonus, but other related claims such as customary bonus are not considered void.There is no categorical provision in the Bonus Act nullifying all other kinds of bonuses, nor does such a conclusion arise by necessary implication.[23]

Establishments employing less than 20 workers are excluded under the Act and the appellants fell outside the grace of the statute for this reason alone. The Court reiterated that the gravitational pull of the judicial construction of Part IV of the Constitution influenced their decision. The judgment in Ghewar Chand[24] leaves room for the non-statutory play of customary bonus. While the ruling of a superior court is binding, certain observations, generalizations and sub-silentio determinations must be judiciously examined.[25]

  •  Plea of res judicata rejected

The plea of constructive res judicata is based on the ‘might and ought’ doctrine. The extension of this doctrine to industrial law has been met with some doubt. Industrial law is typically governed by conciliation, adjudication and methodologies of peaceful industrial relations, where collective bargaining and pragmatic justice claim precedence over formalized rules based on individual contests, specific causes of action and findings.

The dangers of constructive res judicata are to be noted with respect to writ petitions under Article 226.[26] The Court held that the Bonus Act does not bar claims to customary bonus or those based on usages and conditions of service. The claim was initially rejected due to legal bars however, being the wings of justice; the judiciary must move past these bars and decide cases based on merits.[27]


This landmark judgment not only laid an essential precedent in industrial law, but it also paved the way for Public Interest Litigations that can be initiated by groups with common grievances. The payment of bonus has been recognized as a legal right and as a means to maintain industrial peace and progress. The bone of contention in this matter was whether the Bonus Act excludes the payment of customary bonus. The Court analyzed this against the industrial standards and in tune with the developments. Ultimately, it was his concern over protecting the constitutional mandate[28] for the welfare of workers that led Justice Krishna Iyer to adjudge the case in favour of the appellants. For weaker societal segments, the law will fail them if deficiencies creep into pleadings. He placed importance on pursuing the best course to justice and seeing the bigger picture rather than focusing on procedural shortcomings. There is not much difficulty in recognizing customary bonus under industrial law, given that proper averments and sufficient proof is available.[29]

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Bonus is a word of many connotations. Traditional bonus has its emergence from long, continued usage and has manifested into a right. It acts as a gesture of goodwill and maintains industrial peace and harmony. From the perspective of industrial law jurisprudence, the Bonus Act does not operate as a bar to different species of the claim. Where two judicial choices are available to a judge, between the construction in conformity and the social philosophy of Part IV, the latter is given preference. The case was decided based on proper legal reasoning, a deep understanding of the history behind the enactment, and the underlying purpose of the Act.


Industrial peace can be secured best through alternative dispute resolutions before tensions or disputes blow up. Indeed, the judgment of a superior court is binding over all courts. However, ratio-wise luminosity is to be given precedence over scriptural sanctity, as laid down in this case. Imparting eternal value to decisions is not ideal as the law requires change with time. When reading a judgment, facts are to be kept in mind rather than other matters involved. This dictum is being applied in cases to date as can be observed in the Association of Residents of Mhow v. Union of India[30], Commissioner of Income Tax v. Kerala Spinners Ltd.[31] and recently in Volkswagen Finance Ltd., Mumbai v. Ito[32]

The social conscience of a judge hesitates to strip the working class from the rights that they enjoy by way of bonus. The Constitution itself protects these rights. If the Bonus Act is a complete code based on its scheme and spirit, then the payment of a customer bonus that essentially promotes industrial harmony would be an integral part of it.

[1] The Payment of Bonus Act, 1965, No. 21, Acts of Parliament, 1965.

[2]Id. at Section 17.

[3] Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai and Ors., (1976) 3 SCC 832, para. 2.

[4] Id. at para 3.

[5] Industrial Disputes Act, No. 14 of 1947, India Code (1993), vol. 13,Section10A.

[6] Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai and Ors., (1976) 3 SCC 832, para. 3.

[7] Id. at para. 4.

[8] Id. at para 8.

[9]Id. at para. 6.



[12]India 226.

[13] The Payment of Bonus Act, 1965, No. 21, Acts of Parliament, 1965, Section36(1) & (4).

[14]The Payment of Bonus Rules, 1975, Gazette of India, pt. II sec. 3(i), Rules 29 & 36 (Sep. 6, 1975).

[15]The Payment of Wages Act, 1936, Gazette of India, pt. I,Section15(2) (Mar. 28, 1937).

[16]Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai and Ors., (1976) 3 SCC 832, para. 9.

[17]Id. at para 11.

[18]Id. at para 19.

[19]Management of Churakulam Tea Estate v. Workmen,(1969) 1 SCR 931.

[20]M/s. Ispahani Ltd. v. Employees’ Union (1960) 1 SCR 24.

[21]Management of Bombay Co. Ltd. v. Workmen,(1964) 7 SCR 477.

[22]Jalan Trading Co. Pvt. Ltd. v. Mill Mazdoor Union,(1967) 1 SCR 15.

[23]Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai and Ors., (1976) 3 SCC 832, para. 36.

[24]Sanghi Jeevaraj Ghewar Chand & Ors v. Secretary, Madras Chillies,(1969)1 SCR 366.

[25]Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai and Ors., (1976) 3 SCC 832, para. 38.

[26]India 226.

[27] Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai and Ors., (1976) 3 SCC 832, para. 40.

[28] India 39(a), 39(c) and 43.

[29] Mumbai Kamgar Sabha v. Abdulbhai Faizullabhai and Ors., (1976) 3 SCC 832, para. 26.

[30]Association of Residents of Mhow v. Union of India, 2009(108) RD 496 SC.

[31]Commissioner of Income Tax v. Kerala Spinners Ltd., (1991) ILLJ 257 Ker.

[32]Volkswagen Finance Ltd., Mumbai v. Ito, [2020] 115 386.